Income Taxes

12 Months Ended

Dec. 31, 2012

Income Taxes [Abstract]

INCOME TAXES

9. INCOME TAXES:

The Company is subject to U.S. federal tax as well as income tax in multiple states, local and foreign jurisdictions. The Company’s 2004 through 2012 tax years are open and may be subject to examination by these taxing authorities. Such examinations, if any, could result in challenges to tax positions taken and, accordingly, we may record adjustments to our tax provision based on the outcome of such matters.

The Company has elected to recognize interest and penalties related to income tax matters as a part of the income tax provision (benefit).

Significant components of the Company’s income tax provision consisted of the following:

	Year Ended December 31,
	2012			2011			2010
	(In Thousands)
Current tax expense:
Federal	$	-		$	-		$	20
State		263			650			90
Foreign		93			57			98
		356			707			208
Deferred tax expense (benefit):
Federal		1,178			333			(930	)
State		173			49			(203	)
Foreign		-			-			360
Change in valuation allowance		(1,323	)		(324	)		21,881
		28			58			21,108
Unrecognized tax benefit		17			78			79
Income tax provision	$	401		$	843		$	21,395

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2012 and 2011 are as follows:

	December 31,
	2012			2011
	(In Thousands)
Deferred income tax assets:
Net operating loss carryforwards and credits	$	24,883		$	25,588
Acquired intangible assets		8,121			8,943
Reserves and accruals		2,149			2,779
Share-based compensation		2,438			1,938
Depreciation		268			160
Total deferred income tax assets		37,859			39,408
Deferred income tax liabilities:
Acquired intangible assets		(213	)		(405	)
Other		(6	)		(12	)
Total deferred income tax liabilities		(219	)		(417	)
Valuation allowance		(37,726	)		(39,049	)
Deferred income tax liability, net	$	(86	)	$	(58	)

Components of the net deferred tax assets (liabilities) reported in the accompanying consolidated balance sheets are as follows:

	December 31, 2012						December 31, 2011
	Current			Long-term			Current			Long-term
	(In Thousands)
Assets	$	1,119		$	36,610		$	2,401		$	37,162
Liabilities		(3	)		(86	)		(6	)		(566	)
Valuation allowance		(1,110	)		(36,616	)		(2,395	)		(36,654	)
Net deferred tax liability	$	6		$	(92	)	$	-		$	(58	)

The Company has recorded the current portion of the net deferred tax liability within prepaid expenses and other current assets and the long term portion within other liabilities on our consolidated balance sheets.

Significant deferred tax attributes and current activity within the Company’s deferred tax accounts included the following:

Net Operating Loss Carryforwards and Credits:    As of December 31, 2012, we had tax affected net operating loss carryforwards for federal income tax purposes of approximately $21.0 million and alternative minimum, worker’s opportunity and foreign tax credits of approximately $2.1 million, which expire at various intervals through 2030. However, $16.5 million of the Company’s federal net operating loss carryforwards and $1.0 million of worker’s opportunity tax credits are set to expire in 2020. Additionally, the Internal Revenue Code contains provisions that limit the amount of net operating loss and tax credit carryforwards available to be used in any given year in the event of certain circumstances, including significant changes in ownership interests. These limitations may result in the expiration of our historical net operating loss carryforwards and tax credits prior to their utilization. The Company has various tax affected net operating loss carryforwards for state income tax purposes of approximately $1.2 million which expire at various intervals through 2032.

Deferred tax liability:    The Company’s deferred tax liability is created by goodwill as a result of the Meridian Acquisition. In accordance with ASC 350, deferred tax liabilities resulting from the different treatment of goodwill for book and tax purposes cannot offset deferred tax assets in determining the valuation allowance. As a result, a deferred tax provision is required to recognize the tax effects of amortizing this goodwill for tax purposes. The deferred tax liability as a result of the goodwill associated with the Meridian Acquisition is $86 thousand and $58 thousand as of December 31, 2012 and 2011, respectively. For tax purposes, goodwill generated from the Meridian Acquisition amounted to $1.3 million and is deductible over a 15-year period.

Annual changes to the deferred tax valuation allowance are as follows:

	Year Ended December 31,
	2012			2011			2010
	(In Thousands)
Balance, beginning of year	$	39,049		$	39,373		$	17,492
Additions		-			-			21,881
Reductions, net		(1,323	)		(324	)		-
Balance, end of year	$	37,726		$	39,049		$	39,373

We have net deferred tax assets that have arisen primarily as a result of timing differences, net operating loss carryforwards and tax credits.

Our ability to realize a deferred tax asset is based on our ability to generate sufficient future taxable income within the applicable carryforward period and subject to any applicable limitations. We assess, on a routine periodic basis, the estimated future realizability of the gross carrying value of our net deferred tax assets on a more likely than not basis. Our periodic assessments take into consideration both positive evidence (future profitability projections for example) and negative evidence (accumulated deficit position and essentially breakeven operating results on a trailing three-year basis) as it relates to evaluating the future recoverability of our deferred tax assets.

During the third quarter of 2010, in connection with such a review, we recorded a non-cash charge of $21.9 million in connection with an increase to the previously established valuation allowance recorded against the gross carrying value of our deferred tax assets. Subsequent to this adjustment, the recorded valuation allowance represents a full valuation reserve against the total gross carrying value of our net deferred tax assets.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against the deferred tax assets. The Company’s historical financial performance and, to a lesser extent, forecasts and projections were key measurements utilized in our review. As of December 31, 2009 and through the period ended June 30, 2010, the Company recorded an income tax benefit. At those times management determined that the recovery of the deferred tax assets were considered more likely than not, primarily due to positive evidence in the form of historical earnings adjusted for items of a non-recurring nature that would not be indicative of our future operations and projected taxable income. However, as a result of operating loss in the quarter ended September 30, 2010, our assessment of our adjusted and cumulative loss positions, and uncertainty as to the timing of profitability in future periods, we recorded a full valuation allowance against our deferred tax assets during the quarter ended September 30, 2010, as we determined that it was not more than likely that the Company would be able to fully realize future economic benefit from its deferred tax assets.

During 2012, we continued, on a routine periodic basis, to evaluate the future recoverability of our deferred tax assets. In our periodic assessments of positive evidence (improved financial performance and profitability) and negative evidence (accumulated deficit position and essentially breakeven operating results on a trailing three-year basis), we concluded that it was not more than likely that the Company would be able to fully realize future economic benefit from our deferred tax assets and accordingly, continue to apply a full valuation allowance against our deferred tax attributes as of December 31, 2012.

Valuation allowances have been established for U.S. and certain foreign deferred tax assets, which we believe do not meet the “more likely than not” criteria for recognition. If we are subsequently able to utilize all or a portion of the deferred tax assets for which a valuation allowance has been established, then we may be required to recognize these deferred tax assets through the reduction of the valuation allowance which could result in a material benefit to our results of operations in the period in which the benefit is determined.

The establishment of a full valuation allowance against the gross carrying value of our net deferred tax assets does not prohibit or limit the Company’s ability to realize a tax benefit in future periods. All existing deferred tax assets, net operating loss carryforwards and credits will be fully available to reduce certain future federal and state income tax obligations.

The differences in income taxes determined by applying the statutory federal tax rate of 34% to income (loss) from continuing operations before income taxes and the amounts recorded in the accompanying consolidated statements of comprehensive income (loss) result from the following:

	Year Ended December 31,
	2012						2011						2010
	Amount			Rate			Amount			Rate			Amount			Rate
	(Dollar Amounts In Thousands)
Income tax at statutory rate	$	628			34.0	%	$	404			34.0	%	$	(740	)		34.0	%
Add (deduct):
State income taxes, net of federal tax benefit		174			9.4			435			36.6			60			(2.7	)
Tax rate difference on foreign income taxes		188			10.1			222			18.7			(54	)		2.4
Non-deductible transaction costs, intangible assets and goodwill amortization charges and other permanent items		676			36.5			76			6.5			79			(3.6	)
Increase (decrease) in valuation allowance against certain deferred tax assets		(1,323	)		(71.6	)		(324	)		(27.3	)		21,881			(1005.2	)
Unrecognized tax benefits		17			0.9			78			6.6			79			(3.6	)
Other, net		41			2.4			(48	)		(4.1	)		90			(4.1	)
	$	401			21.7	%	$	843			71.0	%	$	21,395			(982.8	)%

In accordance with our evaluation of unrecognized tax benefits, we have established a liability representing our estimated amount of unrecognized tax benefits, plus an additional provision for penalties and interest. A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:

	Year Ended December 31,
	2012			2011			2010
	(In Thousands)
Gross unrecognized tax benefits at beginning of year	$	155		$	203		$	155
Increases in tax positions in the current year		-			-			48
Settlements		(15	)		(48	)		-
Gross unrecognized tax benefits at end of year	$	140		$	155		$	203

The Company’s policy is to recognize accrued interest and penalties related to unrecognized tax benefits and income tax liabilities, when applicable, as part of income tax expense in its consolidated statements of comprehensive income (loss). As of December 31, 2012 and 2011, accrued interest and penalties was $316 thousand and $285 thousand, respectively.

As of December 31, 2012, the $140 thousand tax benefit, if recognized, would reduce our effective tax rate. We do not expect our unrecognized tax benefits to change significantly over the next twelve months.