Earthlink 2015 Annual Report Download - page 27

Table of Contents
our business strategy, changes in economic conditions, changes in operating performance or other indicators of impairment could cause us to record a significant
impairment charge during the period in which the impairment is determined, negatively impacting our results of operations and financial position.
We may have exposure to greater than anticipated tax liabilities and we may be limited in the use of our net operating losses and certain other tax attributes in
the future.
As of December 31, 2015, we had approximately $681.0 million of gross tax net operating losses for federal income tax purposes and approximately $32.6 million
of net tax net operating losses for state income tax purposes, which includes federal and state net operating losses acquired in connection with our acquisitions. The
tax net operating losses for federal income tax purposes begin to expire in 2020 and the tax net operating losses for state income tax purposes began to expire in
2015.
Our future income taxes could be adversely affected by changes in tax laws, regulations, accounting principles or interpretations thereof. Our determination of our
tax liability is always subject to review by applicable tax authorities. Any adverse outcome of such a review could have a negative effect on our operating results
and financial condition. In addition, the determination of our provision for income taxes and other tax liabilities requires significant judgment, and there are many
transactions and calculations where the ultimate tax determination is uncertain. Although we believe our estimates are reasonable, the ultimate tax outcome may
differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is
made.
An “ownership change” that occurs during a “testing period” (as such terms are defined in Section 382 of the Internal Revenue Code of 1986, as amended) could
place significant limitations, on an annual basis, on the use of such net operating losses to offset future taxable income we may generate. In general, future stock
transactions and the timing of such transactions could cause an “ownership change” for income tax purposes. Such transactions may include our purchases under
our share repurchase program, additional issuances of common stock by us and acquisitions or sales of shares by certain holders of our shares, including persons
who have held, currently hold, or may accumulate in the future five percent or more of our outstanding stock. Many of these transactions are beyond our control.
Calculations of an “ownership change” under Section 382 are complex and to some extent are dependent on information that is not publicly available. The risk of
an “ownership change” occurring could increase if additional shares are repurchased, if additional persons acquire five percent or more of our outstanding common
stock in the near future and/or current five percent stockholders increase their interest. Due to this risk, we monitor our purchases of additional shares of our
common stock. Since an “ownership change” also could result from a change in control of our company, with subsequent annual limitations on the use of our net
operating losses, this could discourage a change in control.
Risks Related to Our Liquidity and Financial Resources
Our indebtedness could adversely affect our financial health and limit our ability to react to changes in our business and industry.
As of December 31, 2015, we had $508.9 million gross amount of debt outstanding, which consisted of $300.0 million outstanding principal amount of 7.375%
senior secured notes due 2020 (the “Senior Secured Notes”), $173.9 million outstanding principal amount of 8.875% senior notes due 2019 (the “Senior Notes”)
and $35.0 million outstanding under our senior secured revolving credit facility. We may incur significant additional indebtedness in the future. Our substantial
indebtedness will require us to use a substantial portion of our cash flows from operations to make debt service payments and may:
• limit our ability to use our cash flows from operations for working capital, capital expenditures, acquisitions or other general business purposes;
• limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions or other general business purposes;
• limit our flexibility to plan for, or react to, changes in our business and industry;
•limit our ability to engage in strategic transactions or to make divestitures of non-strategic businesses;
• place us at a competitive disadvantage compared to our less leveraged competitors; and
• increase our vulnerability to the impact of adverse economic and industry conditions.
Our ability to make payments on our indebtedness will depend on our ability in the future to generate cash flows from operations, which is subject to all the risks of
our business. We may not be able to generate sufficient cash flows from operations for us to repay our indebtedness when such indebtedness becomes due and to
meet our other cash needs. Although we reduced our gross amount of outstanding debt by $91.1 million during the year ended December 31, 2015, we may not be
able to continue to reduce the gross amount of our outstanding debt in the future.
24