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EARTHLINK, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Deferred tax assets and liabilities include the following as of December 31, 2004 and 2005:
As of December 31, 2004 and 2005, the Company had NOLs for federal income tax purposes totaling approximately $510.1 million and
$386.9 million, respectively, which begin to expire in 2017. As of December 31, 2004 and 2005, the Company had NOLs for state income tax
purposes totaling approximately $290.6 million and $231.1 million, respectively, which started to expire in 2005. The Company also had $35.6
million of foreign NOLs as of December 31, 2004 and 2005. Under the Tax Reform Act of 1986, the Company’s ability to use its federal, state
and foreign NOLs and federal and state tax credit carryforwards to reduce future taxable income and future taxes, respectively, is subject to
restrictions attributable to equity transactions that have resulted in a change of ownership as defined in Internal Revenue Code Section 382.
During the year ended December 31, 2004, the Company reduced deferred tax assets and the valuation allowance by $18.1 million based on an
analysis of the NOLs and other deferred tax assets. As a result, the NOL amounts as of December 31, 2005 reflect the restriction on the
Company’s ability to use its federal and state NOLs; however, the Company continues to evaluate potential changes to the Section 382
limitations associated with acquired federal and state NOLs. The utilization of these NOLs could be further restricted in future periods which
could result in significant amounts of these NOLs expiring prior to benefiting the Company.
As of December 31, 2005, the NOLs included $80.0 million related to the exercise of employee stock options and warrants. Any benefit
resulting from the utilization of this portion of the NOLs will be
91
Year Ended December 31,
2003
2004
2005
(in thousands)
Federal income tax (benefit) provision at statutory rate
$
(21,768
)
$
40,414
$
57,840
State income taxes, net of federal benefit
(2,830
)
5,254
6,688
Nondeductible expenses
(266
)
361
1,087
Net change to valuation allowance
25,446
—
—
Change in valuation allowance associated with realized deferred
tax assets
—
(
45,360
)
(62,938
)
Valuation allowance for realized deferred tax assets acquired in business
combinations
—
1,969
17,139
Increase in valuation allowance for AMT due
—
1,822
2,582
Other
(582
)
—
78
$
—
$
4,460
$
22,476
December 31,
2004
2005
(in thousands)
Deferred tax assets:
Net operating loss carryforwards
$
204,717
$
158,371
Accrued liabilities and reserves
20,005
17,773
Subscriber base and other intangible assets
104,769
97,295
Other
38,434
38,186
Total deferred tax assets
367,925
311,625
Valuation allowance
(367,925
)
(311,625
)
Net deferred tax asset
$
—
$
—