Business Combination

6 Months Ended

Jun. 30, 2011

Business Combination

Business Combination

(10)Business Combination

On May 19, 2011, the Company entered into an asset purchase agreement whereby it would acquire substantially all of the assets and assume the related liabilities of Sanuk, an innovative action sport and adventure footwear brand.  On July 1, 2011, the Company completed the acquisition of the purchased assets and the assumption of the assumed liabilities.  The total purchase price for the assets related to the Sanuk brand was an initial cash payment of approximately $119,800 subject to certain post-closing adjustments.  Upon the close of the acquisition, the Company also made an estimated payment of $6,800 related to the post-closing adjustments.  The purchase price also includes additional participation payments (contingent consideration) over the next five years as follows:

· 2011 earnings before interest, taxes, depreciation, and amortization (EBITDA) multiplied by ten, less the closing payment, up to maximum of $30,000;

· 51.8% of the gross profit in 2012, defined as total sales less the cost of sales for the business of the sellers;

· 36.0% of gross profit in 2013;

· 8.0% of the product of gross profit in 2015 multiplied by five.

There is no maximum to the contingent consideration payments for 2012, 2013, and 2015.

The Company made this acquisition because it believes Sanuk is a profitable, well-run business with a similar corporate culture, and provides substantial growth opportunities, particularly within the action sports market where it has a large and loyal customer base of active outdoor enthusiasts.  The Sanuk brand complements the Company’s existing brand portfolio with its unique market position through the combination of original and innovative product designs, as well as authentic and irreverent marketing campaigns.  The brand assists in balancing the Company’s existing seasonality, with its largest revenues being generated in the first half of the year.  The Sanuk brand also brings additional distribution channels to the Company, as it sells to hundreds of independent specialty surf and skate shops throughout the US that were not significantly in the Company’s existing customer portfolio.  The acquisition will be accounted for as a business combination and the Company intends to report the Sanuk brand as a new reportable segment.

As the acquisition date was subsequent to June 30, 2011, the Company’s condensed consolidated financial statements as of and for the three and six months ended June 30, 2011 do not contain the results of the Sanuk brand or any of the related entities.  For the six months ended June 30, 2011, the Company incurred approximately $1,400 of transaction costs for the Sanuk acquisition.

The purchase price, including contingent consideration, is made up of the net assets acquired, including tangible assets, trade names, customer and distributor relationships, non-compete agreements, patents, order books, and goodwill.  All of the goodwill associated with this purchase is expected to be deductible for tax purposes.  However, due to the timing of the close of the acquisition, the Company did not have sufficient time to complete the valuation of the acquired assets and assumed liabilities and the fair value of the contingent consideration, and therefore, the amount of goodwill and the tax deduction cannot be determined at this time.

Supplemental pro forma information has not been provided for the Sanuk brand as the acquired operations were components of two legal entities, which were separately managed.  The precise historical financial information related directly to the asset purchase agreement was not prepared. Since this financial information prior to the acquisition is not readily available, compilation of such data is impracticable.