Income Taxes

12 Months Ended

Dec. 31, 2012

Income Taxes [Abstract]

Income Taxes

11.  Income Taxes

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

(in thousands)		Years ended December 31,
		2012	2011	2010
Domestic		$         127	$      1,204	$    (3,114)
Foreign		1,736	1,159	1,071
	Total	$      1,863	$      2,363	$    (2,043)

The provision for income taxes is as follows:

(in thousands)			Years ended December 31,
			2012	2011	2010
Current:
	Federal		$         22	$         62	$            -
	State		19	181	9
	Foreign		562	462	233
		Subtotal	603	705	242
Deferred:
	Federal		-	(1,002)	-
	Foreign		86	(141)	(36)
		Subtotal	86	(1,143)	(36)
		Total	$       689	$      (438)	$       206

The Company is entitled to a deduction for federal and state tax purposes with respect to employees’ stock option activity.  As of December 31, 2012, 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,
		2012		2011		2010
Statutory federal income tax rate		34.0	%	34.0	%	34.0	%
State income taxes, net of federal tax benefit		0.7		5.0		(0.5)
Effect of foreign operations		(9.5)		(12.0)		(4.6)
Change in valuation allowance		(13.4)		(68.3)		(38.8)
Other, principally permanent differences		25.2		22.8		(0.2)
	Effective tax rate	37.0	%	(18.5)	%	(10.1)	%

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:

Deferred tax components:
(in thousands)	December 31,
	2012			2011			2010
Deferred tax assets:
Net operating loss carryforwards	$	4,352		$	4,850		$	5,893
Capital loss carryforwards		2,446			2,351			2,472
Accruals and reserves		145			135			126
Expenses not currently deductible for tax purposes		1,353			1,494			1,358
Alternative minimum tax credit carryforwards		166			166			166
Other		1,568			1,449			1,163
Total deferred tax asset		10,030			10,445			11,178
Valuation allowance		(7,026	)		(6,869	)		(8,662	)
Total deferred tax asset less valuation allowance		3,004			3,576			2,516
Deferred tax liabilities:
Undistributed earnings of foreign subsidiary		(1,473	)		(1,950	)		(1,790	)
Software development costs		(934	)		(690	)		(677	)
Other		(910	)		(1,145	)		(421	)
Total deferred tax liability		(3,317	)		(3,785	)		(2,888	)
Net deferred tax liability	$	(313	)	$	(209	)	$	(372	)

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 and Chinese subsidiaries, 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 $7.0 million valuation allowance on its U.S. deferred tax assets at December 31, 2012.  The valuation allowance for deferred tax assets increased by $1.1 million in 2012, decreased by $1.8 million in 2011 and increased by $287,000 in 2010.

At December 31, 2012, the Company’s largest deferred tax asset of $4.4 million primarily relates to a U.S. net operating loss carryforward of $12.0 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 2012, the Company partially reduced both the liability and receivable from the EnVision acquisition by $269,000 as the related period is now outside the applicable statute of limitations.  During 2011 and 2012, the Company also recorded $126,000 and $165,000 of unrecognized tax benefits for certain foreign tax contingencies, respectively.  The Company made payments of $0 and $8,000 during 2011 and 2012, respectively, related to these foreign tax contingencies.  The Company records these uncertain tax positions in other current liabilities on the consolidated balance sheet, and records the associated interest and penalties as a component of income tax expense.  During 2011 and 2012,  the Company accrued $10,000 and $4,000 of interest and penalties, respectively.

Intraperiod tax allocation

The Company utilizes the with-and-without intraperiod tax allocation approach as described in ASC 740-24-45-7 which results in the use of the windfall tax benefits being utilized last.