Earthlink 2012 Annual Report Download - page 31

Table of Contents
audits, primarily an audit currently being conducted by the Universal Service Administrative Company on previous ITC^DeltaCom Universal
Service Fund assessments and payments. Calculation of payments due with respect to these matters can be complex and subject to differences in
interpretation. As a result, these audits could result in liabilities in excess of such reserves which could adversely affect our results of operations.
Our business may suffer if third parties are unable to provide services or terminate their relationships with us.
Our business and financial results depend, in part, on the availability and quality of certain third-
party service providers. Specifically,
we rely on third parties for customer service and technical support, web hosting services, certain billing and collection services and E911 service
for our VoIP services. Our Consumer Services segment relies primarily on one customer service and technical support vendor. We may have to
increase the price we pay or find a new supplier, which could impact our customers' experience and increase churn. We are not currently
equipped to provide the necessary range of service and support functions in the event that any of our service providers become unable or
unwilling to offer these services to us. Our outsourced customer support providers utilize international locations to provide us with customer
service and technical support services, and as a result, our customer support providers may become subject to financial, economic, environmental
and political risks beyond our or the providers' control, which could jeopardize their ability to deliver customer service and technical support
services. In addition, our VoIP services, including our E911 service, depend on the proper functioning of facilities and equipment owned and
operated by third parties and is, therefore, beyond our control. If one or more of our service providers does not provide us with quality services,
or if our relationship with any of our third party vendors terminates and we are unable to provide those services internally or identify a
replacement vendor in an orderly, cost-
effective and timely manner, our business, financial position, results of operations and cash flows could
suffer.
We may be required to recognize impairment charges on our goodwill and intangible assets, which would adversely affect our results of
operations and financial position.
As of December 31, 2012, we had approximately $379.4 million of goodwill and $214.7 million of other intangible assets. Of the
goodwill, $290.5 million was allocated to our Business Services reporting unit and $88.9 million was allocated to our Consumer Services
reporting unit. We perform an impairment test of our goodwill annually during the fourth quarter of our fiscal year or when events occur or
circumstances change that would more-likely-than-
not indicate that goodwill or any such assets might be impaired. We evaluate the
recoverability of our definite-
lived intangible assets for impairment when events occur or circumstances change that would indicate that the
carrying amount of an asset may not be recoverable. Factors that may be considered a change in circumstances, indicating that the carrying value
of our goodwill or intangible assets may not be recoverable, include a decline in stock price and market capitalization, reduced future cash flow
estimates, higher customer churn and slower growth rates in our industry. The estimated fair value of our Business Services reporting unit
exceeded its carrying value by approximately 3% in our fiscal 2012 goodwill impairment test. Deterioration in estimated future cash flows in this
reporting unit could result in future goodwill impairment. As we continue to assess the ongoing expected cash flows and carrying amounts of our
goodwill and other intangible assets, changes in economic conditions, changes to our business strategy, 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 the use of our net operating losses and certain other tax attributes could
be limited in the future.
As of December 31, 2012, we had approximately $493.6 million
of tax net operating losses for federal income tax purposes and
approximately $786.4 million
of 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 2019 and the tax net
operating losses for state income tax purposes began to expire in 2012.
Our future income taxes could be adversely affected by changes in the valuation of our deferred tax assets and liabilities, including the
realizability of these assets, or 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
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