Income Taxes

12 Months Ended

Dec. 31, 2011

12. Income Taxes

The consolidated income (loss) before income taxes, by domestic and foreign sources, is as follows:

(in thousands)		Years ended December 31,
		2011		2010			2009
Domestic		$	1,204	$	(3,114	)	$	(2,115	)
Foreign			1,159		1,071			2,235
	Total	$	2,363	$	(2,043	)	$	120

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The provision for income taxes is as follows:

(in thousands)	Years ended December 31,
	2011			2010			2009
Current:
Federal	$	62		$	-		$	29
State		181			9			80
Foreign		336			233			512
Subtotal		579			242			621

Deferred:
Federal		(1,002	)		0			0
Foreign		(141	)		(36	)		296
Subtotal		(1,143	)		(36	)		296

Total	$	(564	)	$	206		$	917

The Company is entitled to a deduction for federal and state tax purposes with respect to employees’ stock option activity. As of December 31, 2011, the Company had $5.7 million of unrecognized excess tax deductions related to compensation for stock option exercises which will be recognized when the net operating loss carryforwards are fully utilized and those excess tax benefits result in a reduction to income taxes payable.

The effective income tax rate differed from the statutory federal income tax rate due to the following:

	Effective Tax Rate Percentage (%)

	Years ended December 31,
	2011			2010			2009
Statutory federal income tax rate		34.0	%		34.0	%		34.0	%
State income taxes, net of federal tax benefit		5.0			(0.5	)		44.1
Effect of foreign operations		(12.0	)		(4.6	)		(157.2	)
Change in valuation allowance		(68.3	)		(38.8	)		669.6
Other, principally permanent differences		17.4			(0.2	)		173.7
Effective tax rate		(23.9	)%		(10.1	) %		764.2	%

Deferred income taxes arise from temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. A summary of the tax effect of the significant components of the deferred income tax assets (liabilities) is as follows:

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(in thousands)	December 31,
	2011			2010			2009
Deferred tax assets:
Net operating loss carryforwards	$	4,850		$	5,893		$	5,650
Capital loss carryforwards		2,351			2,472			2,443
Accruals and reserves		135			126			251
Expenses not currently deductible for tax purposes		1,494			1,358			1,153
Alternative minimum tax credit carryforwards		166			166			166
Other		1,449			1,163			660
Total deferred tax asset		10,445			11,178			10,323
Valuation allowance		(6,869	)		(8,662	)		(8,375	)
Total deferred tax asset less valuation allowance		3,756			2,516			1,948

Deferred tax liabilities:
Undistributed earnings of foreign subsidiary		(1,950	)		(1,790	)		(1,313	)
Software development costs		(690	)		(677	)		(724	)
Other		(1,145	)		(421	)		(87	)
Total deferred tax liability		(3,785	)		(2,888	)		(2,124	)

Net deferred tax asset (liability)	$	(209	)	$	(372	)	$	(176	)

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not 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 become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future income in making this assessment.

Management believes that the Company will achieve profitable operations in future years that will enable the Company to recover the benefit of its deferred tax assets. However, other than for a portion of the deferred tax assets that are related to the Company’s Indian subsidiary, the Company presently does not have sufficient objective evidence to substantiate the recovery of the deferred tax assets. Accordingly, the Company has established a full $6.9 million valuation allowance on its U.S. and Scottish deferred tax assets at December 31, 2011. The valuation allowance for deferred tax assets decreased by $1.8 million in 2011, increased by $287,000 in 2010 and increased by $116,000 in 2009.

At December 31, 2011, the Company’s largest deferred tax asset of $4.9 million primarily relates to a U.S. net operating loss carryforward of $13.2 million which expires in various amounts between 2017 and 2030. The amount of U.S. loss carryforward which can be used by the Company each year is limited due to changes in the Company’s ownership which occurred in 2003. Thus, a portion of the Company’s loss carryforward may expire unutilized.

Uncertain Tax Positions

The Company, through its acquisition of EnVision on January 4, 2011, recorded $320,000 of unrecognized tax benefits as well as a receivable from the EnVision shareholders for the same amount as indemnity for this tax position. During 2011, the Company also recorded $126,000 of unrecognized tax benefits in 2011 for certain foreign tax contingencies. These liabilities are included in other current liabilities in the consolidated balance sheet. The Company records interest and penalties associated with uncertain tax positions as a component of income tax expense. As of Deceber 31, 2011, the Company has accrued $10,000 of interest and penalties.

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