9.	INCOME TAXES:

General overview:

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 2013 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 (benefit) provision.

For the year ended December 31, 2013, we recognized an income tax benefit of $(30.1) million compared to income tax expense of $401 thousand and $843 thousand in the years ended December 31, 2012 and 2011, 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, 2013, we had gross deferred tax assets of $31.8 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. Since 2010, we have 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. Since 2010, we have maintained a full valuation allowance against our net deferred tax assets primarily due to the fact that we have essentially been in a cumulative pre-tax loss position over the most recent three-year period. While there has been a trend of positive evidence that has been strengthening in recent 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:

 

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

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

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Our financial performance has continued to improve. We have reported steady growth in operating income over the past three years and believe that our financial performance will continue to improve.

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

Negative Evidence:

 

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In the absence of a cumulative loss in the last 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 ending 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 believe that our positive evidence is strong. The improving financial performance in recent years is an objectively verifiable piece of positive evidence and is the result of a number of factors that have been present to a greater or lesser extent in prior years but have only recently gathered sufficient weight 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 currently use to manage our underlying business and calculated the utilization of our deferred tax assets under a number of scenarios.

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 will 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 (benefit) expense:

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

 

		Year Ended December 31,
		2013				2012				2011
		(In Thousands)
Current tax expense:
Federal		$	-			$	-			$	-
State			234				263				650
Foreign			95				93				57
			329				356				707
Deferred tax expense (benefit):
Federal			5,088				1,178				333
State			748				173				49
Foreign			-				-				-
Change in valuation allowance			(36,226	)			(1,323	)			(324	)
			(30,390	)			28				58
Unrecognized tax benefit			(28	)			17				78
Income tax provision		$	(30,089	)		$	401			$	843

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 result from the following:

 

		Year Ended December 31,
		2013								2012								2011
		Amount				Rate				Amount				Rate				Amount				Rate
		(Dollar Amounts In Thousands)
Income tax at statutory rate		$	1,570				34.0	%		$	628				34.0	%		$	404				34.0	%
Add (deduct):
State income taxes, net of federal tax benefit			243				5.2				174				9.4				435				36.6
Tax rate difference on foreign income taxes			47				1.0				188				10.1				222				18.7
Tax rate change on deferred tax attributes			(169	)			(3.6	)			-				-				-
Non-deductible items			98				2.1				160				8.6				(243	)			(20.4	)
Net decrease in deferred tax attributes			4,370				94.6				516				27.9				319				26.9
Decrease in valuation allowance against certain deferred tax assets			(36,226	)			(784.3	)			(1,323	)			(71.6	)			(324	)			(27.3	)
Unrecognized tax benefits			(28	)			(0.6	)			17				0.9				78				6.6
Other, net			6				0.1				41				2.4				(48	)			(4.1	)
		$	(30,089	)			(651.5	)%		$	401				21.7	%		$	843				71.0	%

 

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, 2013 and 2012 are as follows:

 

		December 31,
		2013				2012
		(In Thousands)
Deferred income tax assets:
Net operating loss carryforwards and credits		$	19,552			$	24,883
Acquired intangible assets			7,543				8,121
Reserves and accruals			1,656				2,149
Share-based compensation			2,775				2,438
Depreciation			346				268
Total deferred income tax assets			31,872				37,859
Deferred income tax liabilities:
Acquired intangible assets			(96	)			(213	)
Other			(4	)			(6	)
Total deferred income tax liabilities			(100	)			(219	)
Valuation allowance			(1,500	)			(37,726	)
Deferred income tax asset (liability), net		$	30,272			$	(86	)

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

 

		December 31, 2013								December 31, 2012
		Current				Long-term				Current				Long-term
		(In Thousands)
Assets		$	1,238			$	30,625			$	1,119			$	36,610
Liabilities			(4	)			(87	)			(3	)			(86	)
Valuation allowance			(59	)			(1,441	)			(1,110	)			(36,616	)
Net deferred tax asset (liability)		$	1,175			$	29,097	)		$	6			$	(92	)

As of December 31, 2012, the Company’s long-term deferred tax liability is reported within other long-term liabilities on the consolidated balance sheet.

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, 2013, we had tax affected net operating loss carryforwards for federal income tax purposes of approximately $15.7 million and alternative minimum and worker’s opportunity credits of approximately $2.1 million, which expire at various intervals through 2030. However, $13.7 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 $345 thousand from excess tax deductions from stock option exercises during fiscal 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 realized.

 

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 $1.3 million which expire at various intervals through 2033.

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

 

		Year Ended December 31,
		2013				2012				2011
		(In Thousands)
Balance, beginning of year		$	37,726			$	39,049			$	39,373
Additions			-				-				-
Reductions, net			(36,226	)			(1,323	)			(324	)
Balance, end of year		$	1,500			$	37,726			$	39,049

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,
		2013				2012				2011
		(In Thousands)
Gross unrecognized tax benefits at beginning of year		$	140			$	155			$	203
Increases in tax positions in the current year			-				-				-
Settlements			(32	)			(15	)			(48	)
Gross unrecognized tax benefits at end of year		$	108			$	140			$	155

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, 2013 and 2012, accrued interest and penalties was $320 thousand and $316 thousand, respectively.

As of December 31, 2013, the $108 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.