1. Definitions.

2. Purchase and Sale of Membership Interests.

3. Representations and Warranties Concerning Transaction.

4. Representations and Warranties Concerning Target. Sellers jointly and severally represent and warrant to Buyer, subject to such exceptions as are disclosed in the disclosure schedule delivered by Sellers to Buyer on the date hereof and initialed by the Parties (the “Disclosure Schedule”) (it being understood that the Disclosure Schedule shall qualify (a) the representations and warranties set forth in the corresponding sections and subsections of this Section 4 and (b) any other representations and warranties of this Section 4 if and solely to the extent that it is readily apparent on the fact of such disclosure (without reference to the documents referenced therein) that it applies to such other representations and warranties), as follows:

5. Pre-Closing Covenants. The Parties agree as follows with respect to the period between the execution of this Agreement and the Closing:

6. Post-Closing Covenants. The Parties agree as follows with respect to the period following the Closing:

7. Conditions to Obligation to Close.

8. Remedies for Breaches of this Agreement.

10. Termination.

11. Miscellaneous.

2.1 Basic Transaction. On and subject to the terms and conditions of this Agreement, Buyer agrees to purchase from each Seller, and each Seller agrees to sell to Buyer, all of his or her or its Membership Interests for the consideration specified below in this Section 2.

2.2 Deposit. Concurrently with the execution of this Agreement, Buyer is delivering to Sellers a deposit of $2,000,000 (the “Deposit”) by wire transfer or delivery of other immediately available funds. The Deposit shall be held by U.S. Bank National Association, as escrow agent, pursuant to the terms of the Escrow Agreement of even date herewith (the “Escrow Agreement”), a copy of which is attached hereto as Exhibit B. The Deposit and any interest or other income thereon shall either be credited toward the cash payment to Sellers at Closing, forfeited to Sellers, or refunded to Buyer upon the occurrence of certain events described in this Agreement. For income tax purposes, the Deposit shall be treated as owned by Buyer during the escrow period, and all interest or other income earned on the Deposit under the Escrow Agreement shall be treated as taxable income of Buyer and shall be reported as such to the Internal Revenue Service and other taxing authorities. The parties agree to treat the Deposit and the Escrow Agreement consistently with the foregoing for all tax reporting purposes.

2.3 Preliminary Purchase Price. Buyer agrees to pay to Sellers at the Closing $10,000,000 (the “Preliminary Purchase Price”) by (1) delivery of cash equal to the difference of Preliminary Purchase Price less the amount of the Deposit and any interest or other income earned on the Deposit and (2) release of the Deposit and any interest or other income earned on the Deposit. The Preliminary Purchase Price shall be allocated among Sellers in accordance with

the percentages set forth on Schedule 2.3 hereof (the “Percentage Ownership Amounts”). The Preliminary Purchase Price shall be subject to post-Closing adjustment as set forth in Section 2.6.

2.4 Closing. The closing of the transactions contemplated by this Agreement (the “Closing”) shall take place at the offices of Faegre & Benson LLP, in Boulder, Colorado, commencing at 9:00 a.m. local time on the second business day following the satisfaction or waiver of all conditions to the obligations of the Parties to consummate the transactions contemplated hereby (other than conditions with respect to actions the respective Parties will take at the Closing itself) or such other date as Buyer and Member Agent may mutually determine (the “Closing Date”); provided, however, that the Closing Date shall be no earlier than December 1, 2006.

2.5 Deliveries at Closing. At the Closing, (i) Sellers will deliver to Buyer the various certificates, instruments, and documents referred to in Section 7.1 below, (ii) Buyer will deliver to Sellers the various certificates, instruments, and documents referred to in Section 7.2 below, (iii) Buyer will deliver to each Seller the consideration specified in Section 2.2 above and (iv) Buyer shall (x) repay all amounts outstanding under Target’s line of credit with Waymire Trading Co. (in an amount not to exceed $1.5 million); (y) repay all outstanding notes payable to the Sellers; and (z) pay to Sellers all accrued distributions as of the Closing Date.

2.6 Closing Merger Equity Adjustment.

2.7 Earn-Out Accounts.

2.8 Payments. Any payments required under this Section 2 shall be made by wire transfer or in other immediately available funds.

2.9 Appointment of Member Agent. Each Seller hereby appoints Rich Schmelzer as its agent and attorney in fact to take any and all actions on behalf of the Seller under this Agreement. The Member Agent shall be entitled to rely on such appointment, and each Seller hereby releases and agrees to indemnify and hold harmless the Member Agent from any liability resulting from the Member Agent’s reliance on such appointment in accordance with their respective Percentage Ownership Amounts.

3.1 Sellers’ Representations and Warranties. Each Seller represents and warrants to Buyer as follows:

3.2 Buyer’s Representations and Warranties. Buyer represents and warrants to Sellers as follows:

4.1 Organization, Qualification, and Corporate Power. Target is a limited liability company duly organized, validly existing and in good standing under the laws of Colorado. Target is duly authorized to conduct business and is in good standing under the laws of each jurisdiction where such qualification is required, except where the failure to be so qualified or in good standing would not reasonably be expected to have a Material Adverse Effect. Target has full power and authority and all licenses, permits, and authorizations necessary to carry on the businesses in which it is engaged and to own and use the properties owned and used by it. Section 4.1 of the Disclosure Schedule lists the managers and officers of Target. Sellers have delivered to Buyer correct and complete copies of the Articles of Organization and Operating Agreement for Target, each as amended to date. Target is governed by the Colorado Limited Liability Company Act, as amended (the “Act”). The membership interest record books for Target are correct and complete. Target is not in default under or in violation of any provision of its Articles of Organization or Operating Agreement.

4.2 Capitalization. The Membership Interests constitute the entire outstanding membership interests of Target. All of the issued and outstanding Membership Interests have been duly authorized. Sellers collectively hold all of the issued Membership Interests, and the Membership Interests are held of record by the respective Sellers as set forth in Section 4.2 of the Disclosure Schedule. There are no outstanding or authorized options, warrants, purchase rights, subscription rights, conversion rights, exchange rights, or other contracts or commitments that could require Target to issue, sell, or otherwise cause to become outstanding any of its Membership Interests, or any equity or voting right therein component thereof. There are no outstanding or authorized equity appreciation, phantom interest, profit participation, or similar rights with respect to Target. There are no voting trusts, proxies, or other agreements or understandings with respect to the voting of the Membership Interests of Target.

4.3 Non-Contravention. Neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (i) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which Target is subject or any provision of the Articles of Organization or Operating Agreement of Target, each as amended to date, or (ii) result in any Conflict or require any notice under any agreement, contract, lease, license, instrument, or other arrangement to which Target is a party or by which it is bound or to which any of its assets is subject (or result in the imposition of any Lien upon any of its assets), except where such Conflict or failure to give notice would not reasonably be expected to have a Material Adverse Effect. Target need not give any notice to, make any filing with, or obtain any authorization, consent, or approval of any government or governmental agency in order for the Parties to consummate the transactions contemplated by this Agreement, except where the failure to give notice, to file, or to obtain any authorization, consent or approval would reasonably be expected to have a Material Adverse Effect.

4.4 Brokers’ Fees. Neither Target nor its Affiliates has any Liability to pay any fees or commissions to any broker, finder, or agent with respect to the transactions contemplated by this Agreement.

4.5 Title to Assets. Target has good and marketable title to, or a valid leasehold interest in, the properties and assets used by it, located on its premises, or shown on the Financial Statements or acquired after the date thereof, free and clear of all Liens, except for properties and assets disposed of in the Ordinary Course of Business since the date of the Financial Statements.

4.6 Subsidiaries. Target does not have any Subsidiaries and does not own or have any right to acquire, directly or indirectly, any outstanding capital stock of, or other equity interests in, any Person.

4.7 Financial Statements. Attached hereto as Exhibit C are the following financial statements (collectively the “Financial Statements”): (i) unaudited balance sheet and statement of income as of and for the fiscal year ended on December 31, 2005 for Target; and (ii) unaudited balance sheet (the “Most Recent Balance Sheet”) and statement of income (the “Most Recent Income Statement”) as of and for the six months ended June 30, 2006 (the “Most Recent Fiscal Month End”) for Target. The Financial Statements present fairly in all material respects the financial condition of Target as of such date and the results of operations of Target for such period, are correct and complete, and are consistent with the books and records of Target (which books and records are correct and complete).

4.8 Events Subsequent to Most Recent Fiscal Month End. Since the Most Recent Fiscal Month End, there has not been any Material Adverse Change. Without limiting the generality of the foregoing, between the date of the Most Recent Fiscal Month End and the date of this Agreement:

4.9 Undisclosed Liabilities. Target does not have any material Liability of any nature required to be reflected on or reserved against in financial statements that are prepared in accordance with GAAP except for (i) Liabilities set forth on the face of the Most Recent Balance Sheet; (ii) Liabilities that have arisen after the Most Recent Fiscal Month End in the Ordinary Course of Business (none of which results from, arises out of, relates to, is in the nature of, or was caused by any material breach of contract, material breach of warranty, tort, infringement, or material violation of law) or (iii) legal and accounting fees and expenses incurred by Target in connection with the execution of this Agreement.

4.10 Legal Compliance. Target has complied, to the Knowledge of any Seller, with all applicable laws (including rules, regulations, codes, plans, injunctions, judgments, orders, decrees, rulings, and charges thereunder and including the Foreign Corrupt Practices Act, 15 U.S.C. 78dd-1 et seq.) of federal, state, local, and foreign governments (and all agencies thereof), except to the extent that such would not have a Material Adverse Effect; provided, that, the foregoing shall not be deemed to cover any notices or violations of laws that are explicitly

covered in another representation or warranty in this Section 4. No action, suit, proceeding, hearing, investigation, charge, complaint, claim, demand, or written notice has been filed or, to the Knowledge of any Seller, commenced against Target alleging any failure so to comply.

4.11 Tax Matters.

4.12 Real Property.

4.13 Intellectual Property.

4.14 Tangible Assets. Target owns or leases all material items of machinery, equipment, and other material tangible assets necessary for the conduct of its business as presently conducted. Each such tangible asset is free from material defects (patent and latent), has been maintained in accordance with normal industry practice, is in good operating condition and repair (subject to normal wear and tear), and is suitable for the purposes for which it presently is used.

4.15 Inventory. The inventory of Target consists of raw materials and supplies, manufactured and purchased parts, goods in process, and finished goods, all of which is merchantable and fit for the purpose for which it was procured or manufactured, and none of which is slow-moving, obsolete, damaged, or defective, subject only to the reserve for inventory writedown set forth on the face of the Most Recent Balance Sheet as adjusted for the passage of time through the date of this Agreement in accordance with the past custom and practice of Target.

4.16 Contracts. Section 4.16 of the Disclosure Schedule lists the following contracts and other agreements to which Target is a party as of the date of this Agreement:

4.17 Notes and Accounts Receivable. All notes and accounts receivable of Target are reflected properly on its books and records, are valid receivables which, to the Knowledge of any Seller, are subject to no setoffs or counterclaims, and are current and collectible. All accounts receivable of Target represent valid obligations arising from sales actually made or services actually performed.

4.18 Powers of Attorney. There are no outstanding powers of attorney executed on behalf of Target.

4.19 Insurance. Section 4.19 of the Disclosure Schedule sets forth the following information with respect to each insurance policy (including policies providing property, casualty, liability, and workers’ compensation coverage and bond and surety arrangements) to which Target has been a party, a named insured, or otherwise the beneficiary of coverage at any time:

4.20 Litigation. Section 4.20 of the Disclosure Schedule sets forth each instance in which Target (i) is subject to any outstanding injunction, judgment, order, decree, ruling, or charge known to the Sellers or (ii) is a party or is, to the Knowledge of any Seller, threatened to be made a party to any action, suit, proceeding, hearing, or investigation of, in, or before any court or quasi-judicial or administrative agency of any federal, state, local, or foreign jurisdiction or before any arbitrator.

4.21 Product Warranty. To the Knowledge of any Seller, each product manufactured, sold, leased, or delivered by Target has been in conformity with all applicable material contractual commitments and all express and implied warranties. Target does not have material Liability for replacement or repair thereof or other damages in connection therewith, subject only to the reserve for product warranty claims set forth on the face of the Most Recent Balance Sheet or, with respect to products manufactured, sold, leased or delivered by Target

after the date of the Most Recent Balance Sheet, except in accordance with the past custom and practice of Target. Section 4.21 of the Disclosure Schedule includes copies of the standard terms and conditions of sale for Target (containing applicable guaranty, warranty, and indemnity provisions). No product manufactured, sold, leased, or delivered by Target is subject to any guaranty, warranty, or other indemnity beyond the applicable standard terms and conditions of sale set forth in Section 4.21 of the Disclosure Schedule or except as implied by law.

4.22 Product Liability. Target does not have any Liability arising out of any injury to individuals or property as a result of the ownership or use of any product manufactured, sold, leased, or delivered by Target.

4.23 Employees. To the Knowledge of any Seller, no executive or employee (a) has any present intention to terminate employment with Target or (b) is a party to any confidentiality, non-competition, proprietary rights or other such agreement between such employee and any Person other than Target that would be material to the performance of such employee’s employment duties or the ability of Target to conduct its business. Target is not a party to or bound by any collective bargaining agreement and has not experienced any strike or material grievance, claim of unfair labor practices, or other collective bargaining dispute within the past 3 years. Target has not committed any material unfair labor practice. Neither any Seller nor any of the managers and officers of Target has any Knowledge of any organizational effort presently being made or threatened by or on behalf of any labor union with respect to employees of Target. With respect to this transaction, any notice required under any law or collective bargaining agreement has been given, and all bargaining obligations with any employee representative have been, or prior to the Closing Date will be, satisfied. Within the past 3 years, Target has not implemented any plant closing or layoff of employees that could implicate the Worker Adjustment and Retraining Notification Act of 1988, as amended, or any similar foreign, state, or local law, regulation, or ordinance.

4.24 Employee Benefits.

4.25 Guaranties. Target is not a guarantor or otherwise liable for any Liability (including indebtedness) of any other Person.

4.26 Environmental, Health, and Safety Matters.

4.27 Business Continuity. None of the computer software, computer hardware (whether general or special purpose), telecommunications capabilities (including all voice, data and video networks) and other similar or related items of automated, computerized, and/or software systems and any other networks or systems and related services that are under the control of Target and are used by or relied on by Target in the conduct of its business (collectively, the “Systems”) have experienced bugs, failures, breakdowns, or continued substandard performance in the past twelve (12) months that has caused any substantial disruption or interruption in or to the use of any such Systems by Target. Target is covered by business interruption insurance in scope and amount customary and reasonable to ensure their ongoing business operations.

4.28 Certain Business Relationships with Target. None of Sellers and none of Target’s managers, officers or employees owns any material asset, tangible or intangible, that is used in the business of Target.

4.29 Customers and Suppliers. Section 4.29 of the Disclosure Schedule lists all suppliers of Target as of the date of this Agreement. Since the date of the Most Recent Balance Sheet, (a) no supplier of Target has indicated that it shall stop, or decrease the rate of, supplying materials, products or services to Target, and (b) no current customer of Target has indicated that it shall stop, or decrease the rate of, buying materials, products or services from Target, except in the case of (a) and (b) above, as would not have a Material Adverse Effect.

5.1 General. Each of the Parties will use his, her, or its commercially reasonable efforts to take all actions and to do all things necessary, proper, or advisable in order to consummate and make effective the transactions contemplated by this Agreement (including satisfaction of the conditions set forth in Section 7 below).

5.2 Notices and Consents. Sellers will cause Target to give any notices to third parties, and will cause Target to use its commercially reasonable efforts to obtain any third-party consents referred to in Section 4.3 above, any authorizations, consents, and approvals of governments and governmental agencies referred to in Section 4.3 above at Target’s expense to be paid prior to Closing.

5.3 Operation of Business. Rich Schmelzer and Sheri Schmelzer will cause Target to operate its business in accordance with the provisions of Section 2.7(c)(i). Without limiting the generality of the foregoing, without Buyer’s consent (which consent shall not be unreasonably withheld or delayed), Rich Schmelzer and Sheri Schmelzer will not cause Target to declare, set aside, or pay any dividend or make any distribution with or return of capital respect to the Membership Interests or redeem, purchase, or otherwise acquire any of the Membership Interests, provided that Target may make cash distributions prior to Closing so long as such distributions do not cause the Member Equity of Target to be below $400,000 at Closing.

5.4 Preservation of Business. Sellers will cause Target to keep its material business and properties substantially intact.

5.5 Access.

5.6 Notice of Developments.

5.7 Exclusivity.

5.8 Tax Matters. Buyer and Sellers agree that the Purchase Price will be allocated for income tax purposes among the assets of Target in accordance with a schedule to be mutually determined by Buyer and Member Agent in good faith within 30 days after the Closing Date Balance Sheet is finalized. The allocation will be in accordance with Section 1060 of the Code and shall be made pursuant to the following principles: (i) cash, inventory, accounts receivable and fixed assets will be allocated an amount of Purchase Price equal to their

respective book values as reflected on the Closing Date Balance Sheet; and (ii) the excess of the Purchase Price over the sum of Target’s cash, inventory, accounts receivable and fixed assets will be allocated to Target’s trademarks, goodwill and other intangible assets. Buyer and Sellers hereby agree to report the transactions contemplated herein for all income tax purposes in a manner consistent with such allocation and shall not make any allocation of the Purchase Price which is contrary to such allocation.

5.9 Buyer Covenant Not to Compete. Between the date of this Agreement and the Closing Date, Buyer will not engage directly or indirectly, in any geographic area, in any business that involves any product designed to decorate shoes except for any decorations printed directly on the shoe or on the shoe strap.

5.10 Tax-Sharing Agreements. Any tax-sharing agreements or similar agreements with respect to or involving Target shall be terminated as of the Closing Date and, after the Closing Date, Target shall not be bound thereby or have any liability thereunder.

6.1 General. In case at any time after the Closing any further actions are necessary or desirable to carry out the purposes of this Agreement, each of the Parties will use commercially reasonable efforts to take such further actions (including the execution and delivery of such further instruments and documents) as any other Party may reasonably request, all at the sole cost and expense of the requesting Party (unless the requesting Party is entitled to indemnification therefor under Section 8 below). Sellers acknowledge and agree that from and after the Closing Buyer will be entitled to possession of all documents, books, records (including Tax records), agreements, and financial data of any sort relating to Target (provided, that, Sellers shall be entitled to retain copies of all such documents as are necessary to file the Tax Returns of any of the Sellers or Target or that provide support for Tax Returns that have been previously filed).

6.2 Transition. None of Sellers will knowingly take any action that is designed or intended to have the effect of discouraging any lessor, licensor, customer, supplier, or other business associate of Target from maintaining the same business relationships with Target after the Closing as it maintained with Target prior to the Closing.

6.3 Confidentiality. Each Seller will treat and hold as such all of the Confidential Information and refrain from using any of the Confidential Information except in connection with this Agreement, and deliver promptly to Buyer or destroy, at the request and option of Buyer, all tangible embodiments (and all copies) of the Confidential Information that are in his, her, or its possession, except for the documentation retained by Sellers pursuant to Section 6.1. In the event that any Seller is requested or required pursuant to written or oral question or request for information or documents in any legal proceeding, interrogatory, subpoena, civil investigative demand, or similar process to disclose any Confidential Information, such Seller will notify Buyer promptly of the request or requirement so that Buyer may seek an appropriate protective order or waive compliance with the provisions of this Section 6.3. If, in the absence of a protective order or the receipt of a waiver hereunder, any of

Sellers is, on the advice of counsel, compelled to disclose any Confidential Information to any tribunal, such Seller may disclose the Confidential Information to the tribunal; provided, however, that the disclosing Seller shall use his, her, or its commercially reasonable efforts to obtain, at the request and expense of Buyer, an order or other assurance that confidential treatment will be afforded to such portion of the Confidential Information required to be disclosed as Buyer shall reasonably designate. The foregoing provisions shall not apply to any Confidential Information that is generally available to the public immediately prior to the time of disclosure unless such Confidential Information is so available due to the actions of a Seller.

6.4 Covenant Not to Compete. For a period of three years from and after the Closing Date, none of Sellers will engage directly or indirectly in any business that involves any product designed to decorate shoes in any geographic area in which Target conducts that business as of the Closing Date; provided, however, that no owner of less than 1% of the outstanding stock of any publicly traded corporation shall be deemed to engage solely by reason thereof in its business. If the final judgment of a court of competent jurisdiction declares that any term or provision of this Section 6.4 is invalid or unenforceable, the Parties agree that the court making the determination of invalidity or unenforceability shall have the power to reduce the scope, duration, or area of the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified after the expiration of the time within which the judgment may be appealed.

6.5 Consulting Payment. The Parties covenant and agree that, with respect to any Earn-Out Payments, prior to making any distributions in accordance with the Earn-Out Allocations, Buyer shall pay the first 2.5% of any such Earn-Out Payment to Zan Design & Associates in consideration for consulting services performed by Zan Design & Associates. Thereafter, the remainder will be distributed in accordance with the Earn-Out Allocations as specified in Section 2.7(b).

6.6 Responsibility for Filing Tax Returns and Payment of Taxes.

6.6 Cooperation on Tax Matters.

7.1 Conditions to Buyer’s Obligation. Buyer’s obligation to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions:

7.2 Conditions to Sellers’ Obligation. The obligation of Sellers to consummate the transactions to be performed by them in connection with the Closing is subject to satisfaction of the following conditions:

Member Agent may waive any condition specified in this Section 7.2 on behalf of all Sellers if they execute a writing so stating at or prior to the Closing.

8.1 Survival of Representations and Warranties. The representations and warranties contained in Sections 4.1 [Organization, Qualification, and Corporate Power], 4.2 [Capitalization], 4.3 [Non-Contravention], 4.4 [Brokers’ Fees], 4.6 [Subsidiaries], Section 4.11 [Tax Matters] and Section 4.26 [Environmental, Health and Safety Matters] and in Section 3.1 (the “Specified Representations”) shall survive the Closing indefinitely (even if Buyer knew or had reason to know of any misrepresentation or breach of warranty at the time of Closing). All of the other representations, warranties and covenants of Sellers contained in this Agreement shall survive the Closing hereunder (even if Buyer knew or had reason to know of any misrepresentation or breach of warranty at the time of Closing) and continue in full force and effect for a period of one (1) year following the Closing Date.

8.2 Indemnification Provisions for Buyer’s Benefit.

8.3 Indemnification Provisions for Sellers’ Benefit.

8.4 Matters Involving Third Parties.

8.5 Determination of Adverse Consequences. All indemnification payments under this Section 8 shall be deemed adjustments to the Purchase Price.

8.6 Release. Each Seller hereby agrees that he, she, or it will not make any claim for indemnification against Target arising out of facts occurring prior to the Closing by reason of the fact that he, she, or it was a manager, officer, employee, or agent of Target or was serving at the request of Target as a partner, trustee, director, manager, officer, employee, or agent of another entity (whether such claim is for judgments, damages, penalties, fines, costs, amounts paid in settlement, losses, expenses, or otherwise and whether such claim is pursuant to any statute, charter document, bylaw, agreement, or otherwise).

8.7 Purchase Price Adjustment. Notwithstanding anything to the contrary herein, Sellers shall not be obligated to indemnify Buyer against any Losses as a result of, or based upon or arising from, any claim or Liability to the extent such claim or Liability is taken into account through the application of Section 2.6.

10.1 Termination of Agreement. This Agreement may be terminated as follows:

10.2 Effect of Termination.

11.1 Nature of Sellers’ Obligations. Other than the representations and warranties contained in Section 3.1, the representations, warranties, and covenants of Sellers in this Agreement are joint and several obligations. This means that, subject to the limitations set forth in Sections 8.2(c) and (e), each Seller shall be responsible to the extent provided in Sections 8.2(a) and 8.2(b) above for the entirety of any Losses suffered by Buyer as a result of any breach thereof.

11.2 Press Releases and Public Announcements. No Party shall issue any press release, give notice to any third party (except as required pursuant to the terms of this Agreement) or make any public announcement relating to the subject matter of this Agreement prior to the Closing without the prior written approval of Buyer and Member Agent, which approvals shall not be unreasonably withheld; any Party may disclose the existence of this Agreement and the terms of the transaction contemplated hereby to such of its officers, directors, manager or agents who such Party reasonably believes have a need to know and who are bound by confidentiality agreements; provided, further, that Buyer may issue any press release or make any public disclosure that its general counsel or outside legal counsel reasonably believes is required by applicable law or any listing or trading agreement concerning its publicly traded securities.

11.3 No Third-Party Beneficiaries. This Agreement shall not confer any rights or remedies upon any Person other than the Parties and their respective successors and permitted assigns.

11.4 Entire Agreement. This Agreement (including the documents referred to herein) constitutes the entire agreement among the Parties and supersedes any prior understandings, agreements, or representations by or among the Parties, written or oral, to the extent they relate in any way to the subject matter hereof.

11.5 Succession and Assignment. This Agreement shall be binding upon and inure to the benefit of the Parties named herein and their respective successors and permitted assigns. No Party may assign either this Agreement or any of his, her, or its rights, interests, or obligations hereunder without the prior written approval of Buyer and Member Agent; provided, however, that Buyer may (i) assign any or all of its rights and interests hereunder to one or more of its Affiliates and (ii) designate one or more of its Affiliates to perform its obligations hereunder (in any or all of which cases Buyer nonetheless shall remain responsible for the performance of all of its obligations hereunder).

11.6 Counterparts. This Agreement may be executed in one or more counterparts (including by means of facsimile), each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

11.7 Headings. The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement.

11.8 Notices. All notices, requests, demands, claims, and other communications hereunder shall be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given (i) when delivered personally to the recipient, (ii) 1 business day after being sent to the recipient by reputable overnight courier service (charges prepaid), (iii) 1 business day after being sent to the recipient by facsimile transmission or electronic mail, or (iv) 4 business days after being mailed to the recipient by certified or registered mail, return receipt requested and postage prepaid, and addressed to the intended recipient as set forth below:

11.9 Governing Law. This Agreement shall be governed by and construed in accordance with the domestic laws of the State of Delaware without giving effect to any choice or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Delaware.

11.10 Amendments and Waivers. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by Buyer and Member Agent. No waiver by any Party of any provision of this Agreement or any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be valid unless the same shall be in writing and signed by the Party making such waiver nor shall such waiver be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such default, misrepresentation, or breach of warranty or covenant.

11.11 Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction.

11.12 Expenses. Each Buyer, Seller, and Target shall bear his, her, or its own costs and expenses (including legal fees, accounting and expenses) incurred in connection with this Agreement and the transactions contemplated hereby; provided, however, that Sellers shall also bear the costs and expenses of Target (including all of its legal fees and expenses) in connection with this Agreement and the transactions contemplated hereby in the event that the transactions contemplated by this Agreement are consummated.

11.13 Relationship. It is not the intention of the Parties to create a partnership, joint venture or association, and neither this Agreement nor the transactions to be performed in connection with this Agreement will be construed as creating such a relationship. Nothing contained in this Agreement will be construed to constitute any Party to be the partner of any other Party or to impose any fiduciary duties between or among the Parties.

11.14 Construction. The Parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Parties and no presumption or burden of proof shall arise favoring or disfavoring any Party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any federal, state, local, or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The word “including” shall mean including without limitation. The Parties intend that each representation, warranty, and covenant contained herein shall have independent significance. If any Party has breached any representation, warranty, or covenant contained herein in any respect, the fact that there exists another representation, warranty, or covenant relating to the same subject matter (regardless of the relative levels of specificity) that the Party has not breached shall not detract from or mitigate the fact that the Party is in breach of the first representation, warranty, or covenant.

11.15 Incorporation of Exhibits, Annexes, and Schedules. The Exhibits, Annexes, and Schedules identified in this Agreement are incorporated herein by reference and made a part hereof.

11.16 Specific Performance. Each Party acknowledges and agrees that the other Parties would be damaged irreparably in the event any provision of this Agreement is not performed in accordance with its specific terms or otherwise is breached, so that a Party shall be entitled to injunctive relief to prevent breaches of this Agreement and to enforce specifically this Agreement and the terms and provisions hereof in addition to any other remedy to which such Party may be entitled, at law or in equity. In particular, the Parties acknowledge that the business of Target is unique and recognize and affirm that in the event Sellers breach this Agreement, money damages would be inadequate and Buyer would have no adequate remedy at law, so that Buyer shall have the right, in addition to any other rights and remedies existing in its favor, to enforce its rights and the other Parties’ obligations hereunder not only by action for damages but also by action for specific performance, injunctive, and/or other equitable relief.

11.17 Submission to Jurisdiction. Each of the Parties submits to the jurisdiction of any state or federal court sitting in or for Boulder, Colorado, in any action or proceeding arising out of or relating to this Agreement and agrees that all claims in respect of the action or proceeding may be heard and determined in any such court. Each Party also agrees not to bring any action or proceeding arising out of or relating to this Agreement in any other court. Each of the Parties waives any defense of inconvenient forum to the maintenance of any action or proceeding so brought and waives any bond, surety, or other security that might be required of any other Party with respect thereto. Any Party may make service on any other Party by sending or delivering a copy of the process to the Party to be served at the address and in the manner provided for the giving of notices in Section 11.8 above. Nothing in this Section 11.17, however, shall affect the right of any Party to serve legal process in any other manner permitted

by law or at equity. Each Party agrees that a final judgment in any action or proceeding so brought shall be conclusive and may be enforced by suit on the judgment or in any other manner provided by law or at equity.

(a) On or before March 31, 2007, Buyer shall prepare and deliver to Member Agent a draft balance sheet (the “Draft Closing Date Balance Sheet”) as of the close of business on the Closing Date (determined on a pro forma basis as though the Parties had not consummated the transactions contemplated by this Agreement). The Draft Closing Date Balance Sheet shall be prepared in accordance with GAAP applied on a basis consistent with the preparation of the Financial Statements; provided, however, that assets, liabilities, gains, losses, revenues, and expenses in interim periods or as of dates other than year-end (which normally are determined through the application of so-called interim accounting conventions or procedures) shall be determined, for purposes of the Draft Closing Date Balance Sheet, through full application of the procedures used in preparing the Most Recent Balance Sheet. The Draft Closing Date Balance Sheet shall provide sufficient detail as is reasonably necessary to confirm the calculations therein.

(b) If Member Agent objects to the Draft Closing Date Balance Sheet, any such objections shall be set forth in reasonable detail in a report (the “Objection Report”) that shall be delivered to Buyer within 15 days after receipt of the Draft Closing Date Balance Sheet that shall indicate the grounds upon which Member Agent disputes that the Draft Closing Date Balance Sheet has been prepared in accordance herewith. Any such Objection Report shall specify those items or amounts as to which Member Agent disagrees, and Sellers shall be deemed to have agreed with all other items and amounts contained in the Draft Closing Date Balance Sheet.

(c) Within 15 calendar days of the receipt by Buyer of the Objection Report, Buyer and Member Agent shall endeavor to agree on any items or amounts in dispute.

(d) If Buyer and Member Agent are unable to agree on any matters in dispute within 15 calendar days after receipt by Buyer of the Objection Report, then, within 15 days of the expiration of such 15-day period, the items or amounts in dispute will be submitted for resolution to a nationally recognized independent accounting firm mutually acceptable to Buyer and Member Agent (the “Accountant”). If Buyer and Member Agent are unable to select an independent accountant acceptable to each of them within such 15-day period, then each of Buyer and Member Agent shall select a nationally recognized independent accounting firm acceptable to such Party, and such accounting firms shall mutually select a third national nationally recognized independent accounting firm to serve as the Accountant. The Accountant shall, within 30 calendar days of such submission of the items or amounts in dispute, make a final determination of the items or amounts in dispute, and the Accountant’s determination shall be within the range of the amounts shown on the Draft Closing Date Balance Sheet and the amounts of the disputed items shown on the Objection Report. The Accountant shall issue a written report to Buyer and Member Agent setting forth the Accountant’s determination(s), and such resolution and such written decision shall be final and binding upon Buyer and Member Agent. Buyer and Member Agent agree that the procedure set forth in this Section 2.6 for resolving disputes with respect to the Draft Closing Date Balance Sheet shall be the sole and exclusive method for resolving any such disputes; provided that this provision shall not prohibit Buyer or Member Agent from instituting litigation to enforce the ruling of the Accountant. Buyer and Member Agent shall cooperate to enable the Accountant to render a written decision as promptly as possible. Buyer and Member Agent shall share the fees and expenses of the Accountant in the same proportion as the dollar amount of the disputed items or amounts that are not resolved in favor of Buyer or Seller (as applicable) bears to the total dollar amount of the items or amounts in dispute that are submitted to the Accountant.

(e) “Closing Date Balance Sheet” means (i) the Draft Closing Date Balance Sheet if no Objection Report is provided by Member Agent within the period set forth in Section 2.6(b); or (ii) if an Objection Report is provided by Member Agent within the period set forth in Section 2.6(b), the Draft Closing Date Balance Sheet with such changes as are agreed by Buyer and Member Agent pursuant to Section 2.6(c) or with such changes as are determined by the Accountant pursuant to Section 2.6(d).

(f) If the Member Equity of Target as of the close of business on the Closing Date as set forth on the Closing Date Balance Sheet (the “Closing Member Equity”) is less than $400,000, the Purchase Price shall be reduced by an amount equal to the amount of such difference (the “Cash Payment Decrease”), and the Cash Payment Decrease shall be paid to Buyer by Sellers in accordance with the percentages set forth on Schedule 2.6 hereof within 10 business days after the date of receipt by Buyer and Member Agent of the Draft Closing Date Balance Sheet (or date of final determination in the case of a dispute).

(g) If the Closing Member Equity is greater than $400,000, the Purchase Price shall be increased by an amount equal to such difference (the “Cash Payment Increase”), and the Cash Payment Increase shall be paid by Buyer to Sellers in accordance with the percentages set forth on Schedule 2.6 hereof within 10 business days

after the date of receipt by Buyer and Member Agent of the Closing Date Balance Sheet (or date of final determination in the case of a dispute).

(a) Subject to the other paragraphs of this Section 2.7, the Purchase Price shall be subject to the following adjustments (collectively, the “Earn-Out Payment”):

(b) Earn-Out Allocations. Subject to Section 6.5, any portion of the Earn-Out Payment that is due with respect to Period 1, Period 2 or Period 3 will be paid by Buyer to those Persons (the “Earn-Out Recipients”) and in accordance with the

percentages set forth on Schedule 2.7 hereof (the “Earn-Out Allocations”) by wire transfer or delivery of other immediately available funds within thirty (30) days following the completion of the calendar quarter in which such Earn-Out Payment milestone is achieved. The maximum amount of the Earn-Out Payment under this Section 2.7 is $10,000,000.

(c) Operational Covenants.

(d) Acceleration of Earn-Out Payments. Except as set forth in Section 2.7(e), upon the occurrence of an Acceleration Event, Buyer will pay to Earn-Out Recipients in accordance with the Earn-Out Allocations, within thirty (30) days of such Acceleration Event, an amount equal to $10,000,000 less the Earn-Out Payments made to date, whether or not the milestones associated with the Earn-Out Payments have been achieved. For purposes hereof, an “Acceleration Event” shall mean (i) the termination of the employment of either Rich Schmelzer or Sheri Schmelzer by Buyer (or any subsidiary or other affiliate of Buyer) without “Cause” or the resignation of either Rich Schmelzer or Sheri Schmelzer of employment with Buyer (or any subsidiary or other affiliate of Buyer) with “Good Reason”, as such terms are defined in the respective Employment Agreements or (ii) the occurrence of breach of the Customer Covenant.

(e) Breach of Operational Covenants. Notwithstanding anything herein to the contrary,

(a) Organization of Certain Sellers. Seller (if a corporation or other entity) is duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation or other formation.

(b) Authorization of Transaction. Seller has full power and authority (including full power and authority) to execute and deliver this Agreement and to perform his, her, or its obligations hereunder. This Agreement constitutes the valid and legally binding obligation of Seller, enforceable in accordance with its terms and conditions except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors rights generally and laws relating to the availability of specific performance, injunctive relief or other equitable remedies. Except as has been obtained prior to the date hereof, Seller need not give any notice to, make any filing with, or obtain any authorization, consent, or approval of any government or governmental agency in order to consummate the transactions contemplated by this Agreement. The execution, delivery, and performance of this Agreement and all other agreements contemplated hereby have been duly authorized by Seller.

(c) Non-Contravention. Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (A) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which Seller is subject or, if Seller is an entity, any provision of its charter, bylaws, or other governing documents, (B) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel (any such event, a “Conflict”), or require any notice that has not been given as of the date of this Agreement under any agreement, contract, lease, license, instrument, or other arrangement to which Seller is a party or by which he, she, or it is

bound or to which any of his, her, or its assets are subject, or (C) result in the imposition or creation of a Lien upon or with respect to the Membership Interests.

(d) Brokers’ Fees. Neither Seller nor any of its Affiliates has any Liability to pay any fees or commissions to any broker, finder, or agent with respect to the transactions contemplated by this Agreement.

(e) Membership Interests. Seller holds of record and owns beneficially the Membership Interests set forth next to his, her, or its name in Section 4.2 of the Disclosure Schedule, free and clear of any restrictions on transfer (other than any restrictions under the Securities Act and state securities laws), Taxes, Liens, options, warrants, purchase rights, contracts, commitments, equities, claims, and demands. Seller is not a party to any option, warrant, purchase right, or other contract or commitment (other than this Agreement) that could require Seller to sell, transfer, or otherwise dispose of any membership interests or equity interests, or any voting or economic right therein, of Target. Seller is not a party to any voting trust, proxy, or other agreement or understanding with respect to the voting of any membership interests or equity interests of Target.

(a) Organization of Buyer. Buyer is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware.

(b) Authorization of Transaction. Buyer has full corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder. This Agreement constitutes the valid and legally binding obligation of Buyer, enforceable in accordance with its terms and conditions except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors rights generally and laws relating to the availability of specific performance, injunctive relief or other equitable remedies. Buyer need not give any notice to, make any filing with, or obtain any authorization, consent, or approval of any government or governmental agency in order to consummate the transactions contemplated by this Agreement. The execution, delivery, and performance of this Agreement and all other agreements contemplated hereby have been duly authorized by Buyer.

(c) Non-Contravention. Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (A) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which Buyer is subject or any provision of its charter, bylaws, or other governing documents or (B) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice under any agreement, contract, lease, license, instrument, or

other arrangement to which Buyer is a party or by which it is bound or to which any of its assets are subject.

(d) Brokers’ Fees. Buyer has no Liability to pay any fees or commissions to any broker, finder, or agent with respect to the transactions contemplated by this Agreement for which any Seller could become liable or obligated.

(e) Cash Resources. Buyer has sufficient cash resources to pay any amounts owed pursuant to Sections 2.6 and 2.7 hereunder.

(a) Target has not sold, leased, transferred, or assigned any of its material assets, tangible or intangible, other than for a fair consideration in the Ordinary Course of Business;

(b) Target has not entered into any agreement, contract, lease, or license (or series of related agreements, contracts, leases, and licenses) outside the Ordinary Course of Business or involving a future payment after the date of this Agreement in excess of $50,000;

(c) no party (including Target) has accelerated, terminated, made a material modification to, or cancelled any material agreement, contract, lease, or license (or series of related agreements, contracts, leases, and licenses);

(d) Target has not imposed any Liens upon any of its assets, tangible or intangible;

(e) Target has not made any capital expenditure (or series of related capital expenditures) in excess of $50,000 in the aggregate;

(f) Target has not made any capital investment in, any loan or advances of money to, or any acquisition of the securities or assets of, any other Person (or series of related capital investments, loans, and acquisitions) outside the Ordinary Course of Business;

(g) Target has not created, incurred, assumed, or guaranteed any indebtedness for borrowed money or capitalized lease obligation involving more than $50,000 in the aggregate, except for trade payables and advances to employees for travel and business expenses in the Ordinary Course of Business;

(h) Target has not delayed or postponed the payment of accounts payable and other Liabilities outside the Ordinary Course of Business;

(i) Target has not cancelled, compromised, waived, or released any material right or claim (or series of material related rights and claims) either involving more than $50,000 or outside the Ordinary Course of Business;

(j) Target has not transferred, assigned, or granted any License of any rights under or with respect to any Intellectual Property;

(k) there has been no change made or authorized in the Articles of Organization or Operating Agreement of Target;

(l) Target has not issued, sold, or otherwise disposed of any of its membership interests, or granted any options, warrants, or other rights to purchase or obtain (including upon conversion, exchange, or exercise) any of its Membership Interests, or any voting or economic interests therein;

(m) Target has not declared, set aside, or paid any dividend or made any distribution or return of capital with respect to its Membership Interests (whether in cash or in kind) or redeemed, purchased, or otherwise acquired any of its membership interests;

(n) Target has not experienced any damage, destruction, or loss (whether or not covered by insurance) to its property;

(o) Target has not made any loan to, or entered into any other transaction with, any of its managers, officers, and employees outside the Ordinary Course of Business;

(p) Target has not entered into any employment contract or collective bargaining agreement, written or oral, or modified the terms of any existing such contract or agreement;

(q) Target has not granted any increase in the base compensation of any of its managers, officers or employees outside the Ordinary Course of Business;

(r) Target has not adopted, amended, modified, or terminated any bonus, profit sharing, incentive, severance, or other plan, contract, or commitment for the benefit of any of its managers, officers or employees;

(s) Target has not changed any employment terms for any of its managers, officers or employees outside the Ordinary Course of Business;

(t) Target has not made or pledged to make any charitable or other capital contribution outside the Ordinary Course of Business;

(u) there has not been any other material occurrence, event, incident, action, failure to act, or transaction outside the Ordinary Course of Business involving Target;

(v) Target has not discharged a material Liability or Lien outside the Ordinary Course of Business; and

(y) Target has not committed to do any of the foregoing.

(a) Target has filed all Tax Returns that it was required to file under applicable laws and regulations. All such Tax Returns were correct and complete in all material respects and were prepared in substantial compliance with all applicable laws and regulations. All Taxes due and owing by Target shown on any Tax Return have been paid. Target currently is not the beneficiary of any extension of time within which to file any Tax Return. No claim has ever been made by an authority in a jurisdiction where Target does not file Tax Returns that Target is or may be subject to taxation by that jurisdiction. There are no Liens for Taxes (other than Taxes not yet due and payable) upon any of the assets of Target.

(b) Target, and to the Knowledge of any Seller, any company from whom Target leases employees, has withheld and paid all Taxes required to have been withheld and paid in connection with any amounts paid or owing to any employee, independent contractor, creditor, member, or other third party.

(c) No Seller or manager or officer (or employee responsible for Tax matters) of Target expects any authority to assess any additional Taxes for any period for which Tax Returns have been filed. No foreign, federal, state, or local tax audits or administrative or judicial Tax proceedings are pending or being conducted with respect to Target. Target has not received from any foreign, federal, state, or local taxing authority (including jurisdictions where Target has not filed Tax Returns) any (i) notice indicating an intent to open an audit or other review, (ii) request for information related to Tax matters, or (iii) notice of deficiency or proposed adjustment for any amount of Tax proposed, asserted, or assessed by any taxing authority against Target. Section 4.11(c) of the Disclosure Schedule lists all federal, state, local, and foreign income Tax Returns filed with respect to Target for the shorter of the taxable periods ended on or after June 30, 2003 or the period of Target’s existence, indicates those Tax Returns that have been audited, and indicates those Tax Returns that currently are the subject of audit. Sellers have delivered to Buyer correct and complete copies of all federal income Tax Returns, examination reports, and statements of deficiencies assessed against or agreed to by Target filed or received since the shorter of the taxable periods ended on or after June 30, 2003 or the period of Target’s existence.

(d) Target has not waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency.

(e) Target is not a party to any agreement, contract, arrangement or plan that has resulted or could result, separately or in the aggregate, in the payment of (i) any “excess parachute payment” within the meaning of Code §280G (or any corresponding provision of

state, local or foreign Tax law) and (ii) any amount that will not be fully deductible as a result of Code §162(m) (or any corresponding provision of state, local or foreign Tax law). Target has not been a United States real property holding corporation within the meaning of Code §897(c)(2) during the applicable period specified in Code §897(c)(1)(A)(ii). Target has not disclosed on its federal income Tax Returns all positions taken therein that could give rise to a substantial understatement of federal income Tax within the meaning of Code §6662. Target is not a party to or bound by any Tax allocation or sharing agreement. Target (A) has not been a member of an Affiliated Group filing a consolidated federal income Tax Return, or (B) does not have any Liability for the Taxes of any Person (other than Target) under Reg. §1.1502-6 (or any similar provision of state, local, or foreign law), as a transferee or successor, by contract, or otherwise.

(f) The unpaid Taxes of Target (A) did not, as of the Most Recent Fiscal Month End, exceed the reserve for Tax Liability (rather than any reserve for deferred Taxes established to reflect timing differences between book and Tax income) set forth on the face of the Most Recent Balance Sheet (rather than in any notes thereto) and (B) do not exceed that reserve as adjusted for the passage of time through the Closing Date in accordance with the past custom and practice of Target in filing its Tax Returns. Since the date of the Most Recent Balance Sheet, Target has not incurred any liability for Taxes arising from extraordinary gains or losses, as that term is used in GAAP, outside the Ordinary Course of Business consistent with past custom and practice.

(g) Target will not be required to include any item of income in, or exclude any item of deduction from, taxable income for any taxable period (or portion thereof) ending after the Closing Date as a result of any:

(h) Target has not distributed stock or equity of another Person, or has had its membership interests distributed by another Person, in a transaction that was purported or intended to be governed in whole or in part by Code §355 or Code §361.

(a) Target does not have, and has never had, any Owned Real Property.

(b) Section 4.12(b) of the Disclosure Schedule sets forth the address of each parcel of Leased Real Property, and a true and complete list of all Leases for each such Leased Real Property (including the date and name of the parties to such Lease document). Target has delivered to Buyer a true and complete copy of each such Lease document. Except as set forth in Section 4.12(b) of the Disclosure Schedule, with respect to each of the Leases:

(c) The Leased Real Property identified in Section 4.12(b) of the Disclosure Schedule (collectively, the “Real Property”) comprises all of the real property used or intended to be used in, or otherwise related to, Target’s business; and Target is not a party to any agreement or option to purchase any real property or interest therein.

(d) All buildings, structures, fixtures, building systems and equipment, and all components thereof, included in the Real Property (the “Improvements”) are in good condition and repair and sufficient for the operation of Target’s business. There are no structural deficiencies or latent defects affecting any of the Improvements and there are no facts or conditions affecting any of the Improvements that would, individually or in the aggregate, interfere in any respect with the use or occupancy of the Improvements or any portion thereof in the operation of Target’s business as currently conducted thereon.

(e) There is no condemnation, expropriation or other proceeding in eminent domain, pending or, to the Knowledge of any Seller, threatened, affecting any parcel of Real Property or any portion thereof or interest therein. There is no injunction, decree, order, writ or judgment outstanding, or any claim, litigation, administrative action or similar proceeding, pending or, to the Knowledge of any Seller, threatened, relating to the ownership, lease, use or occupancy of the Real Property or any portion thereof, or the operation of Target’s business as currently conducted thereon.

(f) The Real Property is in material compliance with all applicable building, zoning, subdivision, health and safety and other land use laws, including the Americans with Disabilities Act of 1990, as amended, and all insurance requirements affecting the Real Property (collectively, the “Real Property Laws”), and the current use and occupancy of the Real Property and operation of Target’s business thereon do not violate in any material respect any Real Property Laws. Target has not received any notice of violation of any Real Property Law and, to the Knowledge of any Seller, there is no Basis for the issuance of any such notice or the taking of any action for such violation.

(g) All water, oil, gas, electrical, steam, compressed air, telecommunications, sewer, storm and waste water systems and other utility services or systems for the Real Property have been installed and are operational and sufficient for the operation of Target’s business as currently conducted thereon.

(h) All certificates of occupancy, permits, licenses, franchises, approvals and authorizations (collectively, the “Real Property Permits”) of all governmental authorities, boards of fire underwriters, associations or any other entity having jurisdiction over the Real Property that are required or appropriate to use or occupy the Real Property or operate Target’s business as currently conducted thereon, have been issued and are in full force and effect. The Real Property Permits are transferable to Buyer without the consent or approval of the issuing governmental authority or entity; no disclosure, filing or other action by Target is required in connection with such transfer; and Buyer shall not be required to assume any additional liabilities or obligations under the Real Property Permits as a result of such transfer.

(i) Target’s use or occupancy of the Real Property or any portion thereof or the operation of Target’s business as currently conducted thereon is not dependent on a “permitted non-conforming use” or “permitted non-conforming structure” or similar variance, exemption or approval from any governmental authority.

(k) The current use and occupancy of the Real Property and the operation of Target’s business as currently conducted thereon do not violate in any material respect any easement, covenant, condition, restriction or similar provision in any instrument of record or other unrecorded agreement affecting such Real Property.

(a) Target owns or has the right to use pursuant to a valid and enforceable written License all Intellectual Property necessary for the operation of the business of Target as presently conducted by Target. Each item of Intellectual Property owned or used by Target immediately prior to the Closing will be owned or available for use by Target on identical terms and conditions immediately subsequent to the Closing. Target has taken all reasonable action to maintain and protect each item of Intellectual Property that it owns.

(b) Target has not infringed upon or misappropriated any Intellectual Property rights of third parties, and none of Sellers and the managers and officers (and employees with responsibility for Intellectual Property matters) of Target has ever received any written charge, complaint, claim, demand, or notice alleging any such infringement or misappropriation (including any claim that Target must license or refrain from using any Intellectual Property rights of any third party). To the Knowledge of any of Sellers and the managers and officers (and employees with responsibility for Intellectual Property matters) of Target, no third party has infringed upon or misappropriated any Intellectual Property rights of Target.

(c) Section 4.13(c) of the Disclosure Schedule identifies each patent or registration that has been issued to Target with respect to any of its Intellectual Property, identifies each pending patent application or application for registration that Target has made with respect to any of its Intellectual Property, and identifies each License that Target has granted to any third party with respect to any of Target’s Intellectual Property. Sellers have delivered to Buyer correct and complete copies of all such patents, registrations, applications and Licenses (as amended to date) and have made available to Buyer correct and complete copies of all other written documentation evidencing ownership and prosecution (if applicable) of each such item. Section 4.13(c) of the Disclosure Schedule also identifies each unregistered trademark, service mark, trade name, corporate name or Internet domain name and computer software item (other than commercially available off-the-shelf software) owned or purported to be owned by Target or licensed to Target in connection with its business. With respect to each item of Intellectual Property owned by Target and required to be identified in Section 4.13(c) of the Disclosure Schedule:

(d) Section 4.13(d) of the Disclosure Schedule identifies each item of Intellectual Property that any third party owns and that Target uses pursuant to License. Sellers have delivered to Buyer correct and complete copies of all such Licenses (as amended to date). With respect to each item of Intellectual Property required to be identified in Section 4.13(d) of the Disclosure Schedule:

(e) To the Knowledge of any of Sellers: (A) Target has not in the past infringed upon or misappropriated any Intellectual Property rights of third parties as a result of the continued operation of its business as presently conducted; and (B) no written notices regarding any of the foregoing (including, without limitation, any demands or offers to license any Intellectual Property from any third party) have been received.

(f) Sellers have taken reasonable actions to maintain and protect the Intellectual Property of Target. To the Knowledge of any of Sellers, the owners of any of the Intellectual Property licensed to Target have taken all reasonable actions to maintain and protect the Intellectual Property covered by such License.

(a) any agreement (or group of related agreements) for the lease of personal property to or from any Person providing for future lease payments after the date of this Agreement in excess of $10,000 per annum;

(b) any agreement (or group of related agreements) for the purchase or sale of raw materials, commodities, supplies, products, or other personal property, or for the furnishing or receipt of services, the performance of which will extend over a period of more than one (1) year, result in a material loss to Target, or involve future consideration after the date of this Agreement in excess of $50,000;

(c) any agreement concerning a partnership or joint venture;

(d) any agreement (or group of related agreements) under which it has created, incurred, assumed, or guaranteed any indebtedness for borrowed money, or any

capitalized lease obligation, in excess of $50,000 or under which it has imposed a Lien on any of its assets, tangible or intangible;

(e) any agreement concerning non-competition;

(f) any agreement with any of Sellers and their Affiliates (other than Target);

(g) any profit sharing, option, equity purchase, equity appreciation, deferred compensation, severance, or other material plan or arrangement for the benefit of its current or former managers, officers, and employees;

(h) any collective bargaining agreement;

(i) any agreement for the employment of any individual on a full-time, part-time, consulting, or other basis providing annual compensation in excess of $50,000 or providing material severance benefits (other than standard offer letters that do not contain terms regarding severance benefits);

(j) any agreement under which it has advanced or loaned any amount to any of its managers, officers, and employees outside the Ordinary Course of Business;

(k) any agreement under which the consequences of a material default or termination could have a Material Adverse Effect;

(l) any agreement under which it has granted any Person any registration rights (including, without limitation, demand and piggyback registration rights);

(m) any settlement, conciliation or similar agreement, the performance of which will involve payment after the Closing Date of consideration in excess of $10,000;

(n) any agreement under which Target has advanced or loaned any Person amounts in excess of $10,000 in the aggregate; or

(o) any other agreement (or group of related agreements) the performance of which involves a future payment after the date of this Agreement in excess of $50,000.

(a) the name, address, and telephone number of the agent;

(b) the name of the insurer, the name of the policyholder, and the name of each covered insured; and

(c) the policy number and the period of coverage.

(a) Section 4.24 of the Disclosure Schedule lists each Employee Benefit Plan that Target directly or indirectly maintains, to which Target directly or indirectly contributes or has any obligation to contribute, or with respect to which Target has any direct or indirect Liability.

(b) Target does not contribute to, have any obligation to contribute to, or have any Liability under or with respect to any Employee Pension Benefit Plan that is a “defined benefit plan” (as defined in ERISA §3(35)). No asset of Target is subject to any Lien under ERISA or the Code.

(a) Target has materially complied and is in material compliance with all Environmental, Health, and Safety Requirements.

(b) Without limiting the generality of the foregoing, Target has obtained and materially complied with, and is in material compliance with, all permits, licenses and other authorizations that are required pursuant to Environmental, Health, and Safety Requirements for the occupation of their facilities and the operation of their business.

(c) Target has not received any written or oral notice, report or other information regarding any actual or alleged violation of Environmental, Health, and Safety Requirements, or any Liabilities, including any investigatory, remedial or corrective obligations, relating to any of them or their facilities arising under Environmental, Health, and Safety Requirements.

(d) To the Knowledge of any Seller, none of the following exists at any property or facility owned or operated by Target: (1) underground storage tanks, (2) asbestos-containing material in any form or condition, (3) materials or equipment containing polychlorinated biphenyls, or (4) landfills, surface impoundments, or disposal areas.

(e) Target has not treated, stored, disposed of, arranged for or permitted the disposal of, transported, handled, manufactured, distributed, or released any substance, including without limitation any hazardous substance, or owned or operated any property or facility (and no such property or facility is contaminated by any such substance) so as to give rise to any current or future Liabilities, including any Liability for fines, penalties, response costs, corrective action costs, personal injury, property damage, natural resources damages or attorney’s fees, pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended

(“CERCLA”), the Solid Waste Disposal Act, as amended (“SWDA”) or any other Environmental, Health, and Safety Requirements.

(f) Neither this Agreement nor the consummation of the transactions that are the subject of this Agreement will result in any obligations for site investigation or cleanup, or notification to or consent of government agencies or third parties, pursuant to any of the so-called “transaction-triggered” or “responsible property transfer” Environmental, Health, and Safety Requirements.

(h) Target has not assumed, or otherwise become subject to, any Liability, including without limitation any obligation for corrective or remedial action, of any other Person relating to Environmental, Health, and Safety Requirements.

(i) Sellers and Target have furnished to Buyer all environmental audits, reports and other material environmental documents relating to Target’s or its predecessors’ or Affiliates’ past or current properties, facilities, or operations that are in their possession or under their reasonable control.

(a) Subject to the terms of the Confidentiality Agreement dated May 31, 2006, each of Sellers will permit, and Sellers will cause Target to permit, representatives of Buyer (including legal counsel and accountants) to have reasonable access to all premises, properties, personnel, books, records (including Tax records), contracts, and documents of or pertaining to each of Target, and each of Sellers will provide, and will cause Target to provide, such other information regarding Target and its business as Buyer shall reasonably request.

(b) Buyer will provide Target and its managers and officers reasonable access to Buyer’s representatives, suppliers and financial information as is reasonably necessary for Target to: (i) appropriately assess Buyer’s ability to support the growth required to satisfy the target amounts for the Earn-Out Payment, and (ii) the application of Target’s accounting principles to the calculation of EBIT.

(a) Sellers will give prompt written notice to Buyer of any material adverse development or of any Material Adverse Effect causing a breach of any of the representations and warranties in Section 4 above. Each Party will give prompt written notice to the others of any material adverse development causing a breach of any of his, her, or its own representations and warranties in Sections 3.1 or 3.2 above. No disclosure by any Party pursuant to this Section 5.6, however, shall be deemed to amend or supplement the Disclosure Schedule or to prevent or cure any misrepresentation, breach of warranty, or breach of covenant.

(b) From the date of this Agreement until the Closing Date, Target shall periodically (but not less frequently than once every 30 days) notify Buyer in writing of any contracts and other agreements that Target has entered into during such

period which would be required to list on Section 4.16 of the Disclosure Schedule had such agreements been entered into prior to the date hereof.

(a) Until the earlier of December 31, 2006 or the date on which this Agreement is validly terminated pursuant to the provisions of Section 10, none of Sellers will (and Sellers will not cause or permit Target to)

(b) Each Seller agrees on behalf of itself and Target to notify Buyer in writing promptly upon the receipt of an Acquisition Proposal.

(c) The term “Acquisition Proposal” refers to any proposal, plan, agreement, understanding or arrangement contemplating (i) any merger, consolidation, reorganization, recapitalization or similar transaction involving Target (other than the transactions contemplated herein), (ii) any acquisition of securities of Target (whether or not outstanding), (iii) any transfer of any material asset of Target, or (iv) any transaction that would prohibit the consummation of the transactions contemplated by this Agreement.

(a) Sellers shall prepare or cause to be prepared and file or cause to be filed all Tax Returns for Target that include any Pre-Closing Tax Period or portion thereof, whether filed before or after the Closing Date. The costs of preparation for any Tax Returns of Target that include any portion of the Pre-Closing Tax Period shall be paid by Sellers.

(b) Sellers should pay all Taxes of Target which are or become due and owing for the Pre-Closing Tax Period, except such Taxes as are reflected in the Closing Date Balance Sheet. In the case of any taxable period that includes (but does not end on) the Closing Date (a “Straddle Period”), the amount of any Taxes based on or measured by income or receipts of Target for the Pre-Closing Tax Period shall be determined based on an interim closing of the books as of the close of business on the Closing Date (and for such purpose, the taxable period of any partnership or other pass-through entity in which Target holds a beneficial interest shall be deemed to terminate at such time) and the amount of other Taxes of Target for a Straddle Period that relates to

the Pre-Closing Tax Period shall be deemed to be the amount of such Tax for the entire taxable period multiplied by a fraction the numerator of which is the number of days in the taxable period ending on the Closing Date and the denominator of which is the number of days in such Straddle Period.

(c) All transfer, documentary, use, stamp, registration and other such Taxes, and all conveyance fees, recording charges and other fees and charges (including any penalties and interest) incurred in connection with consummation of the transactions contemplated by this Agreement shall be paid by Sellers when due, and Sellers will, at their own expense, file all necessary Tax Returns and other documentation with respect to all such Taxes, fees and charges. Notwithstanding the foregoing, Seller shall not be responsible for, and Buyer shall satisfy all obligations arising from, any sales Taxes incurred in connection with the consummation of the transactions contemplated by this Agreement.

(d) The Parties agree to report all payments made pursuant to this Agreement as consideration for the Membership Interests and not as compensation for services or other form of income. No Party shall take a position inconsistent with such treatment on any tax return, tax statement, information report, financial statement or other document or filing.

(a) Buyer, Target, and Sellers shall cooperate fully, as and to the extent reasonably requested by the other Party, in connection with the filing of Tax Returns pursuant to this Section 6.7 and any audit, litigation or other proceeding with respect to Taxes. Such cooperation shall include the retention and (upon the other Party’s request) the provision of records and information that are reasonably relevant to any such audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. Target and Sellers agree (A) to retain all books and records with respect to Tax matters pertinent to Target relating to any taxable period beginning before the Closing Date until the expiration of the statute of limitations (and, to the extent notified by Buyer or Sellers, any extensions thereof) of the respective taxable periods, and to abide by all record retention agreements entered into with any taxing authority, and (B) to give the other Party reasonable written notice prior to transferring, destroying or discarding any such books and records and, if the other Party so requests, Target or Sellers, as the case may be, shall allow the other Party to take possession of such books and records prior thereto.

(b) Buyer and Sellers further agree, upon request, to use their commercially reasonable efforts to obtain any certificate or other document from any governmental authority or any other Person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed (including, but not limited to, with respect to the transactions contemplated hereby).

(c) Buyer and Sellers further agree, upon request, to provide the other Party with all information that either Party may be required to report pursuant to Code §6043 and all Treasury Regulations promulgated thereunder.

(a) The representations and warranties of Sellers set forth in Section 3.1 and Section 4 above shall be true and correct at and as of the Closing Date, as though such representations and warranties were made on the Closing Date (except for such representations and warranties as of a specified date, which shall be accurate as of such date) except as has not had, individually or in the aggregate, a Material Adverse Effect.

(b) Sellers shall have performed and complied with all of their covenants hereunder in all respects through the Closing, except as not had, individually or in the aggregate, a Material Adverse Effect;

(c) no action, suit, or proceeding shall be pending or threatened before any court or quasi-judicial or administrative agency of any federal, state, local, or foreign jurisdiction or before any arbitrator wherein an unfavorable injunction, judgment, order, decree, ruling, or charge would (A) prevent consummation of any of the transactions contemplated by this Agreement, (B) cause any of the transactions contemplated by this Agreement to be rescinded following consummation, or (C) adversely affect the right of Buyer to own the Membership Interests and operate Target’s business;

(d) Sellers shall have delivered to Buyer a certificate to the effect that each of the conditions specified above in Sections 7.1(a)-7.1(c) has been satisfied;

(e) Buyer shall have received the resignations, effective as of the Closing, of each manager of Target other than those whom Buyer shall have specified in writing at least five (5) business days prior to the Closing;

(f) during the combined months of October and November 2006, the aggregate revenue of Target, determined through full application of the procedures used in preparing the Most Recent Income Statement, shall have been at least $2,000,000;

(g) there shall not have occurred a Material Adverse Effect;

(h) each Seller shall deliver to Buyer a non-foreign affidavit dated as of the Closing Date, sworn under penalty of perjury and in form and substance required under the Treasury Regulations issued pursuant to Code §1445 stating that such Seller is not a “Foreign Person” as defined in Code §1445 (the “FIRPTA Affidavit”);

(i) each of Rich Schmelzer and Sheri Schmelzer shall have entered into employment agreements with Buyer, attached hereto as Exhibits D-1 and D-2 (the “Employment Agreements”);

(j) Sellers shall have delivered to Buyer a copy of the Articles of Organization of Target certified on or soon before the Closing Date by the Secretary of State of Colorado;

(k) Sellers shall have delivered to Buyer a copy of the certificate of good standing of Target issued on or soon before the Closing Date by the Secretary of State of Colorado; and

(l) Sellers shall have delivered to Buyer a certificate of the secretary of Target, dated as of the Closing Date, in form and substance reasonably satisfactory to Buyer, stating that there have been no amendments to the Articles of Organization or Operating Agreement of Target since the date specified in clause (l) above.

(a) The representations and warranties of Buyer set forth in Section 3.2 above shall be true and correct at and as of the Closing Date, as though such representations and warranties were made on the Closing Date (except for such representations and warranties as of a specified date, which shall be accurate as of such date) except as has not had, individually or in the aggregate, a Buyer Material Adverse Effect;

(b) Buyer shall have performed and complied with all of its covenants hereunder in all respects through the Closing, except as not had, individually or in the aggregate, a Buyer Material Adverse Effect;

(c) no action, suit, or proceeding shall be pending or threatened before any court or quasi-judicial or administrative agency of any federal, state, local, or foreign jurisdiction or before any arbitrator wherein an unfavorable injunction, judgment, order, decree, ruling, or charge would (A) prevent consummation of any of the transactions contemplated by this Agreement or (B) cause any of the transactions contemplated by this Agreement to be rescinded following consummation (and no such injunction, judgment, order, decree, ruling, or charge shall be in effect);

(d) Buyer shall have delivered to Sellers a certificate to the effect that each of the conditions specified above in Sections 7.2(a)-7.2(c) has been satisfied;

(e) there shall not have occurred a Buyer Material Adverse Effect; and

(f) Rich Schmelzer shall have been released as a guarantor on any lease of Target.

(a) In the event any Seller breaches (or in the event of any third party claim that, if true, would mean any Seller has breached) any of his, her, or its representations and warranties contained in Section 4 or any of its covenants and, provided that Buyer makes a written claim for indemnification against any Seller pursuant to Section 11.8 below within the applicable survival period set forth in Section 8.1 above, then each Seller shall jointly and severally indemnify Buyer from and against the entirety of any Losses paid or incurred by Buyer resulting from, arising out of or caused by the breach.

(b) In the event any Seller breaches (or in the event of any third party claim that, if true, would mean any Seller breached) any of his, her, or its covenants in Section 3.1 above, and provided that Buyer makes a written claim for indemnification against such a Seller pursuant to Section 11.8 below within the applicable survival period set forth in Section 8.1 above, then such Seller shall severally and not jointly indemnify Buyer from and against the entirety of any Losses paid or incurred by Buyer resulting from, arising out of or caused by the breach.

(c) Buyer shall not be entitled to indemnification for any Losses hereunder until the aggregate amount of all Losses of Buyer under this Section 8.2 shall exceed $80,000 (at which point Sellers will be obliged to indemnify Buyer from and against all such Losses relating back to the first dollar).

(d) Except as specifically set forth in Section 8.2(e) below, the maximum aggregate amount that Buyer may recover from Sellers pursuant to the indemnity set forth in Sections 8.2(a) and (b) shall not exceed $800,000; provided, that, in no event shall any Seller be liable for more than his respective Percentage Ownership Amount of $800,000; provided, however, that, if, on the Expiration Date, the Losses

suffered by Buyer pursuant to the indemnity set forth in Sections 8.2(a) and (b) exceed $800,000, then Buyer may recover such amounts in excess of $800,000 by withholding up to a maximum of 10% of any Earn-Out Payment owed by Buyer to the Earn-Out Recipients hereunder and offset such amounts against such Losses (based on the Earn-out Allocations).

(e) Notwithstanding the foregoing, the maximum aggregate amount that Buyer may recover from any particular Seller pursuant to the indemnity set forth in Sections 8.2(a) and (b) arising from breaches of the Specified Representations shall not exceed the total amounts actually paid by Buyer to such Seller under this Agreement.

(f) Nothing in this Section 8 shall prevent Buyer from bringing a common law action for fraud against any Person whose own fraud has caused Buyer to suffer Losses or limit the Losses recoverable by Buyer in such common law action; provided, that, Buyer shall not be entitled to recover more than once for the same Loss.

(a) In the event Buyer breaches (or in the event of any third claim that, if true, would mean Buyer has breached) any of its representations, warranties and covenants contained herein and, provided that any Seller makes a written claim for indemnification against Buyer pursuant to Section 11.8 below within such survival period (if there is an applicable survival period pursuant to Section 8.1 above), then Buyer shall indemnify each Seller from and against any Losses suffered resulting from, arising out of or caused by the breach.

(b) Sellers shall not be entitled to indemnification for any Losses hereunder until the aggregate amount of all Losses of Sellers under this Section 8.3 shall exceed $80,000 (at which point Buyer will be obliged to indemnify Sellers from and against all such Losses relating back to the first dollar); provided, however, that the foregoing shall not apply to the breach by Buyer of any payment obligation pursuant to Section 2.7(d).

(c) The maximum aggregate amount that may be recovered from Buyer pursuant to the provisions of Section 8.3 shall not exceed an amount equal to $800,000 plus 10% of any Earn-Out Payment; provided, however, that the foregoing shall not apply to the breach by Buyer of any payment obligation pursuant to Section 2.7(d).

(a) If any third party notifies any Party with respect to any matter (a “Third-Party Claim”) that may give rise to a claim for indemnification against Sellers or Buyer (the “Indemnifying Party”) under this Section 8, then Buyer or Seller (as applicable) (the “Indemnified Party”) shall promptly notify each Indemnifying Party thereof in writing; provided, however, that no delay on the part of the Indemnified Party in notifying any Indemnifying Party shall relieve the Indemnifying Party from any

obligation hereunder unless (and then solely to the extent) the Indemnifying Party is thereby prejudiced.

(b) Any Indemnifying Party will have the right to defend the Indemnified Party against the Third-Party Claim with counsel of his, her, or its choice reasonably satisfactory to the Indemnified Party so long as (A) the Indemnifying Party notifies the Indemnified Party in writing within 15 days after the Indemnified Party has given notice of the Third-Party Claim that the Indemnifying Party will indemnify the Indemnified Party from and against the entirety of any Adverse Consequences the Indemnified Party may suffer resulting from, arising out of, relating to, in the nature of, or caused by the Third-Party Claim, (B) the Indemnifying Party provides the Indemnified Party with evidence reasonably acceptable to the Indemnified Party that the Indemnifying Party will have the financial resources to defend against the Third-Party Claim and fulfill its indemnification obligations hereunder, (C) the Third-Party Claim involves only money damages and does not seek an injunction or other equitable relief, (D) settlement of, or an adverse judgment with respect to, the Third-Party Claim is not, in the good faith judgment of the Indemnified Party, likely to establish a precedent or practice materially adverse to the continuing business interests or the reputation of the Indemnified Party, and (E) the Indemnifying Party conducts the defense of the Third-Party Claim actively and diligently.

(c) So long as the Indemnifying Party is conducting the defense of the Third-Party Claim in accordance with Section 8.4(b) above, (A) the Indemnified Party may retain separate co-counsel at his, her, or its sole cost and expense and participate in the defense of the Third-Party Claim, (B) the Indemnified Party will not consent to the entry of any judgment on or enter into any settlement with respect to the Third-Party Claim without the prior written consent of the Indemnifying Party (not to be unreasonably withheld), and (C) the Indemnifying Party will not consent to the entry of any judgment on or enter into any settlement with respect to the Third-Party Claim without the prior written consent of the Indemnified Party (not to be unreasonably withheld).

(d) In the event any of the conditions in Section 8.4(b) above is or becomes unsatisfied, however, (A) the Indemnified Party may defend against, and consent to the entry of any judgment on or enter into any settlement with respect to, the Third-Party Claim in any manner his, her, or it may reasonably deem appropriate (and the Indemnified Party need not consult with, or obtain any consent from, any Indemnifying Party in connection therewith), (B) the Indemnifying Parties will reimburse the Indemnified Party promptly and periodically for the costs of defending against the Third-Party Claim (including reasonable attorneys’ fees and expenses), and (C) the Indemnifying Parties will remain responsible for any Adverse Consequences the Indemnified Party may suffer resulting from, arising out of, relating to, in the nature of, or caused by the Third-Party Claim to the fullest extent provided in; provided, however, that, except with the consent of the Member Agent, no settlement of any such Third-Party Claim with third-party claimants shall be determinative of (i) the amount of Losses relating to such matter or (ii) whether Buyer is entitled to indemnification pursuant to this Section 8.

(a) Buyer and Member Agent may terminate this Agreement by mutual written consent at any time prior to the Closing.

(b) Buyer may terminate this Agreement at any time prior to the Closing if there has been a Material Adverse Effect that either (i) is incapable of being cured or (ii) is capable of being cured but which Sellers fail to cure within 15 days after Member Agent receives written notice thereof.

(c) Member Agent may terminate this Agreement at any time prior to the Closing if there has been a Buyer Material Adverse Effect that either (i) is incapable of being cured or (ii) is capable of being cured but which Buyer fails to cure within 15 days after Buyer receives written notice thereof.

(d) Either Buyer or Sellers (acting through the Member Agent) may terminate this Agreement by giving written notice thereof to the other Party if the Closing shall not have occurred on or before December 31, 2006 (unless the failure results primarily from the terminating Party breaching any of its representations, warranties or covenants (including the covenant set forth in Section 2.4) contained in this Agreement).

(a) In the event of the termination of this Agreement as provided in Section 10.1, this Agreement shall be of no further force or effect; provided, however, that this Section 10.2 and Section 11 shall survive the termination of this Agreement and shall remain in full force and effect.

(b) In the event that this Agreement is validly terminated by Buyer pursuant to Section 10.1(b) and Buyer shall not have materially breached any provision of this Agreement, the Deposit and any interest or other income earned on the Deposit shall be forfeited to Buyer and Target shall pay to Buyer liquidated damages in the aggregate amount of $1,000,000 within 10 days of such termination, by wire transfer or delivery of other immediately available funds.

(c) In the event that this Agreement is validly terminated by the Member Agent pursuant to Section 10.1(c) and no Seller shall have materially breached any provision this Agreement, in addition to any other remedies that may be available to Target and Sellers, including breach of contract (which remedies shall not be subject to any limitations set forth in Section 8, including Section 8.3), the Deposit shall be forfeited to Sellers, and any interest or other income earned on the Deposit shall be returned to Buyer. Notwithstanding anything herein to the contrary, the parties hereby confirm their understanding that the Sellers’ sole remedy under this Agreement for any Acceleration Event under Section 2.7(d) shall be the acceleration of the Earn-Out Payment and Sellers shall not be entitled to any other remedy under this Agreement.

(d) In the event that this Agreement is validly terminated pursuant to Sections 10.1(a) or 10.1(d), the Deposit and any interest or other income earned on the Deposit shall be forfeited to Buyer.

(i) If EBIT for the period commencing on Closing and ending on the earlier of: (x) the satisfaction of the $12,500,000 Earn-Out Payment milestone described in paragraph 2.7(a)(i)(B) below and (y) the close of business on December 31, 2007 (“Period 1”):

(ii) If EBIT for the period commencing at the ending of Period 1 and ending on the earlier of: (x) the satisfaction of the $15,625,000 Earn-Out Payment milestone described in paragraph 2.7(a)(ii)(B) below and (y) the close of business on the date that is one year following the end of Period 1 (“Period 2”):

(iii) If EBIT for the period commencing at the ending of Period 2 and ending on the earlier of: (x) the satisfaction of the $15,625,000 Earn-Out Payment milestone described in paragraph 2.7(a)(iii)(B) below and (y) the close of business on the date that is one year following the end of Period 2 (“Period 3”):

(i) Target Operational Covenants. Until the earlier of the end of Year 3 or the date on which the Earn-Out Payment that has been made by Buyer is $10,000,000, Rich Schmelzer and Sheri Schmelzer shall cause Target to operate its business in good faith and in a manner consistent with reasonable business practices and with its operations prior to the date hereof unless Target directs Rich Schmelzer and Sheri Schmelzer to change its business operations or practices.

(ii) Buyer Operational Covenants. Until the earlier of the end of Period 3 or the date on which the Earn-Out Payment that has been made by Buyer is $10,000,000, Buyer shall not, without consent of the Member Agent, require that any current or future customers of Target carry Buyer’s products as a condition to carrying and selling Target’s products (the “Customer Covenant”). If at any time prior to the end of Period 3, neither Rich Schmelzer nor Sheri Schmelzer is employed by Target, Buyer thereafter shall no longer be obligated to comply with this Section 2.7(c)(ii).

(i) in the event Rich Schmelzer or Sheri Schmelzer cause Target to breach in any material respect the covenant set forth in Section 2.7(c)(i) and fail to cure such breach within 10 days following Member Agent’s receipt of written notice thereof by Buyer, Buyer shall have the right (but not the obligation) to take any and all action to remedy the breach and mitigate the consequences of the breach;

(ii) in the event Buyer causes Buyer to breach in any material respect the covenant set forth in Section 2.7(c)(ii) and fails to cure such breach

within 10 days following Buyer’s receipt of written notice thereof by the Member Agent, Sellers shall have the right (but not the obligation) to take any and all action to remedy the breach and mitigate the consequences of the breach.

(i) change in method of accounting for a taxable period ending on or prior to the Closing Date;

(ii) “closing agreement” as described in Code §7121 (or any corresponding or similar provision of state, local or foreign income Tax law) executed on or prior to the Closing Date;

(iii) intercompany transaction or excess loss account described in Treasury Regulations under Code §1502 (or any corresponding or similar provision of state, local or foreign income Tax law);

(iv) installment sale or open transaction disposition made on or prior to the Closing Date; or

(v) prepaid amount received on or prior to the Closing Date.

(i) such Lease is legal, valid, binding, enforceable and in full force and effect;

(ii) the transactions contemplated by this Agreement do not require the consent of any other party to such Lease, will not result in a breach of or default under such Lease, and will not otherwise cause such Lease to cease to be legal, valid, binding, enforceable and in full force and effect on identical terms following the Closing;

(iii) Target’s possession and quiet enjoyment of the Leased Real Property under such Lease has been disturbed and, to the Knowledge of any Seller, there are no disputes with respect to such Lease;

(iv) neither Target nor, to the Knowledge of any Seller, any other party to the Lease is in breach of, or default under, such Lease and, to the Knowledge of any Seller, no event has occurred or circumstance exists that, with the delivery of notice, the passage of time or both, would constitute such a breach or default, or permit the termination, modification or acceleration of rent under such Lease;

(v) no security deposit or portion thereof deposited with respect to such Lease has been applied in respect of a breach of or default under such Lease that has not been redeposited in full;

(vi) Target does not owe, and will not owe in the future, any brokerage commissions or finder’s fees with respect to such Lease;

(vii) the other party to such Lease is not an Affiliate of, and otherwise does not have any economic interest in, Target;

(viii) Target has not subleased, licensed or otherwise granted any Person the right to use or occupy the Leased Real Property or any portion thereof;

(ix) Target has not collaterally assigned or granted any other Lien in such Lease or any interest therein; and

(x) there are no Liens on the estate or interest created by such Lease.

(i) Target owns and possesses all right, title, and interest in and to the item, free and clear of any Lien or License;

(ii) Target’s use of the item is not subject to any outstanding injunction, judgment, order, decree, ruling, or charge;

(iii) no action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand is pending or, to the Knowledge of any of Sellers, threatened that challenges the legality, validity, enforceability, use, or ownership of the item, and there are no grounds for the same;

(iv) Target has never agreed to indemnify any Person for or against any infringement or misappropriation with respect to the item; and

(v) no loss or expiration of the item is threatened or pending, except for patents expiring at the end of their statutory terms (and not as a result of any act or omission by Sellers or Target, including without limitation, a failure by Sellers or Target to pay any required maintenance fees).

(i) the License covering the item is legal, valid, binding, enforceable, and in full force and effect in all material respects;

(ii) the License will continue to be legal, valid, binding, enforceable, and in full force and effect in accordance with items terms on identical terms following consummation of the transactions contemplated hereby;

(iii) to the Knowledge of any Seller, no party to the License is in breach or default, and, to the Knowledge of any Seller, no event has occurred that with notice or lapse of time would constitute a breach or default or permit termination, modification, or acceleration thereunder;

(iv) no party to the License has repudiated any provision thereof;

(v) to the Knowledge of any Seller, the underlying item of Intellectual Property is not subject to any outstanding injunction, judgment, order, decree, ruling, or charge;

(vi) no action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand is pending or, to the Knowledge of any Seller, threatened that challenges the validity or enforceability of the underlying item of Intellectual Property; and

(vii) Target has not granted any unauthorized sublicense or similar right with respect to the License.

(i) To the Knowledge of any Seller, each such Employee Benefit Plan (and each related trust, insurance contract, or fund) has been maintained, funded and administered in accordance with the terms of such Employee Benefit Plan and the terms of any applicable collective bargaining agreement and complies in form and in operation in all respects with the applicable requirements of ERISA, the Code, and other applicable laws, except where such noncompliance would not reasonably be expected to have a Material Adverse Effect.

(ii) All contributions (including all employer contributions and employee salary reduction contributions) that are due have been made to each such Employee Benefit Plan that is an Employee Pension Benefit Plan. All

premiums or other payments for all periods ending on or before the Closing Date have been paid with respect to each such Employee Benefit Plan that is an Employee Welfare Benefit Plan.

(iii) Each such Employee Benefit Plan that is intended to meet the requirements of a “qualified plan” under Code §401(a) has received a determination from the Internal Revenue Service that such Employee Benefit Plan is so qualified.

(i) enter into any agreement, understanding or arrangement relating to any Acquisition Proposal (as defined below);

(ii) engage in any discussions or negotiations relating to any Acquisition Proposal (except to communicate the existence of these provisions);

(iii) provide any Confidential Information regarding Target or its business or operations to any Person in connection with discussions or due diligence regarding an Acquisition Proposal;

(iv) solicit or knowingly encourage the submission of any Acquisition Proposal;

(v) permit any representative of Target or Sellers to do any of the foregoing; or

(vi) participate in any discussions or negotiations regarding, furnish any information with respect to, assist or participate in any effort or attempt by any Person to do or seek any of the foregoing (except to communicate the existence of these provisions). None of Sellers will vote their Membership Interests in favor of any such acquisition.

(A) is equal to or greater than $10,000,000 but less than $12,500,000, the Purchase Price shall be increased by an amount equal to 32% of EBIT for Period 1; or

(B) is equal to or greater than $12,500,000, the Purchase Price shall be increased by an amount equal to $3,333,333.

(A) is equal to or greater than $12,500,000 but less than $15,625,000, the Purchase Price shall be increased by an amount equal to 25.6% of EBIT for Period 2; or

(B) is equal to or greater than $15,625,000, the Purchase Price shall be increased by an amount equal to $3,333,333.

(A) is equal to or greater than $15,625,000 but less than $19,531,000, the Purchase Price shall be increased by an amount equal to 20.5% of EBIT for Period 3; or

(B) is equal to or greater than $19,531,000, the Purchase Price shall be increased by an amount equal to $3,333,333.

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C19w6uivAJYH3dxQVXS0VMraolUV3ET5/ESxgYVzZOnNFZCuHkDmfstgCmG6Bypu IP/+AiGaTBOt9gKI2OPf5Q== 0001104659-06-074169.txt : 20061113 0001104659-06-074169.hdr.sgml : 20061110 20061113100750 ACCESSION NUMBER: 0001104659-06-074169 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20060930 FILED AS OF DATE: 20061113 DATE AS OF CHANGE: 20061113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Crocs, Inc. CENTRAL INDEX KEY: 0001334036 STANDARD INDUSTRIAL CLASSIFICATION: RUBBER & PLASTICS FOOTWEAR [3021] IRS NUMBER: 841521507 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-51754 FILM NUMBER: 061205967 BUSINESS ADDRESS: STREET 1: 6328 MONARCH PARK PLACE CITY: NIWOT STATE: CO ZIP: 80503 BUSINESS PHONE: 3038487000 MAIL ADDRESS: STREET 1: 6328 MONARCH PARK PLACE CITY: NIWOT STATE: CO ZIP: 80503 10-Q 1 a06-22104_110q.htm QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 000-51754

Crocs, Inc.

(Exact name of registrant as specified in its charter)

Delaware		20-2164234
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

6328 Monarch Park Place, Niwot Colorado 80503

(Address of Registrant’s principal executive offices)

(303) 848-7000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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

Large accelerated filer o

Accelerated filer o

Non-accelerated filer x

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

As of October 31, 2006, Crocs, Inc. had 39,022,198 shares of its $0.001 par value common stock outstanding.

Crocs Inc.
Form 10-Q
Quarter Ended September 30, 2006
Table of Contents

PART I—Financial Information		3
Item 1. Financial Statements		3
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2006 and 2005		3
Unaudited Condensed Consolidated Balance Sheets at September 30, 2006 and December 31, 2005		4
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005		5
Notes to Unaudited Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3. Quantitative and Qualitative Disclosures about Market Risk		27
Item 4. Controls and Procedures		28
PART II—Other Information		29
Item 1. Legal Proceedings		29
Item 1A. Risk Factors		29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		29
Item 5. Other Information		30
Item 6. Exhibits		30
Signatures		31

PART I FINANCIAL INFORMATION

ITEM 1. Financial Statements

CROCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)

	Three Months Ended September 30,							Nine Months Ended September 30,
	2006				2005			2006				2005
Revenues		$	111,345			$	38,294		$	241,824			$	75,022
Cost of sales		46,521				16,113			106,348				32,032
Gross profit		64,824				22,181			135,476				42,990
Selling, general and administrative expense		33,344				9,834			70,345				23,059
Income from operations		31,480				12,347			65,131				19,931
Interest expense		162				178			533				380
Other expense (income)—net		(657		)		2			(1,310		)		25
Income before income taxes		31,975				12,167			65,908				19,526
Income tax expense		10,449				4,756			22,275				6,724
Net income		21,526				7,411			43,633				12,802
Dividends on redeemable convertible preferred shares		—				70			33				206
Income attributable to common stockholders		$	21,526			$	7,341		$	43,600			$	12,596
Income per common share: (note 4)
Basic		$	0.56			$	0.22		$	1.19			$	0.39
Diluted		$	0.53			$	0.22		$	1.10			$	0.38
Weighted average common shares:
Basic		38,773,362				25,712,040			36,675,319				25,329,984
Diluted		40,465,723				33,615,781			39,726,845				33,358,633

See notes to condensed consolidated financial statements.

CROCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)

	As of
	September 30, 2006				December 31, 2005
ASSETS
Current assets:
Cash and cash equivalents		$	57,880			$	4,787
Short-term investments		25,400				—
Accounts receivable—net		60,651				17,641
Inventories		49,128				28,494
Deferred tax assets		1,636				1,939
Prepaid expenses and other current assets		10,233				3,492
Total current assets		204,928				56,353
Property and equipment—net		24,713				14,765
Goodwill		350				336
Intangible assets—net		8,106				5,311
Deferred tax assets		1,532				1,084
Other assets		902				183
Total assets		$	240,531			$	78,032
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	30,459			$	20,829
Accrued expenses and other current liabilities		21,716				8,178
Income taxes payable		6,424				8,697
Note payable, current portion of long-term debt and capital lease obligations		817				8,601
Total current liabilities		59,416				46,305
Long-term debt and capital lease obligations, net of current portion		1,550				3,422
Deferred tax liabilities		1,880				1,772
Other liabilities		260				319
Total liabilities		63,106				51,818
Commitments and contingencies (note 10)
Redeemable common shares, 8,410,320 shares issued and outstanding in 2005		—				1,800
Redeemable convertible preferred shares, par value $0.001 per share; 8,000,000 shares authorized, 7,452,492 shares issued and outstanding in 2005—preference in liquidation of $5,500		—				5,500
Stockholders’ equity:
Common shares, par value $0.001 per share; 125,000,000 shares authorized, 38,850,943 and 17,449,699 shares issued and outstanding in 2006 and 2005		39				17
Preferred shares, par value $0.001 per share; 5,000,000 shares authorized, no shares issued and outstanding in 2006 and 2005		—				—
Additional paid-in capital		123,278				13,976
Deferred compensation		(7,146		)		(12,364		)
Retained earnings		60,297				16,697
Accumulated other comprehensive income		957				588
Total stockholders’ equity		177,425				18,914
Total		$	240,531			$	78,032

See notes to condensed consolidated financial statements.

CROCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

	For the Nine Months Ended September 30,
	2006			2005
Cash flows from operating activities:
Net income	$	43,633		$	12,802
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	5,238			2,043
Loss on disposal of fixed assets	330			—
Deferred income taxes	(113		)	(723		)
Share-based compensation	7,195			3,455
Excess tax benefit on share-based compensation	(5,047		)	—
Bad debt expense	1,389			463
Changes in operating assets and liabilities:
Accounts receivable	(43,741		)	(18,302		)
Inventories	(20,415		)	(12,087		)
Prepaid expenses and other assets	(8,397		)	(2,099		)
Accounts payable	7,974			8,357
Accrued expenses and other liabilities	15,364			11,733
Cash provided by operating activities	3,410			5,642
Cash flows from investing activities:
Purchases of short-term investments	(31,800		)	—
Sales of short-term investments	6,400			—
Cash paid for purchases of property and equipment	(13,042		)	(6,190		)
Cash paid for intangible assets	(1,688		)	—
Proceeds from the disposal of property and equipment	340			—
Acquisition of non-competition agreement	—			(636		)
Cash used in investing activities	(39,790		)	(6,826		)
Cash flows from financing activities:
Proceeds from note payable, net	1,811			5,885
Proceeds from (repayment of) long-term debt and capital lease obligations	(12,222		)	1,803
Proceeds from initial public offering, net of offering costs	94,454			—
Excess tax benefit on share-based compensation	5,047			—
Exercise of stock options	564			—
Distribution payment to members	—			(3,000		)
Payment of preferred dividends	(171		)	(275		)
Cash provided by financing activities	89,483			4,413
Effect of exchange rate changes on cash	(10		)	37
Net increase in cash and cash equivalents	53,093			3,266
Cash and cash equivalents—beginning of period	4,787			1,054
Cash and cash equivalents—end of period	$	57,880		$	4,320
Supplemental disclosure of cash flow information—cash paid during the period for:
Interest	$	296		$	380
Income taxes	$	19,583		$	2,300
Supplemental disclosure of non-cash, investing, and financing activities:
Accrued preferred stock dividends	$	—		$	92
Assets acquired under capitalized leases	$	563		$	—

See notes to condensed consolidated financial statements.

CROCS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying condensed consolidated financial statements of Crocs, Inc. and subsidiaries (collectively, “Crocs” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the rules and regulations for reporting on Form 10-Q. Accordingly, they do not include certain information and disclosures required for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. Operating results for the three and nine months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2006.

These statements should be read in conjunction with the consolidated financial statements and footnotes included in the Company’s Form 10-K for the year ended December 31, 2005. Except for investments, which are described below, the accounting policies used in preparing these condensed consolidated financial statements are the same as those described in Note 2 to the consolidated financial statements in the Company’s Form 10-K. Certain reclassifications have been made to the 2005 financial statements to conform to 2006 presentation.

Investments.

The Company accounts for investments in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities (“SFAS 115”). The Company invests in certain investments, which consist primarily of short to intermediate-term fixed income securities issued by U.S. government agencies and municipalities. The Company invests in certain auction rate debt securities that have been classified as short-term investments in the accompanying balance sheets. All investments are classified as available-for-sale and are reported at fair value with unrealized gains and losses, net of tax, included in accumulated other comprehensive income as a separate component of stockholders’ equity. The specific-identification method is used to determine the cost of all investments and the basis by which amounts are reclassified from accumulated other comprehensive income into earnings. See Note 5 for further discussion.

2. RECENT ACCOUNTING PRONOUCEMENTS

In June 2006, the Financial Accounting Standards Board (“FASB”) Emerging Issues Task Force issued EITF No. 06-3, How Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross Versus Net Presentation) (“EITF No. 06-3”), which states a company must disclose its accounting policy (i.e., gross or net presentation) regarding presentation of taxes within the scope of this Issue. If taxes included in gross revenues are significant, a company must disclose the amount of such taxes for each period for which an income statement is presented. The issue will be effective for the first annual or interim reporting period beginning after December 15, 2006. The disclosures are required for annual and interim financial statements for each period for which an income statement is presented. The Company will adopt this Issue effective January 1, 2007. Based on the Company’s current evaluation of this Issue, the Company does not expect the adoption of EITF No. 06-3 to have a significant impact on its consolidated results of operations or financial position.

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 requires the use of a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in income tax positions. The Company is required to adopt FIN 48 effective January 1, 2007. The cumulative effect of initially adopting FIN 48 will be recorded as an adjustment to opening retained earnings in the year of adoption and will be presented separately. Only tax positions that meet the more likely than not recognition threshold at the effective date may be recognized on adoption of FIN 48. The Company is currently evaluating the impact this new standard will have on its future results of operations and financial position.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. The Statement is effective for financial statements issued for the first annual or interim reporting period beginning after November 15, 2007. The Company is currently evaluating the impact this new standard will have on its future results of operations and financial position.

On September 13, 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a potential current year misstatement. Prior to SAB 108, companies could evaluate the materiality of financial statement misstatements using either the income statement or balance sheet approach, with the income statement approach focusing on new misstatements added in the current year, and the balance sheet approach focusing on the cumulative amount of misstatement present in a company’s balance sheet. Misstatements that would be material under one approach could be viewed as immaterial under another approach, and not be corrected. SAB 108 now requires companies to view financial statement misstatements as material if they are material according to either the income statement or balance sheet approach. The Company is currently evaluating the impact of SAB 108 and does not expect the adoption of SAB 108 to have a significant impact on its consolidated results of operations or financial position.

3. EQUITY

On February 13, 2006, the Company issued 4,950,000 shares of common stock on the closing of its initial public offering for $94.5 million, net of underwriting discounts and commissions and related offering costs. In connection with the completion of the offering, the Company’s redeemable common and preferred shares were converted to common shares and those balances were reclassified to permanent equity.

Equity-Based Compensation

The Company issues stock grants to employees and non-employees with vesting schedules of varying lengths. Typically, these grants range from immediate vesting to vesting periods of up to four years. Effective January 1, 2006, the Company adopted SFAS No. 123R, Share-Based Payment (“SFAS 123R”), which establishes accounting guidelines for share-based awards exchanged for employee services, using the prospective method for option grants and restricted stock issued prior to August 15, 2005, the date which the Company filed its initial Registration Statement on Form S-1 and the modified prospective method for option grants issued after August 15, 2005. The Company was required to adopt the prospective method for grants prior to August 15, 2005 as the Company had elected to value employee grants using the minimum value method under SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). For option grants and restricted stock accounted for under the prospective method, the Company will continue to account for the grants under the intrinsic value-based method prescribed by Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees (“APB 25”), and the

related interpretations in accounting for employee stock options. Therefore, the Company does not record any compensation expense for stock options granted to employees, prior to August 15, 2005, if the exercise price equaled the fair market value of the stock option on the date of grant, and the exercise price, number of shares eligible for issuance under the options and vesting periods were fixed.

Under the modified prospective method, compensation expense recognized in the three and nine months ended September 30, 2006, includes: (i) compensation expense of all share-based payments granted after August 15, 2005 but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R and (ii) compensation expense for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. Results for prior periods have not been retrospectively adjusted. The Company records compensation expense related to non-employees under the provisions of SFAS 123R and Emerging Issues Task Force EITF 96-18, Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in conjunction with Selling, Goods or Services (“EITF 96-18”), and recognizes compensation expense over the vesting periods of such awards. Total pre-tax share-based compensation expense recognized was $2.8 million and $7.2 million for the three and nine months ended September 30, 2006, with associated tax benefits of approximately $905,000 and $2.4 million, respectively. The cumulative effect of applying the modified prospective method was to reduce deferred compensation by $1.4 million and the effect on the statement of operations was immaterial. The effect of applying SFAS 123R was to reduce pre-tax income by $1.6 million and $3.3 million for the three and nine months ended September 30, 2006.

SFAS 123R, also required the Company to change the classification, in its consolidated statement of cash flows, of any excess tax benefits realized on the exercise of stock options or issuance of restricted stock unit awards in excess of that which is associated with the expense recognized for financial reporting purposes. These amounts are presented as a financing cash inflow rather than as a reduction of income taxes paid in the consolidated statement of cash flows.

The Company has computed the fair value of options granted using the Black-Scholes option pricing model. In order to calculate the fair value of the options, certain assumptions are made regarding components of the model, including risk-free interest rate, volatility, expected dividend yield rate, and expected option life. Changes to the assumptions could cause significant adjustments to the valuation. For options granted before August 15, 2005, expected volatility was not considered for employee grants as the Company was a non-public entity at the grant date of these options. For stock option grants issued after the filing of the Company’s initial Registration Statement on Form S-1 on August 15, 2005, the minimum value method is no longer used and the Company used a volatility rate of 50% and began to include estimated forfeiture rates. The Company estimated the volatility of its common stock at the date of grant based on the historical volatility of comparable companies. The Company factored in expected retention rates combined with vesting periods to determine the average expected life. The risk-free interest rate for periods within the contractual life of the options is based on the U.S. Treasury yield curve in effect at the time of each grant. Accordingly, the Company has computed the fair values of all options granted during the three and nine months ended September 30, 2006 and 2005, using the Black-Scholes option pricing model and the following weighted average assumptions:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
Expected volatility		50	%		0	%		50	%		0	%
Dividend yield		—			—			—			—
Risk-free interest rate		4.70	%		4.02	%		4.83	%		4.20	%
Weighted average expected life (in years)		5			5			5			5

Because the Company applied the minimum value method of valuing employee stock options prior to becoming a public company, as allowed by SFAS 123, the Company is precluded from presenting pro forma historical statement of operations information under SFAS 123R.

Stock Option Activity

The following summarizes stock option transactions for the nine months ended September 30, 2006:

Options	Shares		Weighted Average Exercise Price			Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2005	2,923,754			$	5.60
Granted	2,082,164			24.01
Exercised	(104,253	)		5.41
Forfeited or expired	(287,882	)		8.98
Outstanding at September 30, 2006	4,613,783			$	12.46		8.0		$	99,164,324
Exercisable at September 30, 2006	3,813,503			$	13.93		8.3		$	76,335,421
Vested at September 30, 2006	935,860			$	2.73		6.4		$	29,219,551
Weighted average fair value of options granted during the period				$	11.82

Options awarded under the Company’s 2005 Equity Incentive Plan (the “Plan”) are exercisable immediately on the date of grant with the exception of 233,624 shares granted to members of the Board of Directors. In order to preserve the vesting provisions of the options, the options that are exercised early are subject to a repurchase right by the Company at the lower of exercise price or fair market value of the underlying stock at the date of repurchase. This repurchase right expires on vesting of the underlying option. Total stock options outstanding under the Plan were 3,445,683 at September 30, 2006 of which 370,916 are fully vested and no longer subject to the repurchase right.

The status of total stock options outstanding at September 30, 2006 was as follows:

Exercise Prices	Number of Shares	Weighted Average Remaining Contractual Life (Years)		Number Exercisable	Fair Value Determination
$1.02	934,480		4.9	467,236		Black-Scholes
$1.70-5.69	1,290,051		7.9	1,154,139		Black-Scholes
$7.15-10.74	389,443		7.8	279,928		Black-Scholes
$21.00	1,192,250		9.4	1,192,250		Black-Scholes
$26.00-$29.95	807,559		9.5	719,950		Black-Scholes
	4,613,783		8.0	3,813,503

As of September 30, 2006, the Company issued unvested options to purchase 3.7 million shares of the Company’s common stock with a weighted average grant date fair value of $10.23. As of September 30, 2006, the Company had $31.2 million of total unrecognized share-based compensation expense related to unvested options, net of expected forfeitures, which is expected to be amortized over the weighted average period of 3.1 years.

Non-vested Stock Awards

The following summarizes restricted stock transactions for the nine months ended September 30, 2006:

Non-vested	Shares		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2005	1,072,431			$	2.75
Granted	—			—
Vested	(484,344	)		2.32
Forfeited or expired	—			—
Outstanding at September 30, 2006	588,087			$	3.11

At September 30, 2006, the Company had $1.4 million of total unrecognized share-based compensation expense related to non-vested stock awards, which is expected to be amortized over the weighted average period of 0.9 years.

Comprehensive Income

Total comprehensive income for the three and nine months ended September 30, 2006 and 2005 was as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
Net income	$	21,526	$	7,411	$	43,633	$	12,802
Foreign currency translation	143		330		369		230
Comprehensive income	$	21,669	$	7,741	$	44,002	$	13,032

4. EARNINGS PER SHARE

Basic income per common share (“EPS”) is computed by dividing the net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from securities that could share in the earnings of the Company. Antidilutive securities are excluded from diluted EPS (in thousands except share and per share data).

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
Reconciliation of net income attributable to common stockholders for basic computation:
Income attributable to common stockholders	$	21,526	$	7,341	$	43,600	$	12,596
Less: Undistributed net income allocated to redeemable convertible preferred stockholders	—		1,650		—		2,830
Undistributed net income allocated to common stockholders	$	21,526	$	5,691	$	43,600	$	9,766
Reconciliation of net income for dilutive computation:
Income attributable to common stockholders	$	21,526	$	7,341	$	43,600	$	12,596
Preferred dividend	—		70		33		206
Net income for dilutive computation	$	21,526	$	7,411	$	43,633	$	12,802
Basic income per common share:
Weighted average common shares outstanding	38,773,362		25,712,040		36,675,319		25,329,984
Basic income per common share	$	0.56	$	0.22	$	1.19	$	0.39
Diluted income per common share:
Weighted average common shares outstanding
Dilutive effect of preferred stock	—		7,452,492		1,064,685		7,452,492
Dilutive effect of stock options	1,281,096		106,789		1,442,243		68,341
Dilutive effect of unvested stock	411,265		344,460		544,598		507,816
Weighted average diluted common shares outstanding	40,465,723		33,615,781		39,726,845		33,358,633
Diluted income per common share	$	0.53	$	0.22	$	1.10	$	0.38

For the three and nine months ended September 30, 2006 there were options outstanding to purchase 2.0 million shares of the Company’s common stock with a weighted-average exercise price per share of $24.13, which could potentially dilute basic earnings per share in the future, but which were not included in diluted earnings per share as their effect was antidilutive. There were no antidilutive securities outstanding in the three and nine months ended September 30, 2005.

5. SHORT-TERM INVESTMENTS

At September 30, 2006, the Company’s short-term investments consisted exclusively of auction rate securities. The Company did not hold any short-term investments at December 31, 2005. Auction rate securities are variable rate bonds of states and joint municipal agencies tied to short-term interest rates with maturities on the face of the underlying securities in excess of 90 days. Auction rate securities have interest rate resets through a modified Dutch auction, at pre-determined short-term intervals, usually every

7, 28, or 35 days. They trade at par and are callable at par on any interest payment date at the option of the issuer. Interest paid during a given period is based on the interest rate determined during the prior auction. The Company recorded such securities as short-term investments based on the short-term nature and structure, the frequency with which the interest rate resets, and the ability to sell auction rate securities at par and at the Company’s discretion with the intent of meeting the Company’s short-term working capital requirements.

Investments in auction rate securities are classified as available-for-sale and are reported at fair value in the Company’s consolidated balance sheets. There were no unrealized gains or losses as of September 30, 2006. The following table summarizes the contractual maturities of available-for-sale securities at September 30, 2006 (in thousands).

Proceeds from sales of short-term investments totaled $6.4 million in the three and nine months ended September 30, 2006. There were no realized gains or losses related to the sales of short-term investments in the three and nine months ended September 30, 2006.

6. INVENTORIES

Inventories by major classification are as follows (in thousands):

	September 30, 2006			December 31, 2005
Finished goods		$	41,245		$	25,449
Work-in-progress		510			6
Raw materials		7,373			3,039
		$	49,128		$	28,494

7. GOODWILL AND INTANGIBLE ASSETS

Intangible assets that are determined to have finite lives are amortized over their useful lives on a straight-line basis. The following table summarizes the Company’s identifiable intangible assets as of September 30, 2006 and December 31, 2005 (in thousands):

	September 30, 2006								December 31, 2005
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount			Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount
Amortizable intangible assets:
Patents	$	1,112		$	7		$	1,105		$	604		$	—		$	604
Customer relationships	1,636			521			1,115			1,569			336			1,233
Core technology	4,332			1,955			2,377			4,154			1,248			2,906
Non-competition agreement	636			180			456			636			86			550
Capitalized software	3,207			154			3,053			18			—			18
Total	$	10,923		$	2,817		$	8,106		$	6,981		$	1,670		$	5,311

The Company’s goodwill balance of $350,000 and $336,000 as of September 30, 2006 and December 31, 2005, respectively relates to the acquisition of Foam Creations in 2004. The change in the goodwill balance during the period is due to foreign currency exchange.

8. NOTE PAYABLE AND LINE OF CREDIT

Notes payable includes the following (in thousands):

	September 30,			December 31,
	2006			2005
Foam Creations demand note payable		$	—		$	2,016
Revolving credit facility		—			5,941
		$	—		$	7,957

Foam Creations, a wholly owned subsidiary, holds a demand note payable to a bank in the amount of up to $2.1 million, bearing interest at base rate plus 0.50%. No amounts were outstanding on this loan as of September 30, 2006. Foam Creations also has an authorized credit line of $300,000 for currency exchanges. No amounts were outstanding on this line as of September 30, 2006. The demand note is secured by the accounts receivable and inventories associated with Foam Creations. Annually, in April, the note is required to be renewed by the bank. Under the terms of the demand note, Foam Creations must satisfy certain restrictive covenants as to minimum financial ratios. Foam Creations was in compliance with these covenants as of September 30, 2006.

In February 2006, the Company repaid all amounts borrowed against its $20 million revolving credit facility and as of September 30, 2006 is no longer able to borrow against the facility. The repayment was funded with proceeds from the Company’s initial public offering.

9. LONG-TERM DEBT

Long-term debt consists of the following (in thousands):

	September 30,			December 31,
	2006			2005
Loan from Development Bank of Canada		$	—		$	2,433
Loan from National Bank of Canada for the purchase of fixed assets		—			796
Loan from National Bank of Canada		—			530
Loan from Development Bank of Canada, maturing May 2011		1,712			—
Capital lease obligations for equipment due on various dates through 2008 with interest rates ranging from 4.25% to 8.97% per annum		241			307
Capital lease obligations for capitalized software due on December 1, 2007 with an effective interest rate of 6.8% per annum		414			—
		2,367			4,066
Less current portion		817			644
Total long-term debt		$	1,550		$	3,422

In March 2006, the Company repaid the loan from the Development Bank of Canada and loans from the National Bank of Canada. These repayments were funded with proceeds from the Company’s initial public offering.

10. COMMITMENTS AND CONTINGENCIES

On September 17, 2004, the Company entered into a Manufacturing Supply Agreement with MDI Products, LLC (“MDI”), a Florida limited liability company whereby the Company agreed to purchase

15,000 pairs of shoes per month for 36 months to maintain exclusivity. The pricing is to be agreed on every twelve months. Termination fees apply for losses incurred by MDI due to premature termination by the Company.

On July 26, 2005, the Company entered into an amended and restated four year Supply Agreement with Finproject S.P.A., the former majority owner of Foam Creations, where the Company has the exclusive right to purchase the material for the manufacture of finished shoe products, except for certain current customer dealings (including boot manufacturers). Based on the supply agreement, the Company has contractual purchase requirements to maintain exclusivity throughout the agreement. The pricing is to be agreed on each quarter and fluctuates based on order volume, currency fluctuations, and raw material prices.

The Company indemnifies certain of its vendors and its directors and executive officers for specified claims. To date, the Company has not paid or been required to defend any indemnification claims, and accordingly, has not accrued any amounts for its indemnification obligations.

11. OPERATING SEGMENTS AND RELATED INFORMATION

The Company primarily designs, manufactures, and markets footwear and apparel under the crocs-brand and Foam Creations manufactures a line of products for the spa and boat industries. All products are manufactured using the same manufacturing process. The Company markets its product to retailers and conducts its own retail sales through retail outlets, company-owned kiosks, and over the internet. Other than revenues and certain direct operating costs, the Company does not maintain discrete financial information for its distribution and retail operations. Accordingly, operating results are assessed on an aggregate basis to make decisions about necessary resources and in assessing performance. Consequently, under the provisions of SFAS No. 131, Disclosure About Segments of an Enterprise and Related Information (“SFAS 131”), the Company has one reportable segment for financial statement purposes.

The Company’s sales by product line are as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
Shoes	$	109,950	$	36,583	$	236,162	$	70,741
Other	1,395		1,711		5,662		4,281
	$	111,345	$	38,294	$	241,824	$	75,022

Geographic information about the United States and international territories is presented below (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
Revenue
United States	$	70,476	$	33,961	$	163,462	$	66,777
Canada	11,929		2,810		24,490		6,066
All other countries	28,940		1,523		53,872		2,179
	$	111,345	$	38,294	$	241,824	$	75,022

	September 30, 2006			December 31, 2005
Long-lived assets
United States		$	16,466		$	8,504
Canada		13,179			10,892
All other countries		3,524			1,016
		$	33,169		$	20,412

There were no customers that comprised greater than 10% of the consolidated revenues of the Company for the three and nine months ended September 30, 2006. For the three months ended September 30, 2005, the Company’s two largest customers accounted for 14% and 10% of consolidated revenues, respectively. For the nine months ended September 30, 2005, the Company’s largest customer totaled 14% of consolidated revenues and no other customer accounted for greater than 10% of the Company’s consolidated revenues.

12. LICENSING AND MATERIAL AGREEMENTS

In April 2006, the Company entered into a three-year agreement which established Crocs as the title sponsor and official footwear of the AVP Pro Beach Volleyball Tour, or AVP. In connection with this agreement, AVP will issue to the Company a six year warrant to purchase up to 1,000,000 shares of AVP common stock at an exercise price of $0.80, which was the closing price of AVP common stock on April 12, 2006. 20% of the warrant shares will be exercisable immediately on the issuance and an additional 20% will become exercisable on April 12, 2007, 2008, 2009 and 2010. As of September 30, 2006 these warrants have not been issued. If the sponsorship agreement is not renewed after the third year, the remainder of the unexercisable shares underlying the warrant will not become exercisable. The Company will pay AVP a cash sponsorship fee of $4.0 million in 2006 and $4.2 million for each subsequent year.

On September 29, 2006, the Company entered into a membership interest purchase agreement with the members of Jibbitz, LLC, a Colorado limited liability company, to acquire 100% of the membership interests of Jibbitz for $10 million in cash, plus potential earn-out consideration of up to $10 million based on Jibbitz’s earnings before interest and taxes (EBIT) over the 3 years following the closing of the acquisition. Subject to the satisfaction of customary closing conditions, the Company expects the acquisition to close in December 2006.

On September 29, 2006, the Company and Jibbitz entered into an endorsement agreement providing that the Company will publicly endorse the products of Jibbitz and license to Jibbitz certain Company trademarks. The Company will also allow Jibbitz to access the Company’s network of distribution and retailers as well as utilize the Company’s warehousing and logistics infrastructure. As consideration, Jibbitz will pay the Company a 15% royalty on gross sales during the term of the Endorsement Agreement and $1.5 million on December 15, 2006, subject to proration in the event the Endorsement Agreement is terminated prior to December 1, 2006. The Endorsement Agreement will terminate on the closing of the Company’s acquisition of Jibbitz or the termination of the membership interest purchase agreement.

The Company recently entered into an arrangement with Disney Consumer Products to introduce a limited edition line of footwear featuring some of Disney’s most popular characters. The new line will be called “Disney by CROCS.” The Disney by CROCS line, which is targeted towards children and adults, will debut with special-edition Mickey Mouse die-cut adult Beach and children’s Cayman models. These styles will be available in a broad range of two-toned color combinations, including Mickey Mouse’s signature black and red.

The Company also entered into licensing agreements to market a line of shoes featuring the names and logos of various universities and colleges. These shoes will feature the school colors and will be sold on

college campuses and through some of the Company’s existing sales and distribution network. In addition, the Company entered into sponsorship and marketing agreements with various colleges and universities, which allows the Company to advertise in the arenas and stadiums and sell the Company’s products on campus and at sporting events.

13. LEGAL PROCEEDINGS

In January 2005, Crocs’ direct subsidiary Foam Creations filed a lawsuit against Holey Soles Holdings Ltd. (“Holey Soles”) in the Federal Court of Canada, Trial Division (at Toronto, Ontario). The complaint alleges trademark and copyright infringement relating to the design of some of its shoe models. Crocs is seeking a permanent injunction with respect to any further acts of infringement of its intellectual property, as well as damages and attorneys’ fees. This action is still pending.

In August 2005, Holey Soles filed a lawsuit against Crocs in the United States District Court for the Southern District of New York. Holey Soles seeks a declaratory judgment that Crocs does not have any valid copyright or trade dress rights with respect to the design of its footwear. In addition, Holey Soles seeks a declaratory judgment that the manufacture, sale and distribution of its footwear products does not constitute unfair competition and does not infringe on Crocs’ copyrights or trade dress rights. Upon Crocs’ request, the action has been transferred to the United States District of Colorado where it has been stayed pending the outcome of The International Trade Commission (“ITC”) Investigation No. 337-TA-567 discussed below. The Company does not expect the ultimate resolution of this matter will have a material adverse impact on its business.

On March 31, 2006, Crocs filed a complaint with the ITC against Acme Ex-Im, Inc., Australia Unlimited, Inc., Cheng’s Enterprises, Inc., Collective Licensing International, LLC, D. Myers & Sons, Inc., Double Diamond Distribution, Ltd., Effervescent, Inc., Gen-X Sports, Inc., Holey Soles Holdings, Ltd., Inter-Pacific Trading Corporation, and Shaka Holdings, Inc., alleging patent and trade dress infringement and seeking an exclusion order banning the importation and sale of infringing products. The utility and design patents asserted in the complaint were issued on February 7, 2006 and March 28, 2006 respectively, by the United States Patent and Trademark Office to Crocs, Inc. The ITC has issued final determinations terminating Shaka Holdings, Inc., Inter-Pacific Trading Corporation and Acme Ex-Im, Inc. from the ITC investigation No. 337-TA-567 on the basis of settlement and Cheng’s Enterprises, Inc. on the suspension of accused activities. In addition, Crocs has entered into settlement agreements with D. Myers & Sons, Inc. and Australia Unlimited, Inc. but no final determinations have been made by the ITC to date. The ITC Administrative Law Judge issued an Initial Determination of non-infringement related to one of the patents at issue. Crocs plans to file a petition with the Commission to review this determination.

On April 3, 2006, Crocs filed a complaint in the U.S. District Court for the District of Colorado alleging infringement upon certain utility and design patents that were issued on February 7, 2006 and March 28, 2006 respectively, by the United States Patent and Trademark Office in the name of Crocs, Inc. The complaint alleges patent and trade dress infringement and seeks injunctive relief as well as monetary damages. Consent judgments have been entered against Shaka Holdings, Inc., Interpacific Trading Corporation and Acme Ex-Im, Inc. Crocs has entered into settlement agreements with D. Myers & Sons, Inc. and Australia Unlimited, Inc. and plans on filing consent judgments with the court related to the same, which Crocs expects will also result in the dismissal of all counterclaims filed in the district court action. The Company does not expect the ultimate resolution of this matter will have a material adverse impact on its business.

On June 15, 2006, Aspen Licensing International, Inc. filed a complaint against the Company in the United States District Court for the District of Massachusetts, alleging that the Company’s “Aspen” model infringes on Aspen Licensing’s trademark rights, and that, in turn, the Company committed acts of false designation of origin, trademark dilution, unfair competition and unfair or deceptive trade practices. The

Company was not served with this complaint, however, in response to Aspen’s filing, the Company changed the name of its “Aspen” model shoe to the Endeavor. In addition, while the Company denies infringement upon Aspen Licensing’s trademark rights, the Company entered into a settlement agreement with Aspen and agreed to pay Aspen $10,000 in exchange for Aspen dismissing the suit with prejudice and allowing the Company to sell out its remaining inventory of “Aspen” labeled shoes. This lawsuit is now dismissed with prejudice.

Although the Company is subject to other litigation from time to time in the ordinary course of its business, the Company is not party to any other pending legal proceedings that the Company believes will have a material adverse impact on its business.

14. SUBSEQUENT EVENTS

On October 19, 2006, the Company acquired 100% of the capital stock of EXO Italia, S.r.l. for € 6.0 million (approximately $7.5 million). EXO Italia, S.r.l.. Headquartered in Padova, Italy, designs and develops EVA (Ethylene Vinyl Acetate) based finished products, primarily for the footwear industry. Since 1993, EXO Italia has worked with several leading branded consumer companies to produce high quality EVA based footwear for the global marketplace.

On October 31, 2006, the Company paid off the remaining $1.7 million balance on the loan from Development Bank of Canada.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, the Company may make other written and oral communications from time to time that contain such statements. Forward-looking statements include statements as to industry trends and future expectations of the Company and other matters that do not relate strictly to historical facts and are based on certain assumptions by management. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. These statements are based on the beliefs and assumptions of the management of the Company based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by such forward looking statements. These forward-looking statements include statements in this Item 2, “Management Discussion and Analysis of Financial Condition and Results of Operations.” Important factors that could cause actual results to differ materially from the forward-looking statements include, among others, the risks described in the section entitled “Risk Factors” under Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2005 and our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006. We caution the reader to carefully consider such factors. Furthermore, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

We are a rapidly growing designer, manufacturer and marketer of footwear for men, women and children under the crocs 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, which we refer to as croslite. All of our footwear products incorporate croslite, which enables us to produce a soft and lightweight, non-marking, slip- and odor-resistant shoe that retails at price points ranging from $19.99 to $59.99. In addition to our footwear products, we recently introduced a line of crocs-branded apparel and accessory items. We also use croslite to manufacture non-branded products that we sell to original equipment manufacturers.

We currently sell our crocs-branded products throughout the U.S. and in over 70 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 kiosk and retail stores. 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, 2006, our retail customer base in the U.S. included over 11,000 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. For the nine months ended September 30, 2006, we recorded revenues of $241.8 million and net income of $43.6 million, compared to $75.0 million of revenues and net income of $12.8 million in the nine months ended September 30, 2005. 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 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 on sales of our crocs footwear. For the nine months ended September 30, 2006, our gross profit was $135.5 million, or 56.0% of revenues, compared to $43.0 million, or 57.3% of revenues, for the nine months ended September 30, 2005. We believe a number of factors have contributed to our ability to achieve gross profit margins at these levels. Generally, we have not discounted the sale price of our crocs footwear due to high levels of demand for our products. 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 currently manufacture our footwear products, accessories, and all non-branded products for original equipment manufacturers at Foam Creations’ facility in Quebec City, Canada. We also manufacture our footwear products at our company-owned and operated facility located in Mexico. In addition, we contract with third party manufacturers in China, Florida, Italy and Romania for the production of our footwear products and accessories. We believe our in-house production capabilities enables us to make rapid changes to manufacturing schedules and provides 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 in the past resulted in our inability to either produce or deliver 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. During 2006, we expanded our manufacturing capacity at the facility we operate in Mexico. We also recently expanded production capacity at our third party manufacturers located in China and added third party manufacturing capacity in Romania. In addition to expanding our production capacity, we are actively expanding our fulfillment and distribution capabilities. For example, we anticipate our new distribution facility in China, which is adjacent to our major third-party manufacturing facilities, will enable us to distribute our products more efficiently on a global basis.

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.

On February 13, 2006, we completed an initial public offering of our common stock in which we sold 4,950,000 shares and our selling shareholders sold 6,435,000 shares. Net proceeds to us from the offering totaled approximately $94.5 million, after payment of underwriters’ fees and commissions and related offering costs. We used the net proceeds from the offering to repay all amounts outstanding under our amended and restated credit facility, all amounts outstanding under loans from the National Bank of Canada, for capital expenditures related to increasing our manufacturing capacity and infrastructure improvements to develop our international operations, and to increase our marketing activities. We did not receive any of the proceeds from the sale of shares of our common stock by the selling shareholders.

General

Revenues are recorded when products are both shipped and the customer takes title and assumes risk of loss, collection of related receivables are probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. Title passes on shipment or on receipt by the customer depending on the country of the sale and the agreement with the customer. Allowances for estimated returns and discounts are recognized when related revenue is recorded. Because we use both internal manufacturing

and 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, and 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, depreciation, amortization, professional fees, facility expenses, bank charges and non-cash charges for share-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, 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 and foreign income taxes.

Factors Affecting Comparability

Set forth below are selected factors that we believe have had, or are expected to have, a significant affect on the comparability of recent or future results of operations:

Equity Compensation Expenses

In December 2004, the Financial Accounting Standards Board (“FASB”) issued a revision to Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), which requires the calculation of the fair value of stock-based compensation, estimation of future forfeitures and income taxes, and recognition of the fair value as a non-cash expense over the vesting period of the underlying instruments. SFAS No. 123R, Share-Based Payment (“SFAS 123R”), eliminates the ability to account for stock-based compensation transactions using the footnote disclosure-only provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and instead requires that such transactions be recognized and reflected in our financial statements using a fair-value-based method.

We adopted SFAS 123R effective as of January 1, 2006 using the prospective method for option grants and restricted stock issued prior to August 15, 2005, which was the date we filed our initial Registration Statement on Form S-1 in connection with our initial public offering and the modified prospective method for option grants issued after August 15, 2005. The adoption of SFAS 123R’s fair-value-based method had a significant adverse impact on our results of operations, although it will have no impact on our overall cash flow. The effect of applying SFAS 123R in the nine months ending 2006 was a decrease of $3.3 million of pre-tax income. We recognize additional stock-based compensation expense in 2006 based on the fair value of any share based payment made in 2006. The amount of compensation expense recognized depends on numerous factors and estimates, including the number and vesting period of option grants, the publicly traded price of the common stock, estimated volatility of the stock price, estimates of the timing and volume of exercises and forfeitures of the options, and fluctuations in future interest and income tax rates.

Effects of Initial Public Offering

In February 2006, we completed an initial public offering of our common stock. As a part of the initial public offering, we issued 4,950,000 shares of our common stock and received net proceeds of approximately $94.5 million. In connection with the initial public offering, all of our then-outstanding shares of redeemable convertible preferred stock, which was not included in stockholders’ equity in our

balance sheet, converted into 7,452,492 shares of our common stock, of which a portion was sold in our initial public offering, and accrued dividends aggregating $171,000 were paid with a portion our net proceeds from the offering. In addition, the put options on our redeemable shares of common stock terminated and such shares were also not previously included in stockholders’ equity in our balance sheet. Therefore, the immediate result of our initial public offering was a significant increase in cash and stockholders’ equity on our balance sheet, and the elimination of the accrual of dividends on the preferred stock. In addition, the common stock outstanding increased significantly because of the conversion of the preferred stock, the termination of the put options on the redeemable shares of common stock and our issuance of shares of common stock. As a result, the basis for the calculation of net income per share on both a basic and diluted basis has changed significantly.

Seasonality

Due to our short operating history and significant sales growth since our inception, we cannot assess with 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. For example, 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 a seasonal decline in the demand for our products. While we have introduced footwear models that are more suitable for cold weather uses, such as the Endeavor, Georgie, All Terrain, Highland and Snowmass, we expect demand for our products, and therefore our sales, may continue to be subject to seasonal variations and significantly impacted by weather conditions, as over 50% of our revenues during the three months ended September 30, 2006 were attributable to our classic models, which are more suitable for warm weather. 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.

Results of Operations

Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005

Revenues. Revenues increased 190.8% or $73.0 million, to $111.3 million, in the three months ended September 30, 2006, from $38.3 million in the three months ended September 30, 2005. This increase was primarily a result of significantly higher unit sales of our footwear products. The higher unit sales resulted from an increase in the number of retail stores selling our products, additional sales resulting from new product offerings, stronger sales to our existing wholesale customers and increases in sales at retail locations owned by us and through our webstore. In addition, our revenues from sales outside of the United States were $40.9 million in the three months ended September 30, 2006 compared to $4.3 million in the three months ended September 30, 2005. We expect our sales to continue to grow as we enter new domestic and international markets and introduce new products.

Gross profit. Gross profit increased 192.3% or $42.6 million, to $64.8 million, in the three months ended September 30, 2006, from $22.2 million in the three months ended September 30, 2005. Our gross profit margin improved by 30 basis points to 58.2% in the three months ended September 30, 2006, compared to 57.9% in the three months ended September 30, 2005. The Company does not consider this to be a material change.

Due to our continued level of growth we believe it is more meaningful for investors to compare our gross margin percentages sequentially to the prior quarter. Our gross profit margin improved by 340 basis

points from 54.8% in the three months ended June 30, 2006. This increase in margin was primarily attributable to better freight management and a decrease in the average order fulfillment costs associated with our increased percentage of orders shipped factory direct. We have also improved efficiencies in managing inventory requirements and improved leverage of fixed operating costs due to higher volume.

Selling, general and administrative expenses. Selling, general and administrative expense increased 239.1% or $23.5 million, to $33.3 million in the three months ended September 30, 2006, from $9.8 million in the three months ended September 30, 2005. As a percentage of net revenues, selling, general and administrative expenses increased 420 basis points to 29.9% for the three months ended September 30, 2006 from 25.7% for the three months ended September 30, 2005. This increase was attributable to an increase in sales and marketing costs including our sponsorship of the AVP tour personnel expenses, professional fees associated with defending our intellectual property and operating as a public company, and an increase in the number of operating kiosks. We expect our selling, general and administrative expense will increase as we hire additional personnel and incur increased costs related to our growth.

Interest expense. Interest expense was $162,000 in the three months ended September 30, 2006, compared to $178,000 in the three months ended September 30, 2005. The decrease in interest expense relates to our use of a portion of the proceeds from our initial public offering to retire bank loans. This debt retirement led to a decrease in average borrowings outstanding on our line of credit and long term debt during the three months ended September 30, 2006 compared to average borrowings outstanding under those arrangements during the three months ended September 30, 2005.

Other income/expense, net. Other income was $657,000 in the three months ended September 30, 2006, compared to expense of $2,000 in the three months ended September 30, 2005 which resulted primarily from an increase in interest income related to an increase in cash and cash equivalents resulting from the completion of our initial public offering in February 2006.

Income tax expense. During the three months ended September 30, 2006, income tax expense was $10.4 million, representing an effective income tax rate of 32.7%, compared to income tax expense of $4.8 million, representing an effective income tax rate of 39.1% in the three months ended September 30, 2005. The decrease relates primarily to an increase in the pre-tax earnings in jurisdictions with lower relative income tax rates as a percentage of total pre-tax earnings.

Dividends on redeemable convertible preferred stock. No dividend payments were paid during the three months ended September 30, 2006. Dividends on our outstanding redeemable convertible preferred stock for the three months ended September 30, 2005 were $70,000. We first issued our Class C membership units with preferred liquidation and dividend rights in June 2004. 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 provided for a dividend at the rate of five percent per annum on the initial investment amount per share. The Series A preferred stock was converted into shares of our common stock in connection with the closing of the initial public offering on February 13, 2006.

Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005

Revenues. Revenues increased 222.3% or $166.8 million, to $241.8 million, in the nine months ended September 30, 2006, from $75.0 million in the nine months ended September 30, 2005. This increase was primarily a result of significantly higher unit sales of our footwear products. The higher unit sales resulted from an increase in the number of retail stores selling our products, additional sales resulting from new product offerings, stronger sales to our existing wholesale customers, and increases in sales at retail locations owned by us and through our webstore. In addition, our revenues from sales outside of the United States were $78.4 million in the nine months ended September 30, 2006 compared to $8.2 million in the nine months ended September 30, 2005.

Gross profit. Gross profit increased 215.1% or $92.5 million, to $135.5 million, in the nine months ended September 30, 2006, from $43.0 million in the nine months ended September 30, 2005. Our gross profit margin was 56.0% for the nine months ended September 30, 2006 and 57.3% for the nine months ended September 30, 2005. This decrease in margin percentage is attributable to increases in third party logistics costs and product mix. These cost increases were partially offset by improved efficiencies in managing inventory requirements and shipping our products directly from our third party manufacturers.

Selling, general and administrative expense. Selling, general and administrative expense increased 205.1% or $47.3 million, to $70.3 million in the nine months ended September 30, 2006, from $23.1 million in the nine months ended September 30, 2005. This increase was attributable to an increase in sales and marketing costs, personnel expenses and costs related to our kiosk operations. We also experienced an increase in our overall corporate infrastructure costs to support our growth. As a percentage of net revenues, selling, general and administrative expenses decreased by 160 basis points to 29.1% for the nine months ended September 30, 2006 from 30.7% for the corresponding period in 2005. As a percentage of total net revenue, selling, general and administrative expenses decreased primarily due to the effect of the improved leverage of operating expenses resulting from higher sales.

Interest expense. Interest expense was $533,000 in the nine months ended September 30, 2006, compared to $380,000 in the nine months ended September 30, 2005. The increase in interest expense relates to the write-off of deferred financing costs related to our revolving credit facility and an increase the average interest rate on borrowings outstanding on our line of credit and long term debt during the nine months ended September 30, 2006 compared to average interest rate on borrowings outstanding under those arrangements during the nine months ended September 30, 2005.

Other income/expense, net. Other income was $1.3 million in the nine months ended September 30, 2006, compared to expense of $25,000 in the nine months ended September 30, 2005 which resulted from an increase in interest income related to an increase in cash and cash equivalents resulting from the completion of our initial public offering in February 2006.

Income tax expense. During the nine month period ended September 30, 2006, income tax expense was $22.3 million, representing an effective income tax rate of 33.8%, compared to income tax expense of $6.7 million, representing an effective income tax rate of 34.4%, in the nine month period ended September 30, 2005. We recognized a tax benefit of $797,000 in the nine month period ended September 30, 2005 to establish our deferred tax assets in connection with the conversion from a limited liability company to a taxable corporation. When compared to the effective income tax rate, excluding the effect of the tax benefit, our effective income tax rate for the nine months ended September 30, 2006 decreased by approximately 400 basis points. The decrease relates primarily to an increase in the pre-tax earnings in jurisdictions with lower income tax rates as a percentage of total pre-tax earnings.

Dividends on redeemable convertible preferred stock. Dividends on our outstanding redeemable convertible preferred stock were $33,000 for the nine months ended September 30, 2006 representing a decrease of $173,000 when compared to the $206,000 for the nine months ended September 30, 2005. We first issued equity with preferred liquidation and dividend rights 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 was converted into shares of our common stock in connection with the closing of our initial public offering in February 2006.

Off-Balance Sheet Arrangements

Our primary off-balance sheet arrangements consist of operating leases related to kiosks, store locations and warehouses. We do not have any relationships with unconsolidated entities or financial

partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts that rely on estimation techniques to calculate fair value. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Liquidity and Capital Resources

Our primary cash needs are working capital and capital expenditures. Other principal uses of cash have been for the distribution in April 2005 of $3.0 million in cash to the members of our predecessor limited liability company pursuant to its operating agreement, 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 to increase manufacturing capacity and improve our global infrastructure. Prior to our initial public offering, we generally financed these needs through sales of our securities, borrowings under our credit facility and cash provided by operating activities.

As of September 30, 2006, we had $83.3 million in cash and cash equivalents and short-term investments compared to $4.8 million in cash and cash equivalents as of December 31, 2005. The increase in cash and cash equivalents reflects the completion of our initial public offering of our common stock in February 2006 whereby we received proceeds of $94.5 million, net of underwriters’ fees and commissions and related offering costs of $2.5 million. To date, we have used $12.2 million of the net proceeds from the offering to pay down our revolving line of credit and long-term debt, $14.7 million of the net proceeds for capital expenditures related to increasing our manufacturing capacity and improving our infrastructure, including approximately $1.7 million to expand and upgrade our existing information technology systems and in October 2006 we paid off the remaining $1.7 million balance on the loan from Development Bank of Canada. We intend to use the remaining net proceeds for the continual development of our global infrastructure, facility upgrades, working capital, and other general corporate purposes. In addition, we may use a portion of the remaining proceeds to acquire products or businesses that are complimentary to our own.

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 facilities operated by us or purchased for our third-party manufacturers.

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 nine months ended September 30, 2006 was $3.4 million, primarily related to net income of $43.6 million plus non-cash items of depreciation and amortization of $5.2 million and share-based compensation expense of $7.2 million, which was offset by increases in working capital resulting from increases in accounts receivable of $43.7 million, inventory of $20.4 million, and a decrease in accounts payable and accrued liabilities and other liabilities of $23.3 million. Cash provided by operating activities in the nine months ended September 30, 2005 was $5.6 million, primarily related to net income of $12.8 million, non-cash expenses for stock-based compensation of $3.5 million and depreciation and amortization of $2.0 million, offset by working capital expenses of $11.9 million.

Cash used in investing activities for the nine months ended September 30, 2006 was $39.8 million, which was related to the net purchases of investments of $25.4 million, capital expenditures for molds, machinery and equipment of $13.0 million and $1.7 million related to the upgrade and expansion of our information technology systems. Cash used in investing activities in the nine months ended September 30, 2005 was $6.8 million related to various capital expenditures of $6.2 million and the acquisition on a non-competition agreement of $636,000.

Cash provided by financing activities was $89.5 million for the nine months ended September 30, 2006 compared to cash provided by financing activities of $4.4 million for the nine months ended September 30, 2005. The $85.1 million increase in cash provided by financing activities primarily resulted from the completion of the initial public offering of our common stock whereby we received net proceeds of $94.5 million, after deducting underwriting discounts and commissions and offering costs of $2.5 million, all partially offset by the repayment of borrowings on our line of credit and long term debt of $12.2 million.

On April 8, 2005 we entered into a $5.0 million secured revolving credit facility, and on October 26, 2005 we amended and restated the credit facility increasing the amount available under this credit facility to $20.0 million. The effective annual interest rate, on borrowings outstanding under the credit facility was 7.25% as of December 31, 2005. Our obligations under the revolving credit facility were secured by substantially all of our property, including, among other things, our accounts receivable, inventory, equipment and fixtures. The credit facility also contained financial covenants that required us to meet a specified consolidated fixed charge coverage ratio and specified levels of consolidated EBITDA. The credit facility was subject to an early termination fee of 1% if we terminated the facility on or prior to October 26, 2006. In February 2006, we repaid all amounts outstanding under the credit facility, together with accrued interest thereon, with a portion of the proceeds from our initial public offering, as of September 30, 2006 we are no longer able to borrow against the facility.

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 report.

We consider certain accounting policies related to revenue recognition, reserves for uncollectible accounts receivable and inventories, share-based compensation and capitalized software 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:

· we enter into a legally binding arrangement with a customer;

· delivery has occurred;

· customer payment is deemed fixed or determinable and free of contingencies or significant uncertainties; and

· collection is reasonably assured.

Title passes on shipment or on receipt by the customer depending on 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.

Reserve for Uncollectible Accounts Receivable. We make ongoing estimates relating to the collectibility of our accounts receivable and maintain a reserve for estimated losses resulting from the inability of our customers to make required payments. In determining the amount of the reserve, we consider our historical level of credit losses and make judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Since we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, a larger reserve might be required. In the event we determine that a smaller or larger reserve is appropriate, we would record a credit or a charge to selling, general and administrative expense in the period in which we made such a determination.

Inventory Write-Downs. We also make ongoing estimates relating to the net realizable value of inventories, based on our assumptions about future demand and market conditions. If we estimate that the net realizable value of our inventory is less than the cost of the inventory recorded on our books, we record a reserve equal to the difference between the cost of the inventory and the estimated net realizable value. This reserve is recorded as a charge to cost of sales. If changes in market conditions result in reductions in the estimated net realizable value of our inventory below our previous estimate, we would increase our reserve in the period in which we made such a determination and record a charge to cost of sales.

Share-Based Compensation. In January 2005, the FASB issued SFAS 123R, which is a revision of SFAS 123. SFAS 123R supersedes Accounting Principles Board APB 25, and amends SFAS No. 95, Statement of Cash Flows (“SFAS 95”). Generally, the approach in SFAS 123R is similar to the approach described in SFAS 123. However, SFAS 123R 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. We adopted SFAS 123R on January 1, 2006.

Pursuant to the transition requirements of SFAS 123R for a newly public entity, we adopted the prospective method for all stock option grants issued prior to August 15, 2005, which was the date we initially filed a Registration Statement on Form S-1 in connection with our initial public offering. As a non-public company we used the minimum value method of measuring equity share options and similar instruments for either recognition or pro forma disclosure purposes under the prospective method required by the Statement we must apply SFAS 123R prospectively to new awards and to awards modified, repurchased, or cancelled after the required effective date. We continue to account for any portion of awards outstanding at the date of initial application using the accounting principles originally applied to those awards which were the provisions of APB 25 and its related interpretive guidance.

For stock option grants issued after the filing of our initial Registration Statement on Form S-1 on August 15, 2005, we have applied the modified prospective method.

The fair value of equity units granted from October 2002 through December 2004 was originally estimated by our board of directors based on 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, May 1, 2005, June 30, 2005, August 1, 2005, October 1, 2005 and December 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, June 30, 2005 and August 1, 2005 valuations were 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 were 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 in 2005 could differ materially from our estimates.

Capitalized Software. We capitalize certain internal software acquisition and development costs that benefit future years in accordance with SOP 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” For software developed for internal use, we expense the costs of developing computer software until the software has reached the application development stage and then capitalize all costs incurred from that time until the software has been installed at which time amortization of the capitalized costs begins. Determination of when the software has reached the application development stage is based on completion of conceptual designs, evaluation of alternative designs and performance requirements. Costs of major enhancements to internal use software are capitalized while routine maintenance of existing software is charged to expense as incurred. The determination of when the software is in the application development stage and the ongoing assessment of the recoverability of capitalized computer software development costs requires considerable judgment by management with respect to certain factors, including but not limited to, estimated economic life and changes in software and hardware technology. We also contract with third parties to help develop or test internal use software and generally capitalize these costs. Internal-use capitalized software costs are amortized over their expected useful life, which is generally five to seven years.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We earn interest income on both our cash and cash equivalents and our investment portfolio. Our investment portfolio generally consists of readily marketable investment-grade debt securities of various issuers and maturities. All investments are denominated in U.S. dollars and are classified as “available for sale.” These instruments are not leveraged, and are not held for trading purposes. As interest rates change, the amount of realized and unrealized gain or loss on these securities will change.

Credit Risk

Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows due to adverse changes in financial and commodity market prices and rates. We are exposed to market risk to the extent that United States and Canadian interest rates change due to inflation or other factors. This exposure is directly related to our normal operating and funding activities. The interest payable on our Canadian line of credit is determined based on the prime rate plus 0.5% per annum, and, the interest rate on our Canadian loan is the bank’s float rate less 0.20%, therefore, interest costs are affected by changes in market interest rates. Interest rates on our capital lease lines are dependent on

interest rates in effect at the time the lease line is drawn on. Total liabilities outstanding at September 30, 2006 under the line of credit, loan and capital lease lines were approximately $2.4 million. Based on amounts borrowed as of September 30, 2006, we would have a resulting decline in future annual earnings and cash flows of approximately $24,000 for every 1% increase in prime lending rates. We have no plans to use derivative instruments or engage in hedging activities. In October 2006, we paid off the outstanding balance on our Canadian loan, with the only remaining outstanding debt related to our capital leases in the amount of $655,000.

Foreign Currency Exchange Risk

We pay the majority of our overseas third party manufacturers in U.S. dollars and have had significant revenues from foreign sales in recent periods. Our ability to sell our products in foreign markets and the U.S. dollar value of the sales made in foreign currencies can be significantly influenced by foreign currency fluctuations. A decrease in the value of foreign currencies relative to the U.S. dollar could result in downward price pressure for our products or losses from currency exchange rates. The volatility of the applicable rates and prices are dependent on many factors that cannot be forecast with reliable accuracy. In the event our foreign sales and purchases 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. We intend to use derivative instruments and engage in hedging activities during the fourth quarter of 2006.

ITEM 4. Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2006, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act report is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

During the last fiscal quarter, we made a change to our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. On April 1, 2006, we implemented a new accounting and operational software package for our U.S. operations. Certain processes and controls were changed to accommodate the needs and requirements of our growth and the new financial reporting system. There were no material changes to our internal controls during the third quarter of 2006.

We are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 by our year ending December 31, 2007. The evidence of such compliance is due no later than the time we file our annual report for the year ending December 31, 2007. We believe adequate resources and expertise, both internal and external have been put in place to meet this requirement.

PART II.
OTHER INFORMATION

ITEM 1. Legal Proceedings

On March 31, 2006, we have filed a complaint with the ITC against 11 companies, alleging infringement on certain of our utility or design patent that were issued on February 7, 2006 and March 28, 2006, by the United States Patent and Trademark Office. The ITC has issued final determinations terminating Shaka Holdings, Inc., Inter-Pacific Trading Corporation and Acme Ex-Im, Inc. from the ITC investigation No. 337-TA-567 on the basis of settlement and Cheng’s Enterprises, Inc. on the suspension of accused activities. In addition, we have entered into settlement agreements with D. Myers & Sons, Inc. and Australia Unlimited, Inc. but no final determinations have been made by the ITC to date. The ITC Administrative Law Judge issued an Initial Determination of non-infringement related to one of the patents at issue. We plan to file a petition with the Commission to review this determination.

On June 15, 2006, Aspen Licensing International, Inc. filed a complaint against us in the United States District Court for the District of Massachusetts, alleging that our “Aspen” model infringes on Aspen Licensing’s trademark rights, and that, in turn, we committed acts of false designation of origin, trademark dilution, unfair competition and unfair or deceptive trade practices. We were not served with this complaint, however, in response to Aspen’s filing, we changed the name of the “Aspen” model shoe to the Endeavor. In addition, while we deny infringement upon Aspen Licensing’s trademark rights, we entered into a settlement agreement with Aspen and agreed to pay Aspen $10,000 in exchange for Aspen dismissing the suit with prejudice and allowing us to sell out the remaining inventory of “Aspen” labeled shoes. This lawsuit is now dismissed with prejudice.

Although we are subject to litigation from time to time in the ordinary course of our business, we are not party to any pending legal proceedings that we believe would have a material adverse impact on our business.

ITEM 1A. Risk Factors

Our Annual Report on Form 10-K for the year ended December 31, 2005 and our most recent Registration Statement on From S-1 filed with the Securities and Exchange Commission on August 14, 2006, contain risks which could materially affect our business, financial condition or future results. The risks described in these documents are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. The risk factors included in Part I of the section entitled Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2005 and in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006 have not materially changed.

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

Use of Proceeds from Sale of Registered Securities

On February 13, 2006, we completed the initial public offering of our common stock pursuant to a Registration Statement on Form S-1 (File No. 333-127526) that was declared effective by the Securities and Exchange Commission on February 7, 2006. The initial public offering resulted in proceeds to us of $94.5 million, net of underwriters’ fees and commissions and related offering costs of $2.5 million. As of September 30, 2006, we used $12.2 million of the net proceeds from the offering to pay down debt, $14.7 million of the net proceeds for capital expenditures related to increasing our manufacturing capacity and improving our infrastructure, and to expand and upgrade our existing information technology systems. We intend to use the remaining net proceeds for the ongoing development of our global infrastructure,

facility upgrades, marketing and advertising, and working capital and other general corporate purposes. In addition, we may use a portion of the remaining proceeds to acquire products or businesses that are complimentary to our own.

ITEM 5. Other Information

On September 20, 2006, our board of directors approved a new compensation arrangement for non-employee directors effective as of September 1, 2006. Under the arrangement, directors who are not our employees receive annual cash compensation of $40,000, payable quarterly. Additional annual cash compensation is paid to the chairperson of each committee of the board of directors as follows: $10,000 for the Chair of the audit committee and $5,000 for each of the compensation committee Chair and the governance and nominating committee Chair. In addition, all directors are reimbursed for their reasonable out-of-pocket expenses incurred in attending meetings of the board of directors and its committees.

Under the new arrangement, each new non-employee director will be awarded options to purchase 40,000 shares of our common stock on their initial election to our board of directors and continuing directors will be awarded options to purchase an additional 10,000 shares of our common stock for each year of service. The Chairman of the board of directors will receive options to purchase an additional 10,000 shares of our common stock on his or her initial election as Chairman. The arrangement provides that the options will be granted at the fair market value of our common stock on the date of grant and have a term of seven years. Each option grant will vest in equal annual installments over four years in connection with our annual meeting of stockholders, so long as such person remains a director.

ITEM 6. Exhibits

Exhibit Number				Description
3.1**				Restated Certificate of Incorporation of Crocs, Inc.
3.2**				Amended and Restated Bylaws of Crocs, Inc.
4.1*				Specimen common stock certificate.
10.39***				Director Compensation Plan
10.40				Membership Interest Purchase Agreement among Crocs, Inc. and the Members of Jibbitz, LLC, dated September 29, 2006.
31.1				Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act.
31.2				Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act.
32.1				Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act.
32.2				Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act.

* Incorporated herein by reference to Crocs, Inc.’s Registration Statement on Form S-1 (File No. 333-127526).

** Incorporated by reference to Crocs, Inc.’s Registration Statement on Form S-8, filed on March 9, 2006 (File No. 333-132312).

*** Management contract or compensatory plan or arrangement.

SIGNATURES

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

	CROCS, INC.
Date: November 10, 2006	By:	/s/ PETER S. CASE
		Name:	Peter S. Case
		Title:	Chief Financial Officer, Senior Vice President—Finance and Treasurer

EX-10.39 2 a06-22104_1ex10d39.htm EX-10

EXHIBIT 10.39

CROCS, INC.

Board of Directors Compensation Plan

On September 20, 2006, the Board of Directors of Crocs, Inc. (the “Company”) approved a new compensation arrangement for non-employee directors effective as of September 1, 2006. The new compensation arrangement provides the following for non-employee directors:

(a) Annual cash compensation of $40,000 payable to each non-employee director in quarterly payments of $10,000 each;

(b) Additional annual cash compensation of $10,000 will be payable to the chair of the Audit Committee and $5,000 will be payable to the chairs of the Governance and Nominating Committee, and the Compensation Committee;

(c) Reimbursement of reasonable out-of-pocket expenses incurred by each director in connection with attendance at meetings of the Board and committees thereof;

(d) Grant to each non-employee director options to purchase 40,000 shares of Common Stock of the Company upon election to the Board when first elected, each such grant to be made at the fair market value of the Company’s Common Stock on the date of grant and to vest in four equal annual installments on the date of the annual meeting of stockholders each year;

(e) Annual grant to each director options to purchase 10,000 shares of Common Stock of the Company for each year of service on the Board after the initial appointment to the Board, each such grant to be made at the fair market value of the Company’s Common Stock on the date of grant and to vest in four equal annual installments on the date of the annual meeting of stockholders each year;

(f) Grant to the Chairman of the Board additional options to purchase 10,000 shares of Common Stock of the Company when first elected as Chairman, such grant to be made at the fair market value of the Company’s Common Stock on the date of grant and to vest in four equal annual installments on the date of the annual meeting of stockholders each year;

(g) All stock option grants to the Board will have seven (7) year terms; and

(h) All stock option grants to members of the Board after the initial grant will be made in connection with the annual meeting of stockholders each year.

EX-10.40 3 a06-22104_1ex10d40.htm EX-10

Exhibit 10.40

MEMBERSHIP INTEREST PURCHASE AGREEMENT

among

CROCS, INC.

and

THE MEMBERS OF JIBBITZ, LLC

September 29, 2006

TABLE OF CONTENTS

			Page
1.	Definitions		1
2.	Purchase and Sale of Membership Interests		7
	2.1	Basic Transaction	7
	2.2	Deposit	7
	2.3	Preliminary Purchase Price	7
	2.4	Closing	8
	2.5	Deliveries at Closing	8
	2.6	Closing Merger Equity Adjustment	8
	2.7	Earn-Out Accounts	10
	2.8	Payments	12
	2.9	Appointment of Member Agent	12
3.	Representations and Warranties Concerning Transaction		12
	3.1	Sellers’ Representations and Warranties	12
	3.2	Buyer’s Representations and Warranties	13
4.	Representations and Warranties Concerning Target		14
	4.1	Organization, Qualification, and Corporate Power	14
	4.2	Capitalization	14
	4.3	Non-Contravention	15
	4.4	Brokers’ Fees	15
	4.5	Title to Assets	15
	4.6	Subsidiaries	15
	4.7	Financial Statements	15
	4.8	Events Subsequent to Most Recent Fiscal Month End	15
	4.9	Undisclosed Liabilities	17
	4.10	Legal Compliance	17
	4.11	Tax Matters	18
	4.12	Real Property	20
	4.13	Intellectual Property	22
	4.14	Tangible Assets	24
	4.15	Inventory	24
	4.16	Contracts	24
	4.17	Notes and Accounts Receivable	26
	4.18	Powers of Attorney	26
	4.19	Insurance	26
	4.20	Litigation	26
	4.21	Product Warranty	26
	4.22	Product Liability	27
	4.23	Employees	27
	4.24	Employee Benefits	27
	4.25	Guaranties	28
	4.26	Environmental, Health, and Safety Matters	28
	4.27	Business Continuity	29

	4.28	Certain Business Relationships with Target	29
	4.29	Customers and Suppliers	29
5.	Pre-Closing Covenants		29
	5.1	General	29
	5.2	Notices and Consents	30
	5.3	Operation of Business	30
	5.4	Preservation of Business	30
	5.5	Access	30
	5.6	Notice of Developments	30
	5.7	Exclusivity	31
	5.8	Tax Matters	31
	5.9	Buyer Covenant Not to Compete	32
	5.10	Tax-Sharing Agreements	32
6.	Post-Closing Covenants		32
	6.1	General	32
	6.2	Transition	32
	6.3	Confidentiality	32
	6.4	Covenant Not to Compete	33
	6.5	Consulting Payment. The Parties covenant and agree that, with respect to any Earn-Out Payments, prior to making any distributions in accordance with the Earn-Out Allocations, Buyer shall pay the first 2.5% of any such Earn-Out Payment to Zan Design & Associates in consideration for consulting services performed by Zan Design & Associates. Thereafter, the remainder will be distributed in accordance with the Earn-Out Allocations as specified in Section 2.7(b). 6.6 Responsibility for Filing Tax Returns and Payment of Taxes	33
	6.6	Cooperation on Tax Matters	34
7.	Conditions to Obligation to Close		35
	7.1	Conditions to Buyer’s Obligation	35
	7.2	Conditions to Sellers’ Obligation	36
8.	Remedies for Breaches of this Agreement		37
	8.1	Survival of Representations and Warranties	37
	8.2	Indemnification Provisions for Buyer’s Benefit	37
	8.3	Indemnification Provisions for Sellers’ Benefit	38
	8.4	Matters Involving Third Parties	38
	8.5	Determination of Adverse Consequences	40
	8.6	Release	40
	8.7	Purchase Price Adjustment	40
10.	Termination		40
	10.1	Termination of Agreement	40
	10.2	Effect of Termination	40
11.	Miscellaneous		41
	11.1	Nature of Sellers’ Obligations	41
	11.2	Press Releases and Public Announcements	41
	11.3	No Third-Party Beneficiaries	41
	11.4	Entire Agreement	42
	11.5	Succession and Assignment	42
	11.6	Counterparts	42
	11.7	Headings	42
	11.8	Notices	42
	11.9	Governing Law	43
	11.10	Amendments and Waivers	43
	11.11	Severability	43
	11.12	Expenses	43
	11.13	Relationship	44
	11.14	Construction	44
	11.15	Incorporation of Exhibits, Annexes, and Schedules	44
	11.16	Specific Performance	44
	11.17	Submission to Jurisdiction	44

Exhibit A Form of Endorsement Agreement

Exhibit B Form of Escrow Agreement

Exhibit C Financial Statements

Exhibit D-1 Employment Agreement with Rich Schmelzer

Exhibit D-2 Employment Agreement with Sheri Schmelzer

MEMBERSHIP INTEREST PURCHASE AGREEMENT

This Membership Interest Purchase Agreement (this “Agreement”) is entered into on September 29, 2006, by and among CROCS, Inc., a Delaware corporation (“Buyer”), each of the parties listed as “Sellers” on the signature pages hereto (each a “Seller” and collectively, “Sellers”), and Rich Schmelzer, as Member Agent (as hereinafter defined). Buyer, Sellers and Member Agent are referred to collectively herein as the “Parties”.

Sellers in the aggregate own all of the outstanding Membership Interests of Jibbitz, LLC, a Colorado limited liability company (“Target”).

This Agreement contemplates a transaction in which Buyer will purchase from Sellers, and Sellers will sell to Buyer, all of the outstanding membership interests of Target in return for cash and the other consideration described herein.

For United States federal income tax purposes, the parties intend to treat the purchase of Target membership interests as a transaction covered under Revenue Ruling 99-6.

Concurrently with the execution of this Agreement, Buyer and Target are entering into the Endorsement Agreement.

Now, therefore, in consideration of the premises and the mutual promises herein made, and in consideration of the representations, warranties, and covenants herein contained, the Parties agree as follows.

“Accountant” has the meaning set forth in Section 2.6 below.

“Acceleration Event” has the meaning set forth in Section 2.7(d) below.

“Acquisition Proposal” has the meaning set forth in Section 5.7 below.

“Act” has the meaning set forth in Section 4.1 below.

“Affiliate” has the meaning set forth in Rule 12b-2 of the regulations promulgated under the Securities Exchange Act.

“Affiliated Group” means any affiliated group within the meaning of Code §1504(a) or any similar group defined under a similar provision of state, local or foreign law.

“Basis” means any past or present fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act, or transaction that forms or could form the basis for any specified consequence.

“Buyer” has the meaning set forth in the preface above.

“Buyer Material Adverse Effect” means any effect or change with respect to Buyer or its business that would be (or could reasonably be expected to be) materially adverse to the ability of Buyer to make the Earn-Out Payment or of Sellers to earn the Earn-Out Payment, or to the ability of Buyer to consummate timely the transactions contemplated hereby (regardless of whether any Seller has knowledge of such effect or change on the date hereof); provided, however, that none of the following shall be deemed, either alone or in combination, to constitute a Buyer Material Adverse Effect: (i) any adverse effect (including any loss of employees, any cancellation of or delay in customer orders, any litigation or any disruption in supplier, partner or similar relationships) proximately resulting from or arising out of the announcement or pendency of this Agreement and the transactions contemplated hereby (except for any adverse effect resulting from a breach by Buyer of a representation, warranty or covenant hereunder); (ii) any adverse effect resulting from or arising out of changes in general economic conditions; (iii) any adverse effect resulting from or arising out of changes generally affecting the industry in which Buyer operates provided that such changes do not affect Buyer in a materially disproportionate manner; (iv) any adverse effect resulting from or arising out of any natural disaster or any acts of terrorism, sabotage, military action or war or any escalation or worsening thereof; or (v) any adverse effect resulting from or arising out of changes in GAAP or applicable laws, rules or regulations.

“Cash Payment Increase” has the meaning set forth in Section 2.6 below.

“Cash Payment Decrease” has the meaning set forth in Section 2.6 below.

“Closing” has the meaning set forth in Section 2.4 below.

“Closing Date” has the meaning set forth in Section 2.4 below.

“Closing Date Balance Sheet” has the meaning set forth in Section 2.6 below.

“Closing Member Equity” has the meaning set forth in Section 2.6 below.

“Code” means the Internal Revenue Code of 1986, as amended.

“Confidential Information” means any information concerning the businesses and affairs of Target that is not already generally available to the public.

“Conflict” has the meaning set forth in Section 3.1(c) below.

“Controlled Group” has the meaning set forth in Code §1563.

“Deposit” has the meaning set forth in Section 2.2 below.

“Disclosure Schedule” has the meaning set forth in Section 4 below.

“Draft Closing Date Balance Sheet” has the meaning set forth in Section 2.6 below.

“Earn-Out Payment” has the meaning set forth in Section 2.7 below.

“EBIT” means the earnings of Target before interest and taxes determined in accordance with the accounting policies of Buyer consistently applied.

“Employee Benefit Plan” mean any “employee benefit plan” (as such term is defined in ERISA §3(3)) and any other employee benefit plan, program or arrangement of any kind.

“Employee Pension Benefit Plan” has the meaning set forth in ERISA §3(2).

“Employee Welfare Benefit Plan” has the meaning set forth in ERISA §3(1).

“Employment Agreements “ has the meaning set forth in Section 7.1 below.

“Endorsement Agreement” means the agreement in the form attached hereto as Exhibit A.

“Environmental, Health, and Safety Requirements” shall mean, as amended and as now and hereafter in effect, all federal, state, local, and foreign statutes, regulations, ordinances, and other provisions having the force or effect of law, all judicial and administrative orders and determinations, all contractual obligations, and all common law concerning public health and safety, worker health and safety, pollution, or protection of the environment, including, without limitation, all those relating to the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, testing, processing, discharge, release, threatened release, control, or cleanup of any hazardous materials, substances, or wastes, chemical substances or mixtures, pesticides, pollutants, contaminants, toxic chemicals, petroleum products or byproducts, asbestos, polychlorinated biphenyls, noise, or radiation.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

“Escrow Agreement” has the meaning set forth in Section 2.2 below.

“Financial Statements” has the meaning set forth in Section 4.7 below.

“FIRPTA Affidavit” has the meaning set forth in Section 7.1 below.

“Force Majeure Event” has the meaning set forth in Section 4.27 below.

“GAAP” means United States generally accepted accounting principles as in effect from time to time, consistently applied.

“Hart-Scott-Rodino Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

“Improvements” has the meaning set forth in Section 4.12 below.

“Indemnified Party” has the meaning set forth in Section 8.4 below.

“Indemnifying Party” has the meaning set forth in Section 8.4 below.

“Intellectual Property” means all of the following in any jurisdiction throughout the world: (a) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all patents, patent applications, and patent disclosures, together with all reissuances, continuations, continuations-in-part, revisions, extensions, and reexaminations thereof, (b) all trademarks, service marks, trade dress, logos, slogans, trade names, corporate names, Internet domain names, and rights in telephone numbers, together with all translations, adaptations, derivations, and combinations thereof and including all goodwill associated therewith, and all applications, registrations, and renewals in connection therewith, (c) all copyrightable works, all copyrights, and all applications, registrations, and renewals in connection therewith, (d) all mask works and all applications, registrations, and renewals in connection therewith, (e) all trade secrets and confidential business information (including ideas, research and development, know-how, formulas, compositions, manufacturing and production processes and techniques, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information, and business and marketing plans and proposals), (f) all computer software (including source code, executable code, data, databases, and related documentation), (g) all advertising and promotional materials, (h) all other proprietary rights, and (i) all copies and tangible embodiments thereof (in whatever form or medium).

“Knowledge” means actual knowledge.

“Lease Consents” has the meaning set forth in Section 7.1 below.

“Leased Real Property” means all leasehold or subleasehold estates and other rights to use or occupy any land, buildings, structures, improvements, fixtures, or other interest in real property held by Target.

“Leases” means all leases, subleases, licenses, concessions and other agreements (written or oral), including all amendments, extensions, renewals, guaranties, and other agreements with respect thereto, pursuant to which Target holds any Leased Real Property, including the right to all security deposits and other amounts and instruments deposited by or on behalf of Target thereunder.

“Liability” means any liability or obligation of whatever kind or nature (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due), including any liability for Taxes.

“License” means any license, sublicense, agreement, or permission with respect to the Intellectual Property of any Person.

“Lien” means any mortgage, pledge, lien, encumbrance, charge, or other security interest, other than (a) liens for Taxes not yet due and payable, (b) purchase money liens and liens securing rental payments under capital lease arrangements, and (c) other liens arising in the Ordinary Course of Business and not incurred in connection with the borrowing of money .

“Loss” or “Losses” means all claims, losses, Liabilities, damages, costs, interest, awards, judgments, penalties, reasonable amounts paid in settlement, and expenses, including

court costs and reasonable attorneys’ and consultants’ fees and expenses, net of actual insurance recoveries.

“Material Adverse Effect” or “Material Adverse Change” means any effect or change with respect to Target or its business that would be (or could reasonably be expected to be) materially adverse to the business, assets, condition (financial or otherwise), operating results or operations of Target, or to the ability of Sellers to consummate timely the transactions contemplated hereby (regardless of whether Buyer has knowledge of such effect or change on the date hereof); provided, however, that none of the following shall be deemed, either alone or in combination, to constitute a Material Adverse Effect: (i) any adverse effect (including any loss of employees, any cancellation of or delay in customer orders, any litigation or any disruption in supplier, partner or similar relationships) proximately resulting from or arising out of the announcement or pendency of this Agreement and the transactions contemplated hereby (except for any adverse effect resulting from a breach by any Seller of a representation, warranty or covenant hereunder); (ii) any adverse effect resulting from or arising out of changes in general economic conditions; (iii) any adverse effect resulting from or arising out of changes generally affecting the industry in which Target operates provided that such changes do not affect Target in a materially disproportionate manner; (iv) any adverse effect resulting from or arising out of any natural disaster or any acts of terrorism, sabotage, military action or war or any escalation or worsening thereof; or (v) any adverse effect resulting from or arising out of changes in GAAP or applicable laws, rules or regulations.

“Member Agent” means agent appointed by the Sellers pursuant to Section 2.9 below.

“Member Equity” means (a) total assets minus (b) total liabilities (including accrued compensation for paid time off and all fees and expenses of the Sellers in connection with the transactions contemplated by the Agreement).

“Membership Interests” means the membership interests of Target.

“Most Recent Balance Sheet” has the meaning set forth in Section 4.7 below.

“Most Recent Fiscal Month End” has the meaning set forth in Section 4.7 below.

“Objection Report” has the meaning set forth in Section 2.6 below.

“Ordinary Course of Business” means the ordinary course of business consistent with past custom and practice (including with respect to quantity and frequency).

“Owned Real Property” means all land, together with all buildings, structures, improvements, and fixtures located thereon, including all electrical, mechanical, plumbing and other building systems, fire protection, security and surveillance systems, telecommunications, computer, wiring, and cable installations, utility installations, water distribution systems, and landscaping, together with all easements and other rights and interests appurtenant thereto (including air, oil, gas, mineral, and water rights), owned by Target.

“Party” has the meaning set forth in the preface above.

“Percentage Ownership Amounts” has the meaning set forth in Section 2.3 below.

“Period 1” has the meaning set forth in Section 2.7 below.

“Period 2” has the meaning set forth in Section 2.7 below.

“Period 3” has the meaning set forth in Section 2.7 below.

“Person” means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization, any other business entity, or a governmental entity (or any department, agency, or political subdivision thereof).

“Pre-Closing Tax Period” means taxable periods ending on or before the Closing Date and the portion through the end of the Closing Date for any taxable period that includes (but does not end on) the Closing Date.

“Preliminary Purchase Price” has the meaning set forth in Section 2.3 below.

“Purchase Price” shall mean the aggregate of the Preliminary Purchase Price and any Earn-Out Payment pursuant to Section 2.7 hereof.

“Real Property” has the meaning set forth in Section 4.12 below.

“Real Property Laws” has the meaning set forth in Section 4.12 below.

“Real Property Permits” has the meaning set forth in Section 4.12 below.

“Securities Act” means the Securities Act of 1933, as amended.

“Securities Exchange Act” means the Securities Exchange Act of 1934, as amended.

“Seller” has the meaning set forth in the preface above.

“Subsidiary” means, with respect to any Person, any corporation, limited liability company, partnership, association, or other business entity of which (i) if a corporation, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers, or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof or (ii) if a limited liability company, partnership, association, or other business entity (other than a corporation), a majority of the partnership or other similar ownership interests thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more Subsidiaries of that Person or a combination thereof and for this purpose, a Person or Persons own a majority ownership interest in such a business entity (other than a corporation) if such Person or Persons shall be allocated a majority of such business entity’s gains or losses or shall be or control any managing director or general

partner of such business entity (other than a corporation). The term “Subsidiary” shall include all Subsidiaries of such Subsidiary.

“Systems” has the meaning set forth in Section 4.27 below.

“Target” has the meaning set forth in the preface above.

“Tax” or “Taxes” means any federal, state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Code §59A), customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not and including any obligations to indemnify or otherwise assume or succeed to the Tax liability of any other Person.

“Tax Return” means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof.

“Third-Party Claim” has the meaning set forth in Section 8.4 below.

Sellers have delivered to Buyer a correct and complete copy of each written agreement (as amended to date) listed in Section 4.16 of the Disclosure Schedule and a written summary setting forth the terms and conditions of each oral agreement referred to in Section 4.16 of the Disclosure Schedule. With respect to each such agreement required to be disclosed on Section 4.16: (A) the agreement is legal, valid, binding, enforceable, and in full force and effect; (B) neither Target nor, to the Knowledge of any Seller, any other party is in material breach or default, and no event has occurred that with notice or lapse of time would constitute a material breach or default, or permit termination, modification, or acceleration, under the agreement; and

(C) neither Target nor, to the Knowledge of any Seller, any other party has repudiated any material provision of the agreement; and (D) to the Knowledge of any Seller, no party is in material breach or default.

With respect to each such insurance policy, to the Knowledge of any Seller, (A) the policy is legal, valid, binding, enforceable, and in full force and effect; (B) neither Target nor any other party to the policy is in material breach or default (including with respect to the payment of premiums or the giving of notices), and no event has occurred that, with notice or the lapse of time, would constitute such a material breach or default, or permit termination, modification, or acceleration, under the policy; and (C) no party to the policy has repudiated any material provision thereof. Section 4.19 of the Disclosure Schedule describes any self-insurance arrangements affecting Target.

Buyer may waive any condition specified in this Section 7.1 if it executes a writing so stating at or prior to the Closing.

If to Sellers: Jibbitz, LLC
3052 Sterling Circle
Boulder Colorado 80301
Attn: Richard Schmelzer
Fax: (303) 484-6380

Copy to: Cooley Godward LLP
380 Interlocken Crescent, Suite 900
Broomfield, CO 80021-8023
Attn: Michael Platt
Fax: (720) 566-4099

and

Daniel L. Swires
9830 Isabelle Rd.
Lafayette, CO 80026
Fax: (303) 665-6448

If to Buyer: Crocs, Inc.
6273 Monarch Park Place
Niwot, CO 80503
Attn: Erik Rebich
Fax: (303) 848-7010

Copy to: Faegre & Benson LLP
3200 Wells Fargo Center
1700 Lincoln Street
Denver, CO 802030
Attn: Bill Campbell
Fax: (303) 607-3600

Any Party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other Parties notice in the manner herein set forth.

September 30,
2006

Within one year

After one year through five years

After five years through ten years

After ten years

* * * * *

IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on the date first above written.

	BUYER:

	CROCS, INC.

	By:	/s/ Erik Rebich
	Name:	Erik Rebich
	Title:	General Counsel


	SELLERS:

	JUNIPER HOLDING CORP.

	By:	/s/ Richard A. Schmelzer
	Name:	Richard A. Schmelzer
	Title:	President and Chief Executive Officer


	ALEXANDER A. SCHMELZER HERITAGE TRUST

	By:	/s/ Richard A. Schmelzer
	Name:	Richard A. Schmelzer
	Title:	Trustee


	RILEY A. SCHMELZER HERITAGE TRUST

	By:	/s/ Richard A. Schmelzer
	Name:	Richard A. Schmelzer
	Title:	Trustee


	JULIAN T. SCHMELZER HERITAGE TRUST

	By:	/s/ Richard A. Schmelzer
	Name:	Richard A. Schmelzer
	Title:	Trustee


	HD PEARL, INC.

	By:	/s/ Daniel Swires
	Name:	Daniel Swires
	Title:	President

	JUSTIN D. SWIRES HERITAGE TRUST

	By:	/s/ Daniel Swires
	Name:	Daniel Swires
	Title:	Trustee


	JESSICA E. SWIRES HERITAGE TRUST

	By:	/s/ Daniel Swires
	Name:	Daniel Swires
	Title:	Trustee


	RANDALL J. WAYMIRE HERITAGE TRUST

	By:	/s/ Tom Waymire
	Name:	Tom Waymire
	Title:	Trustee


	SARAH E. WAYMIRE HERITAGE TRUST

	By:	/s/ Tom Waymire
	Name:	Tom Waymire
	Title:	Trustee


	THERESA L. WAYMIRE HERITAGE TRUST

	By:	/s/ Tom Waymire
	Name:	Tom Waymire
	Title:	Trustee


	MEMBER AGENT:

	/s/ Richard A. Schmelzer
	Rich Schmelzer

EX-31.1 4 a06-22104_1ex31d1.htm EX-31

EXHIBIT 31.1

SECTION 302 CERTIFICATION

I, Ronald R. Snyder, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Crocs, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors or (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 10, 2006	/s/ Ronald R. Snyder
	Ronald R. Snyder
	President and Chief Executive Officer
	(Principal Executive Officer)

EX-31.2 5 a06-22104_1ex31d2.htm EX-31

EXHIBIT 31.2

SECTION 302 CERTIFICATION

I, Peter S. Case, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Crocs, Inc.;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 10, 2006	/s/ Peter S. Case
	Peter S. Case
	Chief Financial Officer, Senior Vice President—Finance and Treasurer
	(Principal Financial and Accounting Officer)

EX-32.1 6 a06-22104_1ex32d1.htm EX-32

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

I, Ronald R. Snyder, President and Chief Executive Officer of Crocs, Inc., hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1) The Quarterly Report on Form 10-Q of Crocs, Inc. for the period ended September 30, 2006 (the “Quarterly Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and

(2) The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition of Crocs, Inc. at the end of the period covered by the Quarterly report and results of operations of Crocs, Inc. for the period covered by the Quarterly report.

Date: November 10, 2006	/s/ Ronald R. Snyder
	Ronald R. Snyder
	President and Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to Crocs, Inc. and will be retained by Crocs, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2 7 a06-22104_1ex32d2.htm EX-32

EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

I, Peter S. Case, Senior Vice President—Finance and Chief Financial Officer of Crocs, Inc., hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(2) The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition of Crocs, Inc. at the end of the period covered by the Quarterly Report and results of operations of Crocs, Inc. for the period covered by the Quarterly Report

Date: November 10, 2006	/s/ Peter S. Case
	Peter S. Case
	Chief Financial Officer, Senior Vice President—Finance and Treasurer
	(Principal Financial and Accounting Officer)

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