Income Taxes

3 Months Ended

Jun. 30, 2011

Income Taxes [Abstract]

INCOME TAXES

NOTE E — INCOME TAXES

The income tax provision for the three months ended June 30, 2011 was determined by applying an estimated annual effective tax rate of (39.8)% to income before taxes. The estimated effective income tax rate was determined by applying statutory tax rates to pretax income adjusted for certain permanent book to tax differences and tax credits.

Below is a reconciliation of the statutory federal income tax rate and the effective income tax rate:

	Three Months Ended June 30,
	2010			2011
Statutory federal tax rate		(34.0	)%		(34.0	)%
State taxes, net		(6.1	)%		(5.1	)%
Stock-based compensation expense		(15.4	)%		(0.9	)%
Federal tax credit		5.8	%		2.0	%
Permanent items		(3.7	)%		(0.6	)%
Change in valuation reserve		(7.5	)%		0.0	%
Other, net		0.1	%		(1.2	)%
Effective income tax rate		(60.8	)%		(39.8	)%

The Company is eligible for tax benefits associated with the excess of the tax deduction available for exercises of non-qualified stock options, or NQSOs, over the amount recorded at grant. The amount of the benefit is based on the ultimate deduction reflected in the applicable income tax return. Benefits of $0.5 million were recorded in fiscal 2011 as a reduction in taxes payable and a credit to additional paid in capital based on the amount that was utilized during the year. Benefits of $0.2 million were recorded for the period ended June 30, 2011.

During fiscal 2011, the Company converted almost all of its existing incentive stock options, or ISOs, to NQSOs. This conversion was applied retrospectively, allowing the Company to benefit by reducing $0.6 million of income tax expense during fiscal 2011 related to non-deductible ISO stock compensation expense that was previously deferred for income tax purposes. The conversion will greatly reduce the impact of stock-based compensation expense on the effective tax rate in the table above. Since July 30, 2008, all stock option grants have been issued as NQSOs.

As of June 30, 2011, the Company had federal net operating loss carryforwards of approximately $8.0 million, of which $4.8 million are associated with the exercise of NQSOs that have not yet been recognized by the Company in its financial statements. The Company also has state net operating loss carryforwards of approximately $4.7 million, of which $2.5 million are associated with the exercise of NQSOs. The Company also has federal tax credit carryforwards of approximately $1.0 million and state tax credits of $0.6 million. A full valuation allowance has been set up for the state tax credits due to the state apportioned income and the potential expiration of the state tax credits due to the carry forward period. These federal and state net operating losses and credit carryforwards are available, subject to the discussion in the following paragraph, to offset future taxable income and, if not utilized, will begin to expire in varying amounts between 2014 — 2030.

In 2007, the Company’s past issuances and transfers of stock caused an ownership change. As a result, the Company’s ability to use its net operating loss carryforwards, attributable to the period prior to such ownership change, to offset taxable income will be subject to limitations in a particular year, which could potentially result in increased future tax liability for the Company. The Company does not believe the ownership change affects the use of the full amount of the net operating loss carryforwards.

As of June 30, 2011, the Company’s U.S. federal income tax returns for tax years 2009 to 2011 remain subject to examination. The Company has various federal income tax return positions in the process of examination for 2009 and 2010. The Company currently believes that the ultimate resolution of these matters, individually or in the aggregate, will not have a material effect on its business, financial condition, results of operations or liquidity.

Uncertain tax positions

As of June 30, 2011, the balance of gross unrecognized tax benefits was approximately $0.4 million, all of which would reduce the Company’s effective tax rate if recognized. The Company does not expect this amount to change in the next 12 months as none of the issues are currently under examination, the statutes of limitations do not expire within the period, and the Company is not aware of any pending litigation. Due to the existence of net operating loss and credit carryforwards, all years since 2002 are open to examination by tax authorities.

The Company has classified the amounts recorded for uncertain tax benefits in the balance sheet as other liabilities (non-current) to the extent that payment is not anticipated within one year. The Company recognizes penalties and interest related to uncertain tax liabilities in income tax expense. Penalties and interest are immaterial as of the date of adoption and are included in the unrecognized tax benefits. For the three months ended June 30, 2010 and 2011, the Company had the following unrecognized tax benefit activity (in thousands):

	Three Months Ended		Three Months Ended
	June 30, 2010		June 30, 2011
Unrecognized tax benefits as of beginning of period	$	398	$	399
Decreases relating to settlements with tax authorities		—		—
Additions based on tax positions related to the current period positions		1		1
Unrecognized tax benefits as of end of period	$	399	$	400