NOTE I — INCOME TAXES

The components of income before income taxes, equity in earnings and extraordinary item are as follows:


	Year Ended December 31,
	2012			2011		2010
	(in thousands)
Domestic	$	20,609		$	16,178	$	20,867
Foreign		(535	)		648		(1,199	)

Total income before income taxes, equity in earnings and extraordinary income	$	20,074		$	16,826	$	19,668

The provision (benefit) for income taxes (before equity in earnings) consists of:


	Year Ended December 31,
	2012			2011			2010
	(in thousands)
Current:
Federal	$	6,691		$	4,657		$	4,269
State and local		761			2,063			1,437
Foreign		503			618			565
Deferred		(2,747	)		(1,216	)		(1,669	)

Income tax provision	$	5,208		$	6,122		$	4,602

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 income tax assets are as follows:


	December 31,
	2012		2011
	(in thousands)
Deferred income tax assets:
Deferred rent expense	$	4,407	$	3,038
Translation adjustment		1,116		2,205
Stock options		3,660		2,743
Inventory		1,381		1,624
Operating loss carry-forward		1,797		2,120
Accounts receivable allowances		106		270
Accrued compensation		669		580
Other		1,915		674

Total deferred income tax assets	$	15,051	$	13,254

Significant components of the Company’s net deferred income tax asset (liability) are as follows:


	December 31,
	2012			2011
	(in thousands)
Deferred income tax liabilities:
Depreciation and amortization	$	(5,945	)	$	(4,867	)
Intangibles		(4,645	)		(6,679	)
Equity in earnings		(3,080	)		(998	)
Other		(167	)		(535	)

Total deferred income tax liabilities		(13,837	)		(13,079	)


Net deferred income tax asset		1,214			175

Valuation allowance		(1,182	)		(3,085	)

Net deferred income tax asset (liability)	$	32		$	(2,910	)

The Company has generated various state net operating loss carryforwards of which $18.7 million remains at December 31, 2012 that begin to expire in 2014. The Company has net operating losses in foreign jurisdictions of $2.1 million at December 31, 2012 that begin to expire in 2016. As of December 31, 2011, management had determined that it was “more likely than not” that certain deferred tax assets would be realized and the corresponding valuation allowance had been released based on the Company’s ability to utilize deferred tax assets currently and the expected future use of temporary differences in the carryback periods. In 2012, the Company recorded an income tax benefit for a non-cash adjustment to a deferred tax liability of $2.3 million related to the prior year. Additionally, the Company recorded a reduction in its valuation allowance of $1.9 million of which $1.1 million related to a portion of the translation adjustment deferred tax asset in connection with the equity method investee, Vasconia. The valuation allowance which remains as of December 31, 2012 relates to certain state net operating losses.

The provision for income taxes (before equity in earnings) differs from the amounts computed by applying the applicable federal statutory rates as follows:


	Year Ended December 31,
	2012			2011			2010

Provision for federal income taxes at the statutory rate		35.0	%		35.0	%		35.0	%
Increases (decreases):
State and local income taxes, net of Federal income tax benefit		3.2			6.4			5.6
Foreign rate differences		(1.8	)		—			—
Non-deductible stock options		—			0.1			1.2
Non-deductible expenses		1.2			3.4			0.1
Valuation allowance		—			(8.2	)		(19.8	)
Reduction of deferred tax liabilities related to the prior year		(11.6	)		—			—
Other		(0.1	)		(0.3	)		1.3

Provision for income taxes		25.9	%		36.4	%		23.4	%

The estimated values of the Company’s gross uncertain tax positions at December 31, 2012, 2011 and 2010 are liabilities of $301,000, $134,000 and $356,000, respectively, and consist of the following:


	Year Ended December 31,
	2012			2011			2010
	(in thousands)
Balance at January 1	$	(134	)	$	(356	)	$	(335	)
Additions based on tax positions related to the current year		—			—			—
Additions for tax positions of prior years		(167	)		(76	)		(200	)
Reductions for tax position of prior years		—			—			—
Settlements		—			298			179

Balance at December 31	$	(301	)	$	(134	)	$	(356	)

The Company had approximately $39,000 and $34,000, net of federal tax benefit, accrued at December 31, 2012 and 2011, respectively, for the payment of interest. The Company’s policy for recording interest and penalties is to record such items as a component of income taxes.

If the Company’s tax positions are ultimately sustained, the Company’s liability, including interest, would be reduced by $301,000, all of which would impact the Company’s tax provision. On a quarterly basis, the Company evaluates its tax positions and revises its estimates accordingly. The Company believes that it is reasonably possible that $301,000 of its tax positions will be resolved within the next twelve months.

The Company has identified the following jurisdictions as “major” tax jurisdictions: U.S. Federal, California, Massachusetts, Pennsylvania, New York, New Jersey and the United Kingdom. The Company is no longer subject to U.S. Federal income tax examinations for the years prior to 2009. At December 31, 2012, the periods subject to examination for the Company’s major state jurisdictions are the years ended 2008 through 2011.