Note 8 - Income Taxes

12 Months Ended

Dec. 31, 2011

Notes To Financial Statements

Income Tax Disclosure [Text Block]

8.   Income Taxes

Deferred income tax assets and liabilities were comprised of the following (in thousands):

	December 31,
	2010			2011
Deferred tax assets:
Net operating loss carryforwards	$	93,273		$	7,872
Allowance for doubtful  accounts		86			123
Depreciable assets		1,495			1,236
Goodwill		5,771			5,269
Other intangible assets		1,589			1,408
Trademarks		134			-
Deferred vacation and bonus		669			164
Deferred occupancy costs		211			230
Inventory uniform capitalization		261			339
Stock-based compensation		637			637
Other		20			162
Total deferred tax asset	$	104,146		$	17,440
Deferred tax liability:
Trademark		-			(169	)
Net deferred tax asset		104,146			17,271
Valuation allowance		(104,146	)		(17,271	)
Net deferred tax asset	$	-		$	-

Under Section 382 of the Internal Revenue Code of 1986, as amended, the Company’s use of its federal net operating loss (“NOL”) carryforwards may be limited if the Company has experienced an ownership change, as defined in Section 382. In 1997 the Company experienced an ownership change for Federal income tax purposes, resulting in an annual limitation on the Company’s ability to utilize its net operating loss carryforwards to offset future taxable income.  The annual limitation was determined by multiplying the value of the Company’s equity before the change by the long-term tax exempt rate as defined by the Internal Revenue Service. As a result of the transaction, the restricted net operating loss was subject to an annual limitation of $7,476. The Company adjusted its deferred tax asset to reflect the estimated limitation.

On March 21, 2011, Phoenix Acquisition Company II, L.L.C. (“Phoenix”), the holder of 5,000,000 shares or 69.3% of the Company’s outstanding common stock along with its parent entity Stonington Capital Appreciation 1994 Fund, L.P. (the “Fund”), and certain of their affiliates (collectively, “Stonington”) completed the transfer of all 5,000,000 shares of common stock to Saints Capital VI, L.P. (“Saints”). This transaction constitutes a change of control as defined in Section 382 and resulted in an additional limitation in its ability to utilize its net operating loss carryforward as well as the ability to use certain unrealized built-in losses.  As a result of this change of control, the net operating losses and unrealized built-in losses are subject to an annual limitation of $698. The Company adjusted its deferred tax asset to reflect the estimated limitation as of March 31, 2011. At December 31, 2011, the Company had available U.S. Federal net operating loss carryforwards of $17,388 which expire at various dates beginning December 31, 2012. As of December 31, 2011, $13,963 of the net operating loss carryforwards is restricted as a result of the ownership change and the remaining amount of $3,425 is not restricted.

Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are expected to become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.

At December 31, 2009, after weighing both the positive and negative evidence of realizing the deferred tax asset, management determined that, based on the weight of all available evidence, it is more likely than not that the Company will not realize its deferred tax assets. The most influential weighted negative evidence considered was two consecutive years of current taxable losses and uncertainty as to when taxable profit can be predicated in the future due to current economic environment. As such, the Company placed a full valuation allowance on its net deferred tax assets and recorded deferred tax expense of $39,936 for the year ended December 31, 2009. At December 31, 2010 and 2011, based on consecutive years of taxable losses the Company determined that it should keep a full valuation allowance on its net deferred tax assets.

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

	For the Years ended December 31,
	2009			2010			2011
Continuing Operations:
Current	$	(75	)	$	(126	)	$	(26	)
Deferred		(11,803	)		1,182			86,875
Net Change in Valuation Allowance		51,739			(1,182	)		(86,875	)
Total provision (benefit)	$	39,861		$	(126	)	$	(26	)
The above is further comprised of  the
following:
Federal	$	-		$	(369	)	$	-
State		(75	)		243			(26	)
Total current provision (benefit)	$	(75	)	$	(126	)	$	(26	)
Deferred tax expense (benefit), net of change in valuation allowance:
Federal	$	42,627		$	(723	)	$	-
State		(2,691	)		723			-
Total deferred provision (benefit)	$	39,936		$	-		$	-

The major elements contributing to the difference between the federal statutory tax rate and the effective tax rate on income from continuing operations are as follows:

	For the Years Ended December 31,
	2009			2010			2011
Statutory rate		35.0	%		35.0	%		35.0	%
Change in valuation allowance		(185.3	)		(114.2	)		3,574.8
Change in NOL limitation								(3,573.3	)
Prior year true-ups		0.1			35.6			(.6	)
State and local income taxes		7.7			24.5			(0.9	)
Certain non-deductible expenses and other		(0.3	)		6.9			(-	)
Permanent differences		-			-			(33.9	)
Effective tax rate		(142.8	%)		(12.2	%)		1.1	%