PART II.
OTHER INFORMATION
ITEM 1.
Legal
Proceedings
On March 31, 2006, we filed a complaint with the
International Trade Commission against 11 companies alleging infringement on
certain of our utility and design patents that were issued on February 7,
2006 and March 28, 2006 by the United States Patent and Trademark Office. The
complaint alleges patent and trade dress infringement and seeks an exclusion
order banning the importation of infringing products.
On April 3, 2006, we filed a complaint in the United
States District Court for the District of Colorado against 11 companies
alleging infringement on certain of our utility and design patents that were
issued on February 7, 2006 and March 28, 2006 by the United States Patent and
Trademark Office. The complaint alleges patent and trade dress infringement and
seeks injunctive relief as well as monetary damages. A counterclaim has been
filed by one defendant in the United States District Court for the District of
Colorado seeking a declaratory judgment of non-infringement, a declaratory
judgment that our patents are not valid, and a declaratory judgment that our
patents are not enforceable. These claims have also been raised as defenses in
the International Trade Commission action.
In June 2006, we settled all of our intellectual
property infringement claims against three of the defendants named in our
complaints with the International Trade Commission and in the United States
District Court for the District of Colorado. In each settlement, the defendant
agreed to cease infringement on our intellectual property rights, and we
released the defendant and its customers of any liability for past
infringement.
On June 15, 2006, Aspen Licensing International, Inc.
filed a complaint against us in the United States District Court for the
District of Massachusetts, alleging that, because we have named one of our
models the Aspen and used such intellectual property in our products, we are
infringing upon Aspen Licensing's trademark rights, and that we have committed acts
of false designation of origin, trademark dilution, unfair competition and
unfair or deceptive trade practices. Aspen Licensing is seeking injunctive
relief as well as monetary damages. We are currently evaluating the claims made
by Aspen Licensing and are considering our response.
Although we are subject to
litigation from time to time in the ordinary course of our business, we are not
party to any pending legal proceedings that we believe will have a material
adverse impact on our business.
ITEM 1A.
Risk
Factors
Our Annual Report on Form 10-K for the year
ended December 31, 2005 and our most recent Registration Statement on From
S-1 filed with the Securities and Exchange Commission on August 7,
2006, contain risks which could
materially affect our business, financial condition or future results. The
risks described in these documents are not the only risks we face. Additional
risks and uncertainties not currently known to us or that we currently deem to
be immaterial also may materially adversely affect our business, financial
condition and/or operating results. The risk factors included in Part I of
the section entitled Item 1A Risk Factors in our Annual Report on Form 10-K
for the year ended December 31, 2005 have not materially changed other
than as set forth below.
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If we are unable to establish and protect our
trademarks and other intellectual property rights, we may be unable to use the
crocs name or logo, and competitors may sell products that are substantially
similar to our crocs footwear, or may produce counterfeit versions of our
products, and such competing or counterfeit products could divert sales and may
damage our brand image.
We believe our trademarks, trade names,
copyrights, trade secrets, issued and pending patents, trade dress and designs
are valuable and integral to our success and competitive position. From time to
time, we have identified competitors selling products that are very similar in
design to certain of our Crocs footwear models, and that are manufactured from
what may be comparable materials to our products. We believe that some of these
products may infringe our intellectual property rights. Given the increased
popularity of our Crocs brand, we believe there is a high likelihood that
counterfeit products or other products infringing on our intellectual property
rights will continue to emerge, seeking to benefit from the consumer demand for
Crocs footwear. In order to protect our brand, we may be required to spend
significant resources to monitor and police our intellectual property rights.
We may not be able to detect infringement and may lose our competitive position
in the market before we are able to do so. In addition, enforcing rights to our
intellectual property may be difficult and expensive, and we may not be
successful in combating counterfeit products and stopping infringement of our
intellectual property rights, particularly in some foreign countries, which
could make it easier for competitors to capture market share. Intellectual
property rights may also be unavailable or limited in the United States and
some foreign countries. Furthermore, our efforts to enforce our trademark and
other intellectual property rights may be met with defenses, counterclaims and
countersuits attacking the validity and enforceability of our trademark and
other intellectual property rights. For example, our attempts to register Crocs
and our Crocs logo as trademarks have been challenged by a large apparel
company, and certain jurisdictions have rejected our attempted registration of
our logo as a trademark based upon such challenge and based upon trademarks
owned by the same company and at least one other large apparel company. If we
are unsuccessful in protecting and enforcing our intellectual property rights,
or if we were required to change our name or use a different logo, continued
sales of such competing products by third parties could harm our brand and
adversely impact our business, financial condition and results of operations.
Similarly, in our enforcement litigation against manufacturers of knock-off
products, at least one manufacturer has alleged counterclaims challenging the
validity and enforceability of our patents and we expect that other defendants
in the litigation may assert similar claims.
We have registered crocs as a trademark
for footwear in Aruba, Australia, the European Union, Israel, Japan, Mexico,
Netherlands Antilles, New Zealand, Panama, Turkey and the World Intellectual
Property Office. As of July 31, 2006, we have also applied to register Crocs
and the Crocs logo as trademarks in 43 jurisdictions around the world,
including the U.S., but such applications have not been approved and are
currently pending. In addition, we have recently extended the scope of our
trademark registrations and applications for both the Crocs mark and logo to
cover non-footwear products such as sunglasses, goggles, knee pads, watches,
luggage, and some of our Internet sales activities. Although we believe that we
have applied for trademark registrations in all jurisdictions where we are
doing or intend to do business, there is a possibility that we have not applied
to register the Crocs mark, the company logos, the individual brand names for
our products or our marketing slogans in countries where we will do business in
the future, and we have elected not to apply for trademark registrations for
some marks in some jurisdictions. Furthermore, we may not obtain trademark
registrations in connection with any applications that we do file and trademark
protection, whether registered or common law, may not be available in every
country in which we offer or intend to offer our products. Failure to
adequately protect our trademark rights could damage or even destroy our Crocs
brand, expose us to trademark liability and impair our ability to compete
effectively. In addition, defending or enforcing our trademark rights could
result in the expenditure of significant financial and managerial resources.
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We believe our success may be enhanced by
our ability to obtain and enforce patent protection for our products, and
therefore have elected to pursue patent protection for our products in the U.S.
and other countries. Currently, we have been issued one Community Design
Registration and three Community Multiple Design Registrations in the European Union
covering a total of ten shoe designs. Additional shoe design applications have
received registrations in Australia, Brazil, China, Hong Kong, India, Israel,
Japan, Singapore, South Africa, and South Korea, and we have been issued one
utility patent and four design patents in the U.S., but we have not been
granted any other utility patents or design patents in the U.S. or any utility
patents in other countries. We do not know whether any of our pending or future
patent applications will result in the issuance of patents, and competitors may
challenge the validity or scope of our issued patents, or our registered
designs or patent applications that proceed to issuance. We cannot predict how
the patent claims in our issued patents, or any patents issued from any pending
or future patent application, will be construed, and such patents may not
provide us with the ability to prevent the development, manufacturing, and/or
marketing of competing products, or may be challenged by third parties on the
basis of validity and enforceability.
We also rely on trade secrets, confidential information and
other unpatented proprietary information, related to, among other things, the
formulation of croslite and product development, especially where we do not
believe patent protection is appropriate or obtainable. Using third party
manufacturers may increase risk of misappropriation of our trade secrets,
confidential information and other unpatented proprietary information. The
agreements we use to try to protect our intellectual property, confidential
information and other unpatented proprietary information may not effectively
protect such intellectual property and information and may not be sufficient to
prevent unauthorized use or disclosure of such trade secrets and information. A
party to one of these agreements may breach the agreement and we may not have
adequate remedies for such breach. As a result, our trade secrets, confidential
information and other unpatented proprietary information may become known to
others, including our competitors. Furthermore, as with any trade secret,
confidential information or other proprietary information, others, including
our competitors, may independently develop or discover such trade secrets and
information, which would render them less valuable to us.
Third parties may claim that we are infringing their
intellectual property rights, and such claims may be costly to defend, may
require us to pay licensing fees, damages, or other amounts, and may prevent,
or otherwise impose limitations on, the manufacture, distribution or sale of
our products.
From time to time, third
parties may claim that we are infringing on their intellectual property rights,
and we may be found to infringe those intellectual property rights. While we do
not believe that any of our products infringe the valid intellectual property
rights of third parties, we may be unaware of the intellectual property rights
of others that may cover some of our technology or products. If we are forced
to defend against such third party claims, whether or not such claims are
resolved in our favor, we could encounter expensive and time consuming
litigation which could divert our management and key personnel from business
operations. For example, one company has filed a lawsuit against us claiming
that our Aspen model infringes upon its trademark rights, and that by using the
Aspen name and intellectual property we have committed acts of false
designation of origin, trademark dilution, unfair competition and unfair or
deceptive trade practices. If we are found to be infringing on the intellectual
property rights of this company or others, we may be required to pay damages or
ongoing royalty payments, or comply with other unfavorable terms. Additionally,
if we are found to be infringing on the intellectual property rights of this
company or others, we may not be able to obtain license agreements on terms
acceptable to us, and this may prevent us from manufacturing, marketing or
selling our products. Thus, such third party claims may significantly reduce
the sales of our products or increase our cost of goods sold. Any such
reductions in sales or cost increases could be significant, and could have a
material and adverse affect on our business.
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We conduct, and in the future expect to conduct, a
significant portion of our activities outside the U.S., and therefore we are
subject to the risks of international commerce.
We use third party
manufacturers located in foreign countries, we operate manufacturing facilities
located in Canada and Mexico, and we sell our products to retailers outside of
the U.S. Foreign manufacturing and sales activities are subject to numerous
risks, including the following:
·
tariffs,
import and export controls and other non-tariff barriers such as quotas and
local content rules;
·
increased
transportation costs due to distance, energy prices or other factors;
·
delays
in the transportation and delivery of goods due to increased security concerns;
·
foreign
currency fluctuations, for which we do not currently engage in any material
hedging transactions;
·
restrictions
on the transfer of funds;
·
changing
economic conditions;
·
restrictions,
due to privacy laws, on the handling and transfer of consumer and other
personal information;
·
changes
in governmental policies and regulations;
·
political
unrest, terrorism or war, any of which can interrupt commerce;
·
expropriation
and nationalization;
·
difficulties
in managing foreign operations effectively and efficiently from the U.S.; and
·
difficulties
in understanding and complying with local laws, regulations and customs in
foreign jurisdictions.
Furthermore, our manufacturing activity outside of the
U.S., including the production of our products by third party manufacturers, is
subject to risks of poor infrastructure, shortages of equipment, and labor
unrest, in addition to those risks noted above. Once our products are
manufactured, we may also suffer delays in distributing our products due to
work stoppages, strikes or lockouts at the ports where our products arrive.
Such labor disruptions could result in product shortages and delays in
distributing our products to retailers. These factors and the failure to
properly respond to them could make it difficult to obtain adequate supplies of
quality products when we need them, resulting in reduced sales and harm to our
business.
In addition, during 2005,
we generated approximately $12.9 million, or 11.9% of our revenues outside
of the U.S., and in the three months ended June 30, 2006, we generated
approximately $27.7 million, or 32.3% of our revenues outside of the U.S.,
and we expect to expand our international sales and marketing operations in the
future. Our ability to capitalize on growth in new international markets and to
maintain the current level of operations in our existing international markets
is subject to risks associated with international sales operations, as noted
above, as well as the difficulties associated with promoting products in
unfamiliar cultures.
Acquisitions may be difficult to identify and
successfully integrate into our business and could have other adverse
consequences.
We have made, and may in the future make, acquisitions
of, or investments in, other companies. For example, in June 2004, we
acquired Foam Creations, and in April 2005, we acquired the manufacturing
30
operations of a footwear
producer in Mexico. We expect to consider other opportunities to acquire or
make investments in other businesses and products that could enhance our
manufacturing capabilities, complement our current products or expand the
breadth of our markets or customer base. The pursuit of acquisitions may divert
the attention of management and cause us to incur various expenses in
identifying, investigating and pursuing suitable acquisitions, whether or not
they are consummated. In the event we finance acquisitions by issuing equity or
convertible debt securities, our stockholders may be diluted.
In addition, we
have limited experience in acquiring other businesses. If we acquire additional
businesses, we may not be able to integrate the acquired operations
successfully with our business or effectively manage the combined business
following completion of the acquisition. We may also not achieve the
anticipated benefits from the acquired business due to any of the following
factors:
·
unanticipated
costs associated with the acquisition;
·
diversion
of managements attention from our core business;
·
harm
to our existing business relationships with manufacturers and customers as a
result of the acquisition;
·
the
potential loss of key employees; or
·
risks
associated with entering new product lines or markets in which we have little
or no prior experience.
If we are unable to
integrate any new business successfully, we could be required either to dispose
of the acquired operations or to undertake changes to the acquired operations
in an effort to integrate them with our business. If we experience any of the
difficulties noted above, our business and financial condition could be
materially and adversely affected.
We may be adversely affected by currency exchange rate
fluctuations.
We purchase products and
supplies from third parties in U.S. dollars and receive payments from certain
of our international customers in foreign currencies. The cost of these
products and supplies sourced overseas, and payments received from customers,
may be affected by changes in the value of the relevant currencies. Price
increases caused by currency exchange rate fluctuations could make our products
less competitive or have an adverse effect on our profitability. Currency
exchange rate fluctuations could also disrupt the business of the third-party
manufacturers that produce our products by making their purchases of raw
materials more expensive and more difficult to finance. Foreign currency
fluctuations could have a material adverse effect on our results of operations
and financial condition.
ITEM 2.
Unregistered
Sales of Equity Securities and Use of Proceeds
Use of Proceeds
from Sale of Registered Securities
On February 13, 2006,
we completed the initial public offering of our common stock pursuant to a
Registration Statement on Form S-1 (File No. 333-127526) that was
declared effective by the Securities and Exchange Commission on February 7,
2006. The initial public offering resulted in proceeds to us of $94.5 million,
net of underwriters fees and commissions and related offering costs of $2.5
million. As of June 30, 2006, we used $12.0 million of the net
proceeds from the offering to pay down debt, $6.9 million of the net proceeds
for capital expenditures related to increasing our manufacturing capacity and
improving our infrastructure, and to expand and upgrade our existing
information technology systems, and $14.7 million to fund the working
capital needs associated with rapid growth. We intend to use the remaining net
proceeds for the ongoing development of our global infrastructure, facility
upgrades, marketing and advertising, and working capital and other general
corporate purposes. In addition, we may
31
use a
portion of the remaining proceeds to acquire products or businesses that are
complimentary to our own.
ITEM
6.
Exhibits
Exhibit Number
|
|
Description
|
3.1**
|
|
Restated Certificate of Incorporation of
Crocs, Inc.
|
3.2**
|
|
Amended and Restated
Bylaws of Crocs, Inc.
|
4.1*
|
|
Specimen common stock
certificate.
|
10.38@
|
|
2006 Executive Incentive
Bonus Plan.
|
31.1
|
|
Certification of the
Chief Executive Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934 as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act.
|
31.2
|
|
Certification of the
Chief Financial Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934 as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act.
|
32.1
|
|
Certification of the
Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act.
|
32.2
|
|
Certification of the
Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act.
|
*
Incorporated
herein by reference to Crocs, Inc.s Registration Statement on Form S-1
(File No. 333-127526).
**
Incorporated by
reference to Crocs, Inc.s Registration Statement on Form S-8, filed
on March 9, 2006 (File NO. 333-132312).
@
Management contract
or compensatory plan or arrangement.
32