Income Taxes

12 Months Ended

Dec. 31, 2012

Income Tax Disclosure [Abstract]

Income Taxes

NOTE 14 — INCOME TAXES

The Company files a consolidated U.S. federal income tax return.  State tax returns are filed on a consolidated, combined or separate basis depending on the applicable laws relating to the Company and its domestic subsidiaries.  Additionally, the Company files tax returns in England and France.

The Company’s income from continuing operations before provision for income taxes was generated from the U.S. and foreign operations for the years ended December 31 as follows (in thousands):

	2012			2011
Earnings (loss) before income taxes:
U.S.	$	(2,659	)	$	(3,295	)
Foreign		3,076			1,335
Earnings (loss) before income taxes	$	417		$	(1,960	)

The Company’s provision for income taxes on continuing operations consisted of the following for the years ended December 31 (in thousands):

	2012			2011
Current:
Federal	$	-		$	(238	)
State		11			21
Foreign		320			300
Total current		331			83
Deferred:
Federal		-			11
State		1			1
Foreign		(17	)		(7	)
Total deferred		(17	)		5
Total provision for income taxes	$	314		$	88

Income tax expense on continuing operations differed from the amount obtained by applying the statutory federal income tax rate of 34% to income before income taxes as follows for the years ended December 31 (in thousands):

	2012			2011
Federal income tax at statutory rates	$	143		$	(668	)
State income taxes, net of federal benefit		11			22
Foreign income taxes		(744	)		(161	)
Changes in valuation allowances		287			897
Foreign income inclusion - IRC 956		607			144
Permanent differences		10			2
Tax benefit from income of discontinued operations		-			(227	)
Expiration of research and development credits		-			79
	$	314		$	88

As a result of the Company’s extensive net operating loss carry-forwards and certain tax credits for research and development expense both in the United States and abroad the Company paid no United States federal income tax in 2012 and no foreign income tax in France in 2012 or 2011. The Company paid foreign income taxes in the United Kingdom for 2012 and 2011.

In recent years, the Company experienced a number of events which impacted upon deferred income taxes. The company sold certain of its operations which resulted in income for 2011 which was offset by domestic net operating losses from prior years. The offset was reflected in a $227,000 adjustment to income tax expense in 2011. No similar adjustment was required in 2012.

The Company’s business is subject to regulations under a wide variety of U.S. federal, state and foreign tax laws, regulations and policies. The majority of the earnings and profits of the Company’s foreign subsidiaries are deemed to have been distributed to the United States, with the exception of undistributed earnings of approximately $1.1 million which have not been taxed in the U.S. and which are deemed to have been reinvested indefinitely outside the United States. These earnings will continue to be indefinitely reinvested but could become subject to an additional tax charge if they were remitted as dividends or were loaned to the Company. No deferred taxes have been provided on these earnings.

Under the terms of the PEM Agreement and the promissory notes described in Note 10, the Company’s foreign subsidiaries have issued guarantees on U.S. credit facilities and, as a result, under Section 956 of the Code, have been deemed to have distributed some of their earnings to fund U.S. operations.  Further, certain of the Company’s foreign subsidiaries have advanced cash funds to the U.S. entities to meet cash needs. This has resulted in U.S. federal taxable income and an increase in U.S. tax liability, which has been reduced through the utilization of available net operating loss carry-forwards and foreign tax credits.

The Company had federal net operating loss carry-forwards of approximately $14.5 million as of December 31, 2012 which will expire at various dates beginning in 2013 through 2042.  The use of the net operating carry-forwards for state tax purposes is governed by rules specific to each state. As of December 31, 2012 and 2011, the Company recorded a valuation allowance on the deferred tax asset.  Management believes sufficient uncertainty exists regarding the realizability of the deferred tax asset items and that a valuation allowance is required. Management considers projected future taxable income and tax planning strategies in making this assessment.  The amount of the deferred tax assets considered realizable, however, could materially change in the near future if estimates of future taxable income during the carry-forward period are changed.

Utilization of the Company’s net operating loss and tax credit carry-forwards may be subject to substantial annual limitation should the Company experience an ownership change triggering limitations provided by the Code and similar state provisions. Such an annual limitation could result in the expiration or elimination of the net operating loss and tax credit carry-forwards before utilization. 

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 tax assets and liabilities were as follows as of December 31 (in thousands):

	2012			2011
Current deferred tax assets:
Allowance for doubtful accounts	$	1		$	4
Inventory reserves and uniform capitalization		661			415
Other accrued liabilities		178			217
		840			636
Valuation allowance-current deferred tax assets		(712	)		(612	)
Total current deferred tax assets		128			24
Long-term deferred tax assets:
Depreciation on property, plant & equipment		142			288
Non-qualified stock option expense		3			9
Deferred compensation		246			208
Deferred income		-			7
Tax credits		114			156
Alternative minimum tax credit carry-forwards		-			106
Net operating loss carry-forwards		5,095			5,333
Other, net		45			49
		5,645			6,156
Valuation allowance-long-term deferred tax assets		(5,586	)		(5,929	)
Total long-term deferred tax assets		59			227
Deferred tax liabilities:
Intangible assets other than goodwill		-			(89	)
Total deferred tax liabilities (long-term)		-			(89	)
Net deferred tax assets	$	187		$	162

The adoption of ASC 740-10 Income Taxes-Tax Positions did not result in a material adjustment to the Company’s liability for unrecognized income tax benefits. The Company has not recognized benefits for any uncertain tax positions that it believes would be more-likely-than-not upheld in an examination by any tax authorities.  The Company currently has no open matters with tax authorities nor is it engaged in an examination by any tax authority.  The Company’s policy on classification of interest and penalties related to unrecognized income tax positions, if any, is to classify interest as interest expense and penalties as selling, general and administrative expense. No interest or penalties were recognized during 2012 or 2011.

The Company files income tax returns in the United States federal jurisdiction, the United Kingdom and France, and in the state jurisdictions of California, Texas, Pennsylvania and New Jersey. The Company is no longer subject to United States federal and state tax examinations for years before 2009 and 2008, respectively, and is no longer subject to tax examinations for the United Kingdom for years prior to 2011, and for France for years prior to 2009.