Earthlink 2004 Annual Report Download - page 50

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Income taxes
We continue to maintain a valuation allowance against our deferred tax assets of $367.9 million, consisting primarily of net operating loss
carryforwards, and we may recognize deferred tax assets in future periods when they are determined to be realizable. To the extent we may
owe income taxes in future periods, we intend to use our net operating loss carryforwards to the extent available to reduce cash outflows for
income taxes.
Other
Our principal sources of liquidity are our cash, cash equivalents and investments in marketable securities, as well as the cash flow we
generate from operations. As of December 31, 2004, we had $218.9 million in cash and cash equivalents. In addition, we held short- and long-
term investments in marketable securities valued at $253.6 million and $58.5 million, respectively. Short-term investments in marketable
securities consist of investments that have maturity dates of and asset-backed, auction rate securities that have reauction periods of up to one
year from the balance sheet date, and long
-term investments in marketable securities consist of investments that have maturity dates of more
than one year from the balance sheet date.
In January 2005, we entered into a definitive agreement with SK Telecom Co., Ltd. to form a joint venture to market wireless voice and
data services in the U.S. Pursuant to the Contribution and Formation Agreement of our joint venture, SK-EarthLink, we have committed to
invest an aggregate of $220.0 million in SK-EarthLink over the next three years, including $180.0 million of cash and $40.0 million in non-
cash assets, including customers, contractual arrangements and agreements to prospectively market SK-EarthLink’s services. We expect the
use of cash for the formation of SK-EarthLink and our subsequent investments to finance SK-EarthLink’s near-term operations to adversely
affect our cash position.
We will also use cash to continue to pay real estate obligations associated with facilities closed in restructuring our contact center
operations. We also expect to incur capital expenditures to maintain and upgrade our network and technology infrastructure. We may use a
portion of our cash to acquire or invest in companies with specific products, service capabilities, marketing channels, and/or subscriber bases
that complement ours, and we may continue to use cash to repurchase shares of our common stock, among other potential opportunities. Our
cash requirements depend on numerous factors, including the rate of market acceptance of our and SK-EarthLink’s services, our ability to
maintain and expand our customer base, the rate of expansion of our network infrastructure, the size and types of acquisitions in which we may
engage, the level of resources required to expand our sales and marketing programs, and general economic developments.
We believe our available cash and marketable securities, together with our results of operations, are sufficient to meet our operating
expenses, capital requirements and investment obligations for the foreseeable future; however, we have no commitments for any additional
financing and have no lines of credit or similar sources of financing. We cannot be sure that we can obtain additional commitments on
favorable terms, if at all. Additional equity financing may dilute our stockholders, and debt financing, if available, may restrict our ability to
declare and pay dividends and raise future capital. If we are unable to obtain additional needed financing, we may be required to reduce the
scope of operations or anticipated expansion, which could materially and adversely affect us.
Related Party Transactions
Through its ownership interest in EarthLink, Sprint is considered a related party. Our marketing relationship with Sprint generated
approximately 10% of our total gross organic subscriber additions during the years ended December 31, 2002, 2003 and 2004. In connection
with our marketing relationship with Sprint, we provide wholesale broadband, narrowband and other services to Sprint. We received
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