Earthlink 2002 Annual Report Download - page 72

As a result of the tax-free merger with OneMain in September 2000, the Company acquired $32.9 million of additional deferred tax
liabilities primarily related to the customer base and related intangibles. The Company acquired $49.4 million and $35.8 million of additional
deferred tax assets, primarily related to net operating losses, in conjunction with the acquisitions of Cidco in December 2001 and PeoplePC in
July 2002, respectively. These additional deferred tax assets and liabilities impact the net change to the valuation allowance.
Deferred tax assets and liabilities include the following as of December 31, 2001 and 2002:
At December 31, 2001 and 2002, the Company had net operating loss carryforwards for federal income tax purposes totaling
approximately $601.9 million and $671.9 million, respectively, which begin to expire in 2010. At December 31, 2001 and 2002, the Company
had net operating loss carryforwards for state income tax purposes totaling approximately $440.0 million and $523.5 million, respectively,
which begin to expire in 2002. The Company also had $35.5 million of foreign net operating loss carryforwards at December 31, 2002. Under
the Tax Reform Act of 1986, the Company's ability to use its federal, state and foreign net operating loss carryforwards 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. The utilization of these
carryforwards could be restricted and could result in significant amounts of these carryforwards expiring prior to benefiting the Company. The
Company is in the process of evaluating the
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extent of the limitation. At December 31, 2001 and 2002, the net operating loss carryforwards include $74.8 million and $75.2 million,
respectively, related to the exercise of employee stock options and warrants. Any benefit resulting from the utilization of this portion of the net
operating loss carryforward will be credited directly to equity.
14. Commitments and Contingencies
Leases
The Company leases certain of its facilities and equipment under non-cancelable operating leases expiring in various years through 2011.
Total rent expense in the years ended December 31, 2000, 2001 and 2002 for all operating leases amounted to $19.8 million, $31.0 million and
Year Ended December 31,
2000 2001 2002
(in thousands)
Federal income tax benefit at statutory rate
$
(121,911
)
$
(119,372
)
$
(51,812
)
State income taxes, net of federal benefit
(13,842
)
(12,633
)
(6,699
)
Nondeductible goodwill and acquisition costs
12,905
13,389
—
Net change to valuation allowance
119,908
121,633
58,225
Other
546
(3,017
)
286
$
(2,394
)
$
—
$
—
As of December 31,
2001 2002
(in thousands)
Deferred tax assets:
Net operating losses
$
243,881
$
283,253
Accrued liabilities and reserves
13,067
21,729
Customer base and other intangible assets
77,390
95,373
Other
3,862
30,312
Total deferred tax assets
338,200
430,667
Valuation allowance
(338,200
)
(430,667
)
Net deferred taxes
$
—
$
—