NOTE H: INCOME TAXES

Pretax income (loss) for the years ending December 31, 2012, 2011 and 2010 was taxed in the following jurisdictions:


	Year Ended December 31,
	2012			2011			2010
	(In thousands)
Domestic	$	(807	)	$	(500	)	$	(383	)
Foreign		(1,788	)		(641	)		952

	$	(2,595	)	$	(1,141	)	$	569

The provision (benefit) for income taxes in each of 2012, 2011 and 2010 is summarized below:


	Year Ended December 31,
	2012			2011			2010
	(In thousands)
Current
Federal	$	—		$	—		$	—
State		61			67			86
Foreign		(409	)		(166	)		273

		(348	)		(99	)		359
Deferred
Federal		(171	)		(178	)		(30	)
State		—			—			13
Foreign		(62	)		22			75

		(233	)		(156	)		58

	$	(581	)	$	(255	)	$	417

Deferred tax assets (liabilities) were comprised of the following at December 31:


	2012			2011
	(In thousands)
Deferred tax assets
Inventory	$	1,187		$	1,185
Bad debt provision		49			85
Property, plant and equipment		109			59
Deferred credits		1,281			1,281
Loss carryforwards		1,054			1,035
Rent		162			150
Other		817			431

Gross deferred tax assets		4,659			4,226
Less valuation allowance⁽²⁾		(1,376	)		(1,213	)

		3,283			3,013

Deferred tax liabilities
Property, plant and equipment		(61	)		(22	)
Unremitted earnings of foreign affiliates		(58	)		(77	)
Other		(30	)		—

Gross deferred tax liabilities		(149	)		(99	)

Net deferred tax assets⁽¹⁾	$	3,134		$	2,914

(1)	Of the total deferred tax assets at December 31, 2012 and 2011, $1,849,000 and $1,787,000 were included in current assets and $1,285,000 and $1,127,000 in 2012 and 2011 were included in other long-term assets at December 31, 2012 and 2011, respectively.

(2)	The deferred tax valuation allowance increased by $163,000 during 2012, $15,000 during 2011 and $37,000 during 2010.

Set forth below is a reconciliation between actual tax expense and expected tax expense for the respective periods presented below:


	Year Ended December 31,
	2012			2011			2010
	(In thousands)
Earnings (loss) before income taxes	$	(2,595	)	$	(1,141	)	$	569

Expected income tax expense at 34%	$	(882	)	$	(388	)	$	193
Difference in rates on earnings of foreign operations		83			80			6
Stock based compensation and other nondeductible expenses		27			43			96
State taxes and credits (net of federal benefit)		50			40			80
Change in valuation allowance		—			7			36
Unremitted earnings of foreign subsidiaries		(19	)		(1	)		—
Exclusion of earnings of foreign affiliates		(54	)		(12	)		(6	)
Foreign dividend		192			—			—
Other		22			(24	)		12

Income tax provision (benefit)	$	(581	)	$	(255	)	$	417

Deferred income taxes have been provided on the undistributed earnings of certain foreign subsidiaries where it is contemplated that earnings will not be reinvested.

At December 31, 2012, the operating loss carryforwards available for federal and state income tax purposes were $2,033,000 and $4,532,000, respectively. The earliest carryforwards begin to expire in 2013. At December 31, 2012, foreign tax credit carryforwards available for federal income tax purposes totaled $328,000, which expire in 2015. State targeted tax area credit carryforwards of $1,245,000 are available with no expiration dates.

It is our policy to classify interest and penalties as a component of tax expense. At December 31, 2012 we had $263,000 of unrecognized tax benefits, of which $3,000 impacted our effective tax rate. Interest and penalties totaled $131,000, which was accrued on the balance sheet at December 31, 2012.

The Company and its domestic subsidiaries file income tax returns in the US federal jurisdiction and in various state jurisdictions. The Company’s foreign subsidiaries file income tax returns in the respective jurisdictions in which they are based. With few exceptions, we are no longer subject to tax examinations by taxing authorities for years before 2007. We do not expect total unrecognized tax benefits to change significantly during the year ending December 31, 2013 due to the expiration of any statutes of limitations.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:


Unrecognized Tax Benefits (in thousands):	2012		2011
Balance as of January 1,	$	260	$	260
Additions for tax positions related to the current year		3		29
Reductions for tax positions of prior years		—		(29	)

Balance as of December 31,	$	263	$	260