Earthlink 2004 Annual Report Download - page 89

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EARTHLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of December 31, 2003 and 2004, the Company had NOLs for federal income tax purposes totaling approximately $639.5 million and
$510.1 million, respectively, which begin to expire in 2010. As of December 31, 2003 and 2004, the Company had NOLs for state income tax
purposes totaling approximately $404.7 million and $290.6 million, respectively, which started to expire in 2002. The Company also had $35.6
million of foreign NOLs as of December 31, 2003 and 2004. 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, 2003, the Company reduced the NOL deferred tax asset and the associated valuation allowance by $28.8
million based on an analysis of Section 382 limitations associated with acquired federal and state NOLs. 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, 2004 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, 2004, the NOLs included $70.0 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 credited directly to equity. As of December 31, 2004, the NOLs included
$98.3 million of NOLs acquired in connection with business acquisitions. Any benefit resulting from the utilization of this portion of the NOLs
will be credited to goodwill.
The Company has provided a valuation allowance for its deferred tax assets, including NOLs, because of uncertainty regarding their
realization.
14. Commitments and Contingencies
Leases
The Company leases certain of its facilities and equipment under non-cancelable operating leases expiring in various years through 2014.
The leases generally contain annual escalation provisions as well as renewal options. The total amount of base rent payments, net of allowances
and incentives, is being charged to expense using the straight-line method over the terms of the leases. In addition to the base rent payments,
EarthLink generally pays a monthly allocation of the buildings’ operating expenses. Total base rent expense in the years ended December 31,
2002, 2003 and 2004 for all operating leases amounted to $29.7 million, $26.2 million and $17.8 million, respectively.
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