Income Taxes

The Company adjusts its effective tax rate each quarter based on its current estimated annual effective tax rate. The Company also records the tax impact of certain discrete items, unusual or infrequently occurring tax events and the effects of changes in tax laws or rates, in the interim period in which they occur. In addition, the Company evaluates its deferred tax assets quarterly to determine if a valuation allowance is required.

The Company considered whether a valuation allowance should be recorded against deferred tax assets based on the likelihood that the benefits of the deferred tax assets would or would not ultimately be realized in future periods. In making this assessment, significant weight was given to evidence that could be objectively verified such as recent operating results and less consideration was given to less objective indicators such as future earnings projections.

After consideration of positive and negative evidence, including the recent history of losses, the Company cannot conclude that it is more likely than not to generate future earnings sufficient to realize the Company's deferred tax assets. Accordingly, the Company increased its valuation allowance by $2.9 million in the three months ended December 31, 2012 to $86.6 million. The valuation allowance at June 30, 2012 was $85.0 million.

A summary of the income tax expense recorded for the three and six months ended December 30, 2012 and 2011 is as follows:



	Three Months Ended						Six Months Ended
	December 31, 2012			December 31, 2011			December 31, 2012			December 31, 2011
(In thousands)	(Unaudited)						(Unaudited)
Loss before taxes	$	(7,313	)	$	(4,050	)	$	(4,017	)	$	(11,288	)
Income tax benefit at statutory rate	(2,487		)	(1,377		)	(1,366		)	(3,838		)
State income tax (benefit) expense (net of federal tax benefit)	(320		)	(168		)	109			(448		)
Dividend income exclusion	—			(9		)	—			(58		)
Valuation allowance	2,852			1,601			1,617			4,683
Other permanent items	(64		)	13			43			67
Income tax (benefit) expense	$	(19	)	$	60		$	403		$	406

As of December 31, 2012 and June 30, 2012 the Company had not recognized the following tax benefits in its consolidated financial statements:



	As of
	December 31, 2012		June 30, 2012
(In thousands)	(Unaudited)
Total unrecognized tax benefits(1)	$	3,211	$	3,211
Unrecognized tax benefits that, if recognized, would affect the Company's effective tax rate, subject to the valuation allowance(1)	$	3,064	$	3,064

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(1) Excluding interest and penalties.

The Company believes it is reasonably possible that approximately $43,000 of its total unrecognized tax benefits could be released in the next 12 months.

The Company is currently appealing a decision reached by the Internal Revenue Service regarding its June 30, 2003 through June 30, 2008 tax returns. In January 2012, the appeals officer gave a preliminary indication that the audit results will be upheld.