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 disagree with 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 IRS applied 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 (the “Settlement Application”). On June 7, 2016, the IRS completed its examination of the Company’s fiscal 2012 and fiscal 2013 periods and issued the Company a Form 5701 and Form 886-A regarding Adjusted Sales Income which was in accordance with the Settlement Application and which the Company has accepted.

Based on the foregoing, the Company was 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 2016, $0.5 million was recorded as income tax expense in the fourth quarter of fiscal 2015 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 was some uncertainty as to what the ultimate tax treatment would 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” existed, and the Company recorded income tax expense and a non-current tax liability of approximately $0.5 million to its March 31, 2015 financial statements representing the maximum amount of income taxes, penalties and interest that the Company estimates it could have owed for fiscal 2014 and fiscal 2015 if the Service Fee was determined to be taxable to the Company as FBCSI under the Internal Revenue Code. As of March 31, 2016, the Company has determined that the Service Fee is taxable to the Company as FBCSI and therefore, beginning March 31, 2016, the tax on the Service Fee is no longer considered to be an uncertain tax position and the Company has recorded any pertinent tax within its current income tax liabilities.

Other

The Company’s provision for income tax (benefit) expense for fiscal 2016 and fiscal 2015 was as follows:

	2016			2015
	(In thousands)
Current:
Federal	$	(685	)	$	(308	)
Foreign, state and other		8			55
Prior year federal and state, with interest		48			1,713
Uncertain tax positions, federal and state		(249	)		481
Deferred:
Federal		602			672
Foreign, state and other		17			454
Provision for income tax (benefit) expense	$	(259	)	$	3,067

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 2016 and fiscal 2015 is analyzed below:

	2016			2015
	(In thousands)
Statutory provision	$	(432	)	$	1,701
Foreign subsidiary		76			(798	)
State taxes		48			637
Permanent differences		3			61
Prior year taxes		—			892
True up to prior year taxes		299			(226	)
Valuation allowance		—			—
(Decrease)/increase in Uncertain Tax Positions		(249	)		481
NOL Adjustments		(4	)		319
Provision for income tax (benefit) expense	$	(259	)	$	3,067

As of March 31, 2016 and March 31, 2015, the significant components of the Company’s deferred tax assets of which were classified as non-current, were as follows:

	2016		2015
	(In thousands)
Deferred tax assets:
Accounts receivable reserves	$	548	$	484
Inventory reserves		284		411
Accruals		42		67
Property, plant and equipment		504		522
Net operating loss and credit carry forwards		23		536
Total deferred tax assets	$	1,401	$	2,020

The Company has no U.S. federal net operating loss carry forwards (“NOLs”) as of March 31, 2016 .

The Company has $0.4 million of state NOLs as of March 31, 2016 as follows (in millions $):

Loss Year (Fiscal)		Included in DTA		Expiration Year (Fiscal)
2014		$0.4 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 a loss of $212,000 for the fiscal year ended March 31, 2016 as compared to income before taxes of $2,367,000 for the fiscal year ended March 31, 2015, 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, 2015 to March 31, 2016 is as follows:

	In 000’s
Total amount of unrecognized tax benefits as of April 1, 2015	$	480
Gross increases in unrecognized tax benefits as a result of tax positions taken during a prior period		—
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		—
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		(480	)
Reductions to unrecognized tax benefits as a result of lapse of statute of limitations		—
Total amount of unrecognized tax benefits as of March 31, 2016		0

The Company is subject to examination and assessment by tax authorities in numerous jurisdictions. As of March 31, 2016, the Company’s open tax years for examination for U.S. federal tax are 2011-2015, and for U.S. states’ tax are 2011-2015. Based on the outcome of tax examinations or due to the expiration of statutes of limitations, it is reasonably possible that the unrecognized tax benefits related to uncertain tax positions taken in previously filed returns may be different from the liabilities that have been recorded for these unrecognized tax benefits. As a result, the Company may be subject to additional tax expense.