4 .	Income taxes

During the

first

six

months of

2017,

we recorded a non-cash charge to our valuation allowance of

$121,000,

increasing our valuation allowance against deferred tax assets to

$12.7

million at

July 1, 2017.

The primary assets covered by this valuation allowance are net operating losses, which are approximately

$20.9

million at

July 1, 2017.

In the prior year

six

months, we utilized

$21.7

million of our net operating loss carry-forward against taxable income resulting primarily from our surrender of corporate-owned life insurance policies. The premiums paid and the growth in surrender value of these policies were excludable from taxable income over the life of these policies when held until death of the covered lives, but this growth, net of premiums paid, became taxable when we surrendered the policies. The aggregate impact of the surrender of these policies in the

first

quarter of last year was the creation of

$24.0

million in taxable income. The income tax in the current

three

and

six

month periods was effectively

due to our net loss. In the prior year, the income tax expense associated with the surrender of the corporate-owned life insurance policies was recognized in full during the prior year

first

quarter and was largely the result of federal alternative minimum tax which limits our ability to offset income generated during the period with net operating carry-forwards, and, to a lesser extent, the impact of surrendering these policies have on state income taxes. Therefore, the income tax benefit recognized during the prior year

three

month period was the result of normal operating losses incurred during the period. Those losses ultimately offset the income recognized in the

first

three

months, which lowered the impact of the federal alternative minimum tax and state income taxes. The income tax expense recognized during the prior year

six

month period was the result of federal alternative minimum tax and, to a lesser extent, the impact of surrendering these policies have on state income taxes.

We maintain a valuation allowance against deferred tax assets that currently exceed our deferred tax liabilities. The primary assets covered by this valuation allowance are net operating loss carry-forwards. The valuation allowance was calculated in accordance with the provisions of ASC

740,

Income Taxes

, which requires an assessment of both positive and negative evidence when measuring the need for a valuation allowance. Our results over the most recent

three

-year period were heavily affected by our business restructuring activities. Our cumulative loss, excluding income from the Continued Dumping and Subsidy Offset Act, in the most recent

three

-year period, in our view, represented sufficient negative evidence to require a valuation allowance under the provisions of ASC

740,

Income Taxes

. We intend to maintain a valuation allowance until sufficient positive evidence exists to support its reversal, resulting in

deferred tax asset balance being recognized. Should we determine that we will

not

be able to realize all or part of our deferred tax asset in the future, an adjustment to the deferred tax asset will be charged to income in the period such determination is made.

Our effective tax rate for the current

three

and

six

month periods was effectively

due to our net loss for the

first

six

months of the year. The effective tax rate in the prior year

three

and

six

month periods were

3.3%

and negative

24.3%,

respectively, driven by the impact of the alternative minimum tax and state related taxes on the surrender of corporate owned life insurance policies. The major reconciling items between our effective income tax rate and the federal statutory rate are the change in our valuation allowance and, in the prior year period, the cash surrender value on life insurance policies.