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** **

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**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 30,2010**

 

**or**

 

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

 

**For the transition periodfrom              to                **

 

**Commission File No. 000-51754**

 

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** **

**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)

 

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Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T(Section 232.405 of this chapter) during the preceding 12 months (or forsuch shorter period that the registrant was required to submit and post suchfiles). Yes o No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act:

 

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

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes o No x

 

Asof October 29, 2010, Crocs, Inc. had 87,248,154 shares of its $0.001par value common stock outstanding.

 

 

 

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**Crocs, Inc.**

**Form 10-Q**

**QuarterEnded September 30, 2010**

**Table ofContents**

 
| **PART I—Financial Information** |                                                                                                                                                   |
|--------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
| Item 1.                               | Financial Statements                                                                                                                                   | 3 |
|                                       | Unaudited  Condensed Consolidated Statements of Operations for the Three Months and Nine  Months Ended September 30, 2010 and 2009 | 3 |
|                                       | Unaudited Condensed Consolidated Balance Sheets  at September 30, 2010 and December 31, 2009                                       | 4 |
|                                       | Unaudited Condensed Consolidated  Statements of Cash Flows for the Nine Months Ended  September 30, 2010 and 2009                  | 5 |
|                                       | Notes to Unaudited Condensed Consolidated Financial  Statements                                                                                        | 6 |
| Item 2.                               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                            | 17 |
| Item 3.                               | Quantitative  and Qualitative Disclosures About Market Risk                                                                                            | 28 |
| Item 4.                               | Controls and  Procedures                                                                                                                               | 29 |
| **PART II—Other Information**    |                                                                                                                                                   |
| Item 1.                               | Legal Proceedings                                                                                                                                      | 29 |
| Item 1A.                              | Risk Factors                                                                                                                                           | 30 |
| Item 6.                               | Exhibits                                                                                                                                               | 30 |
| Signatures                                 | 31                                                                                                                                                     |

 

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**PART I—FINANCIALINFORMATION**

 

**ITEM 1. Financial Statements**

 

**CROCS, INC. AND SUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

**(In thousands, except share and per share data)**

 
| ** **                                    | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                    | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenues                                      |       | $                                                        | 215,605    |                                                    | $          | 177,141 |   | $ | 610,503 |   | $ | 509,756 |   |
| Cost  of sales                                |       | 96,797                                                   |       | 87,291                                                  |       | 273,072 |   | 269,115 |   |
| Gross  profit                                 |       | 118,808                                                  |       | 89,850                                                  |       | 337,431 |   | 240,641 |   |
| Selling,  general and administrative expenses |       | 92,192                                                   |       | 77,995                                                  |       | 261,017 |   | 240,654 |   |
| Foreign  currency transaction gains, net      |       | (908                                                     | )          | (1,032                                                  | )          | (2,329 | ) | (1,247 | ) |
| Restructuring  charges                        |       | —                                                   |       | 17                                                      |       | 2,539 |   | 5,916 |   |
| Impairment  charges                           |       | —                                                   |       | 1,722                                                   |       | 141 |   | 25,447 |   |
| Charitable  contributions                     |       | 78                                                       |       | 2,178                                                   |       | 496 |   | 7,296 |   |
| Income  (loss) from operations                |       | 27,446                                                   |       | 8,970                                                   |       | 75,567 |   | (37,425 | ) |
| Interest  expense                             |       | 153                                                      |       | 155                                                     |       | 445 |   | 1,412 |   |
| Gain  on charitable contribution              |       | (19                                                      | )          | (810                                                    | )          | (135 | ) | (2,833 | ) |
| Other  expense (income), net                  |       | 137                                                      |       | (125                                                    | )          | 87 |   | (833 | ) |
| Income  (loss) before income taxes            |       | 27,175                                                   |       | 9,750                                                   |       | 75,170 |   | (35,171 | ) |
| Income  tax expense (benefit)                 |       | 2,179                                                    |       | (12,318                                                 | )          | 12,173 |   | (4,541 | ) |
| Net  income (loss)                            |       | $                                                        | 24,996     |                                                    | $          | 22,068 |   | $ | 62,997 |   | $ | (30,630 | ) |
| Net  income (loss) per common share:          |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic                                         |       | $                                                        | 0.29       |                                                    | $          | 0.26 |   | $ | 0.73 |   | $ | (0.36 | ) |
| Diluted                                       |       | $                                                        | 0.28       |                                                    | $          | 0.25 |   | $ | 0.72 |   | $ | (0.36 | ) |

 

The accompanying notes are an integral part of these unauditedcondensed consolidated financial statements.

 

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**CROCS, INC. AND SUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

**(In thousands, except share data)**

 
| ** **                                                                                                                                                                                                                                                                                | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                                                                                |       |                             |       |                            |       |
| Current  assets:                                                                                                                                                                                                                                                                          |       |                             |       |                            |       |
| Cash  and cash equivalents                                                                                                                                                                                                                                                                |       | $                                | 143,057    |                            | $          | 77,343 |   |
| Restricted  cash                                                                                                                                                                                                                                                                          |       | 577                              |       | 1,144                           |       |
| Accounts  receivable, net                                                                                                                                                                                                                                                                 |       | 81,303                           |       | 50,458                          |       |
| Inventories                                                                                                                                                                                                                                                                               |       | 142,531                          |       | 93,329                          |       |
| Deferred  tax assets, net                                                                                                                                                                                                                                                                 |       | 7,973                            |       | 7,358                           |       |
| Income  tax receivable                                                                                                                                                                                                                                                                    |       | 9,597                            |       | 8,611                           |       |
| Other  receivables                                                                                                                                                                                                                                                                        |       | 11,008                           |       | 16,140                          |       |
| Prepaid  expenses and other current assets                                                                                                                                                                                                                                                |       | 13,699                           |       | 12,871                          |       |
| Total  current assets                                                                                                                                                                                                                                                                     |       | 409,745                          |       | 267,254                         |       |
| Property  and equipment, net                                                                                                                                                                                                                                                              |       | 65,882                           |       | 71,084                          |       |
| Restricted  cash                                                                                                                                                                                                                                                                          |       | 1,675                            |       | 1,506                           |       |
| Intangible  assets, net                                                                                                                                                                                                                                                                   |       | 42,416                           |       | 35,984                          |       |
| Deferred  tax assets, net                                                                                                                                                                                                                                                                 |       | 18,859                           |       | 18,479                          |       |
| Marketable  securities                                                                                                                                                                                                                                                                    |       | 1,040                            |       | 866                             |       |
| Other  assets                                                                                                                                                                                                                                                                             |       | 15,054                           |       | 14,565                          |       |
| Total  assets                                                                                                                                                                                                                                                                             |       | $                                | 554,671    |                            | $          | 409,738 |   |
|                                                                                                                                                                                                                                                                                      |       |                             |       |                            |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                                             |       |                             |       |                            |       |
| Current  liabilities:                                                                                                                                                                                                                                                                     |       |                             |       |                            |       |
| Accounts  payable                                                                                                                                                                                                                                                                         |       | $                                | 66,763     |                            | $          | 23,434 |   |
| Accrued  expenses and other current liabilities                                                                                                                                                                                                                                           |       | 65,216                           |       | 53,589                          |       |
| Accrued  restructuring charges                                                                                                                                                                                                                                                            |       | 1,844                            |       | 2,616                           |       |
| Income  taxes payable                                                                                                                                                                                                                                                                     |       | 18,188                           |       | 6,377                           |       |
| Note  payable, current portion of long-term debt and capital lease obligations                                                                                                                                                                                                            |       | 1,861                            |       | 640                             |       |
| Total  current liabilities                                                                                                                                                                                                                                                                |       | 153,872                          |       | 86,656                          |       |
| Long  term debt and capital lease obligations                                                                                                                                                                                                                                             |       | 1,235                            |       | 912                             |       |
| Deferred  tax liabilities, net                                                                                                                                                                                                                                                            |       | 2,085                            |       | 2,192                           |       |
| Long  term restructuring                                                                                                                                                                                                                                                                  |       | —                           |       | 520                             |       |
| Other  liabilities                                                                                                                                                                                                                                                                        |       | 32,532                           |       | 31,838                          |       |
| Total  liabilities                                                                                                                                                                                                                                                                        |       | 189,724                          |       | 122,118                         |       |
| Commitments  and contingencies (Note 15)                                                                                                                                                                                                                                             |       |                             |       |                            |       |
| Stockholders’  equity:                                                                                                                                                                                                                                                               |       |                             |       |                            |       |
| Common  shares, par value $0.001 per share; 250,000,000 shares authorized, 87,705,254  and 87,136,697 shares issued and outstanding, respectively, at  September 30, 2010 and 86,224,760 and 85,659,581 shares issued and  outstanding, respectively, at December 31, 2009 |       | 87                               |       | 85                              |       |
| Treasury  stock, at cost, 568,557 and 565,179 shares, respectively                                                                                                                                                                                                                        |       | (23,610                          | )          | (25,260                         | )          |
| Additional  paid-in capital                                                                                                                                                                                                                                                               |       | 273,418                          |       | 266,472                         |       |
| Retained  earnings                                                                                                                                                                                                                                                                        |       | 85,152                           |       | 22,155                          |       |
| Accumulated  other comprehensive income                                                                                                                                                                                                                                                   |       | 29,900                           |       | 24,168                          |       |
| Total  stockholders’ equity                                                                                                                                                                                                                                                          |       | 364,947                          |       | 287,620                         |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                                                          |       | $                                | 554,671    |                            | $          | 409,738 |   |

 

The accompanying notes are an integral part of these unauditedcondensed consolidated financial statements.

 

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**CROCS, INC. AND SUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(U****naudited)**

**(In thousands)**

 
| ** **                                                                                  | ** ** | **For the Nine Months  Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2010**                                                              | ** ** | **2009** | ** ** |
| **Cash  flows from operating activities:**                                                  |       |                                                                  |       |   |   |
| Net  income (loss)                                                                          |       | $                                                                     | 62,997     |   | $ | (30,630 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities:   |       |                                                                  |       |   |   |
| Depreciation  and amortization                                                              |       | 26,704                                                                |       | 28,585 |   |
| Loss  (gain) on disposal of fixed assets                                                    |       | 905                                                                   |       | (819 | ) |
| Unrealized  gain on foreign exchange transactions                                           |       | (1,183                                                                | )          | (11,327 | ) |
| Deferred  income taxes                                                                      |       | (307                                                                  | )          | 864 |   |
| Asset  impairment                                                                           |       | 133                                                                   |       | 25,387 |   |
| Inventory  write down                                                                       |       | —                                                                |       | 2,568 |   |
| Charitable  contributions                                                                   |       | 512                                                                   |       | 7,261 |   |
| Gain  on charitable contributions                                                           |       | (143                                                                  | )          | (2,828 | ) |
| Non-cash  restructuring charges                                                             |       | 196                                                                   |       | 1,768 |   |
| Share-based  compensation                                                                   |       | 5,511                                                                 |       | 24,860 |   |
| Bad  debt expense                                                                           |       | 2,608                                                                 |       | 836 |   |
| Changes  in operating assets and liabilities:                                               |       |                                                                  |       |   |   |
| Accounts  receivable                                                                        |       | (30,876                                                               | )          | (28,561 | ) |
| Income  tax receivable                                                                      |       | (431                                                                  | )          | 31,433 |   |
| Inventories                                                                                 |       | (48,674                                                               | )          | 24,250 |   |
| Prepaid  expenses and other assets                                                          |       | 3,088                                                                 |       | (12,214 | ) |
| Accounts  payable                                                                           |       | 44,169                                                                |       | (1,372 | ) |
| Accrued  restructuring charges                                                              |       | (1,324                                                                | )          | 1,809 |   |
| Accrued  expenses and other liabilities                                                     |       | 24,003                                                                |       | (13,897 | ) |
| Cash  provided by operating activities                                                      |       | 87,888                                                                |       | 47,973 |   |
| **Cash  flows from investing activities:**                                                  |       |                                                                  |       |   |   |
| Cash  paid for purchases of property and equipment                                          |       | (19,654                                                               | )          | (13,792 | ) |
| Proceeds  from disposal of property and equipment                                           |       | 1,014                                                                 |       | 2,065 |   |
| Cash  paid for intangible assets                                                            |       | (9,217                                                                | )          | (5,366 | ) |
| Purchases  of marketable securities                                                         |       | (5,585                                                                | )          | — |   |
| Maturities  of marketable securities                                                        |       | 6,283                                                                 |       | — |   |
| Change  in restricted cash                                                                  |       | 335                                                                   |       | 316 |   |
| Cash  used in investing activities                                                          |       | (26,824                                                               | )          | (16,777 | ) |
| **Cash  flows from financing activities:**                                                  |       |                                                                  |       |   |   |
| Proceeds  from note payable                                                                 |       | 27,100                                                                |       | 293 |   |
| Repayment  of note payable and capital lease obligations                                    |       | (28,173                                                               | )          | (22,630 | ) |
| Debt  issuance costs                                                                        |       | —                                                                |       | (458 | ) |
| Repurchase  of stock for stock option exercise tax withholding                              |       | (421                                                                  | )          | — |   |
| Exercise  of stock options                                                                  |       | 3,311                                                                 |       | 1,023 |   |
| Cash  provided by (used in) financing activities                                            |       | 1,817                                                                 |       | (21,772 | ) |
| Effect  of exchange rate changes on cash                                                    |       | 2,833                                                                 |       | 14,932 |   |
| Net  increase in cash and cash equivalents                                                  |       | 65,714                                                                |       | 24,356 |   |
| Cash  and cash equivalents—beginning of period                                         |       | 77,343                                                                |       | 51,665 |   |
| Cash  and cash equivalents—end of period                                               |       | $                                                                     | 143,057    |   | $ | 76,021 |   |
| **Supplemental  disclosure of cash flow information—cash paid during the period for:** |       |                                                                  |       |   |   |
| Interest                                                                                    |       | $                                                                     | 425        |   | $ | 1,380 |   |
| Income  taxes                                                                               |       | $                                                                     | 9,289      |   | $ | 11,158 |   |
| Non-cash  investing and financing activities:                                               |       |                                                                  |       |   |   |
| Assets  acquired through capital leases                                                     |       | $                                                                     | 2,606      |   | $ | 1,760 |   |
| Accrued  purchases of property, plant and equipment                                         |       | $                                                                     | 1,255      |   | $ | 1,333 |   |
| Accrued  purchases of intangibles                                                           |       | $                                                                     | 1,118      |   | $ | 1,702 |   |

 

The accompanying notes are an integral part of these unauditedcondensed consolidated financial statements.

 

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**CROCS, INC. AND SUBSIDIARIES**

 

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1. BASIS OF PRESENTATION**

 

Crocs, Inc.and its subsidiaries (collectively, “we,” “us,” or the “Company”) are engagedin the design, manufacture, worldwide marketing and brand management offootwear, apparel and accessories made for men, women and children.

 

The accompanying unauditedcondensed consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States (“GAAP”) forinterim financial information and with the rules and regulations forreporting on Form 10-Q. Accordingly, these statements do not include allof the information and disclosures required by GAAP or Securities and ExchangeCommission (“SEC”) rules and regulations for complete financialstatements. In the opinion of management, these financial statements reflectall adjustments (consisting solely of normal recurring matters) considerednecessary for a fair presentation of the results for the interim periodspresented. The results of operations for any interim period are not necessarilyindicative of results for the full year.

 

These statements should beread in conjunction with the consolidated financial statements and footnotesincluded in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2009 (the “2009 Form 10-K”). The accounting policiesused in preparing these unaudited condensed consolidated financial statementsare the same as those described in Note 2 — Summary of SignificantAccounting Policies to the consolidated financial statements in the 2009Form 10-K.

 

Certainreclassifications have been made to prior year amounts to conform to currentyear presentation. Net foreign currency transaction gains have beenreclassified from selling, general, and administrative expenses and are nowreported separately. Marketable securities of a long-term nature have been reclassifiedfrom long-term other assets and are now reported separately. There was nochange to the Company’s income (loss) from continuing operations as a result ofthese reclassifications.

 

Thepreparation of financial statements in conformity with GAAP requires managementto make estimates, judgments and assumptions that affect the reported amountsof assets and liabilities at the date of the financial statements and thereported amounts of revenue and expenses during the reporting period.Management believes that the estimates, judgments and assumptions made whenaccounting for items and matters such as, but not limited to, the allowance fordoubtful accounts, returns and discounts, impairment assessments and charges,recoverability of assets (including deferred tax assets), uncertain taxpositions, share-based compensation expense, the fair value of acquiredintangibles, the assessment of lower of cost or market on inventory, usefullives assigned to long-lived assets, depreciation and provisions for contingenciesare reasonable based on information available at the time they are made.Management also makes estimates in the assessments of potential losses inrelation to threatened or pending legal and tax matters. See Note 18 — LegalProceedings. Actual results could materially differ from these estimates. Formatters not related to income taxes, if a loss is considered probable and theamount can be reasonably estimated, the Company recognizes an expense for theestimated loss. If there is the potential to recover a portion of the estimatedloss from a third party, the Company makes a separate assessment ofrecoverability and reduces the estimated loss if recovery is also deemedprobable.

 

*Change in Accounting Principle*

 

EffectiveJanuary 1, 2010, the Company changed its inventory valuation method forall inventories from the first-in, first-out (“FIFO”) cost method to the movingaverage cost method, which approximates FIFO. The Company believes the changeto the moving average cost method is preferable because it results in betteralignment with the physical flow of inventory than the FIFO methodology; it iscalculated by our inventory information system which incorporates automatedcontrols; and it is the method management uses when preparing budgets,reviewing actual and forecasted financial information and determining incentivemanagement compensation. The moving average cost method results insubstantially the same results of operations in each reporting period.Financial statements for periods ending on or before December 31, 2009have not been retroactively adjusted due to immateriality. The impact of thechange for the three and nine month periods ended September 30, 2010 wasalso immaterial.

 

**2. RECENT ACCOUNTING PRONOUNCEMENTS**

 

InJanuary 2010, the Financial Accounting Standards Board (“FASB”) issuedAccounting Standards Update (“ASU”) 2010-06, *ImprovingDisclosures About Fair Value Measurement,* which amends thedisclosure requirements related to recurring and non-recurring fair valuemeasurements. The guidance requires additional disclosures about the differentclasses of assets and liabilities measured at fair value, the valuationtechniques and inputs used, the activity in Level 3 fair value measurements,and the transfers 

 

 

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betweenLevels 1, 2, and 3 of the fair value measurement hierarchy. The Company adoptedthis guidance at the beginning of 2010 with the exception of the disclosurerequirements relating to purchases, sales, issuances and settlements of Level 3assets and liabilities, which will be effective beginning January 1, 2011.As this guidance only requires expanded disclosures, its adoption did not andwill not impact the unaudited condensed consolidated financial statements. SeeNote 8 — Fair Value Measurements.

 

InDecember 2009, the FASB issued ASU 2009-17, *Improvementsto Financial Reporting by Enterprises Involved with Variable Interest Entities*.The amendments in ASU 2009-17 replace the quantitative-based risks-and-rewardscalculation for determining which reporting entity, if any, has a controllingfinancial interest in a variable interest entity with an approach focused onidentifying which reporting entity has (1) the power to direct theactivities of a variable interest entity that most significantly affect theentity’s economic performance and (2) the obligation to absorb losses of,or the right to receive benefits from, the entity. The ASU also requiresadditional disclosures about a reporting entity’s involvement with variableinterest entities and about any significant changes in risk exposure as aresult of that involvement. The Company adopted the guidance at the beginningof 2010 with no material impact on the unaudited condensed consolidatedfinancial statements. See Note 14 — Variable Interest Entities.

 

**3. INVENTORIES**

 

Inventories by majorclassification are as follows (in thousands):

 
| ** **       | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|------------------|------------|------------------------------|------------|-----------------------------|------------|
| Finished  goods  |       | $                            | 133,110    |                        | $          | 88,775 |   |
| Work-in-progress |       | 203                          |       | 220                         |       |
| Raw  materials   |       | 9,218                        |       | 4,334                       |       |
| Net  Inventory   |       | $                            | 142,531    |                        | $          | 93,329 |   |

 

**4. PROPERTYAND EQUIPMENT**

 

Property and equipmentincludes the following (in thousands):

 
| ** **                      | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|---------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Machinery  and equipment        |       | $                            | 86,277     |                        | $          | 82,733 |   |
| Leasehold  improvements         |       | 46,132                       |       | 38,436                      |       |
| Subtotal                        |       | 132,409                      |       | 121,169                     |       |
| Less:  accumulated depreciation |       | (66,527                      | )          | (50,085                     | )          |
| Property  and equipment, net    |       | $                            | 65,882     |                        | $          | 71,084 |   |

 

**5. INTANGIBLE ASSETS**

 

The following tablesummarizes the Company’s identifiable intangible assets (in thousands).

 
| ** **                           | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **Gross  Carrying  Amount**      | ** ** | **Accumulated  Amortization**   | ** ** | **Net  Carrying  Amount** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** |
| Intangible  assets:                  |       |                             |       |                            |       |   |   |   |   |   |   |   |   |
| Patents,  copyrights, and trademarks |       | $                                | 5,622      |                            | $          | 1,810 |   | $ | 3,812 |   | $ | 5,673 |   | $ | 1,396 |   | $ | 4,277 |   |
| Customer  relationships              |       | 5,806                            |       | 5,226                           |       | 580 |   | 5,928 |   | 4,912 |   | 1,016 |   |
| Core  technology                     |       | 4,690                            |       | 4,690                           |       | — |   | 4,614 |   | 4,614 |   | — |   |
| Non-competition  agreement           |       | 636                              |       | 636                             |       | — |   | 636 |   | 594 |   | 42 |   |
| Capitalized  software                |       | 50,071                           |       | 12,047                          |       | 38,024 |   | 38,884 |   | 8,235 |   | 30,649 |   |
| Total  intangible assets             |       | $                                | 66,825     |                            | $          | 24,409 |   | $ | 42,416 |   | $ | 55,735 |   | $ | 19,751 |   | $ | 35,984 |   |

 

For amortizable intangibleassets denominated in a foreign currency, the Company translates the grossasset and accumulated amortization at the applicable period end exchange rateand records amortization expense using the weighted average exchange rate forthe 

 

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applicable period.  The difference between the two is recorded inaccumulated other comprehensive income line item in the Company’s unauditedcondensed consolidated balance sheets.

 

**6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES**

 

Accrued expenses and othercurrent liabilities include the following (in thousands):

 
| ** **                                            | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Accrued  compensation and benefits                    |       | $                            | 21,897     |                        | $          | 21,007 |   |
| Fulfillment  and freight and duties                   |       | 9,941                        |       | 10,765                      |       |
| Professional  services                                |       | 6,063                        |       | 4,329                       |       |
| Sales/Use  and VAT taxes payable                      |       | 7,285                        |       | 4,330                       |       |
| Other                                                 |       | 20,030                       |       | 13,158                      |       |
| Total  accrued expenses and other current liabilities |       | $                            | 65,216     |                        | $          | 53,589 |   |

 

**7. RESTRUCTURING ACTIVITIES**

 

Duringthe year ended December 31, 2008, the Company announced its decision torestructure its operations, which included the closure of its Canadian andBrazilian manufacturing facilities and the consolidation of Canadiandistribution activities into existing North American operations.  As of September 30, 2010, the Companyhas recorded $9.1 million in restructuring and exit costs in connection withthese activities and does not expect to incur additional related costs in thefuture.

 

Duringthe year ended December 31, 2009, the Company pursued furtherrestructuring efforts and made certain organizational changes in order tobetter align costs with revenues which included the closure of variouswarehouses and office buildings as well as the settlement and termination ofcontracts prior to term.  As of September 30,2010, the Company has recorded $16.0 million in restructuring and exit costs inconnection with these activities and does not expect to incur additionalrelated costs in the future.

 

Duringthe nine months ended September 30, 2010, the Company recordedrestructuring charges of $1.9 million, of which $1.4 million is reflected incost of sales. These charges are primarily related to a change in the estimatein lease termination costs associated with the closure of distributionfacilities in North America and Europe, pursuant to the cost savingsinitiatives undertaken by the Company in 2008 and 2009, as discussed above.  During the nine months ended September 30,2010, the Company also recorded $2.0 million in restructuring expensesreflected in income from operations, primarily consisting of severance pay andadditional stock-based compensation related to the departure of the Company’sformer Chief Executive Officer. See Note 11 — Stock-Based Compensation.

 

Restructuringcharges for the nine months ended September 30, 2010 were recorded bysegment as follows: $1.0 million in the Americas segment; $0.9 million in theEurope segment; and $2.0 million in the Corporate and other group. As of September 30,2010, restructuring charges were recorded by segment as follows: $15.9 millionin the Americas segment; $4.3 million in the Europe segment; $0.4 million inthe Asia segment; and $6.5 million in the Corporate and other group.

 

Restructuringcharges are included in the following line items: cost of sales andrestructuring charges on the Company’s unaudited condensed consolidatedstatements of operations. The following table summarizes the changes in therestructuring accruals during the nine months ended September 30, 2010 (inthousands).

 
| **Description**             | ** ** | **As of  December 31,  2009** | ** ** | **Additions** | ** ** | **Cash  Payments** | ** ** | **Adjustments(1)** | ** ** | **As of********September 30, 2010** | ** ** |
|-----------------------------|------------|-----------------------------------------|------------|---------------|------------|--------------------|------------|--------------------|------------|----------------------------------------------------|------------|
| Termination  benefits       |       | $                                       | 516        |          | $          | 1,853              |       | $                  | (2,304     | )                                                  | $          | (65 | ) | $ | — |   |
| Operating  lease exit costs |       | 2,233                                   |       | 1,840         | (2)        | (2,299             | )          | 70                 | (2)        | 1,844                                              |       |
| Other  restructuring costs  |       | 387                                     |       | —        |       | (391               | )          | 4                  |       | —                                             |       |
|                        |       | $                                       | 3,136      |          | $          | 3,693              |       | $                  | (4,994     | )                                                  | $          | 9 |   | $ | 1,844 |   |

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(1)          Adjustmentsrelate primarily to differences resulting from the translation of the liabilitybalance at the rate of exchange at the balance sheet date and restructuringexpense translated at the weighted average rate of exchange for the applicableperiod.

 

(2)          Includes $0.5million in lease exit costs associated with the closure of the Canadianfacilities and $1.4 million in lease exit costs associated with the costsavings programs initiated in 2009.

 

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**8.****FAIR VALUE MEASUREMENTS**

 

Fairvalue is defined by GAAP as the price that would be received from selling anasset or paid to transfer a liability in an orderly transaction between marketparticipants at the measurement date. When determining the fair valuemeasurements for assets and liabilities required to be recorded at fair value,the Company considers the principal or most advantageous market in which itwould transact and considers assumptions that market participants would usewhen pricing the asset or liability, such as inherent risk, transferrestrictions, and risk of non-performance.

 

Thefair value standards establish a fair value hierarchy that requires an entityto maximize the use of observable inputs and minimize the use of unobservableinputs when measuring fair value. A financial instrument’s categorizationwithin the fair value hierarchy is based upon the lowest level of input that issignificant to the fair value measurement. The fair value standards establishthree levels of inputs that may be used to measure fair value:

 

·                  Level 1 —quoted prices for identical instruments in active markets;

 

·                  Level 2 —quoted prices for similar instruments in active markets, quoted prices foridentical or similar instruments in markets that are not active andmodel-derived valuations, in which all significant inputs are observable inactive markets; and

 

·                  Level 3 —unobservable inputs for which there is little or no market data, which requirethe reporting entity to develop its own assumptions.

 

*FinancialInstruments*

 

Thefollowing table summarizes the Company’s financial assets and liabilitiesrequired to be measured at fair value on a recurring basis as ofSeptember 30, 2010 and December 31, 2009 (in thousands).

 

 

 

 
| ** **                  | ** ** | **Fair Value as of********September 30, 2010** | ** ** | **Fair Value as of********December 31, 2009** | ** ** | ** **       | ** ** |
|-----------------------------|------------|-------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|------------------|------------|
| ** **                  | ** ** | **Level 1**                                                        | ** ** | **Level 2**                                                       | ** ** | **Level 3** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Balance Sheet Classification** | ** ** |
| Assets:                     |       |                                                                    |       |                                                                   |       |             |       |   |   |   |   |   |   |   |   |
| Certificates of deposit     |       | $                                                                       | —     |                                                                   | $          | 1,040            |       | $ | — |   | $ | — |   | $ | 866 |   | $ | — |   | Marketable securities(1) |   |
| Derivatives:                |       |                                                                    |       |                                                                   |       |             |       |   |   |   |   |   |   |   |   |
| Foreign currency contracts  |       | —                                                                  |       | —                                                                 |       | —           |       | — |   | — |   | — |   | Other current assets and other long-term assets |   |
| Total Assets                |       | $                                                                       | —     |                                                                   | $          | 1,040            |       | $ | — |   | $ | — |   | $ | 866 |   | $ | — |   |   |   |
|                        |       |                                                                    |       |                                                                   |       |             |       |   |   |   |   |   |   |   |   |
| Liabilities:                |       |                                                                    |       |                                                                   |       |             |       |   |   |   |   |   |   |   |   |
| Derivatives:                |       |                                                                    |       |                                                                   |       |             |       |   |   |   |   |   |   |   |   |
| Foreign  currency contracts |       | $                                                                       | —     |                                                                   | $          | 23               |       | $ | — |   | $ | — |   | $ | — |   | $ | — |   | Accrued liabilities and other long-term liabilities |   |

----

(1)          Marketable securities consist of certificates ofdeposit with maturities greater than three months and up to three years at thetime of purchase. These securities are carried at fair value and are held atfinancial institutions.

 

Thefair values of the Company’s derivative instruments are determined using adiscounted cash flow valuation model. The significant inputs used in the modelare readily available in public markets or can be derived from observablemarket transactions, and therefore, have been classified as Level 2. Theseinputs include the applicable exchange rates and forward rates, and discountrates based on the prevailing LIBOR deposit rates.

 

The Company’s otherfinancial instruments including debt are not required to be carried at fairvalue. The carrying value of these financial instruments, including cashequivalents, accounts receivable, accounts payable and accrued liabilities,approximate fair value due to their short maturities. Based on borrowing ratescurrently available to the Company, with similar terms, the carrying values ofcapital lease obligations and the line of credit approximate their fair values.

 

*Non-FinancialInstruments*

 

Themajority of the Company’s non-financial instruments, which include inventories,property, plant and equipment and intangible assets are not required to becarried at fair value on a recurring basis. However, if certain triggeringevents occur (or at least annually) such that a non-financial instrument isrequired to be evaluated for impairment, a resulting asset impairment wouldrequire that the non-financial instrument be recorded at the lower of cost orits fair value. Fair values of property, plant and equipment and indefinitelived intangibles are primarily determined using an income approach with inputsthat are mainly unobservable (Level 3), such as expected future cash flows.During the three and nine months ended September 30, 2010, the Companyrecorded $0 and $0.1 million, 

 

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respectively,in impairment charges related to its property, plant and equipment. During thethree and nine months ended September 30, 2009, the Company recorded $1.7million and $25.4 million, respectively, in impairment charges primarilyrelated to the write-off of obsolete long-lived assets associated with theconsolidation of warehouse and distribution space, as well as the write-off ofcertain intangible assets that the Company no longer intended to utilize.

 

**9.DERIVATIVE FINANCIAL INSTRUMENTS**

 

In the normal course ofbusiness, the Company’s financial results are impacted by currency ratemovements in foreign currency denominated assets, liabilities and cash flows asit makes a portion of its purchases and sales in local currencies. The Companymay, from time to time, employ derivative financial instruments to manage itsexposure to fluctuations in foreign currency rates such as forward currencyexchange contracts to hedge its net investment and intercompany payable orreceivable balances in foreign operations and to manage the foreign currencyexchange rate risk on forecasted revenue and inventory purchases denominated inforeign currencies. Other forward foreign exchange contracts are entered intoto hedge against changes in the functional currency value of monetary assetsand liabilities denominated in a non-functional currency. These derivativefinancial instruments are viewed as risk management tools and are not used fortrading or speculative purposes.

 

TheCompany recognizes all derivative financial instruments as either assets orliabilities in the unaudited condensed consolidated balance sheets and measuresthose instruments at fair value using Level 2 inputs (see Note 8 — Fair ValueMeasurements). The accounting for changes in the fair value of a derivativeinstrument depends on whether it has been designated and qualifies as part of ahedging relationship. During the nine months ended September 30, 2010, theCompany did not designate any of its derivatives as hedges and, therefore, allchanges in fair value are reflected in the Company’s results of operations. TheCompany did not have any derivative instruments during the three and ninemonths ended September 30, 2009. The following tables present the amountsaffecting the unaudited condensed consolidated statements of operations for thethree and nine months ended September 30, 2010 (in thousands).

 
| ** **                                         | ** ** | **Three months ended  September 30, 2010** | ** ** | **Nine months ended  September 30, 2010** | ** ** | **Location of Loss (Gain) Recognized********In Income on Derivatives** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|
| Derivatives not designated as hedging instruments: |       |                                                           |       |                                                          |       |                                                                                                      |       |
| Foreign currency exchange forwards                 |       | $                                                              | (96        | )                                                             | $          | 23                                                                                                        |       | Other expense (income), net |   |
|                                                    |            |                                                                |            |                                                               |            |                                                                                                           |            |  |  |

 

Thefollowing table summarizes the Company’s outstanding foreign currency exchangeforward contracts at September 30, 2010 (in thousands). The Company had nooutstanding foreign currency related financial instruments at December 31,2009.

 

| **Currency Purchased Forward** | ** ** | **Currency Sold Forward** | ** ** | **Maturity Date** |
|------------------------------------------|------------|-------------------------------------|------------|------------------------|
| MXP                                      |       | 7,937                               |       | USD                    |   | 600 |   | October 2010 |
| USD                                      |       | 1,454                               |       | GBP                    |   | 950 |   | October 2010 |
| USD                                      |       | 2,000                               |       | JPY                    |   | 166,980 |   | October 2010 |
| USD                                      |       | 2,000                               |       | JPY                    |   | 167,600 |   | November 2010 |

 

**10.****NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS**

 

*Notes Payable*

 

OnSeptember 30, 2010, the Company amended its Revolving Credit and SecurityAgreement (“the Credit Agreement”) with PNC Bank, N.A. (“PNC”), originallydated September 25, 2009.  Based onthe amended terms, the Credit Agreement provides for an asset-backed revolvingcredit facility of up to $30.0 million in total, which includes a $20.0 millionsublimit for borrowings against the Company’s eligible inventory, a $2 millionsublimit for borrowings against the Company’s eligible inventory in-transit,and a $10 million sublimit for letters of credit, and matures on September 24,2014. Total borrowings available under the credit facility at any given timeare subject to customary reserves and reductions to the extent the Company’sasset borrowing base changes. Borrowings under the credit facility are securedby all of the Company’s assets, including all receivables, equipment, generalintangibles, inventory, investment property, subsidiary stock and leaseholdinterests. The Credit Agreement requires the Company to prepay borrowings underthe Credit Agreement in the event of certain dispositions of property.

 

Withrespect to domestic rate loans, principal amounts outstanding bear interest at1.5% plus the greater of either (i) PNC’s published reference rate,(ii) the Federal Funds Open Rate (as defined in the Credit Agreement) ineffect on such day plus 0.5% or, (iii) the sum of the daily LIBOR rate and1.0%. Eurodollar denominated principal amounts outstanding bear interest at3.0% plus the Eurodollar rate (as defined in the Credit Agreement). The Credit Agreementrequires monthly interest payments with respect to domestic rate loans and atthe end of 

 

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eachinterest period with respect to Eurodollar rate loans. The Credit Agreementcontains certain customary restrictive and financial covenants. The Company was in compliance with thesefinancial covenants as of September 30, 2010.

 

Asof September 30, 2010 and December 31, 2009, the Company had nooutstanding borrowings under the Credit Agreement and at September 30,2010, had issued and outstanding letters of credit of $1.0 million whichwere reserved against the borrowing base.

 

*CapitalLeases*

 

The Company holds variouscapital leases for certain equipment with a gross carrying value of $0.4million, which is depreciated using the straight-line method over the economiclife of the leased equipment. Depreciation of equipment under capitalizedleases is included in cost of sales and selling, general and administrativeexpenses line items on the Company’s unaudited condensed consolidatedstatements of operations. Certain software acquired under various capitalleases with a gross carrying value of $4.5 million is classified as capitalizedsoftware and amortized using the straight-line method over the economic life.Amortization of capitalized software under capitalized leases is included inthe cost of sales and selling, general and administrative expenses line itemson the Company’s unaudited condensed consolidated statements of operations.

 

Notespayable and capital lease obligations consist of the following (in thousands):

 
| ** **                                                                                                                                   | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Capital Lease Obligations (for certain capitalized  software) bearing interest rates ranging from 8.7% to 12.4% and maturities  through 2013 |       | $                            | 2,922      |                        | $          | 1,329 |   |
|                                                                                                                                         |       |                         |       |                        |       |
| Capital Lease Obligations (for certain equipment)  bearing interest at 8.8% and maturities through 2014                                 |       | 174                          |       | 223                         |       |
| Total notes payable and capital lease obligations                                                                                            |       | $                            | 3,096      |                        | $          | 1,552 |   |

 

**11. STOCK-BASED COMPENSATION**

 

Options granted generallyvest ratably over four years with the first year vesting on a cliff basisfollowed by monthly vesting for the remaining three years. Restricted stockawards and restricted stock units granted generally vest ratably over threeyears. Stock-based compensation expense is recognized ratably over theapplicable vesting period and is recognized in the cost of sales and selling,general and administrative expense line items in the Company’s unauditedcondensed consolidated statements of operations. During the three and ninemonths ended September 30, 2010, $1.6 million and $5.5 million,respectively, of stock-based compensation expense was recorded. During thethree and nine months ended September 30, 2009, $1.5 million and$26.6 million, respectively, of stock-based compensation was recorded.

 

During the three and ninemonths ended September 30, 2010, 0.3 million and 1.7 million shares ofcommon stock, respectively, were issued related to stock option exercises andvested shares of restricted stock. During the year ended December 31,2009, 1.4 million shares of common stock were issued related to stock optionexercises and vested shares of restricted stock.

 

***Stock Options***

 

A summary of stock optionactivity for the three and nine months ended September 30, 2010 and 2009is as follows:

 
| ** **                                                                   | ** ** | **Three Months Ended September 30, 2010** | ** ** | **Nine Months Ended September 30, 2010** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| **Options**                                                                  | ** ** | **Shares**                                                         | ** ** | **Weighted  Average  Exercise Price**                        | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| Outstanding  at June 30, 2010 and  December 31, 2009, respectively |       | 6,350,336                                                          |       | $                                                                 | 7.93       |   | 7,755,254 |   | $ | 7.67 |   |
| Granted                                                                      |       | 100,000                                                            |       |                                                              | 12.51      |   | 249,750 |   |   | 10.75 |   |
| Exercised                                                                    |       | (251,590                                                           | )          |                                                              | 3.85       |   | (1,128,320 | ) |   | 2.93 |   |
| Forfeited  or expired                                                        |       | (118,247                                                           | )          |                                                              | 9.45       |   | (796,185 | ) |   | 11.75 |   |
| Outstanding  at September 30, 2010                                      |       | 6,080,499                                                          |       | $                                                                 | 8.14       |   | 6,080,499 |   | $ | 8.14 |   |

 

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| ** **                                                                   | ** ** | **Three Months Ended September 30, 2009** | ** ** | **Nine Months Ended September 30, 2009** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| **Options**                                                                  | ** ** | **Shares**                                                         | ** ** | **Weighted  Average  Exercise Price**                        | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| Outstanding  at June 30, 2009 and  December 31, 2008, respectively |       | 8,064,057                                                          |       | $                                                                 | 8.25       |   | 7,582,511 | (1) | $ | 10.56 |   |
| Granted                                                                      |       | 10,000                                                             |       |                                                              | 6.26       |   | 1,663,000 |   |   | 1.88 |   |
| Exercised                                                                    |       | (261,914                                                           | )          |                                                              | 3.04       |   | (463,587 | ) |   | 2.12 |   |
| Forfeited  or expired                                                        |       | (515,985                                                           | )          |                                                              | 18.93      |   | (1,485,766 | ) |   | 17.62 |   |
| Outstanding  at September 30, 2009                                      |       | 7,296,158                                                          |       | $                                                                 | 7.68       |   | 7,296,158 |   | $ | 7.68 |   |

 

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(1) Includes a reduction of 2,315,951options representing options repurchased by the Company as a result of theApril 2009 tender offer.

 

***Restricted Stock Sharesand Units***

 

From time to time, theCompany grants restricted stock units to certain employees located outside ofthe United States. The number of restricted stock units granted to employeesduring both the three and nine months ended September 30, 2010 was 0.1million. No restricted stock units were issued during the same periods in 2009.

 

During 2010, the Company’sboard of directors approved grants of shares and units of the Company’srestricted stock to certain executives and non-executives. Half of suchrestricted stock awards and units vest ratably on each of the first fouranniversaries of the grant date and the remaining half vest on a cliff basis onthe fourth anniversary of the grant date, provided that certain corporateperformance metrics are achieved. During the three and nine months ended September 30,2010, 0.5 and 0.7 million shares and units of restricted stock, respectively,were granted under this program.

 

A summary of the Company’stotal restricted stock share activity for the three and nine months endedSeptember 30, 2010 and 2009 is as follows:

 
| ** **                                                                  | ** ** | **Three Months Ended September 30, 2010** | ** ** | **Nine Months Ended September 30, 2010** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| **Restricted Stock Shares**                                       | ** ** | **Shares**                                                         | ** ** | **Weighted  Average  Grant Date  Fair Value**           | ** ** | **Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
| Non-vested  at June 30, 2010 and  December 31, 2009, respectively |       | 806,852                                                            |       | $                                                                 | 5.02       |   | 1,322,240 |   | $ | 3.04 |   |
| Granted                                                                     |       | 419,200                                                            |       |                                                              | 12.51      |   | 637,557 |   |   | 12.10 |   |
| Vested                                                                      |       | (29,068                                                            | )          |                                                              | 13.02      |   | (537,479 | ) |   | 10.03 |   |
| Forfeited  or expired                                                       |       | (16,667                                                            | )          | 1.14                                                              |       | (242,001 | ) |   | 1.33 |   |
| Non-vested  at September 30, 2010                                      |       | 1,180,317                                                          |       | $                                                                 | 7.67       |   | 1,180,317 |   | $ | 7.67 |   |

 
| ** **                                                                  | ** ** | **Three Months Ended September 30, 2009** | ** ** | **Nine Months Ended September 30, 2009** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| **Restricted Stock Shares**                                       | ** ** | **Shares**                                                         | ** ** | **Weighted  Average  Grant Date  Fair Value**           | ** ** | **Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
| Non-vested  at June 30, 2009 and  December 31, 2008, respectively |       | 1,787,204                                                          |       | $                                                                 | 2.62       |   | 939,000 |   | $ | 3.87 |   |
| Granted                                                                     |       | 30,000                                                             |       |                                                              | 6.26       |   | 1,282,110 |   |   | 2.43 |   |
| Vested                                                                      |       | (149,859                                                           | )          |                                                              | 4.97       |   | (513,765 | ) |   | 3.35 |   |
| Forfeited  or expired                                                       |       | (21,000                                                            | )          | 1.14                                                              |       | (61,000 | ) |   | 4.60 |   |
| Non-vested  at September 30, 2009                                      |       | 1,646,345                                                          |       | $                                                                 | 2.78       |   | 1,646,345 |   | $ | 2.78 |   |

 

***Separation Agreement***

 

On March 31, 2010, theCompany entered into a separation agreement with its former Chief ExecutiveOfficer. Pursuant to the separation agreement, the vesting of options topurchase 100,000 shares of Company common stock, which were exercised, and100,000 shares of restricted stock were accelerated as of March 31, 2010.Additionally, pursuant to the terms of the separation agreement, the Company’sformer Chief Executive Officer forfeited options to purchase 200,000 shares ofCompany common stock and 200,000 shares of restricted stock. The Companyrecorded an insignificant amount to restructuring charges related to theacceleration of the vesting of these options and restricted stock awards.

 

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**12****. INCOME TAXES**

 

During the three monthsended September 30, 2010, the Company recognized an income tax expense of$2.2 million on pre-tax income of $27.2 million, representing an effectiveincome tax rate of 8.0% compared to an income tax benefit of $12.3 million on pre-taxincome of $9.8 million, representing an effective income tax rate of (126.2%)for the same period in 2009. During the nine months ended September 30,2010, the Company recognized an income tax expense of $12.2 million on pre-taxincome of $75.2 million, representing an effective income tax rate of 16.2%compared to an income tax benefit of $4.5 million on a pre-tax loss of $35.2million, representing an effective income tax rate of (12.8%) for the sameperiod in 2009. The change in effective tax rate is primarily the result of aone-time $3.0 million tax benefit recognized in the third quarter of 2010 dueto a change in an international tax treaty which reduces certain taxes forwhich accruals have previously been made, a $14.4 million one-time tax benefitrecognized in the third quarter of 2009 related to the Company’s restructuringof its international operations to streamline and simplify its businessoperations, and changes in the mix of profitability in foreign jurisdictionswhere the Company is taxable. The Company had unrecognized tax benefits of $29.9million at September 30, 2010 and $29.2 million at December 31, 2009.

 

**13. EARNINGS (LOSS) PER SHARE**

 

For all periods presented,basic and diluted earnings (loss) per common share (“EPS”) is presented usingthe two-class method, which is an earnings allocation formula that determinesearnings per share for common stock and any participating securities accordingto dividends rights and participation rights in undistributed earnings. Underthe two-class method, EPS is computed by dividing the sum of distributed andundistributed earnings (loss) attributable to common stockholders by theweighted average number of shares of common stock outstanding during theperiod.

 

A participating security isan unvested share-based payment award containing non-forfeitable rights todividends and must be included in the computation of earnings per sharepursuant to the two-class method.  Sharesof the Company’s non-vested restricted stock awards and units are consideredparticipating securities.

 

Diluted EPS reflects thepotential dilution from securities that could share in the earnings of theCompany. Anti-dilutive securities are excluded from diluted EPS.

 

The following table setsforth EPS for the three and nine months ended September 30, 2010 and 2009(in thousands, except share and per share data).

 
| ** **                                                          | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                          | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net  income (loss) attributable to common stockholders              |       | $                                                        | 24,996     |                                                    | $          | 22,068 |   | $ | 62,997 |   | $ | (30,630 | ) |
| Income  allocated to participating securities                       |       | (323                                                     | )          | —                                                  |       | (724 | ) | — |   |
| Net income (loss) attributable to common  stockholders — basic |       | $                                                        | 24,673     |                                                    | $          | 22,068 |   | $ | 62,273 |   | $ | (30,630 | ) |
|                                                                |       |                                                     |       |                                                    |       |   |   |   |   |
| Weighted  average common shares outstanding — basic            |       | 85,787,809                                               |       | 85,514,385                                              |       | 85,155,931 |   | 84,933,858 |   |
| Dilutive  effect of stock options                                   |       | 1,554,207                                                |       | 1,964,933                                               |       | 1,878,645 |   | — |   |
| Weighted  average common shares outstanding - diluted               |       | 87,342,016                                               |       | 87,479,318                                              |       | 87,034,576 |   | 84,933,858 |   |
|                                                                |       |                                                     |       |                                                    |       |   |   |   |   |
| Net  income (loss) per common share:                                |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic                                                               |       | $                                                        | 0.29       |                                                    | $          | 0.26 |   | $ | 0.73 |   | $ | (0.36 | ) |
| Diluted                                                             |       | $                                                        | 0.28       |                                                    | $          | 0.25 |   | $ | 0.72 |   | $ | (0.36 | ) |

 

For all periods presentedabove, there were certain outstanding share based payments which couldpotentially dilute basic EPS in the future which were not included in dilutedincome (loss) per share as their effect would have been anti-dilutive. Due tothe Company’s net loss for the nine months ended September 30, 2009, theCompany had participating securities that were not allocated net loss and thedilutive effect of stock options were not included in the computation ofdiluted EPS, since they would have an anti-dilutive effect.

 

For both the three and ninemonths ended September 30, 2010, 3.1 million options, which couldpotentially dilute basic EPS in the future, were not included in diluted income(loss) per share as their effect would have been anti-dilutive. For the threeand nine months ended September 30, 2009, 8.0 million and 5.4 millionoptions, respectively, were anti-dilutive. The weighted average exercise priceper share of the options that were anti-dilutive was $13.70 and $13.72 for thethree and nine months ended September 30, 2010, respectively, and $6.34and $5.97 for the three and nine months ended September 30, 2009,respectively.

 

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**14. VARIABLE INTEREST ENTITIES**

 

In 2007, the Companyestablished a relationship with Shanghai Shengyiguan Trade, Ltd Co (“ST”)for the purpose of serving as a distributor of the Company’s products in thePeople’s Republic of China. The Company has determined that ST is a variableinterest entity for which it is the primary beneficiary. The Company currentlycontrols all business activities and absorbs substantially all of the expectedresidual returns and substantially all of the expected losses of ST based onagreements with ST. The Company determined that it is the primary beneficiaryof ST by virtue of its variable interest in the equity of ST. All voting rightshave been assigned to the Company and there is a transfer agreement between STand the Company under which all of the equity, assets, and liabilities are tobe transferred to the Company at the Company’s sole discretion, subject tocertain conditions.

 

Theunaudited condensed consolidated financial statements include $7.1 millionin total assets as of September 30, 2010, primarily consisting of cash,inventory and receivables, partially offset by $0.3 million in liabilities asof September 30, 2010, primarily consisting of accounts payable andaccrued expenses, excluding liabilities related to the support provided by theCompany. ST carries cash assets which are restricted to the extent that themonetary laws of the People’s Republic of China may limit the Company’s abilityto utilize ST’s cash.

 

**15. COMMITMENTS AND CONTINGENCIES**

 

On July 26, 2005, theCompany entered into an amended and restated supply agreement with FinprojectS.P.A., the former majority owner of Crocs Canada, pursuant to which theCompany has the exclusive right to purchase the material for the manufacture offinished shoe products, except for certain current customer dealings (includingboot manufacturers). The supply agreement automatically renews for one-yearterms and provides that the Company meet minimum purchase requirements tomaintain exclusivity throughout the term of the agreement. The pricing is to beagreed upon each quarter and fluctuates based on order volume, currencyfluctuations, and raw material prices.

 

The Company guarantees thepayment to one of its raw material suppliers for purchases of material used byone of its third-party manufacturers of finished shoe products. The maximumpotential amount of future payments the Company could be required to make underthe guarantee is €2.1 million (approximately $2.9 million atSeptember 30, 2010). The Company evaluates the estimated loss for theguarantee under Accounting Standards Codification Topic 450, *Contingencies,* and Topic 460, *Guarantees*.The Company considers such factors as the degree of probability of anunfavorable outcome and the ability to make a reasonable estimate of the amountof loss. The Company has recourse as a matter of common law. To date, theCompany has not made any payments under the guarantee and, as ofSeptember 30, 2010, has not recorded a liability related to the guaranteein its unaudited condensed consolidated financial statements, as the Companydoes not believe the potential obligation under this guarantee is material.

 

The Company leases space forcertain of its offices, warehouses, vehicles and equipment under leasesexpiring at various dates through 2026. Certain leases also contain rentescalation clauses (step rents) that require additional rental amounts in thelater years of the term. Rent expense for leases with step rents is recognizedon a straight-line basis over the minimum lease term. Step rents, tenantimprovement allowances, rent holidays and other items are factored into the minimumlease payment and recognized on a straight-line basis over the minimum leaseterm. Deferred rent is included in the unaudited condensed consolidated balancesheets in the accrued expenses and other current liabilities line item.

 

The Company indemnifiescertain of its vendors and its directors and executive officers for specifiedclaims. To date, the Company has not paid or been required to defend anyindemnification claims, and accordingly, has not accrued any amounts for itsindemnification obligations. The Company reimburses the officers and directorsthat are subject to the securities class action filed in 2007 for the defensecosts relating to such action, which are partially or fully offset by insurancethat covers these expenditures. The Company has other various immaterialcommitments and contingencies that are not discussed above.

 

**16. OPERATING SEGMENTS AND RELATED INFORMATION**

 

TheCompany operates in the consumer products industry internationally in which theCompany principally designs, manufactures, markets and sells its brandedfootwear, apparel and accessories for men, women and children. During 2009, theCompany changed the information that was presented to the chief operatingdecision maker and has restated its revenues, depreciation and amortization,operating income and assets by segment as shown below. The Company identifiesits reportable segments as those geographic regions that represent 10% or moreof its revenue, operating income (as defined below), or total assets. TheCompany has three reportable segments: Americas, Europe and Asia. All of thereportable segments derive their revenue from the sale of footwear, apparel andaccessories. The Company evaluates performance and makes decisions aboutallocating resources to its operating segments based on financial measures suchas revenue and operating income.

 

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Operatingincome is the primary measure used by the Company’s chief operating decisionmaker to evaluate segment operating performance and to decide how to allocateresources to segments. Operating income is defined as operating income beforeasset impairment charges and restructuring charges. The Company evaluates theperformance of its segments based primarily on the results of the segmentwithout allocating corporate expenses, or indirect general, administrative andother expenses. The Corporate and other category includes (i) Ocean Minded,(ii) Colorado Footwear CV, and (iii) corporate category, whichmaintains corporate costs such as stock-based compensation, research anddevelopment, brand marketing, legal expenses, depreciation on global long-livedassets such as molds, tooling, IT systems, and other global costs that arenot allocated to the regions.

 

Segmentprofits or losses include adjustments to eliminate intercompany profit orlosses on intercompany sales.  Netrevenues as shown below represent sales to external customers for each segment.

 
| ** **                                       | ** ** | **Three Months********Ended September 30** | ** ** | **Nine Months********Ended September 30,** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                       | ** ** | **2010**                                                  | ** ** | **2009**                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                       | ** ** | **(in thousands)**                                   | ** ** | **(in thousands)**                                   | ** ** |
| **Revenues:**                                    |       |                                                      |       |                                                      |       |   |   |   |   |
| Americas                                         |       | $                                                         | 103,540    |                                                      | $          | 78,638 |   | $ | 279,163 |   | $ | 229,178 |   |
| Europe                                           |       | 32,597                                                    |       | 29,854                                                    |       | 105,095 |   | 90,350 |   |
| Asia                                             |       | 79,053                                                    |       | 68,013                                                    |       | 222,404 |   | 186,979 |   |
| Total segments                                   |       | 215,190                                                   |       | 176,505                                                   |       | 606,662 |   | 506,507 |   |
| Corporate and other                              |       | 415                                                       |       | 636                                                       |       | 3,841 |   | 3,249 |   |
| Total consolidated revenues                      |       | $                                                         | 215,605    |                                                      | $          | 177,141 |   | $ | 610,503 |   | $ | 509,756 |   |
|                                             |       |                                                      |       |                                                      |       |   |   |   |   |
| **Operating Income:**                            |       |                                                      |       |                                                      |       |   |   |   |   |
| Americas                                         |       | $                                                         | 22,256     |                                                      | $          | 8,355 |   | $ | 56,913 |   | $ | 16,148 |   |
| Europe                                           |       | 4,813                                                     |       | 2,974                                                     |       | 22,488 |   | 16,054 |   |
| Asia                                             |       | 23,792                                                    |       | 20,028                                                    |       | 68,070 |   | 49,867 |   |
| Total segments                                   |       | 50,861                                                    |       | 31,357                                                    |       | 147,471 |   | 82,069 |   |
| SG&A restructuring                           |       | —                                                    |       | (17                                                       | )          | (2,539 | ) | (5,916 | ) |
| Asset impairment                                 |       | —                                                    |       | (1,722                                                    | )          | (141 | ) | (25,447 | ) |
| Corporate and other                              |       | (23,415                                                   | )          | (20,648                                                   | )          | (69,224 | ) | (88,131 | ) |
| Total consolidated operating income (loss)       |       | 27,446                                                    |       | 8,970                                                     |       | 75,567 |   | (37,425 | ) |
| Interest expense                                 |       | 153                                                       |       | 155                                                       |       | 445 |   | 1,412 |   |
| Gain on charitable contributions                 |       | (19                                                       | )          | (810                                                      | )          | (135 | ) | (2,833 | ) |
| Other expense (income), net                      |       | 137                                                       |       | (125                                                      | )          | 87 |   | (833 | ) |
| Income (loss) before income taxes                |       | $                                                         | 27,175     |                                                      | $          | 9,750 |   | $ | 75,170 |   | $ | (35,171 | ) |
|                                             |       |                                                      |       |                                                      |       |   |   |   |   |
| **Depreciation and Amortization:**               |       |                                                      |       |                                                      |       |   |   |   |   |
| Americas                                         |       | $                                                         | 2,446      |                                                      | $          | 3,773 |   | $ | 7,037 |   | $ | 8,297 |   |
| Europe                                           |       | 625                                                       |       | 1,036                                                     |       | 2,078 |   | 2,757 |   |
| Asia                                             |       | 1,411                                                     |       | 1,870                                                     |       | 4,354 |   | 5,149 |   |
| Total segments                                   |       | 4,482                                                     |       | 6,679                                                     |       | 13,469 |   | 16,203 |   |
| Corporate and other                              |       | 4,612                                                     |       | 2,729                                                     |       | 13,235 |   | 12,382 |   |
| Total consolidated depreciation and amortization |       | $                                                         | 9,094      |                                                      | $          | 9,408 |   | $ | 26,704 |   | $ | 28,585 |   |

 

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The following tablesummarizes our consolidated assets by operating segment as of September 30,2010 and December 31, 2009.  Segmentassets include the elimination of any intersegment profits or losses ininventory and the elimination of intercompany receivables and loans.

 
| ** **                      | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|---------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | **(in thousands)**          | ** ** |
| **Assets:**                     |       |                             |       |                            |       |
| Americas                        |       | $                                | 263,503    |                            | $          | 277,454 |   |
| Europe                          |       | 71,404                           |       | 66,838                          |       |
| Asia                            |       | 222,374                          |       | 151,052                         |       |
| Total segments                  |       | 557,281                          |       | 495,344                         |       |
| Corporate and other(1) (2) |       | (2,610                           | )          | (85,606                         | )          |
| Total consolidated assets       |       | $                                | 554,671    |                            | $          | 409,738 |   |

----

(1)          At December 31,2009, $45.8 million of assets with global functionality were included in theAmericas segment assets which were included in the Corporate and other categoryassets at September 30, 2010.

 

(2)          Negative assetswithin the Corporate and other category primarily include eliminations ofinvestments made from the Americas segment in the other reportable segments.

 

**17. COMPREHENSIVE INCOME (LOSS)**

 

Comprehensive income (loss)for the three and nine months ended September 30, 2010 and 2009 was asfollows (in thousands):

 
| ** **                                                                                | ** ** | **Three Months********Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2010**                                                   | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net  income (loss)                                                                        |       | $                                                          | 24,996     |                                                | $          | 22,068 |   | $ | 62,997 |   | $ | (30,630 | ) |
| Foreign  currency translation                                                             |       | 12,522                                                     |       | 6,390                                               |       | 6,736 |   | 8,696 |   |
| Reclassification  of cumulative foreign exchange translation adjustments to net income(1) |       | (1,004                                                     | )          | —                                              |       | (1,004 | ) | — |   |
| Comprehensive  income (loss)                                                              |       | $                                                          | 36,514     |                                                | $          | 28,458 |   | $ | 68,729 |   | $ | (21,934 | ) |

----

(1)                      Amountsrepresent realized gains recognized on payments of intercompany balancesdenominated in foreign currencies for which collection had not been previouslyplanned or anticipated.

 

**18. LEGAL PROCEEDINGS**

 

On March 31, 2006, theCompany filed a complaint with the International Trade Commission (“ITC”)against Acme Ex-Im, Inc., Australia Unlimited, Inc., Cheng’sEnterprises, Inc., Collective Licensing International, LLC, D.Myers & Sons, Inc., Double Diamond Distribution, Ltd.,Effervescent, Inc., Gen-X Sports, Inc., Holey SolesHoldings, Ltd., Inter-Pacific Trading Corporation, and ShakaHoldings, Inc., alleging patent and trade dress infringement and seekingan exclusion order banning the importation and sale of infringing products. OnAugust 10, 2006, the Company filed a motion to voluntarily remove itstrade dress claim from the investigation to focus on the patent claims. TheCompany’s motion was granted by Order No. 20 on August 24, 2006. Theutility and design patents asserted in the complaint were issued to the Companyon February 7, 2006 and March 28, 2006 respectively, by the UnitedStates Patent and Trademark Office. The ITC has issued final determinationsterminating Shaka Holdings, Inc., Inter-Pacific Trading Corporation,Acme Ex-Im, Inc., D. Myers & Sons, Inc., AustraliaUnlimited, Inc. and Gen-X Sports, Inc. from the ITC investigationNo. 337-TA-567 on the basis of settlement and Cheng’sEnterprises, Inc. on the suspension of accused activities. The ITCAdministrative Law Judge (“ALJ”) issued an Initial Determination ofnon-infringement related to one of the patents at issue. The Company filed apetition with the Commission to review this determination. The Commissiongranted the Company’s petition and on February 15, 2007, after briefing bythe parties, the Commission vacated the ALJ’s determination of non-infringementwith respect to the remaining respondents and remanded it to the ALJ forfurther proceedings consistent with the Commission’s order. In light of theCommission’s Order, the procedural schedule and hearing date were resetpursuant to Order No. 38. A trial was held before the ALJ fromSeptember 7 to 14, 2007. The ALJ issued an Initial Determination onApril 11, 2008 with a finding of no violation, finding infringement of theutility patent by certain accused products, but also finding that the utilitypatent was invalid as obvious. The ALJ also found that the design patent wasvalid, but not infringed by the accused products. The Company filed a Petitionfor Review of the Initial Determination which was due on April 24, 2008.On June 18, 2008, the Commission issued a Notice that it would review theALJ’s findings in the Initial Determination with respect to the determinationof non-infringement of the design patent and the determination of invalidity ofthe utility patent. On July 25, 2008, the Commission issued a Notice ofits decision to terminate the Investigation with a finding of no violation asto either patent. The Company filed a Petition for Review of the decision withthe United States Court of Appeals for the Federal Circuit onSeptember 22, 2008, and filed its initial brief on January 21, 2009.Briefing 

 

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before the Federal Circuitwas completed in April 2009 and oral arguments were heard on July 10,2009. On October 4, 2009, the Company and Collective LicensingInternational, LLC reached a settlement. Collective Licensing International,LLC agreed to cease and desist infringing on the Company’s patents and to paythe Company certain monetary damages, which was recorded upon receipt. OnFebruary 24, 2010, the Federal Circuit found that the Commission erred infinding that the utility patent was obvious and reversed the Commission’sdetermination of non-infringement of the design patent. On April 12, 2010,one of the remaining parties, Effervescent, Inc., filed a request for apanel or en banc hearing with the Federal Circuit of the February 24, 2010decision to which the Company responded on April 28, 2010. The FederalCircuit denied the petition on May 20, 2010 and the matter has beenremanded to the ITC. On July 6, 2010, the Commission ordered the matter tobe assigned to an ALJ for a determination on enforceability. On August 26,2010, the ALJ determined that the evidentiary record need not be reopened andthat the remand would proceed based on the prior submissions of the parties.

 

On December 8, 2009,Columbia Sportswear Company (“Columbia”) filed an Amended Complaint adding theCompany as a defendant in a case between Columbia and Brian P. O’Boyle and 1Pen. Inc. in the Multnomah County Circuit Court in the State of Oregon.Columbia asserted claims against the Company for misappropriation of tradesecrets, aiding and abetting breach of fiduciary duty, intentional interferencewith contract, injunctive relief, disgorgement and an accounting. The AmendedComplaint sought damages in an unspecified amount, return of patent rights,reasonable attorney’s fees and costs and expenses against the Company. On July 29,2010, the Company and Columbia settled all issues between them and Columbiadismissed with prejudice all claims against the Company in exchange for certainmonetary and other considerations.

 

The Company and certaincurrent and former officers and directors have been named as defendants incomplaints filed by investors in the United States District Court for theDistrict of Colorado. The first complaint was filed in November 2007;several other complaints were filed shortly thereafter. These actions wereconsolidated and, in September 2008, the Court appointed a lead plaintiffand counsel. An amended consolidated complaint was filed in December 2008.The amended complaint purports to state claims under Section 10(b), 20(a),and 20A of the Exchange Act on behalf of a class of all persons who purchased theCompany’s stock between April 2, 2007 and April 14, 2008 (the “Class Period”)and includes the company’s independent auditor as a defendant. The amendedcomplaint alleges that, during the Class Period, defendants made false andmisleading public statements about the Company and its business and prospectsand that, as a result, the market price of the Company’s stock was artificiallyinflated. The amended complaint also claims that certain current and formerofficers and directors traded in the Company’s stock on the basis of materialnon-public information. The amended complaint seeks compensatory damages onbehalf of the alleged class in an unspecified amount, interest, and an award ofattorneys’ fees and costs of litigation. The Company believes the claims lackmerit and intends to defend the action vigorously. Motions to dismiss arecurrently pending with the Court. Due to the inherent uncertainties oflitigation and because the litigation is at a preliminary stage, the Companycannot at this time accurately predict the ultimate outcome of the matter.

 

Although the Company issubject to other litigation from time to time in the ordinary course ofbusiness, including employment, intellectual property and product liabilityclaims, the Company is not party to any other pending legal proceedings thatthe Company believes will have a material adverse impact on its business.

 

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

 

**Forward-Looking Statements**

 

This Quarterly Report on Form 10-Q contains “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995. In addition, we may make other written and oral communications fromtime to time that contain such statements. Forward-looking statements includestatements as to industry trends and our future expectations and other mattersthat do not relate strictly to historical facts and are based on certainassumptions of our management. These statements are often identified by the useof words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,”“estimate,” or “continue,” and similar expressions or variations. Thesestatements are based on the beliefs and assumptions of our management based oninformation currently available to us. Such forward-looking statements aresubject to risks, uncertainties and other factors that could cause actualresults to differ materially from future results expressed or implied by suchforward-looking statements. This Item 2, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” containsforward-looking statements. Important factors that could cause actual resultsto differ materially from the forward-looking statements include, among others,the risks described in the section entitled “Risk Factors” under Item 1Ain our Annual Report on Form 10-K for the year ended December 31,2009 and subsequent filings with the Securities and Exchange Commission. Wecaution the reader to carefully consider such factors. Furthermore, suchforward-looking statements speak only as of the date of this report. Weundertake no obligation to update any forward-looking statements to reflect eventsor circumstances after the date of such statements.

 

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**BusinessOverview**

 

We are a designer, manufacturer, distributor, worldwide marketer andbrand manager of footwear, apparel and accessories for men, women and children.We strive to be the global leader in molded footwear design and development. Wedesign, manufacture and sell a broad product offering that provides new andexciting molded footwear products that feature fun, comfort and functionality.Our products include footwear and accessories that utilize our proprietaryclosed cell-resin, called Croslite. Our Croslite material is unique in that itenables us to produce an innovative, lightweight, non-marking, andodor-resistant shoe. Certain shoes made with the Croslite material have beencertified by U.S. Ergonomics to reduce peak pressure on the foot, reducemuscular fatigue while standing and walking and to relieve the musculoskeletalsystem.

 

Sincethe initial introduction and popularity of our Beach and Crocs Classic designs,we have expanded our Croslite products to include a variety of new styles andproducts and have extended our product reach through the acquisition of brandplatforms such as Jibbitz, LLC (“Jibbitz”) and Ocean Minded, Inc. (“OceanMinded”). We intend to continue branching out into other types of footwear,bringing a unique and original perspective to the consumer in styles that maybe unexpected from Crocs. In part, we believe this will help us to continue tobuild a stable year-round business as we look to offer more winter-orientedstyles.

 

Ourmarketing efforts surround specific product launches and employ a fullyintegrated approach utilizing a variety of media outlets, including print andonline media and television. Our marketing efforts strive to drive business toboth our wholesale partners and our company-operated retail and internetstores, ensuring that our presentation and story are first class and drivepurchasing at the point of sale.

 

We currently sell our Crocs-branded products throughout the U.S. and inmore than 100 countries. We sell our products through domestic andinternational retailers and distributors and directly to end-user consumersthrough our webstores, company-operated retail stores, outlets and kiosks. Thebroad appeal of our footwear has allowed us to market our products to a widerange of distribution channels, including department stores and traditionalfootwear retailers as well as a variety of specialty and independent retailchannels.

 

**Financial Highlights**

 

Duringthe three months ended September 30, 2010, revenues increased 21.7%, or$38.5 million, compared to the same period in 2009, as a result of strongersales in each of our geographic operating segments. Diluted earnings per sharefor the third quarter of 2010 improved to $0.28 compared to $0.25 during thesame period in 2009. We believe these financial improvements are a result ofimproved global economic conditions, an increased marketing presence, and theimpact of our cost savings initiatives as described below.

 

The following items impactedour operating results for the three and nine months ended September 30,2010 and 2009, and should be considered in evaluating the comparability of suchresults.

 

·                  During 2009, wecontinued to implement various cost savings initiatives, which were initiatedin 2008, so as to better align our cost structure with revenue. These costsavings initiatives included the consolidation of our global distributioncenters; reduction of warehouse space; impairments of certain assets we nolonger intended to utilize, including molds, tooling, equipment and otherassets; reduction in future stock-based compensation expense as a result of atender offer; and reduction in our global workforce.

 

·                  During 2009, wealso continued to implement a plan, which was initiated in 2008, to dispose ofexcess discontinued and impaired product inventories. Much of this product hadbeen written down to a level that we considered realizable; however, we wereable to sell this product at prices substantially higher than what we hadpreviously estimated. Accordingly, the net effect of these sales was accretiveto our gross profit and revenue in 2009. In the third quarter of 2010, sales ofdiscontinued and impaired product were at more normal levels given seasonalityand historical fluctuations in our business.

 

**Recent Events**

 

On September 30, 2010,we entered into the Second Amendment to the Revolving Credit and SecurityAgreement with PNC Bank, N.A. (“PNC”), to amend certain provisions of theRevolving Credit and Security Agreement dated as of September 25, 2009 andamended as of October 14, 2009 (the “Credit Agreement”). The amendment tothe Credit Agreement, among other things, (i) extended the maturity datefrom September 24, 2012 to September 24, 2014, (ii) decreasedthe revolving interest rate by 0.5% for both domestic and Eurodollar rateloans, (iii) removed the interest rate floor on Eurodollar rate loans, (iv) increasedthe sublimit for borrowings against eligible inventory from $17.5 million to$20 million, (v) increased the letter of credit sublimit from $4 millionto $10 million, (vi) decreased letter of credit fees from 3.5% to 2.5%,and (vii) amended certain restrictive covenants and events of default to bemore favorable to us.

 

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**General**

 

Revenuesare recorded when products are shipped and the customer takes title and assumesrisk of loss, collection of related receivables are probable, persuasiveevidence of an arrangement exists, and the sales price is fixed ordeterminable. Title passes on shipment or on receipt by the customer dependingon the country of the sale and the agreement with the customer. Allowances forestimated returns and discounts are recognized when related revenue isrecorded. Because we use both internal manufacturing and contract with thirdparties to manufacture our products, our cost of sales represents our costs tomanufacture products in our company-operated facilities, including rawmaterials costs and all direct overhead expenses related to production, as wellas the cost to purchase finished products from our third-party manufacturersand costs to transport these products to our facilities, inclusive of allwarehouse and outbound freight and duties expenses. Cost of sales also includesdepreciation and amortization of manufacturing assets such as molds andtooling. Our selling, general and administrative expense consists primarily ofwages and related payroll and employee benefit costs for selling, marketing andadministrative employees, all non-product retail-related expenses (includingrent and depreciation) and professional fees, facility expenses, bank chargesand non-cash charges for share-based compensation. Selling, general andadministrative expenses also include depreciation and amortization related tonon-product, non-manufacturing assets such as our global information systems.

 

**Presentation of Operating Segments**

 

Wehave three operating segments: Americas, Europe and Asia. All of the reportablesegments derive their revenue from the sale of footwear, apparel andaccessories. We evaluate performance and make decisions about allocatingresources to our operating segments based on financial measures such as revenueand operating income. We evaluate the performance of our segments basedprimarily on the results of the segment without allocating corporate expensesor indirect general, administrative and other expenses. The Corporate and othercategory includes (i) Ocean Minded, (ii) Colorado Footwear CV, and(iii) corporate category, which maintains corporate costs such asstock-based compensation, research and development, brand marketing, legalexpenses, depreciation on global long-lived assets such as molds,tooling, IT systems, and other global costs that are not allocated to theregions. Segment profits or losses include adjustments to eliminateintercompany profit or losses on intercompany sales. Net segment revenues inthe discussion that follows represent sales to external customers for eachsegment.

 

**Results of Operations**

 

**Comparison of the Three Months Ended September 30, 2010and 2009**

** **
| ** **                                    | ** ** | **Three Months Ended September 30,**                        | ** ** | **Change** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------------------------------------|------------|------------|------------|
| ** **                                    | ** ** | **2010**                                                                        | ** ** | **2009**   | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                    | ** ** | **(amounts in thousands, except per share data)** | ** ** | ** ** | ** ** |
| Revenues                                      |       | $                                                                               | 215,605    |       | $          | 177,141 |   | $ | 38,464 |   | 21.7 | % |
| Cost  of sales                                |       | 96,797                                                                          |       | 87,291     |       | 9,506 |   | 10.9 | % |
| Gross  profit                                 |       | 118,808                                                                         |       | 89,850     |       | 28,958 |   | 32.2 | % |
| Selling,  general and administrative expenses |       | 92,192                                                                          |       | 77,995     |       | 14,197 |   | 18.2 | % |
| Foreign  currency transaction gains, net      |       | (908                                                                            | )          | (1,032     | )          | 124 |   | 12.0 | % |
| Restructuring  charges                        |       | —                                                                          |       | 17         |       | (17 | ) | N/M |   |
| Impairment  charges                           |       | —                                                                          |       | 1,722      |       | (1,722 | ) | N/M |   |
| Charitable  contributions                     |       | 78                                                                              |       | 2,178      |       | (2,100 | ) | (96.4 | )% |
| Income  from operations                       |       | 27,446                                                                          |       | 8,970      |       | 18,476 |   | 206.0 | % |
| Interest  expense                             |       | 153                                                                             |       | 155        |       | (2 | ) | (1.3 | )% |
| Other,  net                                   |       | 118                                                                             |       | (935       | )          | 1,053 |   | 112.6 | % |
| Income  before income taxes                   |       | 27,175                                                                          |       | 9,750      |       | 17,425 |   | 178.7 | % |
| Income  tax expense (benefit)                 |       | 2,179                                                                           |       | (12,318    | )          | 14,497 |   | 117.7 | % |
| Net  income                                   |       | $                                                                               | 24,996     |       | $          | 22,068 |   | $ | 2,928 |   | 13.3 | % |
| Net  income (loss) per basic share            |       | $                                                                               | 0.29       |       | $          | 0.26 |   | $ | 0.03 |   | N/M |   |
| Net  income (loss) per diluted share          |       | $                                                                               | 0.28       |       | $          | 0.25 |   | $ | 0.03 |   | N/M |   |
|                                          |       |                                                                            |       |       |       |   |   |   |   |
| Gross  margin                                 |       | 55.1                                                                            | %          | 50.7       | %          |   |   |   |   |
| Operating  margin                             |       | 12.7                                                                            | %          | 5.1        | %          |   |   |   |   |

----

N/M— Not meaningful

 

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*Revenues*.  Revenues increased $38.5 million, or 21.7%,during the three months ended September 30, 2010 compared to the sameperiod in 2009, primarily due to a 17.9% increase in unit sales and a 3.1%increase in average selling price per pair of shoes, as shown in the tablebelow. During the three months ended September 30, 2009, we sold $11.5million in end of life and impaired products as we disposed of excess andimpaired inventory, (see “Financial Highlights”). The following table setsforth revenue by channel and by region as well as other revenue information forthe third quarter of 2010 and 2009.

 
| ** **                                 | ** ** | **Three months ended September 30,**                 | ** ** | **Change** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------------------------------|------------|------------|------------|
| ** **                                 | ** ** | **2010**                                                                 | ** ** | **2009**   | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                 | ** ** | **(in millions, except average selling price)** | ** ** | ** ** | ** ** |
| Wholesale channel revenue                  |       | $                                                                        | 123.9      |       | $          | 107.1 |   | $ | 16.8 |   | 15.7 | % |
| Retail channel revenue                     |       | 72.5                                                                     |       | 53.9       |       | 18.6 |   | 34.5 | % |
| Internet channel revenue                   |       | 19.2                                                                     |       | 16.1       |       | 3.1 |   | 19.3 | % |
|                                       |       |                                                                     |       |       |       |   |   |   |   |
| Americas revenue (includes Corporate) |       | $                                                                        | 104.0      |       | $          | 79.3 |   | $ | 24.7 |   | 31.1 | % |
| Asia revenue                               |       | 79.0                                                                     |       | 68.0       |       | 11.0 |   | 16.2 | % |
| Europe revenue                             |       | 32.6                                                                     |       | 29.9       |       | 2.7 |   | 9.0 | % |
|                                       |       |                                                                     |       |       |       |   |   |   |   |
| Footwear unit sales                        |       | 11.2                                                                     |       | 9.5        |       | 1.7 |   | 17.9 | % |
| Average selling price                      |       | $                                                                        | 18.23      |       | $          | 17.69 |   | $ | 0.54 |   | 3.1 | % |

 

Duringthe three months ended September 30, 2010, revenues from our wholesalechannel grew by $16.8 million, or 15.7%, compared to the same period in 2009,particularly in the Americas and in Asia, primarily due to improvements in theglobal economy, our efforts to improve our wholesale customer relationships,market acceptance and growth of our new product line and heightened brandawareness resulting from fully-integrated marketing campaigns during the thirdquarter of 2009 (see “Business Overview”).

 

Revenuesfrom our company-operated retail locations increased $18.6 million, or 34.5%,in the three months ended September 30, 2010 compared to the same periodin 2009, which was primarily driven by the opening of 44 new company-operatedretail locations since September 30, 2009. During the three months ended September 30,2010, we continued to implement our plan to close certain kiosks and open morebranded stores where we can better merchandise the full breadth and depth ofour product line. The table below sets forth information about the number ofcompany-operated retail locations as of September 30, 2010 and 2009.

 
| ** **                                | ** ** | **As of September 30,** | ** ** |
|-------------------------------------------|------------|----------------------------------------|------------|
| ** **                                | ** ** | **2010**                               | ** ** | **2009** | ** ** | **Change** | ** ** |
| Company-operated retail locations - Total |       | 354                                    |       | 310 |   | 44 |   |
|                                      |       |                                   |       |   |   |   |   |
| Type:                                     |       |                                   |       |   |   |   |   |
| Crocs Kiosk/Store in Store                |       | 165                                    |       | 178 |   | (13 | ) |
| Crocs Retail Stores                       |       | 120                                    |       | 83 |   | 37 |   |
| Crocs Outlet Stores                       |       | 69                                     |       | 49 |   | 20 |   |
|                                      |       |                                   |       |   |   |   |   |
| Geography:                                |       |                                   |       |   |   |   |   |
| Americas                                  |       | 181                                    |       | 162 |   | 19 |   |
| Asia                                      |       | 151                                    |       | 131 |   | 20 |   |
| Europe                                    |       | 22                                     |       | 17 |   | 5 |   |

 

Revenuesfrom our internet channel increased by $3.1 million, or 19.3%, during the threemonths ended September 30, 2010 compared to the same period in 2009,primarily due to increased sales in our Europe segment resulting from theaddition of local language internet sites for France, Germany, Spain and Italyand continued strengthening in consumer demand.

 

Revenuesfrom our combined consumer-direct sales channels, defined as our retail andinternet channels, increased from 39.5% of total revenues for the three monthsended September 30, 2009 to 42.5% of total revenues for the three monthsended September 30, 2010. As consumer-direct channel sales continue togrow as a percentage of our total sales, we expect to see improvements in totalrevenue and gross margin since these channels have historically achieved higheraverage selling prices than the wholesale channel.

 

Revenuesfrom non-classic footwear models continued to make up the majority of ourrevenues during the three months ended September 30, 2010, as our classicmodels and core products (defined below) have become a smaller portion of ourtotal revenue in recent quarters. The following table sets forth sales of ourclassic models, core products and new footwear products as a percentage of ourtotal unit sales.

 

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| ** **                               | ** ** | **Three Months Ended September 30,** | ** ** |
|------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                               | ** ** | **2010**                                                 | ** ** | **2009** | ** ** |
| Classic models (Beach and Crocs Classic) |       | 10.4                                                     | %          | 15.7 | % |
| Core products(1)                         |       | 17.9                                                     | %          | 34.7 | % |
| New footwear products                    |       | 31.2                                                     | %          | 27.0 | % |

----

(1)                Core products include Classic models, KidsCrocs Classic, Athens, Kids Athens, Mary Jane, Girls Mary Jane, Mammoth andKids Mammoth.

 

Averageforeign currency exchange rates during the three months endedSeptember 30, 2010 increased revenue by $2.2 million as compared tothe three months ended September 30, 2009. Sales in international marketsin foreign currencies are expected to continue to represent a substantialportion of our overall revenues. Accordingly, changes in foreign currencyexchange rates could materially affect our overall revenues or thecomparability of those revenues from period to period as a result oftranslating our financial statements into our reporting currency, the U.S.dollar.

 

*AmericasSegment Revenues.*  Revenuesfrom the Americas segment increased $24.9 million, or 31.7%, during the threemonths ended September 30, 2010 compared to the same period in 2009,driven by revenue growth in all regional channels. Revenues fromcompany-operated retail locations increased $12.2 million, or 38.9%, to $43.6million as the number of company-operated retail locations in the regionincreased by 19. Regional wholesale channel revenues increased $11.9 million,or 33%, to $48.2 million primarily due to increased demand resulting fromcontinued investments in cooperative advertising and merchandising assistancefor select locations at our largest U.S. wholesale accounts.

 

*AsiaSegment Revenues.*  Revenuesfrom the Asia segment increased $11.0 million, or 16.2%, during the threemonths ended September 30, 2010 compared to the same period in 2009,driven by revenue growth in all regional channels. Revenues fromcompany-operated retail locations increased $5.6 million, or 29.9%, to $24.3 asthe number of company-operated retail locations in the region increased by 20.Regional wholesale channel revenues increased $5.1 million, or 10.7%, to $52.5million primarily due to a higher average selling price.

 

*Europe SegmentRevenues. *Revenues inEurope increased $2.7 million, or 9.0%, during the three months endedSeptember 30, 2010 compared to the same period in 2009, which was largelydriven by an increase of $2.3 million or 88.4% in internet channel revenuesresulting from the addition of local language internet sites for France,Germany, Spain and Italy, as previously mentioned.

 

*Gross profit. *During the three months ended September 30, 2010, gross profitincreased $28.9 million, or 32.2%, to $118.8 million compared to the sameperiod in 2009. Gross margin increased 440 basis points to 55.1% during thethree months ended September 30, 2010 compared to the same period in 2009.These increases are primarily attributable to an increase of 17.9% in unitsales, favorable shifts in product mix (consumer-direct channels) toward highermargin products and lower distribution costs as we continue to increase directshipments from the factories to our wholesale customers and retail channel.Offsetting these increases was the accretive effect of impaired unit sales thattook place during the second quarter of 2009 as discussed in “FinancialHighlights.” The net effect of these sales during the third quarter of 2009 was$9.6 million.

 

Averageforeign currency exchange rates during the three months endedSeptember 30, 2010 increased our gross profit by $2.3 million as comparedto the three month period ended September 30, 2009. We expect that salesat subsidiary companies with functional currencies other than the U.S. dollarwill continue to generate a substantial portion of our overall gross profit.Accordingly, changes in foreign currency exchange rates could materially affectour overall gross profit or the comparability of our gross profit from periodto period as a result of translating our financial statements into ourreporting currency, the U.S. dollar.

 

*Selling, general and administrative expenses and foreigncurrency transaction losses (gains)*.  Selling, general and administrative expenseincreased $14.2 million or 18.2% during the three months endedSeptember 30, 2010 compared to the same period in 2009, primarily due anincrease of $7.2 million in salaries, recruiting, rent and building costsresulting from the continued expansion of our retail selling channel, an increaseof $4.0 million in marketing, media and agency costs related to our fallholiday marketing campaign, and an increase of $1.5 million of bad debt expenseprimarily related to our Asia operating segment.

 

Average foreign currency exchange rates used to translateexpenses from our functional currencies to our reporting currency, the U.S.dollar, during the three months ended September 30, 2010 decreasedselling, general and administrative expenses by approximately $1.0 million ascompared to the same period in 2009.

 

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*Impairment charges. *No impairment charges wererecorded during the three months ended September 30, 2010 compared to $1.7million in impairment charges recorded during the same period in 2009. Thethird quarter 2009 impairment charges consisted of:

 

·                  $0.9 million related to the write-off ofcapitalized software, patents, trade names and other intangible assets that weno longer intended to utilize;

 

·                  $0.5 millionrelated to the write-off of obsolete molds, tooling, manufacturing anddistribution equipment, sales and marketing assets and other distribution andmanufacturing assets, primarily associated with the consolidation of warehouseand distribution space; and

 

·                  $0.3 million related to the write-off ofother smaller items.

 

Thefollowing table summarizes operating income by segment for the three monthsended September 30, 2010 and 2009 (in thousands).

 
| ** **                           | ** ** | **Three Months Ended September 30,** | ** ** |
|--------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                           | ** ** | **2010**                                                 | ** ** | **2009** | ** ** |
| Operating Income:                    |       |                                                     |       |   |   |
| Americas                             |       | $                                                        | 22,256     |   | $ | 8,355 |   |
| Europe                               |       | 4,813                                                    |       | 2,974 |   |
| Asia                                 |       | 23,792                                                   |       | 20,028 |   |
| Total segments                       |       | 50,861                                                   |       | 31,357 |   |
| SG&A Restructuring               |       | —                                                   |       | (17 | ) |
| Asset Impairment                     |       | —                                                   |       | (1,722 | ) |
| Corporate  and other                 |       | (23,415                                                  | )          | (20,648 | ) |
|                                 |       |                                                     |       |   |   |
| Total  consolidated operating income |       | $                                                        | 27,446     |   | 8,970 |   |
|                                      |            |                                                          |            |  |  |  |  |

 

*Segments — Operating Margin.*  Total segment operating income increased$19.5 million, or 62.2%, during the three months ended September 30, 2010compared to the same period in 2009, primarily due to higher revenues in eachof our operating segments and the impact of cost savings initiatives, (see “FinancialHighlights”), which were partially offset by the increased costs resulting from the continued expansion of our retailselling channel, increased costs related to our fully-integratedmarketing campaigns, increased baddebt expense and the accretive effect of impaired unit sales that tookplace during 2009. (See discussions above).

 

*Income tax expense*.  During the three months endedSeptember 30, 2010, we recognized an income tax expense of $2.2 million onpre-tax income of $27.2 million, representing an effective income tax rate of8.0% during the three months ended September 30, 2010, compared to anincome tax benefit of $12.3 million on a pre-tax income of $9.8 million,representing an effective income tax rate of (126.2%) during the same period in2009. The change in effective tax rate is primarily the result of a one-time$3.0 million tax benefit recognized in the third quarter of 2010 due to achange in an international tax treaty which reduces certain taxes for whichaccruals have previously been made, a $14.4 million one-time tax benefitrecognized in the third quarter of 2009 related to the Company’s restructuringof its international operations to streamline and simplify its businessoperations and changes in the mix of profitability in foreign jurisdictionswhere the Company is taxable.

 

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**Comparison of the Nine Months Ended September 30, 2010and 2009**

** **
| ** **                                    | ** ** | **Nine Months Ended September 30,**                         | ** ** | **Change** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------------------------------------|------------|------------|------------|
| ** **                                    | ** ** | **2010**                                                                        | ** ** | **2009**   | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                    | ** ** | **(amounts in thousands, except per share data)** | ** ** | ** ** | ** ** |
| Revenues                                      |       | $                                                                               | 610,503    |       | $          | 509,756 |   | $ | 100,747 |   | 19.8 | % |
| Cost  of sales                                |       | 273,072                                                                         |       | 269,115    |       | 3,957 |   | 1.5 | % |
| Gross  profit                                 |       | 337,431                                                                         |       | 240,641    |       | 96,790 |   | 40.2 | % |
| Selling,  general and administrative expenses |       | 261,017                                                                         |       | 240,654    |       | 20,363 |   | 8.5 | % |
| Foreign  currency transaction gains, net      |       | (2,329                                                                          | )          | (1,247     | )          | (1,082 | ) | (86.8 | )% |
| Restructuring  charges                        |       | 2,539                                                                           |       | 5,916      |       | (3,377 | ) | (57.1 | )% |
| Impairment  charges                           |       | 141                                                                             |       | 25,447     |       | (25,306 | ) | (99.4 | )% |
| Charitable  contributions                     |       | 496                                                                             |       | 7,296      |       | (6,800 | ) | (93.2 | )% |
| Income  (loss) from operations                |       | 75,567                                                                          |       | (37,425    | )          | 112,992 |   | 301.9 | % |
| Interest  expense                             |       | 445                                                                             |       | 1,412      |       | (967 | ) | (68.5 | )% |
| Other,  net                                   |       | (48                                                                             | )          | (3,666     | )          | 3,618 |   | 98.7 | % |
| Income  (loss) before income taxes            |       | 75,170                                                                          |       | (35,171    | )          | 110,341 |   | 313.7 | % |
| Income  tax expense                           |       | 12,173                                                                          |       | (4,541     | )          | 16,714 |   | 368.1 | % |
| Net  income (loss)                            |       | $                                                                               | 62,997     |       | $          | (30,630 | ) | $ | 93,627 |   | 305.7 | % |
| Net  income (loss) per basic share            |       | $                                                                               | 0.73       |       | $          | (0.36 | ) | $ | 1.09 |   | N/M |   |
| Net  income (loss) per diluted share          |       | $                                                                               | 0.72       |       | $          | (0.36 | ) | $ | 1.08 |   | N/M |   |
|                                          |       |                                                                            |       |       |       |   |   |   |   |
| Gross  margin                                 |       | 55.3                                                                            | %          | 47.2       | %          |   |   |   |   |
| Operating  margin                             |       | 12.4                                                                            | %          | (7.3       | )%         |   |   |   |   |

----

N/M— Not meaningful

 

*Revenues*.  Revenues increased $100.7 million, or 19.8%,during the nine months ended September 30, 2010 compared to the sameperiod in 2009, primarily due to a 12.5% increase in unit sales and an 8.1%increase in average selling price per pair of shoes, as shown in the tablebelow. During the nine months ended September 30, 2009, we sold $54.5million in end of life and impaired products as we disposed of excess andimpaired inventory as described above in “Financial Highlights”. The followingtable sets forth revenue by channel and by region as well as other revenueinformation for the nine months ended September 30, 2010 and 2009.

 
| ** **                            | ** ** | **Nine months ended September 30,**                  | ** ** | **Change** | ** ** |
|---------------------------------------|------------|--------------------------------------------------------------------------|------------|------------|------------|
| ** **                            | ** ** | **2010**                                                                 | ** ** | **2009**   | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                            | ** ** | **(in millions, except average selling price)** | ** ** | ** ** | ** ** |
| Wholesale channel revenue             |       | $                                                                        | 384.1      |       | $          | 327.5 |   | $ | 56.6 |   | 17.3 | % |
| Retail channel revenue                |       | 173.3                                                                    |       | 137.1      |       | 36.2 |   | 26.4 | % |
| Internet channel revenue              |       | 53.1                                                                     |       | 45.2       |       | 7.9 |   | 17.5 | % |
|                                  |       |                                                                     |       |       |       |   |   |   |   |
| Americas revenue (includes Corporate) |       | $                                                                        | 283.0      |       | $          | 232.4 |   | $ | 50.6 |   | 21.8 | % |
| Asia revenue                          |       | 222.4                                                                    |       | 187.0      |       | 35.4 |   | 18.9 | % |
| Europe revenue                        |       | 105.1                                                                    |       | 90.4       |       | 14.7 |   | 16.3 | % |
|                                  |       |                                                                     |       |       |       |   |   |   |   |
| Footwear unit sales                   |       | 33.3                                                                     |       | 29.6       |       | 3.7 |   | 12.5 | % |
| Average selling price                 |       | $                                                                        | 17.52      |       | $          | 16.21 |   | $ | 1.31 |   | 8.1 | % |

 

Duringthe nine months ended September 30, 2010, revenues from our wholesalechannel grew by $56.6 million, or 17.3%, compared to the same period in 2009,particularly in the Americas and Asia, as demand for product continued to growresulting from a stronger global economy, on-going efforts made to improve ourwholesale customer relationships and market acceptance of our new product line.

 

Revenuesfrom our company-operated retail locations increased $36.2 million, or 26.4%,during the nine months ended September 30, 2010 compared to the sameperiod in 2009, which was driven by the expanded availability of product to ourretail customer due to the increase in retail locations (see table above),where we can better merchandise the full breadth and depth of our product lineand improved pricing.

 

Revenuesfrom our internet channel increased by $7.9 million, or 17.5%, primarily due toincreased sales in our Europe segment, resulting from the addition of locallanguage internet sites for France, Germany, Spain and Italy as well asstronger consumer demand.

 

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Theseincreases were partially offset by revenue declines from our internet channelin Asia where we saw a drop in demand due to prolonged cold weather and an increasein imitation products in the region, particularly in Japan.

 

Revenuesfrom our combined consumer-direct sales channels increased to 37.1% of revenueduring the nine months ended September 30, 2010 compared to 35.8% duringthe same period in 2009. As consumer-direct channel sales continue to grow as apercentage of our total sales, we expect to realize growth in total revenuesand gross margin since these channels have historically achieved higher averageselling prices than the wholesale channel.

 

Revenuesfrom non-classic footwear models continued to make up the majority of ourrevenues during the nine months ended September 30, 2010, as our classicmodels and core products (defined below) have become a smaller portion of ourtotal revenue in recent quarters. The following table sets forth sales of ourclassic models, core products and new footwear products as a percentage of ourtotal unit sales.

 
| ** **                               | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                               | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| Classic models (Beach and Crocs Classic) |       | 10.3                                                    | %          | 17.0 | % |
| Core products(1)                         |       | 20.2                                                    | %          | 34.9 | % |
| New footwear products                    |       | 30.8                                                    | %          | 12.8 | % |

----

(2)                Core products include Classic models, KidsCrocs Classic, Athens, Kids Athens, Mary Jane, Girls Mary Jane, Mammoth andKids Mammoth.

 

Averageforeign currency exchange rates during the nine months ended September 30,2010 contributed $17.1 million to our revenues as compared to the ninemonths ended September 30, 2009. We expect that sales in internationalmarkets in foreign currencies will continue to represent a substantial portionof our overall revenues. Accordingly, changes in foreign currency exchangerates could materially affect our overall revenues or the comparability ofthose revenues from period to period as a result of translating our financialstatements into our reporting currency, the U.S. dollar.

 

*AmericasSegment Revenues.*  Revenuesfrom the Americas segment increased $50.0 million, or 21.8%, during the ninemonths ended September 30, 2010 compared the same period in 2009, as aresult of increased revenue in all channels. Revenues from company-operatedretail locations in the region grew $27.0 million, or 34.7%, to $104.7 millionfor the nine months ended September 30, 2010 compared to the same periodin 2009 primarily due to increased unit sales resulting from an increase in thenumber of company-operated retail locations in the region, as discussed above,and price improvements. Regional wholesale revenues grew $22.0 million, or18.2%, to $143.1 million for the nine months ended September 30, 2010compared to the same period in 2009 primarily due to increased unit sales.

 

*AsiaSegment Revenues.*  Revenues inAsia increased $35.4 million, or 18.9%, during the nine months endedSeptember 30, 2010 compared to the same period in 2009, due to increasedwholesale and retail channel revenues. Regional wholesale channel revenuesincreased by $28.2 million, or 21.6%, primarily due to continued strong demandand improved pricing. Regional revenues from company-operated retail locationsincreased $7.6 million, or 15.0%, to $58.1 million during the nine months endedSeptember 30, 2010 compared to the same period in 2009, due to priceimprovements and an increase of company-operated retail locations in theregion, as discussed above. Regional retail revenue growth was negatively affectedby a prolonged cold weather season in parts of the region and a rise inimitation products in Japan.

 

*EuropeSegment Revenues.* Revenues inEurope increased $14.7 million, or 16.3%, during the nine months endedSeptember 30, 2010 compared to the same period in 2009 which was driven bygrowth in all sales channels. Regional internet channel revenues increased by$6.7 million to $12.3 million during the nine months ended September 30,2010, which was more than twice the internet channel revenues earned during thesame period in 2009, primarily due to the addition of local language internetsites for France, Germany, Spain and Italy, as previously mentioned. Wholesalechannel revenues increased $6.4 million, or 8.4%, to $82.3 million during thenine months ended September 30, 2010 compared to the same period in 2009,due to increased demand.

 

*Gross profit. *During the nine months ended September 30, 2010 gross profitincreased $96.8 million, or 40.2%, to $337.4 million compared to the sameperiod in 2009. Gross margin increased 810 basis points to 55.3% during thenine months ended September 30, 2010 compared to the same period in 2009.These increases are primarily attributable to an increase of 12.5% in salesvolume and favorable shifts in product mix (consumer-direct channels) towardhigher margin products.  Additionally, wecontinue to implement our strategy to increase shipments made directly from thefactories to our wholesale customers and our retail channel. Thesefactory-direct shipments lower our distribution cost and, as factory-directshipment volume increased, we began to realize benefits from this strategy in2010. The increase is also attributable to a decrease of $4.4 million inrestructuring charges due to higher 2009 restructuring costs associated withthe closures and consolidation our distribution spaces in the Americas andEurope segments. 

 

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Offsetting these increases was the accretive effectof impaired unit sales that took place during the second quarter of 2009 asdiscussed in “Financial Highlights.” The net effect of these sales during thefirst nine months of 2009 was $41.6 million.

 

Averageforeign currency exchange rates during the nine months ended September 30,2010 increased our gross profit by $10.5 millioncompared to the same period in 2009. We expect that sales at subsidiarycompanies with functional currencies other than the U.S. dollar will continueto generate a substantial portion of our overall gross profit. Accordingly,changes in foreign currency exchange rates could materially affect our overallgross profit or the comparability of our gross profit from period to period asa result of translating our financial statements into our reporting currency,the U.S. dollar.

 

*Selling, general and administrative expenses and foreigncurrency transaction losses (gains)*.  Selling, general and administrative expenseincreased $20.4 million, or 8.5%, in the nine months ended September 30,2010 compared to the same period in 2009, primarily due to an increase ofapproximately $20.1 million in salaries, rent and other retail-related costslargely driven by the expansion of our retail selling channel and an increaseof approximately $12.9 million in costs related to our 2010 marketing campaign.Offsetting these cost increases was an increase of $1.1 million in net gains onchanges in currency exchange rates for transactions denominated, and settled orto be settled, in a currency other than the functional currency, and a declineof $16.0 million in stock-based compensation, $13.3 million of which wasdue to the acceleration of stock-based compensation expense from our 2009tender offer during the nine months ended September 30, 2010 compared tothe same period in 2009.

 

Average foreign currency exchange rates used totranslate expenses from our functional currencies to our reporting currency,the U.S. dollar, during the nine months ended September 30, 2010 increasedselling, general and administrative expenses by approximately $1.9 million ascompared to the same period in 2009.

 

*Restructuringcharges*.  We recorded $3.9 million inrestructuring charges in the nine months ended September 30, 2010, ofwhich $1.4 million was recorded to cost of sales. These restructuring chargesconsisted of $2.0 million in severance costs related to the departure of ourformer Chief Executive Officer, John Duerden, during the first quarter of 2010as well as $1.9 million which was related to a change in estimate of ouroriginal accruals for lease termination costs for our Canadian office, closedin 2008, and our distribution facilities in North America and Europe.

 

Forthe nine months ended September 30, 2009, we recorded a combined $11.7million in restructuring charges, of which $5.8 million was included in costsof sales. These charges consisted of:

 

·                  $4.2 million in costs associated with theconsolidation of our warehousing, distribution and office space worldwide;

 

·                  $2.7 million in severance costs;

 

·                  $1.1 million related to the release fromfurther obligations under the earn-out provisions of our acquisition of Bite,LLC; and

 

·                  $3.7 million in other restructuring charges.

 

*Impairment charges. *During the nine months endedSeptember, 30, 2010, we recorded $0.1 million in impairment charges compared to$25.4 million in impairment charges recording during the same period in 2009.The 2009 charges consisted of:

 

·                  $17.0 million related to the write-off ofobsolete molds, tooling, manufacturing and distribution equipment, sales andmarketing assets and other distribution and manufacturing assets, primarilyassociated with the consolidation of warehouse and distribution space;

 

·                  $7.5 million related to the write-off ofcapitalized software, patents, trade names and other intangible assets that weno longer intended to utilize; and

 

·                  $0.9 million related to the write-off ofother smaller items.

 

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Thefollowing table summarizes operating income (loss) by segment for the ninemonths ended September 30, 2010 and 2009 (in thousands):

 
| ** **                                 | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                 | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| Operating Income:                          |       |                                                    |       |   |   |
| Americas                                   |       | $                                                       | 56,913     |   | $ | 16,148 |   |
| Europe                                     |       | 22,488                                                  |       | 16,054 |   |
| Asia                                       |       | 68,070                                                  |       | 49,867 |   |
| Total segments                             |       | 147,471                                                 |       | 82,069 |   |
| SG&A Restructuring                     |       | (2,539                                                  | )          | (5,916 | ) |
| Asset Impairment                           |       | (141                                                    | )          | (25,447 | ) |
| Corporate and other                        |       | (69,224                                                 | )          | (88,131 | ) |
| Total consolidated operating income (loss) |       | 75,567                                                  |       | (37,425 | ) |
|                                            |            |                                                         |            |  |  |  |  |

 

*Segments — Operating Margin.*  Total segment operating income increased $65.4million, or 79.7%, during the nine months ended September 30, 2010compared to the same period in 2009, primarily due to increased revenue in eachof our operating segments, a decrease of $4.4 million in restructuring chargesand the impact of our cost savings initiatives (see “Financial Highlights”).These increases were partially offset by theaccretive effect of impaired unit sales that took place during 2009, andincreased costs related to the expansion of our retail selling channel and our2010 fully-integrated marketing campaign, as previously discussed.

 

*Interest expense*. Interest expense decreased $1.0 million, or 68.5%, during the ninemonths ended September 30, 2010 compared to same period in 2009 primarilydue to lower borrowing rates and borrowing balances under our currentasset-backed credit facility.

 

*Income tax expense*.  During the nine months endedSeptember 30, 2010, we recognized an income tax expense of $12.2 millionon a pre-tax income of $75.2 million, representing an effective income tax rateof 16.2% compared to an income tax benefit of $4.5 million on a pre-tax loss of$35.2 million, representing an effective income tax rate of (12.8%) for thesame period in 2009. The change in effective tax rate is primarily the resultof a one-time $3.0 million tax benefit recognized in the third quarter of 2010due to a change in an international tax treaty which reduces certain taxes forwhich accruals have previously been made, a $14.4 million one-time tax benefitrecognized in the third quarter of 2009 related to the Company’s restructuringof its international operations to streamline and simplify its businessoperations, and changes in the mix of profitability in foreign jurisdictionswhere the Company is taxable.

 

**Liquidityand Capital Resources**

 

At September 30, 2010,we had $143.1 million in cash and cash equivalents. We anticipate that cashflows from operations will be sufficient to meet the ongoing needs of ourbusiness for the next 12 months. In order to provide additional liquidity inthe future and to help support our strategic goals, we also have anasset-backed revolving credit facility with PNC (see discussion below), whichprovides us with up to $30.0 million in borrowings and matures on September 24,2014.  Additional future financing may benecessary; however, due to current macroeconomic conditions and their affect onthe global credit markets, there can be no assurance that we will be able tosecure additional debt or equity financing on terms acceptable to us or at all.

 

*Credit Facility*

 

OnSeptember 30, 2010, we amended our Revolving Credit and Security Agreementwith PNC, originally dated September 25, 2009. Based on the amended terms,the Credit Agreement provides for an asset-backed revolving credit facility ofup to $30.0 million in total, which includes a $20.0 million sublimit forborrowings against our eligible inventory, a $2 million sublimit for borrowingsagainst our eligible inventory in-transit, and a $10 million sublimit forletters of credit, and matures on September 24, 2014. Total borrowingsavailable under the facility at any given time are subject to customaryreserves and reductions to the extent our asset borrowing base changes.Borrowings under the facility are secured by all of our assets including all receivables,equipment, general intangibles, inventory, investment property, subsidiarystock and leasehold interests. The terms of the Credit Agreement require us toprepay borrowings in the event of certain dispositions of property. Withrespect to domestic rate loans, principal amounts outstanding bear interest at1.5% plus the greater of either (i) PNC’s published reference rate,(ii) the Federal Funds Open Rate (as defined in the credit facility) ineffect on such day plus 0.5% or, (iii) the sum of the daily LIBOR rate and1.0%. Eurodollar denominated principal amounts outstanding bear interest at3.0% plus the Eurodollar rate (as defined in the credit facility). The CreditAgreement requires monthly interest payments with respect to domestic rate loansand at the end of each interest period with respect to Eurodollar rate loansand contains certain customary restrictive and financial covenants. We were in compliance with these financialcovenants as of September 30, 2010. As of September 30, 2010and December 31, 2009, we had no outstanding borrowings under the creditfacility. At September 30, 2010, we had issued and outstanding letters ofcredit of $1.0 million which were reserved against the borrowing base.

 

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*WorkingCapital and Cash Flow*

 

Our accounts receivable balance as ofSeptember 30, 2010 was $81.3 million, an increase of $30.8 million whencompared to the balance as of December 31, 2009. The increase in accountsreceivable between December 31, 2009 and September 30, 2010 waslargely the result of seasonality and higher sales in the third quarter of 2010compared to the fourth quarter of 2009. Days sales outstanding remainedrelatively flat at 34.7 at September 30, 2010 compared to 34.1 at December 31,2009.

 

We are a global business with operations in manydifferent countries, which requires cash accounts to be held in variouscurrencies. The global market has recently experienced many fluctuations inforeign currency exchange rates which impacts our results of operations andcash positions. The future fluctuations in foreign currencies may have amaterial impact on our cash flows and capital resources. Cash balances held inforeign countries have additional restrictions and covenants associated withthem, which adds increased strains on our liquidity and ability to timelyaccess and transfer cash balances between entities.

 

We consider unremitted earnings of subsidiariesoperating outside of the U.S. to be indefinitely reinvested and it is not ourcurrent intent to change this position. However, most of the cash heldoutside of the U.S. could be repatriated to the U.S., but under current law,would be subject to U.S. federal and state income taxes, less applicableforeign tax credits. In some countries, repatriation of certain foreignbalances is restricted by local laws and could have adverse tax consequences ifwe were to move the cash to another country. Certain countries, includingChina, have monetary laws which may limit our ability to utilize cash resourcesin those countries for operations in other countries. These limitations mayaffect our ability to fully utilize our cash resources for needs in the U.S. orother countries and may adversely affect our liquidity. As of September 30,2010, we held $137.6 million of our total $143.1 million in cash ininternational locations. This cash is primarily used for the ongoing operationsof the business in the locations in which the cash is held. Of the $137.6million, $35.8 million could potentially be restricted, as described above. Ifthe remaining $101.8 million were to be repatriated to the U.S., we would berequired to pay approximately $6.7 million in international withholding taxeswith no offsetting credit. We believe that we have sufficient U.S. netoperating losses (“NOLs”) to absorb any future increases to U.S. net income(and therefore, U.S. federal income tax) brought about by potential cashrepatriation up to the lesser of the total U.S. NOL balances or the currentforeign subsidiaries’ earnings. There are full valuation allowances on the NOLsthat would be released to result in no tax effect or cash tax payments for theU.S. up to the aforementioned limitation.

 

We have entered into various operating leases thatrequire cash payments on a specified schedule. Over the next five years we arecommitted to make payments of approximately $130.2 million related to ouroperating leases. We plan to continue to enter into operating leases related toour retail stores. We also continue to evaluate cost reduction opportunities.Our evaluation of cost reduction opportunities will include an evaluation ofcontracts for sponsorships, operating lease contracts and other contracts thatrequire future minimum payments resulting in fixed operating costs. Any changesto these contracts may require early termination fees or other charges thatcould result in significant cash expenditures.

 

Ourinventories increased to $142.5 million at September 30, 2010 from $93.3million at December 31, 2009, which was primarily driven by growthassociated with the addition of 37 new retail locations; the addition ofcomponent raw material inventory, as we continue to manufacture more of ourhybrid product which provides savings on costs incurred with importing theseproducts from China; and a significant increase in order backlog.

 

During the three and nine months endedSeptember 30, 2010 and 2009, we had net capital expenditures of $7.3million and $26.1 million and $6.1 million and $18.3 million, respectively. We willcontinue to make ongoing capital investments in molds and other toolingequipment related to manufacturing new products and footwear styles as well asthose related to opening additional retail stores. We continue to evaluate oursoftware needs and may continue to spend on upgrades or improvements to currentsystems or may implement new systems as our business needs require.

 

**Seasonality**

 

Due to the seasonal nature of our product, which is more heavilyfocused on footwear styles suitable for warm weather, revenues generated duringour first and fourth quarters are typically less than revenues generated duringour second and third quarters, when the northern hemisphere is experiencingwarmer weather. We intend to continue branching out into other types offootwear, including offering more winter-oriented styles, and this productexpansion may help us mitigate some of this seasonality in the future. Ourquarterly results of operations may fluctuate significantly as a result of avariety of other factors, including the timing of new model introductions orgeneral economic or consumer conditions. Accordingly, results of operations andcash flows for any one quarter are not necessarily indicative of results to beexpected for any other quarter or for any other year.

 

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**CriticalAccounting Policies and Estimates**

 

For a discussion ofaccounting policies that we consider critical to our business operations andunderstanding of our results of operations, and that affect the moresignificant judgments and estimates used in the preparation of our unauditedcondensed consolidated financial statements, see Item 7. “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Critical Accounting Policies” contained in our annual report onForm 10-K for the year ended December 31, 2009 and incorporated byreference herein.

 

**SignificantAccounting Policies and Estimates**

 

For a discussion ofaccounting policies that we consider significant to our business operations andunderstanding of our results of operations, see Note 2 — Summary of SignificantAccounting Policies to our consolidated financial statements contained in ourannual report on Form 10-K for the year ended December 31, 2009 andincorporated by reference herein.

 

Effective January 1,2010, we changed our inventory valuation method for all inventories from thefirst-in, first-out (“FIFO”) cost method to the moving average cost method,which approximates FIFO. We believe the change to the moving average costmethod is preferable under the circumstances because the moving averagemethodology results in better alignment with the physical flow of inventorythan the FIFO methodology, it is calculated by our inventory informationsystem, which incorporates automated controls, and is also the methodmanagement uses when preparing budgets, reviewing actual and forecastedfinancial information, as well as the method used in determining incentivemanagement compensation. The moving average cost results substantially in thesame results of operations per period. As such, financial statements forperiods ending on or before December 31, 2009 have not been retroactivelyadjusted due to immateriality. The impact of the change for the three month andnine month period ended September 30, 2010 is also immaterial. We do notbelieve the change will have a significant impact on our financial statementsin the future.

 

**ITEM 3. Quantitative and Qualitative Disclosures About Market Risk**

 

*Credit and Interest Rate Risk*

 

Weare exposed to interest rate risk to the extent that interest rates change dueto inflation or other factors. This exposure is directly related to its normaloperating and funding activities. As previously discussed, the principalamounts outstanding under the revolving credit facility with PNC, whichprovides for borrowings of up to $30.0 million in total, bear interest at 1.5%per annum plus the greater of either (i) PNC’s published reference rate,(ii) the Federal Funds Open Rate (as defined in the credit facility) ineffect on such day plus 0.5% or, (iii) the sum of the daily LIBOR rate and1.0% with respect to domestic rate loans, and 3.0% plus the Eurodollar rate (asdefined in the credit facility) with respect to outstanding Eurodollardenominated principal amounts. The credit facility requires monthly interestpayments with respect to domestic rate loans and at the end of each interestperiod with respect to Eurodollar rate loans. Since we currently have nooutstanding borrowings as of September 30, 2010 under the revolving creditfacility, a change in prevailing interest rates in the near term will notmaterially affect our overall results.

 

Weearned interest income of $0.2 million and $0.4 million on our cash and cashequivalents and marketable securities during the three and nine months endedSeptember 30, 2010, respectively. During the three and nine months endedSeptember 30, 2009, we earned interest income of $0.1 million and $0.5million, respectively, on our cash and cash equivalents and marketablesecurities. During the nine months ended September 30, 2010 and 2009, oursensitivity to market fluctuations in interest rates was not material to itsoverall results.

 

*Foreign Currency Exchange Risk*

 

We have significant revenuesfrom foreign sales in recent periods. While the majority of expensesattributable to our foreign operations are paid in the functional currency ofthe country in which such operations are conducted, we pay the majority of ouroverseas third-party manufacturers in U.S. dollars. Our ability to sell ourproducts in foreign markets and the U.S. dollar value of the sales made inforeign currencies may be significantly influenced by foreign currencyfluctuations. We are primarily exposed to changes in exchange rates for theBritish pound, the Japanese yen, the Mexican peso and the euro. In the eventour foreign sales and purchases increase and are denominated in currenciesother than the U.S. dollar, our operating results may be affected byfluctuations in the exchange rate of currencies we receive for such sales. Weengage in foreign exchange forward contracts to reduce our transactionalexposure to changes in foreign exchange rates and to hedge specific commitmentsand anticipated transactions and not for speculative or trading purposes. Theseforeign exchange forward contracts are accounted for as derivatives designatedas non-hedging instruments in accordance with accounting standards forderivatives. The fair values of these instruments at September 30, 2010and December 31, 2009 were not material. The change in the value of theseinstruments is immediately recognized in earnings. The impact of suchinstruments is included in other expense (income), net.

 

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**ITEM 4.  Controlsand Procedures**

 

***Evaluation of Disclosure Controls andProcedures***

 

Under the supervision of andwith the participation of our senior management, including our Chief ExecutiveOfficer and Chief Financial Officer, we conducted an evaluation of the effectivenessof the design and operation of our disclosure controls and procedures, asdefined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act,as of the end of the period covered by this quarterly report (the “EvaluationDate”). Based on this evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that as of the Evaluation Date, our disclosurecontrols and procedures were effective, such that the information relating tous, including our consolidated subsidiaries, required to be disclosed in ourSecurities and Exchange Commission (“SEC”) reports (i) is recorded,processed, summarized and reported within the time periods specified in SECrules and forms, and (ii) is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate to allow timely decisions regarding required disclosure.

 

***Changes in Internal Control over FinancialReporting***

 

Therehave been no changes to our internal control over financial reporting duringthe three months ended September 30, 2010 that have materially affected,or are reasonably likely to materially affect, our internal control overfinancial reporting.

 

**PART II—OTHERINFORMATION**

 

**ITEM 1.  LegalProceedings**

 

On March 31, 2006, theCompany filed a complaint with the International Trading Commission (“ITC”)against Acme Ex-Im, Inc., Australia Unlimited, Inc., Cheng’sEnterprises, Inc., Collective Licensing International, LLC, D.Myers & Sons, Inc., Double Diamond Distribution, Ltd.,Effervescent, Inc., Gen-X Sports, Inc., Holey SolesHoldings, Ltd., Inter-Pacific Trading Corporation, and ShakaHoldings, Inc., alleging patent and trade dress infringement and seekingan exclusion order banning the importation and sale of infringing products. OnAugust 10, 2006, the Company filed a motion to voluntarily remove itstrade dress claim from the investigation to focus on the patent claims. TheCompany’s motion was granted by Order No. 20 on August 24, 2006. Theutility and design patents asserted in the complaint were issued to the Companyon February 7, 2006 and March 28, 2006 respectively, by the UnitedStates Patent and Trademark Office. The ITC has issued final determinationsterminating Shaka Holdings, Inc., Inter-Pacific Trading Corporation,Acme Ex-Im, Inc., D. Myers & Sons, Inc., AustraliaUnlimited, Inc. and Gen-X Sports, Inc. from the ITC investigationNo. 337-TA-567 on the basis of settlement and Cheng’sEnterprises, Inc. on the suspension of accused activities. The ITCAdministrative Law Judge (“ALJ”) issued an Initial Determination ofnon-infringement related to one of the patents at issue. The Company filed apetition with the Commission to review this determination. The Commissiongranted the Company’s petition and on February 15, 2007, after briefing bythe parties, the Commission vacated the ALJ’s determination of non-infringementwith respect to the remaining respondents and remanded it to the ALJ forfurther proceedings consistent with the Commission’s order. In light of theCommission’s Order, the procedural schedule and hearing date were resetpursuant to Order No. 38. A trial was held before the ALJ fromSeptember 7 to 14, 2007. The ALJ issued an Initial Determination onApril 11, 2008 with a finding of no violation, finding infringement of theutility patent by certain accused products, but also finding that the utilitypatent was invalid as obvious. The ALJ also found that the design patent wasvalid, but not infringed by the accused products. The Company filed a Petitionfor Review of the Initial Determination which was due on April 24, 2008.On June 18, 2008, the Commission issued a Notice that it would review theALJ’s findings in the Initial Determination with respect to the determinationof non-infringement of the design patent and the determination of invalidity ofthe utility patent. On July 25, 2008, the Commission issued a Notice ofits decision to terminate the Investigation with a finding of no violation asto either patent. Crocs filed a Petition for Review of the decision with theUnited States Court of Appeals for the Federal Circuit on September 22,2008, and filed its initial brief on January 21, 2009. Briefing before theFederal Circuit was completed in April 2009 and oral arguments were heardon July 10, 2009. On October 4, 2009, the Company and CollectiveLicensing International, LLC reached a settlement. Collective LicensingInternational, LLC agreed to cease and desist infringing on the Company’spatents and to pay the Company certain monetary damages, which was recordedupon receipt. On February 24, 2010, the Federal Circuit found that theCommission erred in finding that the utility patent was obvious and reversedthe Commission’s determination of non-infringement of the design patent. Thecase has been remanded back to the Commission for a determination ofinfringement of the utility patent and any appropriate remedies. OnApril 12, 2010, one of the remaining parties, Effervescent, Inc.,filed a request for a panel or en banc hearing with the Federal Circuit of theFebruary 24, 2010 decision, to which the Company responded onApril 28, 2010. The Federal Circuit denied the petition on May 20,2010 and the matter has been remanded to the ITC. On July 6, 2010, theCommission ordered the matter to be assigned to an ALJ for adetermination on enforceability. On August 26, 2010, the ALJ determinedthat the evidentiary record need not be reopened and that the remand wouldproceed based on the prior submissions of the parties.

 

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On December 8, 2009,Columbia Sportswear Company (“Columbia”) filed an Amended Complaint adding theCompany as a defendant in a case between Columbia and Brian P. O’Boyle and 1Pen. Inc. in the Multnomah County Circuit Court in the State of Oregon.Columbia asserted claims against the Company for misappropriation of tradesecrets, aiding and abetting breach of fiduciary duty, intentional interferencewith contract, injunctive relief, disgorgement and an accounting. The AmendedComplaint sought damages in an unspecified amount, return of patent rights,reasonable attorney’s fees and costs and expenses against the Company. On July 29,2010, the Company and Columbia settled all issues between them and Columbiadismissed with prejudice all claims against the Company in exchange for certainmonetary and other considerations.

 

**ITEM 1A.  RiskFactors**

 

There have been no materialchanges to the risk factors contained in our Annual Report on Form 10-Kfor the year ended December 31, 2009.

 

**ITEM 6.  Exhibits.**

 

**Exhibit List**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                 |       | Restated Certificate of  Incorporation of Crocs, Inc. (incorporated herein by reference to  Exhibit 4.1 to Crocs, Inc.’s Registration Statement on  Form S-8, filed on March 9, 2006 (File No. 333-132312).                                                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.1                 |       | Certificate of Amendment  to the Restated Certificate of Incorporate of Crocs, Inc. (incorporated  herein by reference to Exhibit 3.1 to Crocs, Inc.’s Current Report  on Form 8-K, filed on July 12, 2007).                                                                                                                                                                                     |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.2                 |       | Amended and Restated  Bylaws of Crocs, Inc. (incorporated herein by reference to  Exhibit 4.2 to Crocs, Inc.’s Registration Statement on  Form S-8, filed on March 9, 2006 (File No. 333-132312).                                                                                                                                                                                           |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.1                 |       | Specimen common stock  certificate(incorporated herein by reference to Exhibit 4.2 to  Crocs, Inc.’s Amendment No. 4 to Registration Statement on  Form S-1, filed on January 19, 2006 (File No. 333-127526).                                                                                                                                                                               |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.1                |       | Second Amendment to  Revolving Credit and Security Agreement, dated as of September 30, 2010,  among Crocs, Inc., Crocs Retail, Inc., Crocs Online, Inc.,  Ocean Minded, Inc., Jibbitz, LLC, Bite, Inc. and PNC Bank, National  Association (incorporated herein by reference to Exhibit 10.1 to  Crocs, Inc.’s Current Report on Form 8-K, filed on October 4,  2010). |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 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††      |       | Certification of the Chief  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act.                                                                                                                                                                                                                                        |

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††                                    Filed herewith.

 

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**SIGNATURES**

 

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

 
|                         | CROCS, INC. |
|------------------------------|------------------|
|                         |             |   |
| Date: November 4,  2010 | By:              | /s/ Russell C. Hammer |
|                         |             | Name: | Russell C. Hammer |
|                         |             | Title: | *Chief  Financial Officer, Senior Vice President—Finance and Treasurer* |

 

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