Note 10 - Income Taxes

12 Months Ended

May 27, 2012

Income Tax Disclosure [Text Block]

10.          Income Taxes

The provision for income taxes consisted of the following (in thousands):

	Year ended			Year ended			Year ended
	May 27, 2012			May 29, 2011			May 30, 2010
Current:
Federal	$	4,597		$	881		$	844
State		(586	)		176			170
Foreign		56			—			—
Total		4,067			1,057			1,014
Deferred:
Federal		2,641			3,140			3,186
State		477			(16	)		62
Total		3,118			3,124			3,248
Income tax expense	$	7,185		$	4,181		$	4,262

The actual provision for income taxes differs from the statutory U.S. federal income tax rate as follows (in thousands):

	Year Ended  May 27, 2012			Year Ended  May 29, 2011			Year Ended  May 30, 2010
Provision at U.S. statutory rate (1)	$	6,958		$	2,835		$	2,886
State income taxes, net of federal benefit		451			213			217
Goodwill impairment charge		—			1,849			—
Change in valuation allowance		1			(7	)		390
Tax-exempt interest		(40	)		(115	)		(209	)
Tax credit carryforwards		(368	)		(637	)		(102	)
Transaction Costs		322			—			982
Domestic Manufacturing Deduction		(208	)		—			—
Other		69			43			98
Total	$	7,185		$	4,181		$	4,262

(1) Statutory rate was 35% for fiscal years 2012, 2011 and 2010.

The increase in the income tax expense in fiscal year 2012 compared to fiscal year 2011 is due to a 187% increase in taxable income partially offset by a decrease in the Company’s effective tax rate to 36% down from 52% in fiscal year 2011, the increase in taxable income over prior year is attributable to a 140% increase in net income before taxes.  The decrease in the income tax expense in fiscal year 2011 compared to fiscal year 2010 is due to a 2% decrease in taxable income partially offset by an increase in the Company’s effective tax rate to 52% in fiscal year 2011 up from 51% in fiscal year 2010.

The effective tax rates for fiscal year 2012 differ from the statutory federal income tax rate of 35 percent as a result of several factors, including state taxes, non-deductible stock-based compensation expense, tax exempt interest, domestic manufacturing deduction and the benefit of federal and state research and development credits and accounting for transaction costs associated with the GreenLine acquisition in fiscal year 2012.  The effective tax rates for fiscal year 2011 differ from the statutory federal income tax rate of 35 percent as a result of several factors, including state taxes, non-deductible stock-based compensation expense, tax exempt interest and the goodwill impairment charge.  In addition to the above, the Company was able to further reduce the effective tax rate for fiscal

year 2011 as a result of being a recipient of a therapeutic drug credit award and the extension of the federal research and development credit. The effective tax rates for the fiscal year 2010 differ from the statutory federal income tax rate of 35 percent as a result of several factors, including state taxes, non-deductible stock-based compensation expense, tax exempt interest and accounting for transaction costs associated with the Lifecore acquisition in fiscal year 2010.

Significant components of deferred tax assets and liabilities consisted of the following (in thousands):

	May 27, 2012			May 29, 2011
Deferred tax assets:
Net operating loss carryforwards	$	3,954		$	6
Research and AMT credit carryforwards		328			892
Accruals and reserves, not currently deductible for tax		2,191			627
Stock-based compensation		981			837
Other		428			396
Gross deferred tax assets		7,882			2,758
Valuation allowance		(419	)		(383	)
Net deferred tax assets		7,463			2,375
Deferred tax liabilities:
Basis difference in trading securities		(2,510	)		(253	)
Depreciation and amortization		(5,575	)		(4,293	)
Goodwill and other indefinite life intangibles		(15,339	)		(8,625	)
Deferred tax liabilities		(23,424	)		(13,171	)
Net deferred tax (liabilities) assets	$	(15,961	)	$	(10,796	)

Valuation allowances are reviewed each period on a tax jurisdiction by jurisdiction basis to analyze whether there is sufficient positive or negative evidence to support a change in judgment about the realizability of the related deferred tax assets. Based on this analysis and considering all positive and negative evidence, we determined that a valuation allowance of $419,000 and $383,000 as of May 27, 2012 and May 29, 2011, respectively, should be recorded as a result of a book impairment loss on the Company’s investment in Aesthetic Sciences as it is more likely than not that a portion of the deferred tax asset will not be realized in the foreseeable future.  The valuation allowance increase of $36,000 from the prior year was due to a change in the Company’s apportionment.

As of May 27, 2012, the Company had federal, California and other state net operating loss carryforwards of approximately $9.3 million, $6.1 million and $12.2 million, respectively.  These losses expire in different periods through 2031, if not utilized.  Such net operating losses consist of excess tax benefits from employee stock option exercises and have not been recorded in the Company’s deferred tax assets. The Company will record approximately $6.1 million of the gross California net operating loss as a credit to additional paid in capital as and when such excess tax benefits are ultimately realized.  The Company acquired additional net operating losses through the acquisition of GreenLine. Utilization of these acquired  net operating losses in a specific year is limited due to the “change in ownership” provision of the Internal Revenue Code of 1986 and similar state provisions. The net operating losses presented above for federal and state purposes is net of any such limitation.

The Company also had federal and state research and development tax credits carryforwards of approximately $2.2 million and $800,000, respectively.  The research and development tax credit carryforwards expire in different periods through 2032 for federal purposes and have an unlimited carryforward period for state purposes.  The Company also has a federal therapeutic drug tax credit carryforward of $244,000 that will expire in 2030.  Furthermore, the Company has federal alternative minimum tax credits of approximately $900,000 that can be carried forward indefinitely. Certain tax credit carryovers are attributable to excess tax benefits from employee stock option exercises and have not been recorded in the Company’s deferred tax assets. The Company will record $3.3 million of the above Federal credit and $188,000 of the gross California credit will be recorded to additional paid in capital as and when such excess tax benefits are ultimately realized.

The accounting for uncertainty in income taxes recognized in an enterprise’s financial statements prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and the derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

	As of
	May 27, 2012			May 29, 2011			May 30, 2010
Unrecognized tax benefits – beginning of the period	$	760		$	868		$	619
Gross increases – tax positions in prior period		1			280			138
Gross decreases – tax positions in prior period		(1	)		(310	)		(203	)
Gross increases – current-period tax positions		246			75			332
Settlements		—			—			(18	)
Lapse of statute of limitations		(240	)		(153	)		—
Unrecognized tax benefits – end of the period	$	766		$	760		$	868

The unrecognized tax benefits at May 27, 2012, May 29, 2011 and May 30, 2010 were $766,000, $760,000 and $868,000, of which $593,000, $601,000 and $708,000, respectively, will impact the effective tax rate.  The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes.  The total amount of penalties and interest is not significant as of May 27, 2012. Additionally, the Company expects its unrecognized tax benefits related to the expiration of tax attributes to change by $8,000 within the next 12 months.

Due to tax attribute carryforwards, the Company is subject to examination for tax years 1997 and later for U.S. tax purposes. The Company was also subject to examination in various state jurisdictions for tax years 1998 and later, none of which were individually material.