15.INCOME TAXES

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



YEAR ENDED
AUGUST 31,		2013		2012		2011
Current:
Federal	$	1,251	$	-	$	-
State		273		228		204
Foreign		3,256		2,553		1,643
		4,780		2,781		1,847

Deferred:
Federal		5,176		1,311		(430)
State		(414)		(3)		(149)
Foreign		(151)		(269)		45
Benefit of foreign tax credit
carryforward		(5,404)		(2,677)		(3,788)
Utilization of net loss carryforwards		189		4,763		6,012
Provision resulting from the allocation
of certain tax items directly to
contributed capital		903		-		102
		299		3,125		1,792
	$	5,079	$	5,906	$	3,639

The allocation of the total income tax provision is as follows (in thousands):



YEAR ENDED
AUGUST 31,		2013		2012		2011
Net income	$	5,079	$	5,906	$	3,639
Other comprehensive income		(260)		(73)		310
	$	4,819	$	5,833	$	3,949

Income before income taxes consisted of the following (in thousands):



YEAR ENDED
AUGUST 31,		2013		2012		2011
United States	$	14,939	$	11,006	$	7,438
Foreign		4,459		2,741		1,008
	$	19,398	$	13,747	$	8,446

The differences between income taxes at the statutory federal income tax rate and the consolidated income tax rate reported in our consolidated income statements were as follows:


YEAR ENDED AUGUST 31,	2013	2012	2011
Federal statutory income tax rate	35.0%	35.0%	35.0%
State income taxes, net of federal effect	1.6	2.7	3.7
Foreign jurisdictions tax differential	1.0	1.8	0.3
Tax differential on income subject to both U.S. and foreign taxes	(3.3)	(3.4)	(5.7)
Effect of claiming foreign tax credits instead of deductions for prior years	(12.2)	-	-
Uncertain tax positions	1.8	3.2	3.7
Management stock loan interest and non-deductible expenses	1.3	2.2	3.6
Non-deductible executive compensation	0.9	1.4	1.3
Non-deductible meals and entertainment	0.8	0.9	1.5
Other	(0.7)	(0.8)	(0.3)
	26.2%	43.0%	43.1%

In prior fiscal years, we elected to take deductions on our U.S. federal income tax returns for foreign income taxes paid, rather than claiming foreign tax credits. During those years we either generated or used net operating loss carryforwards and were therefore unable to utilize foreign tax credits. In fiscal 2011 we began claiming foreign tax credits on our U.S. federal income tax returns. Although we could not utilize the credits we claimed for fiscal 2012 and fiscal 2011 in those respective years, we concluded it was more likely than not that these foreign tax credits will be utilized in the future. As of August 31, 2013, we have no remaining U.S. federal net operating loss carryforwards. Additionally, overall U.S. taxable income and foreign source income for fiscal 2013 are sufficient to utilize all of the foreign tax credits generated in during the fiscal year, plus additional credits generated in prior years. Accordingly, we plan to amend our U.S. federal income tax returns from fiscal 2003 through fiscal 2007 to claim foreign tax credits instead of foreign tax deductions. The net tax benefit resulting from claiming these additional foreign tax credits totaled $2.4 million in fiscal 2013.

We accrued taxable interest income on outstanding management common stock loans (Note 11). Consistent with the accounting treatment for these loans, we did not recognize interest income, thus resulting in a permanent book versus tax difference. We also recognized expenses during fiscal 2013 in connection with the resolution of the management stock loans, which were not deductible for income tax purposes.

The significant components of our deferred tax assets and liabilities were comprised of the following (in thousands):



YEAR ENDED
AUGUST 31,		2013		2012
Deferred income tax assets:
Sale and financing of corporate
headquarters	$	10,289	$	10,953
Foreign income tax credit
carryforward		5,423		6,205
Deferred compensation		2,405		2,296
Bonus and other accruals		1,430		1,399
Unearned revenue		2,257		1,188
Inventory and bad debt reserves		731		746
Other		1,089		1,372
Total deferred income tax assets		23,624		24,159
Less: valuation allowance		-		-
Net deferred income tax assets		23,624		24,159

Deferred income tax liabilities:
Intangibles step-ups – indefinite lived		(8,418)		(8,667)
Intangibles step-ups – definite lived		(7,580)		(8,371)
Property and equipment depreciation		(4,290)		(4,822)
Intangible asset impairment and
amortization		(4,614)		(4,919)
Unremitted earnings of foreign
subsidiaries		(428)		(582)
Other		(63)		(142)
Total deferred income tax liabilities		(25,393)		(27,503)
Net deferred income taxes	$	(1,769)	$	(3,344)

Deferred income tax amounts are recorded as follows in our consolidated balance sheets (in thousands):



YEAR ENDED
AUGUST 31,		2013		2012
Current assets	$	4,685	$	3,634
Long-term assets		25		23
Long-term liabilities		(6,479)		(7,001)
Net deferred income tax liability	$	(1,769)	$	(3,344)

As of August 31, 2013 we have utilized all of our U.S. federal net operating loss carryforwards. The Company still has U.S. state net operating loss carryforwards generated in various jurisdictions that expire primarily between August 31, 2014 and August 31, 2029.

Our U.S. foreign income tax credit carryforwards were comprised of the following (in thousands):



Credit Generated in					Credits Used		Credits Used		Credits
Fiscal Year Ended	Credit Expires		Credits		in Prior		in Fiscal		Carried
August 31,	August 31,		Generated		Years		2013		Forward
2003	2013	$	585	$	-	$	(585)	$	-
2004	2014		625		-		(625)		-
2005	2015		877		-		(877)		-
2006	2016		625		-		(625)		-
2007	2017		1,071		-		(917)		154
2011	2021		3,531		-		-		3,531
2012	2022		2,645		(907)		-		1,738
2013	2023		3,064		-		(3,064)		-
		$	13,023	$	(907)	$	(6,693)	$	5,423

We plan to amend our U.S. federal income tax returns from fiscal 2003 through fiscal 2007 to claim foreign tax credits instead of the foreign tax deductions that were previously claimed. The additional taxable income from claiming these foreign credits results in the complete utilization of our remaining net operating loss carryforwards in fiscal 2012 and in the ability to utilize a portion of the foreign tax credit generated in fiscal 2012.

We have determined that projected future taxable income is adequate to allow for realization of all deferred tax assets. We considered sources of taxable income, including future reversals of taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, and reasonable, practical tax-planning strategies to generate additional taxable income. Based on the factors described above, we concluded that realization of all our deferred tax assets is more likely than not at August 31, 2013.

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



YEAR ENDED
AUGUST 31,		2013		2012		2011
Beginning balance	$	4,212	$	3,703	$	3,940
Additions based on tax positions
related to the current year		720		297		6
Additions for tax positions in
prior years		69		327		384
Reductions for tax positions of prior
years resulting from the lapse of
applicable statute of limitations		(74)		-		-
Other reductions for tax positions of
prior years		(798)		(115)		(627)
Ending balance	$	4,129	$	4,212	$	3,703

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $3.1 million at August 31, 2013 and 2012. Included in the ending balance of gross unrecognized tax benefits is $3.0 million related to individual states’ net operating loss carryforwards. Interest and penalties related to uncertain tax positions are recognized as components of income tax expense. The net accruals and reversals of interest and penalties increased income tax expense by $0.1 million in fiscal 2013, increased income tax expense by $0.1 million in fiscal 2012, and increased income tax expense by an insignificant amount in fiscal 2011. The balance of interest and penalties included on our consolidated balance sheets at August 31, 2013 and 2012 was $0.3 million and $0.2 million, respectively. We do not expect a material change in our unrecognized tax benefits over the next twelve months.

We file United States federal income tax returns as well as income tax returns in various states and foreign jurisdictions. The tax years that remain subject to examinations for our major tax jurisdictions are shown below. Additionally, any net operating losses that were generated in prior years and utilized in these years may be subject to examination.

2006-2013	Canada
2006-2013	Australia
2008-2013	Japan, United Kingdom
2009-2013	United States – state and local income tax
2010-2013	United States – federal income tax