8.	INCOME TAXES:

General overview:

The Company is subject to U.S. federal tax as well as income tax in multiple states and local and foreign jurisdictions. The Company’s 2004 through 2014 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).

For the year ended December 31, 2014, we recorded an income tax provision of $3.2 million compared to an income tax benefit of $(30.1) million and an income tax provision of $401 thousand in the years ended December 31, 2013 and 2012, respectively. The significant tax benefit recognized during 2013 related to the reversal of the majority of the valuation allowance provided against the carrying value of our deferred tax assets.

Deferred tax asset valuation allowance:

As of December 31, 2014, we had gross deferred tax assets of $28.7 million. Our deferred tax assets have arisen as a result of timing differences (primarily generated in connection with historical goodwill and intangible asset impairment charges), net operating loss carryforwards and tax credits. These assets represent amounts that we are able to use to reduce our future taxable income.

We maintained a valuation allowance of $1.5 million against the carrying value of our gross deferred tax attributes as of December 31, 2014 and 2013. Prior to December 31, 2013, we maintained a full valuation allowance on our deferred tax assets, reducing the carrying value of these assets on our balance sheet to zero.

We assess the realizability of our deferred tax assets and assess the need for a valuation allowance on an ongoing basis. The periodic assessment of the net carrying value of our deferred tax assets under the applicable accounting rules is highly judgmental. We are required to consider all available positive and negative evidence in evaluating the likelihood that we will be able to realize the benefit of our deferred tax assets in the future. Such evidence includes scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and the results of recent operations. Since this evaluation requires consideration of events that may occur some years into the future, there is significant judgment involved, and our conclusion could be materially different should certain of our expectations not transpire.

When assessing all available evidence, we consider the extent to which we have generated pre-tax income or losses over the most recent three-year period to be an important piece of objective evidence. Beginning in 2010, we maintained a full valuation allowance against our net deferred tax assets primarily due to the fact that we had essentially been in a cumulative pre-tax loss position over the most recent three-year period. While there had been a trend of positive evidence that had been strengthening in subsequent years, it was not sufficiently persuasive to outweigh the negative evidence provided by our cumulative pre-tax loss position. During the year ended December 31, 2013, we emerged from a cumulative three year pre-tax loss position, which removed this important piece of negative evidence from our evaluation.

Our assessment for the year ended December 31, 2013 considered the following positive and negative evidence. Based on this evidence, we concluded that it was more likely than not that we would generate sufficient pre-tax income in future periods to utilize substantially all of our deferred tax assets.

Positive Evidence:

We had generated U.S.-based pre-tax income of more than $8.2 million over the previous three years and had utilized some of our available tax assets to reduce tax liabilities that would have otherwise arisen in those periods.

The majority of our federal net operating loss carryforwards do not expire until 2020.

Our financial performance had continued to improve. We had reported steady growth in operating income over the previous three years and believed that our financial performance would continue to improve.

Our forecasts of future taxable income indicated that our pre-tax income and taxable income would increase in the future.

Negative Evidence:

In the absence of a cumulative loss in the previous three years, the remaining negative evidence consists of our accumulated deficit.

After consideration of this evidence, we determined that it was unlikely that the losses incurred prior to the year ended December 31, 2011 would be repeated and as a result, we did not place significant weight on the negative evidence provided by our pre-2011 losses.

We believed that our positive evidence was strong. The improved financial performance in previous years was an objectively verifiable piece of positive evidence and was the result of a number of factors that had been present to a greater or lesser extent in prior years but had only gathered sufficient weight during 2013 to deliver objectively verifiable, consistent taxable income.

In light of the fact that the majority of our federal NOLs expire in 2020, a key consideration in our analysis was the Company’s projections of future taxable income. In performing our analysis, we utilized the most updated plans and projections that we used to manage our underlying business and calculated the utilization of our deferred tax assets under a number of scenarios.

The Company, during its 2014 period assessment of the need for a valuation allowance against the carrying value of deferred tax assets, noted that the same historical positive and negative evidence contemplated in our 2013 analysis, in conjunction with the continued improvement in operating performance during 2014, provided the Company with strengthening positive evidence supporting that a full valuation allowance was not required.

Realization of our deferred tax assets is dependent on our generating sufficient taxable income in future periods. Although we believe it is more likely than not that future taxable income would be sufficient to allow us to recover substantially all of the value of our deferred tax assets, realization is not assured and future events could cause us to change our judgment. In the event that actual results differ from our estimates, or we adjust these estimates in the future periods, further adjustments to our valuation allowance may be recorded, which could materially impact our financial position and net income (loss) in the period of the adjustment.

Income tax provision (benefit):

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


	Year Ended December 31,
	2014			2013			2012
	(In Thousands)
Current tax expense:
Federal	$	-		$	-		$	-
State		377			234			263
Foreign		68			95			93

		445			329			356
Deferred tax expense (benefit):
Federal		2,092			5,088			1,178
State		709			748			173
Foreign		301			-			-
Change in valuation allowance		-			(36,226	)		(1,323	)

		3,102			(30,390	)		28
Unrecognized tax benefit		(370	)		(28	)		17

Income tax provision (benefit)	$	3,177		$	(30,089	)	$	401

The Company has not provided for U.S. income taxes on undistributed earnings of its foreign subsidiary because the Company considers such earnings to be indefinitely reinvested. In the event of distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes, subject to an adjustment, if any, for foreign tax credits, and foreign withholding taxes payable to certain foreign tax authorities. Determination of the amount of U.S. income tax liability that would be incurred is not practicable because of the complexities associated with this hypothetical calculation.

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


	Year Ended December 31,
	2014						2013						2012
	Amount			Rate			Amount			Rate			Amount			Rate
	(Dollar Amounts In Thousands)
Income tax at statutory rate	$	2,468			34.0	%	$	1,570			34.0	%	$	628			34.0	%
Add (deduct):
State income taxes, net of federal tax benefit		556			7.7			243			5.2			174			9.4
Tax rate difference on foreign income taxes		26			0.4			47			1.0			188			10.1
Tax effect of rate change on deferred tax assets		252			3.5			(169	)		(3.6	)		-			-
Non-deductible items		112			1.6			98			2.1			160			8.6
Net decrease in deferred tax attributes		183			2.5			4,370			94.6			516			27.9
Decrease in valuation allowance against certain deferred tax assets		-			-			(36,226	)		(784.3	)		(1,323	)		(71.6	)
Unrecognized tax benefits		(370	)		(5.1	)		(28	)		(0.6	)		17			0.9
Other, net		(50	)		(0.7	)		6			0.1			41			2.4

	$	3,177			43.9	%	$	(30,089	)		(651.5	)%	$	401			21.7	%

Deferred income taxes:

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, 2014 and 2013 are as follows:


	December 31,
	2014			2013
	(In Thousands)
Deferred income tax assets:
Net operating loss carryforwards and credits	$	17,539		$	19,552
Acquired intangible assets		6,444			7,543
Reserves and accruals		1,565			1,656
Share-based compensation		2,877			2,775
Depreciation		407			346

Total deferred income tax assets		28,832			31,872
Deferred income tax liabilities:
Acquired intangible assets		(18	)		(96	)
Other		(144	)		(4	)

Total deferred income tax liabilities		(162	)		(100	)
Valuation allowance		(1,500	)		(1,500	)

Deferred income tax asset, net	$	27,170		$	30,272

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


	December 31, 2014						December 31, 2013
	Current			Long-term			Current			Long-term
	(In Thousands)
Assets	$	1,265		$	27,677		$	1,238		$	30,625
Liabilities		(3	)		(269	)		(4	)		(87	)
Valuation allowance		(66	)		(1,434	)		(59	)		(1,441	)

Net deferred tax asset (liability)	$	1,196		$	25,974		$	1,175		$	29,097

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, 2014, we had tax affected net operating loss carryforwards for both federal and state income tax purposes of approximately $15.3 million and alternative minimum and worker’s opportunity credits of approximately $2.1 million, which expire at various intervals through 2030. However, $12.1 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.

Not included in the federal net operating loss carryforwards are $1.1 million of excess tax deductions from stock option exercises during fiscal 2014 and 2013. Pursuant to the guidance on accounting for stock-based compensation, the deferred tax asset relating to excess tax benefits from these exercises was not recognized for financial statement purposes. The future benefit from these deductions will be recorded as a credit to additional paid-in capital when taxes payable are reduced on the income tax return.

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 effected net operating loss carryforwards for state income tax purposes of approximately $1.1 million which expire at various intervals through 2034.

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


	Year Ended December 31,
	2014		2013			2012
	(In Thousands)
Balance, beginning of year	$	1,500	$	37,726		$	39,049
Additions		-		-			-
Reductions, net		-		(36,226	)		(1,323	)

Balance, end of year	$	1,500	$	1,500		$	37,726

Unrecognized tax benefits:

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,
	2014			2013			2012
	(In Thousands)
Gross unrecognized tax benefits, beginning of year	$	108		$	140		$	155
Increase in tax position in current year		-			-			-
Settlement/Expiration of statute		-			(32	)		(15	)
De-recognition through administrative policy		(99	)		-			-

Gross unrecognized tax benefits, end of year	$	9		$	108		$	140

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. As of December 31, 2014 and 2013, accrued interest and penalties was $49 thousand and $320 thousand, respectively.

As of December 31, 2014, the $9 thousand tax benefit, if recognized, would not have a material impact on our effective tax rate. We do not expect our unrecognized tax benefits to change significantly over the next twelve months.