Income Taxes

12 Months Ended

Sep. 30, 2011

Income Taxes [Abstract]

Income Taxes

7. Income Taxes

The components of the provision for income taxes are as follows (in thousands):

	Successor			Predecessor
	Period from April 20, 2011 through September 30, 2011			Period from October 2,  2010 through April 19, 2011		Fiscal Year Ended October  1, 2010			Fiscal Year Ended October  2, 2009
Current:
United States	$	—		$	—	$	(54	)	$	(149	)
Foreign		360			349		2,591			269
State and local		10			11		11			(10	)
Total current		370			360		2,548			110
Deferred:
United States		(2,784	)		—		—			—
Foreign		161			20		(1,981	)		761
State and local		(342	)		—		—			—
Total deferred		(2,965	)		20		(1,981	)		761
	$	(2,595	)	$	380	$	567		$	871

The acquisition of the Company’s Common Stock in connection with the Merger triggered an ownership change under Section 382. Section 382 imposes an annual limitation (based upon the value at the time of the ownership change, as determined under Section 382 of the Internal Revenue Code) on the amount of taxable income that can be offset with NOL carryovers that existed at time of the acquisition. Section 383 will also limit the Company’s ability to use R&D tax credit carryovers. In addition, as the tax basis of the Company’s assets exceeded the fair market value of its assets at the time of the ownership change, Section 382 will also limit the Company’s ability to use amortization of capitalized R&D and goodwill to offset taxable income for the first five years following an ownership change. Any unused annual limitation may be carried over to later years until the applicable expiration date for the respective NOLs. Similar limitations have been implemented by states and certain foreign jurisdictions. The Company is in the process of finalizing the impact of Section 382 on the Company’s deferred tax items and, it has preliminarily assessed the impact of Section 382 on our fully reserved deferred tax assets. The change of ownership has significantly limited the Company’s ability to utilize its federal and state deferred tax assets and impaired the carrying value of the deferred tax assets and changed the amount of our unrecognized tax benefits. As the federal and state deferred tax assets are fully reserved, this impairment has not had an impact on the Company’s current year financial position or results of operations. However, the limitation on the use of the Company’s NOLs, credits and amortization which resulted from the ownership changes could adversely impact the Company’s future operating results and financial condition.

In addition, the Company can within nine and a half months of the Merger elect under Section 338 of the Internal Revenue Code to treat the Merger as if it were an asset purchase for federal income tax purposes. If the Company makes a Section 338 election, generally the Company’s tax basis of its assets will equal the fair market value at the time of the Merger, the intangible assets would be deductible over 15 years under IRC Section 197 and the net operating losses, federal credits and remaining deferred taxes would be eliminated. The Company’s financial position and results of operations and cash flows could materially change if the Company makes a Section 338 election.

Deferred income tax assets and liabilities consist of the tax effects of temporary differences related to the following (in thousands):

	Successor			Predecessor
	September 30, 2011			October 1, 2010
Deferred tax assets:
Intangible assets	$	32,112		$	121,009
Capitalized research and development		51,007			232,709
Net operating losses		119,231			628,359
Research and development and investment credits		1,346			153,905
Other, net		47,623			95,052
Valuation allowance		(223,702	)		(1,175,361	)
Total deferred tax assets		27,617			55,673
Deferred tax liabilities:
Property		(2,664	)		—
Other		(11,821	)		—
Amortization		(11,783	)		—
Deferred state taxes		—			(54,143	)
Indefinite life assets		(19,894	)		—
Total deferred tax liabilities		(46,162	)		(54,143	)
	$	(18,545	)	$	1,530

In assessing the realizability of deferred income tax assets, the accounting guidance establishes a more likely than not standard. If it is determined that it is more likely than not that deferred income tax assets will not be realized, a valuation allowance must be established against the deferred income tax assets. The ultimate realization of the assets is dependent on the generation of future taxable income during the periods in which the associated temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income and tax planning strategies when making this assessment.

Accounting guidance further states that forming a conclusion that a valuation allowance is not required is difficult when there is negative evidence such as cumulative losses in recent years. As a result of the Company’s cumulative losses, the Company concluded that a full valuation allowance was required as of September 30, 2011 and October 1, 2010 for federal and state purposes. However, domestic operations recorded a deferred tax liability of $19.9 million for indefinite-lived intangibles. As of the successor fiscal year ended September 30, 2011, foreign operations recorded a $1.3 million net deferred tax asset. As of the predecessor fiscal year ended October 1, 2010, foreign operations recorded a $1.5 million net deferred tax asset.

The valuation allowance decreased $952.6 million during the successor period from April 20, 2011 through September 30, 2011. The decrease in the successor fiscal year ended September 30, 2011 was primarily due to Sections 382 and 383 limitations. The valuation allowance decreased $16.7 million during the predecessor fiscal year ended October 1, 2010. The decrease in the predecessor fiscal year ended October 1, 2010 was primarily due to income and the expiration of net operating losses and deferred stock compensation that expired without benefit.

As a result of the Section 382 and 383 limitations the Company’s deferred tax assets at September 30, 2011 do not have excess tax benefits from employee stock option exercises that are a component of the Company’s net operating loss carryovers. The Company’s deferred tax assets at October 1, 2010 did not include $20.8 million of excess tax benefits from employee stock option exercises that were a component of the Company’s net operating loss carryovers.

As a result of the Section 382 limitation, as of September 30, 2011, the Company has U.S. federal and California net realizeable net operating loss carryforwards of approximately $272 million and $553 million, respectively. The Company has written off NOL carry forwards prior to the statutory expiration dates for amounts that it preliminarily expects to be unutilized. If unutilized, the net operating losses will expire at various dates between 2012 and 2031. As a result of the Section 383 limitation the Company has net realizable federal tax credit carryforwards of $0.5 million that expire in 2031. The Company also has net realizable state income tax credit carryforwards of approximately $0.8 million that have no expiration date.

A reconciliation of income taxes computed at the U.S. federal statutory income tax rate to the provision for income taxes is as follows (in thousands):

	Successor			Predecessor
	Period from April 20, 2011 through September 30, 2011			Period from October 2,  2010 through April 19, 2011			Fiscal Year Ended October  1, 2010			Fiscal Year Ended October  2, 2009
U.S. Federal stautory tax at 35%	$	(37,801	)	$	(14,453	)	$	8,005		$	(12,873	)
State taxes, net of federal effect		(215	)		(834	)		1,165			348
U.S. and foreign income taxes on foreign earnings		442			54			(1,197	)		7,863
Research and development credits		(527	)		(468	)		(186	)		(939	)
Valuation allowance		34,733			905			(16,658	)		(8,808	)
Detriment/(benefit) from discontinued operations and equity method investments, net of impairments		—			—			4,614			6,670
Asset impairments		—			—			—			4,494
Stock options		—			2,399			4,440			3,189
Other		773			12,777			384			927
Provision for income taxes	$	(2,595	)	$	380		$	567		$	871

Income (loss) from continuing operations before income taxes and (loss) gain on equity investments consists of the following components (in thousands):

	Successor			Predecessor
	Period from April 20, 2011 through September 30, 2011			Period from October 2,  2010 through April 19, 2011			Fiscal Year Ended October  1, 2010		Fiscal Year Ended October  2, 2009
United States	$	(108,229	)	$	(43,536	)	$	20,073	$	(32,737	)
Foreign		224			748			2,799		(4,042	)
	$	(108,005	)	$	(42,788	)	$	22,872	$	(36,779	)

Certain of the Company’s foreign income tax returns for the years 2001 through 2008 are currently under examination. Management believes that adequate provision for income taxes has been made for all years, and the results of the examinations will not have a material impact on the Company’s financial position, cash flows or results of operations.

No provision has been made for U.S. federal or deemed distribution of approximately $0.8 million and $0.8 million of undistributed earnings of foreign subsidiaries as of September 30, 2011 and October 1, 2010, respectively, which are permanently reinvested.

The following table summarizes the successor and predecessor fiscal years ended September 30, 2011 and October 1, 2010 activity related to the Company’s unrecognized tax benefits:

	Successor			Predecessor
	Period from April 20, 2011 through September 30, 2011			Period from October 2, 2010 through April 19, 2011			Fiscal Year Ended October 1, 2010			Fiscal Year Ended October 2, 2009
Beginning balance	$	63,436		$	68,021		$	73,837		$	77,304
Increases related to current year tax positions		121			334			2,822			730
Decreases related to prior year tax positions		(15	)		(212	)		—			—
Expiration of the statue of limitations for the assessment of taxes		(747	)		(346	)		(9,130	)		(4,429	)
Other		(54,538	)		(4,361	)		492			232
Ending balance	$	8,257		$	63,436		$	68,021		$	73,837

The reductions in our unrecognized tax benefits of $57.6 million in 2011 were primarily due to the Section 382 and 383 limitations on the Company’s net operating losses and credits. As the Company reduced its net operating losses and credits for the Section 382 and 383 limitations it also reduced the related reserves.

The Company also accrued potential interest of $0.5 million related to these unrecognized tax benefits during the combined successor fiscal period from April 20, 2011 through September 30, 2011 and predecessor period from October 2, 2010 through April 19, 2011. The Company also accrued potential interest of $0.5 million during the predecessor fiscal year 2010. As of September 30, 2011, the Company has recorded a liability for potential interest of $1.7 million related to these positions. The Company expects $1.4 million of the unrecognized tax benefits, primarily related to foreign reserves to reverse over the next 12 months. The Company does not expect its uncertain tax positions to otherwise change materially over the next 12 months.

The Company files U.S., state, and foreign income tax returns in jurisdictions with varying statutes of limitations. The fiscal 2006 through 2010 tax years generally remain subject to examination by federal and most state tax authorities.