NOTE 5 — INCOME TAXES:

Income Tax Issues Concerning Overseas Income

On April 15, 2013 and June 5, 2013, the Company received correspondence from the Internal Revenue Service (“IRS”) pertaining to the Company’s fiscal 2010 and fiscal 2011, including a (i) Form 5701 and Form 886-A regarding Adjusted Sales Income (collectively referred to as “NOPA 1”) and (ii) Form 5701 and Form 886-A regarding Adjusted Subpart F-Foreign Base Company Sales Income (“FBCSI”) (collectively referred to as “NOPA 2”), which challenged certain tax positions of the Company with respect to the Company’s controlled foreign corporation in Macao (the “Macao CFC”).

Although the Company continues to dispute the assessments made by the IRS as set forth in each of NOPA 1 and NOPA 2, in June 2015, following a formal IRS Appeal, the Company and the IRS agreed to settle on the following terms: (1) that the IRS would not pursue the aforementioned NOPA 1 and NOPA 2 income assessments pertaining to fiscal 2010 and fiscal 2011 provided that the Company agreed to treat 30% of the Macao CFC’s income as taxable Subpart F income in the U.S. for fiscal 2010 and fiscal 2011, and (2) that the IRS would impose no penalties for fiscal 2010 and fiscal 2011 (collectively, the “Settlement Agreement”). Based on discussions between the Company, its advisors and the IRS, the Company believes that the IRS intends to apply the Settlement Agreement’s calculation reached for the Company’s fiscal 2010 and fiscal 2011 periods to the Company’s fiscal 2012 and fiscal 2013 periods.

Based on the foregoing, the Company estimates that it is subject to additional federal and state income taxes for fiscal 2010 though fiscal 2013 of approximately $3.0 million. Of this amount, approximately $1.6 million was recorded as income tax expense in the fourth quarter of fiscal 2015, $0.5 million was recorded as income tax expense in the fourth quarter of fiscal 2014 and $0.9 million was recorded as income tax expense in the fourth quarter of fiscal 2013.

With respect to fiscal 2014 and fiscal 2015, there is some uncertainty as to what the ultimate tax treatment will be of a service fee regularly paid by the Company to the Macao CFC (the “Service Fee”). Therefore, an uncertain tax position under the requirements of ASC 740-10 “Income Tax Accounting” exists, and the Company has recorded an income tax expense and liability of approximately $0.5 million to its March 31, 2015 financial statements, $0.4 million of which was recorded in the third quarter of fiscal 2015 and $0.1 million of which was recorded in the fourth quarter of fiscal 2015, representing the maximum amount of income taxes, penalties and interest that the Company estimates it could owe for fiscal 2014 and fiscal 2015 if the Service Fee is determined to be taxable to the Company as FBCSI under the Internal Revenue Code.

Other

The Company’s provision for income tax (benefit) expense for fiscal 2015 and fiscal 2014 was as follows:


	2015			2014
	(In thousands)
Current:
Federal	$	(308	)	$	(450	)
Foreign, state and other		55			(484	)
Prior year federal and state, with interest		1714			0
Uncertain tax positions, federal and state		480			0
Deferred:
Federal		672			(467	)
Foreign, state and other		454			(68	)


Provision for income tax (benefit) expense	$	3,067		$	(1,469	)

The Company files a consolidated federal return and certain state and local income tax returns.

The difference between the effective rate reflected in the provision for income taxes and the amounts determined by applying the statutory federal rate of 34% to earnings before income taxes for fiscal March 2015 and fiscal 2014 is analyzed below:


	2015			2014
	(In thousands)

Statutory provision	$	1,702		$	(52	)
Foreign subsidiary		(798	)		(1,009	)
State taxes		336			(529	)
Permanent differences		61			304
Prior year taxes		1,193			0
True up to prior year taxes		(226	)		(158	)
Valuation allowance		0			(234	)
Increase in Uncertain Tax Positions		480			0
NOL Adjustments		319			209

Provision for income tax (benefit) expense	$	3,067		$	(1,469	)

As of March 31, 2015 and March 31, 2014, the significant components of the Company’s deferred tax assets and liabilities were as follows:


	2015		2014
	(In thousands)
Deferred tax assets:
Current:
Accounts receivable reserves	$	484	$	842
Inventory reserves		411		401
Accruals		67		151

Total current deferred tax assets		962		1,394

Non-current:
Property, plant and equipment		522		669
Net operating loss and credit carry forwards		536		1,084

Total non-current deferred tax assets		1,058		1,753


Total deferred tax assets		2,020		3,147

Deferred tax liabilities:
Non-current:

Uncertain tax position				0

Total deferred tax liabilities				0


Net deferred tax assets	$	2,020	$	3,147

The Company has $1.4 million of U.S. federal net operating loss carry forwards (“NOLs”) as of March 31, 2015 that expire in 2034.

The Company has $0.3 million of state NOLs as of March 31, 2015 as follows (in millions $):


Loss Year (Fiscal)	Included in DTA		Expiration Year (Fiscal)

2014	$	0.3 million		2034

The tax benefits related to these state net operating loss carry forwards and future deductible temporary differences are recorded to the extent management believes it is more likely than not that such benefits will be realized.

Income of foreign subsidiaries before taxes was $2,367,000 for the fiscal year ended March 31, 2015 as compared to income before taxes of $2,966,000 for the fiscal year ended March 31, 2014, respectively.

No provision was made for U.S. or additional foreign taxes on undistributed earnings of foreign subsidiaries. Such earnings have been and will be reinvested but could become subject to additional tax if they were remitted as dividends, or were loaned to the Company or a domestic affiliate, or if the Company should sell its stock in the foreign subsidiaries. It is not practicable to determine the amount of additional tax, if any, that might be payable on undistributed foreign earnings.

A reconciliation of the Company’s changes in uncertain tax positions from April 1, 2014 to March 31, 2015 is as follows:


	In 000’s
Total amount of unrecognized tax benefits as of April 1, 2013	$	121
Gross increases in unrecognized tax benefits as a result of tax positions taken during a prior period		223
Gross decreases in unrecognized tax benefits as a result of tax positions taken during a prior period		—
Gross increases in unrecognized tax benefits as a result of tax positions taken during the current period		257
Gross decreases in unrecognized tax benefits as a result of tax positions taken during the current period		—
Decreases in unrecognized tax benefits relating to settlements with taxing authorities		—
Reductions to unrecognized tax benefits as a result of lapse of statute of limitations		(121	)

Total amount of unrecognized tax benefits as of March 31, 2015		480