Commitments and Contingencies

6 Months Ended

Jun. 30, 2011

Commitments and Contingencies

Commitments and Contingencies

(9) Commitments and Contingencies

The Company is currently involved in various legal claims arising from the ordinary course of business. Management does not believe that the disposition of these matters will have a material effect on the Company’s financial position or results of operations. In addition, the Company has agreed to indemnify certain of its licensees, distributors and promotional partners in connection with claims related to the use of the Company’s intellectual property. The terms of such agreements range up to five years initially and generally do not provide for a limitation on the maximum potential future payments. Management believes the likelihood of any payments is remote and would be immaterial. The Company determined the risk was low based on a prior history of insignificant claims. The Company is not currently involved in any indemnification matters in regards to its intellectual property.

The Company filed a lawsuit against counterfeit websites asking the court to issue a temporary restraining order to freeze the payment provider accounts and assign over the domains.  In February 2011, the Company filed a guarantee in the amount of $500.  Performance of the guarantee is required by the Company in the event that a defendant proves that the restraining order should not have been issued.  As of June 30, 2011, the Company determined the risk of payment is low.  The guarantee will be in place for the duration of the lawsuit which is anticipated to be resolved within the year.

The Company’s federal income tax returns for the years ended December 31, 2006 through December 31, 2009 are under examination by the Internal Revenue Service (IRS).  In connection with the examination, the Company has received notices of proposed adjustments (NOPAs), which the Company agreed with and recorded in its financial statements.  In addition, in March 2011, the Company received a NOPA related to transfer pricing arrangements with the Company’s subsidiaries in which adjustments were asserted totaling approximately $55,000 of additional taxable income, representing additional federal taxes and penalties of approximately $27,000, excluding interest.  The Company responded to this NOPA indicating that it disagrees with the proposed adjustments and will appeal the NOPA if the Company is unable to reach a resolution at the exam level.  The Company does not know the timing of completion of the examination or if the examination will result in a material effect to the Company’s condensed consolidated financial statements.  It is reasonably possible that the Company’s unrecognized tax benefit could change, however, the Company believes its unrecognized tax benefits are adequate.

Although the Company believes its tax estimates are reasonable and prepares its tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audits, and any related litigation, could be materially different from the Company’s estimates or from its historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on operating results or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, or interest assessments.

The Company has on-going income tax examinations under various state tax jurisdictions.  It is the opinion of management that these audits and inquiries will not have a material impact on the Company’s condensed consolidated financial statements.

In March 2011, the Company entered into contracts requiring minimum purchase commitments of sheepskin that Deckers’ affiliates, manufacturers, factories and other agents (each or collectively, a “Buyer”) must make on or before July 31, 2011.  As of June 30, 2011, the remaining commitment was approximately $19,000.  These contracts may result in unconditional purchase obligations if a Buyer does not meet the minimum purchase requirements. In the event that a Buyer does not purchase such minimum commitments on or before July 31, 2011, the Company is required to make a deposit for the remaining amounts, plus cash not yet received from a Buyer on pending orders, on or before July 31, 2011.  Such deposit shall be refundable upon receipt of payment by Buyers for such amounts.  The contract does not permit net settlement.  The Company expects sheepskin purchases by third party factories will eventually exceed the contract levels; however, subsequent to June 30, 2011, the Company believes it will be required to make a deposit for the remaining commitment, plus cash not yet received from a Buyer on pending orders, of approximately $23,000 under this contractual arrangement.  Management believes this deposit will become fully refundable and, therefore, would have an immaterial effect on the condensed consolidated statement of operations.  The Company determined this based upon its projected sales and inventory purchases.

Subsequent to June 30, 2011, the Company entered into a new sheepskin purchase agreement for a total minimum commitment of approximately $40,000, whereby the Company will make an advance deposit of $20,000, for purchases targeted to be made by a Buyer between July 1, 2011 and January 31, 2012 under this contract.  The advance deposit shall be repaid to the Company as Buyers purchase goods under the terms of this agreement.  This agreement may result in an unconditional purchase obligation if a Buyer does not meet the minimum purchase requirements.  In the event that a Buyer does not purchase such minimum commitments, the Company shall be responsible for compliance with any and all minimum purchase commitments under this contract.  The contract does not permit net settlement. The Company expects sheepskin purchases by third party factories will eventually exceed the contract levels.  Therefore, management believes the likelihood of any non-performance payments under this contractual arrangement is remote and would have an immaterial effect on the statement of operations.  The Company determined this based upon its projected sales and inventory purchases.