EarthLink (ELNK) 10-Q 2014 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to               .

Commission File Number: 001-15605

EARTHLINK HOLDINGS CORP.

(Exact name of registrant as specified in its charter)

Delaware	46-4228084
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1170 Peachtree Street NE, Suite 900, Atlanta, Georgia  30309

(Address of principal executive offices)  (Zip Code)

(404) 815-0770

(Registrant’s telephone number, including area code)

 _______________________________________________________

(Former name, former address and former fiscal year, if changed since last report date)

_______________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x	Accelerated filer o
Non-accelerated filer o	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

As of October 31, 2014, 102,344,888 shares of common stock, $0.01 par value per share, were outstanding.

EARTHLINK HOLDINGS CORP.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended September 30, 2014

TABLE OF CONTENTS

Part I
Item 1.  Financial Statements	1
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.  Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.  Controls and Procedures	39
Part II
Item 1.  Legal Proceedings	41
Item 1A.  Risk Factors	41
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 5.  Other Information	41
Item 6.  Exhibits	42
Signatures	43

PART I

Item 1.  Financial Statements.

EARTHLINK HOLDINGS CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

	December 31, 2013			September 30, 2014
	(in thousands, except per share data)
				(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	116,636		$	129,612
Accounts receivable, net of allowance of $8,615 and $6,903 as of December 31, 2013 and September 30, 2014, respectively	100,792			105,501
Prepaid expenses	15,945			16,138
Deferred income taxes, net	549			453
Other current assets	13,930			16,110
Total current assets	247,852			267,814
Property and equipment, net	438,321			414,802
Goodwill	139,215			137,770
Other intangible assets, net	155,428			107,546
Other long-term assets	26,502			23,183
Total assets	$	1,007,318		$	951,115
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	33,440		$	23,716
Accrued payroll and related expenses	35,041			40,442
Other accrued liabilities	88,225			105,397
Deferred revenue	49,689			45,328
Current portion of long-term debt and capital lease obligations	1,489			1,534
Total current liabilities	207,884			216,417
Long-term debt and capital lease obligations	606,442			606,382
Long-term deferred income taxes, net	2,221			3,483
Other long-term liabilities	28,553			24,298
Total liabilities	845,100			850,580
Stockholders’ equity:
Preferred stock, $0.01 par value, 100,000 shares authorized, 0 shares issued and outstanding as of December 31, 2013 and September 30, 2014	—			—
Common stock, $0.01 par value, 300,000 shares authorized, 197,491 and 198,559 shares issued as of December 31, 2013 and September 30, 2014, respectively, and 101,876 and 102,280 shares outstanding as of December 31, 2013 and September 30, 2014, respectively	1,975			1,986
Additional paid-in capital	2,047,607			2,038,422
Accumulated deficit	(1,144,975		)	(1,195,235		)
Treasury stock, at cost, 95,615 shares and 96,279 shares as of December 31, 2013 and September 30, 2014, respectively	(742,389		)	(744,638		)
Total stockholders’ equity	162,218			100,535
Total liabilities and stockholders’ equity	$	1,007,318		$	951,115

The accompanying notes are an integral part of these financial statements.

1

EARTHLINK HOLDINGS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2014			2013			2014
	(in thousands, except per share data) (unaudited)
Revenues	$	308,578		$	297,745		$	938,767		$	892,423
Operating costs and expenses:
Cost of revenues (exclusive of depreciation and amortization shown separately below)	144,760			135,695			450,564			425,759
Selling, general and administrative (exclusive of depreciation and amortization shown separately below)	108,911			105,948			320,469			317,030
Depreciation and amortization	46,689			46,716			134,314			139,186
Impairment of goodwill and long-lived assets	—			589			255,599			11,360
Restructuring, acquisition and integration-related costs	9,928			1,108			28,468			10,993
Total operating costs and expenses	310,288			290,056			1,189,414			904,328
Income (loss) from operations	(1,710		)	7,689			(250,647		)	(11,905		)
Interest expense and other, net	(13,985		)	(13,970		)	(46,714		)	(42,008		)
Loss from continuing operations before income taxes	(15,695		)	(6,281		)	(297,361		)	(53,913		)
Income tax benefit	4,582			4,329			40,029			3,592
Loss from continuing operations	(11,113		)	(1,952		)	(257,332		)	(50,321		)
Gain (loss) from discontinued operations, net of tax	(225		)	—			(1,622		)	61
Net loss	$	(11,338	)	$	(1,952	)	$	(258,954	)	$	(50,260	)
Other comprehensive loss, net of tax:
Unrealized holding losses on investments, net of tax	(1		)	—			(12		)	—
Other comprehensive loss, net of tax	(1		)	—			(12		)	—
Comprehensive loss	$	(11,339	)	$	(1,952	)	$	(258,966	)	$	(50,260	)
Basic and diluted net loss per share
Continuing operations	$	(0.11	)	$	(0.02	)	$	(2.50	)	$	(0.49	)
Discontinued operations	—			—			(0.02		)	—
Basic and diluted net loss per share	$	(0.11	)	$	(0.02	)	$	(2.52	)	$	(0.49	)
Basic and diluted weighted average common shares outstanding	102,580			102,268			102,835			102,312
Dividends declared per share	$	0.05		$	0.05		$	0.15		$	0.15

The accompanying notes are an integral part of these financial statements.

2

EARTHLINK HOLDINGS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months Ended September 30,
	2013			2014
Cash flows from operating activities:	(in thousands) (unaudited)
Net loss	$	(258,954	)	$	(50,260	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	134,314			139,186
Impairment of goodwill and long-lived assets	255,599			11,360
Loss on disposals and sales of fixed assets	217			—
Non-cash income taxes	(40,206		)	(3,939		)
Stock-based compensation	9,218			10,208
Amortization of debt discount, premium and issuance costs	1,044			3,067
Loss on repayment of debt	2,080			—
Other operating activities	(608		)	(33		)
Decrease (increase) in accounts receivable, net	5,438			(4,694		)
Increase in prepaid expenses and other assets	(420		)	(616		)
Decrease in accounts payable and accrued and other liabilities	(23,117		)	(1,032		)
Decrease in deferred revenue	(1,175		)	(1,909		)
Net cash provided by operating activities	83,430			101,338
Cash flows from investing activities:
Purchases of property and equipment	(109,647		)	(74,239		)
Purchases of marketable securities	(41,209		)	—
Sales and maturities of marketable securities	88,060			—
Purchase of business	(16,806		)	—
Purchase of customer relationships	(1,195		)	—
Change in restricted cash	1,013			(500		)
Other investing activities	1,251			586
Net cash used in investing activities	(78,533		)	(74,153		)
Cash flows from financing activities:
Proceeds from issuance of debt, net of issuance costs	290,692			—
Repayment of debt and capital lease obligations	(316,046		)	(1,125		)
Payment of dividends	(15,693		)	(10,897		)
Repurchases of common stock	(5,604		)	(2,210		)
Other financing activities	36			23
Net cash used in financing activities	(46,615		)	(14,209		)
Net (decrease) increase in cash and cash equivalents	(41,718		)	12,976
Cash and cash equivalents, beginning of period	157,621			116,636
Cash and cash equivalents, end of period	$	115,903		$	129,612

The accompanying notes are an integral part of these financial statements.

3

EARTHLINK HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

1.  Organization

EarthLink Holdings Corp. (“EarthLink” or the “Company”), together with its consolidated subsidiaries, is a leading managed network, security and cloud services provider to business and residential customers in the United States. The Company operates two reportable segments, Business Services and Consumer Services. The Company’s Business Services segment provides a broad range of data, voice and IT services to retail and wholesale business customers. The Company’s Consumer Services segment provides nationwide Internet access and related value-added services to residential customers. The Company operates an extensive network including more than 28,000 route fiber miles, 90 metro fiber rings and secure enterprise-class data centers that provide data and voice IP service coverage across more than 90 percent of the United States. For further information concerning the Company’s reportable segments, see Note 13, “Segment Information.”

2. Summary of Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements of EarthLink for the three and nine months ended September 30, 2013 and 2014 and the related footnote information are unaudited and have been prepared on a basis consistent with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 as filed with the Securities and Exchange Commission (the “SEC”) (the “Annual Report”).

These financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto contained in the Annual Report.  In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of normal recurring adjustments) which management considers necessary to present fairly the Company’s financial position, results of operations and cash flows for the interim periods presented.  The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the results anticipated for the entire year ending December 31, 2014.

Basis of Consolidation

The accompanying condensed consolidated financial statements of EarthLink include the accounts of its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated.

Discontinued Operations

 The operating results of the Company's telecom systems business acquired as part of ITC^DeltaCom, Inc. ("ITC^DeltaCom") have been separately presented as discontinued operations for all periods presented. See Note 5, "Discontinued Operations," for further discussion.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements.  Actual results may differ from those estimates.

Reclassifications

Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. 

4

EARTHLINK HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

Long-Lived Assets

The Company evaluates the recoverability of long-lived assets, including property and equipment and purchased definite-lived intangible assets, for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used or a significant adverse change that would indicate the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss, if any, based on the difference between the carrying amount and fair value. Long-lived assets held for sale are reported at the lower of cost or fair value less costs to sell. During the nine months ended September 30, 2014, the Company recorded $11.4 million for impairment of long-lived assets, which included $5.3 million recorded during the the three months ended March 31, 2014 for impairment of work in progress for an information technology project not expected to be used, $5.4 million recorded during the the three months ended June 30, 2014 for impairment of additional work in progress and software licenses not expected to be used and $0.6 million recorded during the three months ended September 30, 2014 due to other long-lived asset impairments. The impairment losses are classified within impairment of goodwill and long-lived assets in the Condensed Consolidated Statements of Comprehensive Loss.

Recently Adopted Accounting Pronouncement

On January 1, 2014, the Company adopted new guidance on the presentation of unrecognized tax benefits. This guidance requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward, except as follows: to the extent a net operating loss carryforward, a similar tax loss or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this new guidance did not have a material impact on the Company's consolidated financial statements.

Recently Issued Accounting Pronouncement

In April 2014, the Financial Accounting Standards Board issued authoritative guidance on reporting discontinued operations. The new guidance changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods.

In May 2014, the Financial Accounting Standards Board issued authoritative guidance on revenue from contracts with customers. The new guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard requires significantly expanded disclosures about revenue contract assets and liabilities. The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2016, and interim periods within those annual periods, and may be applied on a full retrospective or modified retrospective approach. Early adoption is prohibited. The Company is evaluating the impact of the implementation of this standard on its financial statements.

In August 2014, the Financial Accounting Standards Board issued authoritative guidance related to the disclosure of uncertainties about an entity's ability to continue as a going concern. The new guidance requires management to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements and to provide related footnote disclosures if so. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's financial statements.

5

EARTHLINK HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

3.  Earnings per Share

Basic net loss per share represents net loss divided by the weighted average number of common shares outstanding during the reported period. Diluted net loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock, including stock options and restricted stock units (collectively “Common Stock Equivalents”), were exercised, vested or converted into common stock. The dilutive effect, if any, of outstanding stock options and restricted stock units is reflected in diluted earnings per share by application of the treasury stock method. In applying the treasury stock method for stock-based compensation arrangements, the assumed proceeds are computed as the sum of the amount the employee must pay upon exercise, the amount of compensation cost attributed to future services and not yet recognized and the amount of excess tax benefits, if any, that would be credited to additional paid-in capital assuming exercise of the awards. The Company has not included the effect of Common Stock Equivalents in the calculation of diluted earnings per share for the three and nine months ended September 30, 2013 and 2014 because such inclusion would have an anti-dilutive effect due to the Company's net loss per share. As of September 30, 2013 and 2014, the Company had 9.5 million and 8.3 million stock options and restricted stock units outstanding, respectively, which were excluded from the determination of dilutive earnings per share. Anti-dilutive securities could be dilutive in future periods.

4.  Restructuring, Acquisition and Integration-Related Costs

Restructuring, acquisition and integration-related costs consist of costs related to EarthLink’s restructuring, acquisition and integration-related activities. Such costs include: 1) integration-related costs, such as system conversions, rebranding costs and integration-related consulting and employee costs; 2) severance, retention and other employee termination costs associated with acquisition and integration activities and with certain voluntary employee separations; 3) facility-related costs, such as lease termination and asset impairments; and 4) transaction-related costs, which are direct costs incurred to effect a business combination, such as advisory, legal, accounting, valuation and other professional fees. Restructuring, acquisition and integration-related costs are expensed in the period in which the costs are incurred and the services are received and are included in restructuring, acquisition and integration-related costs in the Condensed Consolidated Statements of Comprehensive Loss.  Restructuring, acquisition and integration-related costs consisted of the following during the three and nine months ended September 30, 2013 and 2014:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2013		2014			2013		2014
	(in thousands)
Integration-related costs	$	5,192	$	1,270		$	15,678	$	7,985
Severance, retention and other employee costs	4,029		39			9,718		2,005
Facility-related costs	37		(203		)	1,872		999
Transaction-related costs	670		2			985		4
Legacy plan restructuring costs	—		—			215		—
Restructuring, acquisition and integration-related costs	$	9,928	$	1,108		$	28,468	$	10,993

Restructuring, acquisition and integration-related costs during the three and nine months ended September 30, 2013 and 2014 primarily includes costs incurred in connection with the Company's acquisitions and costs incurred in connection with integrating operating support systems, networks and certain billing systems. Restructuring, acquisition and integration-related costs recorded during the nine months ended September 30, 2013 included costs incurred to restructure the Company's sales organization, which resulted in a reduction in the Company's sales workforce and some office closings. The Company recorded $2.2 million of severance costs and $0.6 million of facility-related costs in connection with this restructuring, which is included in restructuring, acquisition and integration-related costs in the Condensed Consolidated Statement of Comprehensive Loss.

As of December 31, 2013, the Company had $5.1 million of facility exit and restructuring liabilities, of which $2.9 million was classified as other accrued liabilities and $2.2 million was classified as other long-term liabilities. As of September 30, 2014, the Company had $4.8 million of facility exit and restructuring liabilities, of which $1.2 million was classified as other accrued liabilities and $3.6 million was classified as other long-term liabilities.

6

EARTHLINK HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

5.  Discontinued Operations

The operating results of the Company's telecom systems business acquired as part of ITC^DeltaCom have been separately presented as discontinued operations for all periods presented. On August 2, 2013, the Company sold its telecom systems business. The Company received $0.6 million of cash and recorded an $0.8 million receivable for contingent consideration expected to be received over four years. No gain or loss was recognized on the sale. The Company has no significant continuing involvement in the operations or significant continuing direct cash flows. The telecom systems results of operations were previously included in the Company's Business Services segment.

The following table presents summarized results of operations related to discontinued operations for the three and nine months ended September 30, 2013 and 2014:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2013			2014		2013			2014
	(in thousands)
Revenues	$	774		$	—	$	5,922		$	116
Operating costs and expenses	(1,036		)	—		(7,777		)	(22		)
Income tax benefit (provision)	37			—		233			(33		)
Gain (loss) from discontinued operations, net of tax	$	(225	)	$	—	$	(1,622	)	$	61

6. Goodwill and Other Intangible Assets

Goodwill

The changes in the carrying amount of goodwill by operating segment during the nine months ended September 30, 2014 were as follows:

	Consumer Services Segment		Business Services Segment			Total
	(in thousands)
Balance as of December 31, 2013
Goodwill	$	88,920	$	394,873		$	483,793
Accumulated impairment loss	—		(344,578		)	(344,578		)
	88,920		50,295			139,215
Goodwill adjustments	—		(1,445		)	(1,445		)
Balance as of September 30, 2014
Goodwill	88,920		393,428			482,348
Accumulated impairment loss	—		(344,578		)	(344,578		)
	$	88,920	$	48,850		$	137,770

7

EARTHLINK HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

The goodwill adjustment during the nine months ended September 30, 2014 resulted from adjustments in the fair value of assets and liabilities assumed in acquisitions that were not deemed material to retrospectively adjust amounts recorded at the acquisition date.

Other Intangible Assets

The following table presents the components of the Company’s acquired identifiable intangible assets included in the accompanying Condensed Consolidated Balance Sheets as of December 31, 2013 and September 30, 2014:

	As of December 31, 2013							As of September 30, 2014
	Gross Carrying Value		Accumulated Amortization			Net Carrying Value		Gross Carrying Value		Accumulated Amortization			Net Carrying Value
	(in thousands)
Customer relationships	$	366,651	$	(219,030	)	$	147,621	$	365,553	$	(262,930	)	$	102,623
Developed technology and software	26,261		(19,194		)	7,067		26,261		(21,521		)	4,740
Trade names	9,121		(8,796		)	325		9,121		(9,121		)	—
Other	1,800		(1,385		)	415		1,800		(1,617		)	183
	$	403,833	$	(248,405	)	$	155,428	$	402,735	$	(295,189	)	$	107,546

Definite-lived intangible assets are amortized over their estimated useful lives. The Company amortizes its customer relationships using the straight-line method to match the estimated cash flow generated by such assets, and amortizes its developed technology and trade names using the straight-line method because a pattern to which the expected benefits will be consumed or otherwise used up could not be reliably determined. As of September 30, 2014, the weighted average amortization periods were 5.3 years for customer relationships, 3.8 years for developed technology and software, 3.3 years for trade names and 3.6 years for other identifiable intangible assets.

Amortization of intangible assets, which is included in depreciation and amortization in the Condensed Consolidated Statements of Comprehensive Loss, for the three and nine months ended September 30, 2013 and 2014 was as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2014		2013		2014
	(in thousands)
Amortization expense	$	16,795	$	15,500	$	49,687	$	47,428

Based on the current amount of definite-lived intangible assets, the Company expects to record amortization expense of approximately $15.3 million during the remaining three months in the year ending December 31, 2014 and $60.6 million, $29.4 million, $1.8 million and $0.4 million during the years ending December 31, 2015, 2016, 2017 and 2018, respectively. Actual amortization expense to be reported in future periods could differ materially from these estimates as a result of acquisitions, changes in useful lives and other relevant factors.

Impairment of Goodwill

During the first quarter of 2013, the Company recognized a $256.7 million non-cash impairment charge to goodwill related to its Business Services reporting unit, of which $255.6 million is included in continuing operations and $1.1 million is reflected in discontinued operations. The impairment was based on an analysis of a number of factors after a decline in the Company's market capitalization following the announcement of its fourth quarter 2012 earnings and 2013 financial guidance. The primary factor contributing to the impairment was a change in the discount rate and market multiples as a result of the change in these market conditions, both key assumptions used in the determination of fair value.

The Company tests its goodwill annually during the fourth quarter of each fiscal year or when events or changes in circumstances indicate that goodwill might be impaired. The Company's stock price and market capitalization declined during the three months ended March 31, 2013 following the announcement in mid-February 2013 of the Company's fourth quarter 2012 earnings and 2013 financial guidance. As a result of the sustained decrease in stock price and market capitalization, the Company

8

EARTHLINK HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

performed an interim goodwill test in conjunction with the preparation of its financial statements for the three months ended March 31, 2013.

Impairment testing of goodwill is required at the reporting unit level and involves a two-step process. The Company identified two reporting units, Business Services and Consumer Services, for evaluating goodwill. Each of these reporting units constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results. The first step of the impairment test involves comparing the estimated fair values of the Company's reporting units with the reporting units' carrying amounts, including goodwill. The Company estimated the fair values of its reporting units based on weighting of the income and market approaches. These models use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. Under the income approach, the fair value of the reporting unit was estimated based on the present value of estimated cash flows using a discounted cash flow method. The significant assumptions used in the discounted cash flow method included internal forecasts and projections developed by management for planning purposes, available industry/market data, strategic plans, discount rates and the growth rate to calculate the terminal value. Under the market approach, the fair value was estimated using the guideline company method. The Company selected guideline companies in the industry where each reporting unit operates.

Upon completion of the first step, the Company determined that the carrying value of its Business Services reporting unit exceeded its estimated fair value as of March 31, 2013, so a second step was performed to compare the carrying amount of goodwill to the implied fair value of that goodwill. The implied fair value of goodwill for the Business Services reporting unit was determined in the same manner as utilized to recognize goodwill in a business combination. To determine the implied value of goodwill, estimated fair values were allocated to the identifiable assets and liabilities of the Business Services reporting unit as of March 31, 2013. The implied fair value of goodwill was measured as the excess of the fair value of the Business Services reporting unit over the amounts assigned to its identifiable assets and liabilities. The impairment loss of $256.7 million during the first quarter 2013 was measured as the amount the carrying value of goodwill exceeded the implied fair value of the goodwill. Of this amount, $49.3 million was deductible for tax purposes.

7.  Other Accrued Liabilities

Other accrued liabilities consisted of the following as of December 31, 2013 and September 30, 2014:

	As of December 31, 2013		As of September 30, 2014
	(in thousands)
Accrued taxes and surcharges	$	25,628	$	22,677
Accrued communications costs	23,602		26,712
Amounts due to customers	9,890		8,907
Accrued interest	5,289		17,414
Accrued dividends	1,397		6,575
Other	22,419		23,112
Total other accrued liabilities	$	88,225	$	105,397

9

EARTHLINK HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

8.  Long-Term Debt and Capital Lease Obligations

The Company’s long-term debt and capital lease obligations consisted of the following as of December 31, 2013 and September 30, 2014:

	As of December 31, 2013			As of September 30, 2014
	(in thousands)
EarthLink senior secured notes due June 2020	$	300,000		$	300,000
EarthLink senior notes due May 2019	300,000			300,000
Unamortized discount on EarthLink senior notes due May 2019	(7,762		)	(6,901		)
Capital lease obligations	15,693			14,817
Carrying value of debt and capital lease obligations	607,931			607,916
Less current portion of debt and capital lease obligations	(1,489		)	(1,534		)
Long-term debt and capital lease obligations	$	606,442		$	606,382

Senior Secured Notes due June 2020

General.  In May 2013, the Company completed a private placement of $300.0 million aggregate principal amount of 7.375% Senior Secured Notes due 2020 (the “Senior Secured Notes”).  The Senior Secured Notes were issued at 100% of their principal amount, resulting in gross proceeds of approximately $300.0 million and net proceeds of $292.6 million after deducting transaction fees and expenses of $7.4 million. The transaction fees and expenses were recorded in other long-term assets in the Condensed Consolidated Balance Sheet and are being amortized to interest expense on a straight-line basis over the life of the Senior Secured Notes. In August 2013, in accordance with the registration rights granted to the original purchasers of the Senior Secured Notes, the Company completed an exchange offer of the privately placed Senior Secured Notes for new 7.375% Senior Secured Notes due 2020 registered with the SEC with substantially identical terms to the original Senior Secured Notes.

The Senior Secured Notes accrue interest at a rate of 7.375% per year, payable on June 1 and December 1 of each year, commencing on December 1, 2013. The Senior Secured Notes will mature on June 1, 2020. No principal amount is due until June 1, 2020.

Redemption.  The Company may redeem the Senior Secured Notes, in whole or in part, (i) from June 1, 2016 until May 31, 2017 at a price equal to 105.531% of the principal amount of the Senior Secured Notes redeemed; (ii) from June 1, 2017 until May 31, 2018 at a price equal to 103.688% of the principal amount of the Senior Secured Notes redeemed; (iii) from June 1, 2018 until May 31, 2019 at a price equal to 101.844% of the principal amount of the Senior Secured Notes redeemed; and (iv) from June 1, 2019 and thereafter at a price equal to 100% of the principal amount of the Senior Secured Notes redeemed, in each case plus accrued and unpaid interest.  Prior to June 1, 2016, the Company may also redeem the Senior Secured Notes, in whole or in part, at a price equal to 100% of the aggregate principal amount of the Senior Secured Notes to be redeemed plus a make-whole premium and accrued and unpaid interest.  In addition, prior to June 1, 2016, the Company may redeem up to 35% of the aggregate principal amount of the Senior Secured Notes with the net cash proceeds of certain equity offerings at a price equal to 107.375% of the principal amount of the Senior Secured Notes redeemed, plus accrued and unpaid interest.

Ranking and guaranty. The Senior Secured Notes and the related guarantees of certain of the Company’s wholly-owned subsidiaries (the “Guarantors”) are the Company's and the Guarantors' senior secured obligations and rank equally with all of the Company's and the Guarantors' other senior secured indebtedness. The Senior Secured Notes and the guarantees are secured by a first-priority lien on substantially all of EarthLink's assets and the assets of the Guarantors (subject to certain exceptions and permitted liens).

Covenants. The indenture governing the Senior Secured Notes includes covenants which, subject to certain exceptions, limit the ability of the Company and its Restricted Subsidiaries (as defined in the indenture) to, among other things, incur additional indebtedness, make certain types of restricted payments, create liens, transfer and sell assets, enter into certain transactions with affiliates, issue or sell stock of subsidiaries, engage in sale-leaseback transactions and create restrictions on dividends or other payments by restricted subsidiaries. Upon a change of control (as defined in the indenture), the Company may be required to make an offer to repurchase the Senior Secured Notes at 101% of their principal amount, plus accrued and unpaid interest. The indenture governing the Senior Secured Notes also contains customary events of default. As of September 30, 2014, the Company was in compliance with these covenants.

10

EARTHLINK HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

The indenture governing the Senior Secured Notes contains covenants regarding the Company's ability to make Restricted Payments (as defined in the indenture), including certain dividends, stock purchases, debt repayments and investments.  The indenture governing the Company's Senior Secured Notes currently permits approximately $74.0 million in Restricted Payments. The Company's ability to make Restricted Payments varies over time, and is determined, in part, by the extent that the Company's cumulative EBITDA exceeds 300% of its cumulative interest expense.

Senior Notes due May 2019

General.  In May 2011, the Company completed a private placement of $300.0 million aggregate principal amount of 8.875% Senior Notes due 2019 (the “Senior Notes”).  The Senior Notes were issued at 96.555% of their principal amount, resulting in gross proceeds of approximately $289.7 million and net proceeds of $280.2 million after deducting transaction fees of $9.5 million. In September 2011, in accordance with the registration rights granted to the original purchasers of the Senior Notes, the Company completed an exchange offer of the privately placed Senior Notes for new 8.875% Senior Notes due 2019 registered with the SEC with substantially identical terms to the original Senior Notes.

The Senior Notes accrue interest at a rate of 8.875% per year, payable on May 15 and November 15 of each year, commencing on November 15, 2011. The Senior Notes will mature on May 15, 2019. No principal amount is due until May 15, 2019.

Redemption.  The Company may redeem the Senior Notes, in whole or in part, (i) from May 15, 2015 until May 15, 2016 at a price equal to 104.438% of the principal amount of the Senior Notes redeemed; (ii) from May 15, 2016 until May 15, 2017 at a price equal to 102.219% of the principal amount of the Senior Notes redeemed; and (iii) from May 15, 2017 at a price equal to 100% of the principal amount of the Senior Notes redeemed, in each case plus accrued and unpaid interest.  Prior to May 15, 2015, the Company may also redeem the Senior Notes, in whole or in part, at a price equal to 100% of the aggregate principal amount of the Senior Notes to be redeemed plus a make-whole premium and accrued and unpaid interest.

Ranking and guaranty. The Senior Notes and the related guarantees of the Guarantors are the Company’s and the Guarantors’ unsecured senior obligations and rank equally with all of the Company’s and the Guarantors’ other senior indebtedness.

Covenants. The indenture governing the Senior Notes includes covenants which, subject to certain exceptions, limit the ability of the Company and its Restricted Subsidiaries (as defined in the indenture) to, among other things, incur additional indebtedness, make certain types of restricted payments, incur liens on assets of the Company or the Restricted Subsidiaries, engage in asset sales and enter into transactions with affiliates. Upon a change of control (as defined in the indenture), the Company may be required to make an offer to repurchase the Notes at 101% of their principal amount, plus accrued and unpaid interest. The indenture governing the Senior Notes also contains customary events of default. As of September 30, 2014, the Company was in compliance with these covenants.

The indenture governing the Senior Notes contains covenants regarding the Company's ability to make Restricted Payments (as defined in the indenture), including certain dividends, stock purchases, dept repayments and investments.  The indenture governing the Company's Senior Notes currently permits approximately $199.2 million in Restricted Payments. The Company's ability to make Restricted Payments varies over time, and is determined, in part, by the extent that the Company's cumulative EBITDA exceeds 300% of its cumulative interest expense.

Revolving Credit Facility

General.  In May 2013, the Company entered into an amended and restated credit agreement (the “Credit Agreement”) providing for a senior secured revolving credit facility with aggregate revolving commitments of $135.0 million. The senior secured revolving credit facility terminates on May 29, 2017, and all amounts outstanding thereunder shall be due and payable in full. The Company paid $1.9 million of transaction fees and expenses related to the amended senior secured revolving credit facility, which are being amortized to interest expense over the life of the credit facility using the straight-line method. Commitment fees and borrowing costs under this facility vary and are based on the Company’s most recent Consolidated Leverage Ratio (as defined in the Credit Agreement).  As of September 30, 2014, the Company’s Commitment Fee was 0.5% and the Company’s borrowing cost would be LIBOR plus 3.25% for LIBOR Rate Loans and the Base Rate plus 2.25% for Base Rate Loans. No loans were outstanding under the senior secured revolving credit facility as of September 30, 2014. However, $1.8 million of letters of credit were outstanding under the facility’s Letter of Credit Sublimit as of September 30, 2014.

11

EARTHLINK HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

The Company is the borrower under the Credit Agreement. All obligations of the borrower under the Credit Agreement are guaranteed by substantially all of the Company's existing direct and indirect domestic subsidiaries and will be guaranteed by certain of the Company's future direct and indirect domestic subsidiaries. The obligations of the Company and the subsidiary guarantors under the Credit Agreement, as well as obligations under certain treasury management, interest protection or other hedging arrangements entered into with a lender, are secured by (subject to certain liens permitted by the Credit Agreement) liens, which rank equally with the Company's other senior secured indebtedness, on or security interests in substantially all of the Company's and the subsidiary guarantors' present and future assets (subject to certain exclusions set forth in the Credit Agreement).

Prepayment. The Company may prepay the senior secured revolving credit facility in whole or in part at any time without premium or penalty, subject to reimbursement of the lenders’ breakage and redeployment costs in the case of prepayment of LIBOR borrowings. The Company may irrevocably reduce or terminate the unutilized portion of the senior secured revolving credit facility at any time without penalty.

Covenants. The Credit Agreement contains representations and warranties, covenants, and events of default with respect to the Company and its subsidiaries that are customarily applicable to senior secured credit facilities. The negative covenants in the Credit Agreement include restrictions on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, make capital expenditures, incur liens on assets, engage in certain mergers, acquisitions or divestitures, pay dividends, repurchase stock or make other distributions, voluntarily prepay certain other indebtedness (including certain prepayments of the Company’s existing notes), enter into transactions with affiliates, make investments, and change the nature of their businesses, and amend the terms of certain other indebtedness (including the Company’s existing notes), in each case subject to certain exceptions set forth in the Credit Agreement.

The Credit Agreement requires the Company to maintain a consolidated net leverage ratio of not greater than 3.5 to 1.0 (with restrictions on cash netting) and a consolidated interest coverage ratio of not less than 3.0 to 1.0 in order to borrow under the Credit Agreement. Additionally, the Credit Agreement requires the Company to maintain a consolidated net leverage ratio of not greater than 3.0 to 1.0 in order to repurchase common stock and to make dividend payments in excess of the $0.05 per share regular quarterly dividend. The Company was in compliance with all covenants as of September 30, 2014 as well as maintaining a consolidated net leverage ratio of not greater than 3.0 to 1.0.

Financial Information Under Rule 3-10 of Regulation S-X

The Company’s Senior Secured Notes and Senior Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by each of the Company’s existing and future domestic subsidiaries, other than certain subsidiaries that are minor (the “Guarantor Subsidiaries”). All of the Guarantor Subsidiaries are 100% owned by the Company and have, jointly and severally, fully and unconditionally guaranteed, to each holder of the Notes, the full and prompt performance of the Company’s obligations under the Notes and the indenture governing the Notes, including the payment of principal (or premium, if any) and interest on the Notes, on an equal and ratable basis. Further, the Company has no independent assets or operations, and there are no significant restrictions on the ability of its consolidated subsidiaries to transfer funds to the Company in the form of cash dividends, loans or advances. The Company’s assets consist solely of investments it has made in its consolidated subsidiaries, and its operations consist solely of changes in its investment in subsidiaries and interest associated with the Senior Secured Notes and Senior Notes. Based on these facts, and in accordance with SEC Regulation S-X Rule 3-10, “Financial statements of guarantors and issuers of guaranteed securities registered or being registered,” the Company is not required to provide condensed consolidating financial information for the Guarantor Subsidiaries.

Capital Lease Obligations

The Company maintains capital leases relating to indefeasible right-to-use agreements, vehicles and equipment. Depreciation expense related to assets under capital leases is included in depreciation and amortization expense in the Condensed Consolidated Statements of Comprehensive Loss.

12

EARTHLINK HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

9.  Stockholders’ Equity

Share Repurchases

Since the inception of the Company’s share repurchase program, the Board of Directors has authorized a total of $750.0 million for the repurchase of EarthLink’s common stock. As of September 30, 2014, the Company had $65.7 million available under the current authorizations. The Company may repurchase its common stock from time to time in compliance with the Securities and Exchange Commission’s regulations and other legal requirements, including through the use of derivative transactions, and subject to market conditions and other factors. The share repurchase program does not require the Company to acquire any specific number of shares and may be terminated by the Board of Directors at any time. In addition, the agreements governing the Company’s Senior Secured Notes and Senior Notes and the Company's Credit Agreement contain restrictions on the ability of the Company to repurchase common stock.

The Company repurchased 1.1 million shares of its common stock pursuant to its share repurchase program for $5.6 million during the nine months ended September 30, 2013. The Company repurchased 0.7 million shares of its common stock pursuant to its share repurchase program for $2.2 million during the nine months ended September 30, 2014.

Dividends

During the nine months ended September 30, 2013 and 2014, cash dividends declared were $0.15 and $0.15 per common share, respectively. The Company also pays cash dividend amounts on each outstanding restricted stock unit to be paid at the time the restricted stock unit vests. Cash dividend amounts are forfeited if the restricted stock units do not vest. Total dividend payments were $15.7 million and $10.9 million during the nine months ended September 30, 2013 and 2014, respectively. The Company's third quarter 2014 dividend was paid subsequent to the quarter in October 2014. The decision to declare future dividends is made at the discretion of the Board of Directors and will depend on, among other things, the Company’s results of operations, financial condition, cash requirements, investment opportunities and other factors the Board of Directors may deem relevant. In addition, the agreements governing the Company’s Senior Secured Notes and Senior Notes and the Company's Credit Agreement contain restrictions on the amount of dividends the Company can pay.

10.  Stock-Based Compensation

The Company measures compensation cost for all stock awards at fair value on the date of grant and recognizes compensation expense over the requisite service period for awards expected to vest. The Company estimates the fair value of stock options using the Black-Scholes valuation model, and determines the fair value of restricted stock units based on the quoted price of EarthLink’s common stock on the date of grant. Such value is recognized as expense over the requisite service period, net of estimated forfeitures, using the straight-line attribution method. For performance-based awards, the Company recognizes expense over the requisite service period, net of estimated forfeitures, using the accelerated attribution method when it is probable that the performance measure will be achieved. The estimate of awards that will ultimately vest requires significant judgment, and to the extent actual results or updated estimates differ from the Company’s current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class and historical employee attrition rates. Actual results, and future changes in estimates, may differ substantially from the Company’s current estimates.

Stock-based compensation expense was $1.2 million and $2.9 million during the three months ended September 30, 2013 and 2014, respectively, and $9.2 million and $10.2 million during the nine months ended September 30, 2013 and 2014, respectively.  The Company has classified stock-based compensation expense within selling, general and administrative expense, the same operating expense line item as cash compensation paid to employees.

Stock Incentive Plans

The Company has granted to employees and non-employee directors options to purchase the Company’s common stock and restricted stock units under various stock incentive plans. Under the plans, employees and non-employee directors are eligible to receive awards of various forms of equity-based incentive compensation, including stock options, restricted stock, restricted stock units, phantom share units and performance awards, among others. The plans are administered by the Board of Directors or the Leadership and Compensation Committee of the Board of Directors, which determine the terms of the awards granted. Stock

13

EARTHLINK HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

options are generally granted with an exercise price equal to the closing market value of EarthLink Holdings Corp. common stock on the date of grant, have a term of ten years or less, and vest over terms of four years from the date of grant. Restricted stock units are granted with various vesting terms that range from one to three years from the date of grant.

Options Outstanding

The following table summarizes stock option activity as of and for the nine months ended September 30, 2014:

	Stock Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
	(shares and dollars in thousands)
Outstanding as of December 31, 2013	5,570		$	7.33
Granted	300		4.97
Forfeited and expired	(3,359	)	7.14
Outstanding as of September 30, 2014	2,511		7.31		6.3	$	—
Vested and expected to vest as of September 30, 2014	2,320		7.31		6.3	—
Exercisable as of September 30, 2014	1,237		8.41		4.2	—

The aggregate intrinsic value amounts in the table above represent the closing price of the Company’s common stock on September 30, 2014 in excess of the exercise price, multiplied by the number of stock options outstanding, exercisable or vested and expected to vest, when the closing price is greater than the exercise price. This represents the amount that would have been received by the stock option holders if they had all exercised their stock options on September 30, 2014. As of September 30, 2014, there was $1.3 million of total unrecognized compensation cost related to stock options. That cost is expected to be recognized over a weighted-average period of 2.3 years.

The following table summarizes the status of the Company’s stock options as of September 30, 2014:

									Stock Options
Stock Options Outstanding									Exercisable
						Weighted
						Average	Weighted			Weighted
						Remaining	Average			Average
Range of					Number	Contractual	Exercise		Number	Exercise
Exercise Prices					Outstanding	Life	Price		Exercisable	Price
					(in thousands)				(in thousands)
$	4.97	to	$	4.97	300	9.3	$	4.97	—	$	—
6.08		to	6.08		845	8.4	6.08		211	6.08
6.90		to	7.32		90	2.4	7.06		90	7.06
7.51		to	7.51		577	7.4	7.51		289	7.51
7.64		to	11.82		699	2.1	9.66		647	9.76
4.97		to	11.82		2,511	6.3	7.31		1,237	8.41

The fair value of stock options granted during the nine months ended September 30, 2013 and 2014 was estimated using the Black-Scholes option-pricing model with the following assumptions:

	Nine Months Ended September 30,
	2013	2014
Dividend yield	3.29%	4.02%
Expected volatility	31.20%	46.77%
Risk-free interest rate	0.88%	1.60%
Expected life	5 years	5 years

14

EARTHLINK HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

The weighted average grant date fair value of options granted during the nine months ended September 30, 2013 and 2014 was $1.19 per share and $1.48 per share, respectively. The dividend yield assumption was based on the Company's history of dividend payouts at the time of grant. The expected volatility was based on a combination of the Company's historical stock price and implied volatility. The selection of implied volatility data to estimate expected volatility was based upon the availability of prices for actively traded options on the Company's stock. The risk-free interest rate assumption was based upon the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding.

Restricted Stock Units

The following table summarizes restricted stock unit activity as of and for the nine months ended September 30, 2014: 

	Restricted Stock Units		Weighted Average Grant Date Fair Value
	(in thousands)
Outstanding as of December 31, 2013	3,936		$	6.80
Granted	4,572		4.16
Vested	(1,823	)	7.11
Forfeited	(883	)	5.77
Outstanding as of September 30, 2014	5,802		$	4.78

The fair value of restricted stock units is determined based on the closing price of EarthLink’s common stock on the grant date. The weighted-average grant date fair value of restricted stock units granted during the nine months ended September 30, 2013 and 2014 was $6.07 and $4.16, respectively.  As of September 30, 2014, there was $17.6 million of total unrecognized compensation cost related to nonvested restricted stock units. That cost is expected to be recognized over a weighted-average period of 2.1 years. The total fair value of shares vested during the nine months ended September 30, 2013 and 2014 was $5.3 million and $7.7 million, respectively, which represents the closing price of the Company’s common stock on the vesting date multiplied by the number of restricted stock units that vested.

11.  Income Taxes

During the nine months ended September 30, 2014, the Company recorded an income tax benefit of $3.6 million, including an income tax benefit of $4.4 million for discrete items, resulting in an effective tax rate for the nine months ended September 30, 2014 of approximately 6.7%. During the nine months ended September 30, 2013, the Company recorded an income tax benefit of $40.0 million, resulting in an effective tax rate for the nine months ended September 30, 2013 of approximately 13.0%.

The difference between the effective tax rate and the federal statutory rate during the nine months ended September 30, 2014 primarily relates to changes in the valuation allowance on net deferred tax assets and reduction of liabilities for uncertain tax positions. The income tax benefit for the nine months ended September 30, 2014 includes tax expense for foreign and state taxes, amortization of intangibles with indefinite useful lives, and a discrete benefit primarily for expirations of statutes related to uncertain tax positions of $4.4 million including related interest and penalties.

As of September 30, 2014, the Company had a valuation allowance of $325.5 million against its net deferred tax assets, exclusive of its deferred tax liabilities with indefinite useful lives. The Company continually reviews the adequacy of the valuation allowance and recognizes the benefits of deferred tax assets only as the reassessment indicates that it is more likely than not that the deferred tax assets will be realized. As of September 30, 2014, the Company does not believe it is more likely than not that the remaining net deferred tax assets will be realized. Should the Company’s assessment change in a future period it may release all or a portion of the valuation allowance at such time, which would result in a deferred tax benefit in the period of adjustment.

15

EARTHLINK HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

A reconciliation of changes in the amount of unrecognized tax benefits for the nine months ended September 30, 2014 is as follows:

	Nine Months Ended
	September 30, 2014
	(in thousands)
Balance as of December 31, 2013	$	21,628
Reductions as a result of a lapse of statute of limitations	(3,481		)
Balance as of September 30, 2014	$	18,147

As of September 30, 2014, $0.3 million of interest and $0.1 million of penalties associated with uncertain tax positions had been accrued. Within the next twelve months, it is reasonably possible that approximately $1.1 million of the total uncertain tax positions recorded will reverse, primarily due to the expiration of statutes of limitation in various jurisdictions.

12.  Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). A three-tier fair value hierarchy is used to prioritize the inputs used in measuring fair value.  These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as observable inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The estimated fair value of the Company’s debt was determined based on Level 2 input using observable market prices in less active markets. The following table presents the fair value of the Company’s debt, excluding capital leases, as of December 31, 2013 and September 30, 2014:

	As of December 31, 2013				As of September 30, 2014
	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value
	(in thousands)
Senior Secured Notes	$	300,000	$	303,663	$	300,000	$	305,250
Senior Notes	292,238		304,470		293,099		300,000
Total debt, excluding capital leases	$	592,238	$	608,133	$	593,099	$	605,250

13.  Segment Information

The Company reports segment information along the same lines that its chief executive officer reviews its operating results in assessing performance and allocating resources. The Company operates two reportable segments, Business Services and Consumer Services. The Company’s Business Services segment provides a broad range of data, voice and IT services to retail and wholesale business customers. The Company’s Consumer Services segment provides nationwide Internet access and related value-added services to residential customers.

The Company evaluates performance of its segments based on segment operating income. Segment operating income includes revenues from external customers, related cost of revenues and operating expenses directly attributable to the segment, which include costs over which segment managers have direct discretionary control, such as advertising and marketing programs, customer support expenses, product development expenses, certain technology and facilities expenses, billing operations and provisions for doubtful accounts. Segment operating income excludes other income and expense items and certain expenses over which segment managers do not have discretionary control. Costs excluded from segment operating income include various corporate expenses (consisting of certain costs such as corporate management, human resources, finance and legal), depreciation and amortization, impairment of goodwill and intangible assets, restructuring, acquisition and integration-related costs, and stock-based compensation expense, as they are not considered in the measurement of segment performance.

16

EARTHLINK HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

Information on reportable segments and a reconciliation to consolidated loss from operations for the three and nine months ended September 30, 2013 and 2014 is as follows:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2013			2014		2013			2014
	(in thousands)
Business Services
Revenues	$	240,626		$	237,054	$	728,497		$	705,273
Cost of revenues (excluding depreciation and amortization)	121,429			113,785		378,946			358,604
Gross margin	119,197			123,269		349,551			346,669
Direct segment operating expenses	86,856			88,078		254,650			260,523
Segment operating income	$	32,341		$	35,191	$	94,901		$	86,146
Consumer Services
Revenues	$	67,952		$	60,691	$	210,270		$	187,150
Cost of revenues (excluding depreciation and amortization)	23,331			21,910		71,618			67,155
Gross margin	44,621			38,781		138,652			119,995
Direct segment operating expenses	12,739			10,573		38,618			33,534
Segment operating income	$	31,882		$	28,208	$	100,034		$	86,461
Consolidated
Revenues	$	308,578		$	297,745	$	938,767		$	892,423
Cost of revenues	144,760			135,695		450,564			425,759
Gross margin	163,818			162,050		488,203			466,664
Direct segment operating expenses	99,595			98,651		293,268			294,057
Segment operating income	64,223			63,399		194,935			172,607
Depreciation and amortization	46,689			46,716		134,314			139,186
Impairment of goodwill and long-lived assets	—			589		255,599			11,360
Restructuring, acquisition and integration-related costs	9,928			1,108		28,468			10,993
Corporate operating expenses	9,316			7,297		27,201			22,973
Income (loss) from operations	$	(1,710	)	$	7,689	$	(250,647	)	$	(11,905	)

The Company manages its working capital on a consolidated basis and does not allocate long-lived assets to segments. In addition, segment assets are not reported to, or used by, the chief operating decision maker and therefore, total segment assets have not been disclosed.

The Company has not provided information about geographic segments because substantially all of the Company’s revenues, results of operations and identifiable assets are in the United States.

17

EARTHLINK HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

Information on revenues by groups of similar services and by segment for the three and nine months ended September 30, 2013 and 2014 is as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2014		2013		2014
	(in thousands)
Business Services
Retail services	$	199,389	$	189,122	$	599,901	$	573,028
Wholesale services	36,338		42,788		114,280		117,200
Other services	4,899		5,144		14,316		15,045
Total revenues	240,626		237,054		728,497		705,273
Consumer Services
Access services	56,999		49,516		176,735		154,665
Value-added services	10,953		11,175		33,535		32,485
Total revenues	67,952		60,691		210,270		187,150
Total Revenues	$	308,578	$	297,745	$	938,767	$	892,423

The Company’s Business Services segment earns revenue by providing a broad range of data, voice and IT services to retail and wholesale business customers. The Company presents its Business Services revenue in the following three categories: (1) retail services, which includes data, voice and IT services provided to business customers; (2) wholesale services, which includes the sale of transmission capacity to other telecommunications carriers and businesses; and (3) other services, which primarily consists of web hosting. The Company's IT services, which are included within its retail services, include data centers, virtualization, security, applications, premises-based solutions, managed solutions and support services. Revenues generally consist of recurring monthly charges for such services; usage fees; installation fees; termination fees; and administrative fees.

The Company’s Consumer Services segment earns revenue by providing nationwide Internet access and related value-added services to residential customers. The Company presents its Consumer Services revenue in the following two categories: (1) access services, which includes narrowband and broadband Internet access services; and (2) value-added services, which includes revenues from ancillary services sold as add-on features to EarthLink’s Internet access services, such as security products, premium email only, home networking and email storage; search revenues; and advertising revenues. Revenues generally consist of recurring monthly charges for such services.

14. Commitments and Contingencies

Legal proceedings and other disputes

General. The Company is party to various legal proceedings and other disputes arising in the normal course of business, including, but not limited to, regulatory audits, trademark and patent infringement, billing disputes, rights of access, tax, consumer protection, employment and tort. The Company accrues for such matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Where it is probable that a liability has been incurred and there is a range of expected loss for which no amount in the range is more likely than any other amount, the Company accrues at the low end of the range. The Company reviews its accruals each reporting period. The Company recorded a $2.2 million liability during the three and nine months ended September 30, 2014 for a loss contingency that became probable and estimable during the period.

The Company's management believes that there are no disputes, litigation or other legal proceedings, audits or disputes asserted or pending against the Company that could have, individually or in the aggregate, a material adverse effect on its financial position, results of operations or cash flows, and believes that adequate provision for any probable and estimable losses has been made in the Company's consolidated financial statements. However, the ultimate result of any current or future litigation or other legal proceedings, audits or disputes is inherently unpredictable and could result in liabilities that are higher than currently predicted.

Regulatory audits. The Company is subject to regulatory audits in the ordinary course of business with respect to various matters, including audits by the Universal Service Administrative Company on universal service fund assessments and payments. These audits can cover periods for several years prior to the date the audit is undertaken and could result in the imposition of

18

EARTHLINK HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

liabilities, interest and penalties if the Company's positions are not accepted by the auditing entity. The Company's financial statements contain reserves for certain of such potential liabilities.

Patents. From time to time, the Company receives notices of infringement of patent rights from parties claiming to own patents related to certain of the Company's services and products. Certain of these claims are made by patent holding companies that are not operating companies. The alleging parties generally seek royalty payments for prior use as well as future royalty streams. Most of these matters are in preliminary stages. The Company intends to vigorously defend its position with respect to these matters.

Billing disputes. The Company is periodically involved in disputes related to its billings to other carriers for access to its network. The Company does not recognize revenue related to such matters until the period that the fees for services are determinable and it is reasonably assured of the collection of amounts billed. In the event that a claim is made related to revenues previously recognized, the Company assesses the validity of the claim and adjusts the amount of revenue being recognized to the extent that the claim adjustment is considered probable and estimable. The Company recognized $6.8 million of net favorable disputes related to its billings to other carriers during the three and nine months ended September 30, 2014, which is included in Business Services revenues in the Condensed Consolidated Statements of Comprehensive Loss.

     The Company periodically disputes network access charges that it is assessed by other companies with which the Company interconnects. The Company maintains adequate reserves for anticipated exposure associated with these billing disputes. The reserves are subject to changes in estimates and management judgment as new information becomes available. In view of the length of time historically required to resolve these disputes, they may be resolved or require adjustment in future periods and relate to costs invoiced, accrued or paid in prior periods. While the Company believes its reserves for billing disputes are adequate, it is reasonably possible that the Company could record additional expense of up to $5.6 million for unrecorded disputed amounts. The Company's disputes also include the claw-back of amounts which were historically overpaid. The Company recognized $4.7 million and $9.6 million, respectively, for favorable disputes with telecommunication vendors during the three and nine months ended September 30, 2014, which is included in Business Services cost of revenues in the Condensed Consolidated Statements of Comprehensive Loss.

 Regulation

The Company's services are subject to varying degrees of federal, state and local regulation. These regulations are subject to ongoing proceedings at federal and state administrative agencies or within state and federal judicial systems. Results of these proceedings could change, in varying degrees, the manner in which the Company operates. The Company cannot predict the outcome of these proceedings or their effect on the Company's industry generally or upon the Company specifically.

Leases

During the nine months ended September 30, 2014, the Company entered into a new non-cancelable operating lease. As of September 30, 2014, minimum lease commitments under the Company's non-cancelable leases increased by approximately $1.1 million during the year ending December 2015, $1.8 million during the years ending December 2016, 2017 and 2018 and $6.5 million thereafter.

19

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Certain statements in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. The words “estimate,” “plan,” “intend,” “expect,” “anticipate,” “believe” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are found at various places throughout this report. EarthLink disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our goals will be achieved. Important factors that could cause actual results to differ from estimates or projections contained in the forward-looking statements are described under “Cautionary Note Concerning Factors That May Affect Future Results” in this Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to provide a reader of our financial statements with a narrative from the perspective of management. The following Management’s Discussion and Analysis should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements and related Notes thereto and with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited Consolidated Financial Statements and the Notes thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2013. Management's Discussion and Analysis of Financial Condition and Results of Operations is presented in the following sections:

• Overview

• Consolidated Results of Operations

• Segment Results of Operations

• Liquidity and Capital Resources

• Non-GAAP Financial Measures

• Cautionary Note Regarding Factors That May Affect Future Results

Overview

EarthLink Holdings Corp. (“EarthLink” or the “Company”), together with our consolidated subsidiaries, is a leading managed network, security and cloud services provider to business and residential customers in the United States. We operate two reportable segments, Business Services and Consumer Services. Our Business Services segment provides a broad range of data, voice and IT services to retail and wholesale business customers. Our Consumer Services segment provides nationwide Internet access and related value-added services to residential customers. We operate an extensive network including more than 28,000 route miles of fiber, 90 metro fiber rings and secure enterprise-class data centers that provide data and voice IP service coverage across more than 90 percent of the United States.

General Developments in our Business

Key developments in our business during the nine months ended September 30, 2014 are described below:

• Generated revenues of $892.4 million, a 5% decrease compared to the nine months ended September 30, 2013, consisting of a $23.2 million decrease in Business Services revenue and a $23.1 million decrease in Consumer Services revenue. The decreases were primarily driven by declines in traditional voice and data products. However, partially offsetting these declines were several favorable items, including sales of growth products for our Business Services, the inclusion of revenues from CenterBeam, Inc. ("CenterBeam") which we acquired in July 2013, favorable dispute settlements related to our billings to other carriers for access to our network, targeted rate increases and new fees for modem equipment rental on certain Consumer Services subscribers.

• Generated a net loss of $50.3 million, which reflects a decrease in Adjusted EBITDA, as described below.

• Generated Adjusted EBITDA (a non-GAAP measure, see “Non-GAAP Financial Measures” in this Item 2) of $159.8 million, a decrease from $177.0 million in the prior year period primarily due to the decrease in revenues from traditional voice and data products, offset by reduced costs.

• Generated cash flows from operating activities of $101.3 million, an increase from $83.4 million during the nine months ended September 30, 2013.

• Generated Unlevered Free Cash Flow (a Non-GAAP measure, see “Non-GAAP Financial Measures” in this Item 2) of

20

$85.6 million, an increase from $67.3 million in prior year period primarily due to reduced capital expenditures, offset by the decrease in Adjusted EBITDA noted above.

• Declared dividends of $0.15 per share, resulting in $10.9 million of dividend payment to shareholders during the nine months ended September 30, 2014 and $5.1 million of dividend payments to shareholders in October 2014.

• Repurchased 0.7 million shares of our common stock pursuant to our share repurchase program for $2.2 million.

Developments in our Business Strategy

Our business strategy has been to be the premier communications and IT services provider for mid-market and enterprise customers. After our new Chief Executive Officer joined us in the first quarter of 2014, we conducted a thorough review of our strategy.

We currently have a broad portfolio of products and services. In our Business Services segment, these include: managed network services, traditional voice and data services for small business customers, carrier and transport services, and cloud and IT services. We also operate a Consumer Services business. In connection with our review of our strategy, we analyzed these products and services to establish a more focused direction for our company and to align our organization, operations and investments accordingly.

The primary result of this analysis is that we believe we should leverage our core strengths and focus our business strategy on growing our managed network services to distributed multi-location customers, as we have successfully been doing in the retail industry. We will support our managed network services with a relevant set of cloud and IT services.

Other features of our developing business strategy include the following:

• Increasing cash flow in our traditional voice and data services through a lower and more variable cost structure, as we have successfully done in our consumer business.

• Managing our investment in cloud and IT services and in data centers to invest in services that are most relevant to our managed network services business.

• Simplifying and rationalizing our product portfolio in our Business Services segment in order to be better able to invest in core products such as Multiprotocol Label Switching (“MPLS”) and hosted voice.

• Reviewing our addressable market in order to align our business around customer segments and to focus on the highest growth segments.

• Increasing our emphasis on selling transport services.

• Evaluating product portfolio alternatives that could further simplify our business and accelerate our development, which could lead us to discontinue or divest non-strategic products, assets or customers.

We believe that these and other features of our operating plan will enable us to optimize our go-to-market model and the experience of our customers in our core products and services. This will include a refined customer segmentation and coverage model, a simpler pricing structure and shortened customer installation times.

Challenges and Risks

The primary challenge we face in executing on our business strategy is to continue to grow revenues from our growth products and services in order to offset revenue declines in our other products and services. Contributing to this challenge are the following: responding to competitive and economic pressures, reducing churn in our existing customer base, reducing the cycle time for customer installations, providing products and services that meet changing customer needs on a timely and cost-effective basis, and adapting to regulatory changes and initiatives. Another primary challenge is managing the rate of decline in revenues for our traditional products.  To address these challenges, we are targeting larger customers who have lower churn profiles, focusing efforts on customer retention, re-terming contracts with our existing customers, upselling additional growth products and services to existing customers, implementing cost efficiencies in order to maximize cash flows and seeking to make costs more variable. Our future success for growth depends on the timing and market acceptance of our new products and services, our ability to market our services to new customers, our ability to differentiate our services from those of our competitors, our ability to maintain and expand our sales to existing customers, our ability to strengthen awareness of our brand, our ability to provide quality implementation and customer support for these products and the reliability and quality of our services.

21

Revenue Sources

Business Services. Our Business Services segment earns revenue by providing a broad range of data, voice and IT services to retail and wholesale business customers. We present our Business Services revenue in the following three categories: (1) retail services, which includes data, voice and IT services provided to business customers; (2) wholesale services, which includes the sale of transmission capacity to other telecommunications carriers and businesses; and (3) other services, which primarily consists of web hosting. Our IT services, which are included within our retail services, include data centers, virtualization, security, applications, premises-based solutions, managed solutions and support services. Revenues generally consist of recurring monthly charges for such services; usage fees; installation fees; termination fees; and administrative fees.

Consumer Services. Our Consumer Services segment earns revenue by providing nationwide Internet access and related value-added services to residential customers. We present our Consumer Services in two categories: (1) access services, which includes narrowband access services and broadband access services; and (2) value-added services, which includes revenues from ancillary services sold as add-on features to EarthLink’s Internet access services, such as security products, premium email only, home networking and email storage; search revenues; and advertising revenues. Revenues generally consist of recurring monthly charges for such services.

Trends in our Business

Our financial results are impacted by several significant trends, which are described below.

Industry factors. We operate in the communications and IT services industry, which is characterized by intense competition, industry consolidation resulting in larger competitors, an evolving regulatory environment, changing technology and changes in customer needs.  We expect these trends to continue. In addition, merger and acquisition transactions and other factors have reduced the number of vendors from which we may purchase network elements that we leverage to operate our business.

Traditional Business Services revenues. Our traditional voice and data business service revenues, specifically traditional voice and lower-end, single site broadband services, have been declining due to competitive pressures and changes in the industry, and we expect this trend to continue. We have also experienced an increase in churn for these retail products, especially as customers come out of contract term and as we implement targeted price increases. To counteract trends in our Business Services revenues, we are focused on building long-term customer relationships, offering customers a bundle that includes our growth services and focusing on larger, more complex customers who have a lower churn profile. We are focused on providing managed network services and relevant cloud and IT services. As a result, sales in our growth products have increased and the mix of new sales is shifting towards our growth products. We are also taking steps to lower the cost structure of our Business Services operations.

Economic conditions. Many of our customers are small and medium-sized businesses, and more specifically retail businesses. We believe these businesses are more likely to be affected by economic downturns than larger, more established businesses. We believe that the financial and economic pressures faced by our customers in this environment of diminished consumer spending, corporate downsizing and tightened credit have had, and may continue to have, an adverse effect on our results of operations, including longer sales cycles and increased customer demands for price reductions in connection with contract renewals. Additionally, our consumer access services are discretionary and dependent upon levels of consumer spending. Unfavorable economic conditions could cause customers to slow spending in the future, which could adversely affect our revenues and churn.

Consumer access declines. Our consumer access subscriber base and revenues have been declining and are expected to continue to decline due to the continued maturation of the market for Internet access and competitive pressures in the industry. In addition, we have implemented, and expect to continue to implement, targeted price increases, which could negatively impact our churn rates. To counteract trends in our consumer revenues, we are focused on customer retention, operational efficiency and adding customers through marketing channels that we believe will produce an acceptable rate of return.

Business Outlook

We expect continued declines in Business Services revenues from traditional voice and data products. Revenues may also be adversely impacted by churn, competition, regulatory changes, timing and market acceptance of our newer products and services, shifting patterns of use, convergence of technology and general economic conditions. However, to counteract these pressures, we are focusing on growing our managed network products and services and improving operating efficiency. We are also focused on growing our wholesale services as we capitalize on new and unique fiber routes within our footprint. As a result, we expect the mix of our retail Business Service revenues to change over time, from traditional products to growth products and services. As our product mix shifts towards growth products, revenues may be impacted in the near term by longer sales cycles

22

and installations and higher costs to deliver these services. We expect our consumer access subscriber base and revenues to continue to decrease due to limited sales and marketing activities, competition from cable, DSL and wireless providers, declines in gross broadband subscriber additions and the continued maturation of the market for narrowband Internet access. However, we expect the rate of churn and revenue decline to continue to decline as our customer base becomes longer tenured.

Consolidated Results of Operations

The following table sets forth statement of operations data for the three and nine months ended September 30, 2013 and 2014:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2014			2013			2014
	(in thousands)
Revenues	$	308,578		$	297,745		$	938,767		$	892,423
Operating costs and expenses:
Cost of revenues (exclusive of depreciation and amortization shown separately below)	144,760			135,695			450,564			425,759
Selling, general and administrative (exclusive of of depreciation and amortization shown separately below)	108,911			105,948			320,469			317,030
Depreciation and amortization	46,689			46,716			134,314			139,186
Impairment of goodwill and long-lived assets	—			589			255,599			11,360
Restructuring, acquisition and integration-related costs	9,928			1,108			28,468			10,993
Total operating costs and expenses	310,288			290,056			1,189,414			904,328
Income (loss) from operations	(1,710		)	7,689			(250,647		)	(11,905		)
Interest expense and other, net	(13,985		)	(13,970		)	(46,714		)	(42,008		)
Loss from continuing operations before income taxes	(15,695		)	(6,281		)	(297,361		)	(53,913		)
Income tax benefit	4,582			4,329			40,029			3,592
Loss from continuing operations	(11,113		)	(1,952		)	(257,332		)	(50,321		)
Gain (loss) from discontinued operations, net of tax	(225		)	—			(1,622		)	61
Net loss	$	(11,338	)	$	(1,952	)	$	(258,954	)	$	(50,260	)

Revenues

The following table presents revenues by groups of similar services and by segment for the three and nine months ended September 30, 2013 and 2014:

	Three Months Ended September 30,				Change					Nine Months Ended September 30,				Change
	2013		2014		Dollar			Percent		2013		2014		Dollar			Percent
	(dollars in thousands)
Business Services
Retail services	$	199,389	$	189,122	$	(10,267	)	(5	)%	$	599,901	$	573,028	$	(26,873	)	(4	)%
Wholesale services	36,338		42,788		6,450			18	%	114,280		117,200		2,920			3	%
Other	4,899		5,144		245			5	%	14,316		15,045		729			5	%
Total revenues	240,626		237,054		(3,572		)	(1	)%	728,497		705,273		(23,224		)	(3	)%
Consumer Services
Access services	56,999		49,516		(7,483		)	(13	)%	176,735		154,665		(22,070		)	(12	)%
Value-added services	10,953		11,175		222			2	%	33,535		32,485		(1,050		)	(3	)%
Total revenues	67,952		60,691		(7,261		)	(11	)%	210,270		187,150		(23,120		)	(11	)%
Total revenues	$	308,578	$	297,745	$	(10,833	)	(4	)%	$	938,767	$	892,423	$	(46,344	)	(5	)%

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Business Services

Retail Services. Retail services include data, voice and IT services (including data centers, virtualization, security, applications, premises-based solutions, managed solutions and support services) provided to business customers. The following table presents the primary reasons for the change in Business Services retail revenues for the three and nine months ended September 30, 2014 compared to the prior year periods:

	Three Months Ended			Nine Months Ended
	September 30, 2014			September 30, 2014
	(in millions)
Due to decline in traditional voice and data products (a)	$	(16.8	)	$	(54.5	)
Due to growth products (b)	5.4			15.5
Due to CenterBeam acquisition (c)	—			8.3
Due to IT services (d)	0.7			3.4
Due to favorable settlements in current year (e)	0.4			0.4
Total change in retail services revenues	$	(10.3	)	$	(26.9	)

______________

(a) Decrease due to decline in certain traditional voice and data products, including traditional voice, lower-end, single site broadband services and web hosting. Revenues for these traditional voice and data products have been decreasing due to competition in the industry, the migration of customers to more advanced services and a decreased emphasis on selling these services. These decreases were partially offset by the targeted price increases implemented during the year.

(b) Increase due to sales of growth products, including MPLS and hosted Voice-over-Internet Protocol (“VoIP”).

(c) Increase due to the inclusion of revenues from the acquisition of CenterBeam beginning in July 2013.

(d) Increase primarily due to new IT services product launches over the past year to expand our IT services portfolio.

(e) Increase due to favorable dispute settlements related to our billings to other carriers for access to our network, for which revenue had not been previously recognized.

Wholesale Services. Wholesale services includes the sale of transmission capacity to other telecommunications carriers and businesses. The following table presents the primary reasons for the change in wholesale services revenues during the three and nine months ended September 30, 2014 compared to the prior year periods:

	Three Months Ended		Nine Months Ended
	September 30, 2014		September 30, 2014
	(in millions)
Due to net favorable settlements in current year (a)	$	6.4	$	6.4
Due to favorable adjustment in prior year (b)	—		(1.2		)
Due to other changes (c)	0.1		(2.3		)
Total change in wholesale services revenues	$	6.5	$	2.9

______________

(a) Increase due to net favorable dispute settlements related to our billings to other carriers for access to our network, for which revenue had not been previously recognized.

(b) Decrease due to a $1.2 million favorable adjustment recognized during the nine months ended September 30, 2013 associated with the One Communications Corp. ("One Communications") acquisition. During the first quarter of 2013, an arbitrator made a final decision with respect to post-closing working capital adjustments relating to the acquisition.

(c) Decrease primarily due to an increase in customer churn, partially offset by an increase in transport and usage revenues as we capitalize on unique fiber routes.

Other Services. Other services consists primarily of web hosting and certain equipment-related revenue. The increase in other services revenues during the three and nine months ended September 30, 2014 compared to the prior year periods was primarily due to an increase in equipment-related revenues, partially offset by a decrease in web hosting revenues due to a decline in average web hosting accounts.

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Consumer Services

Access services. Access services include narrowband access services (including traditional, fully-featured narrowband access and value-priced narrowband access) and broadband access services (including high-speed access via DSL and cable and VoIP). Access service revenues primarily consist of recurring monthly charges for narrowband and broadband access services.

The decrease in consumer access revenues during the three and nine months ended September 30, 2014 compared to the prior year periods was due to a decrease in narrowband access and broadband access revenues. This was primarily due to a decrease in average consumer access subscribers, which decreased from 1.0 million and 1.1 million during the three and nine months ended September 30, 2013, respectively, to 0.9 million during the three and nine months ended September 30, 2014.  The decrease in average consumer access subscribers resulted from limited sales and marketing activities, the continued maturation of and competition in the market for Internet access and competitive pressures in the industry. However, we continue to focus on the retention of customers and on marketing channels that we believe will produce an acceptable rate of return. Partially offsetting the decrease in revenues during the three and nine months ended September 30, 2014 compared to the prior year periods was an increase in average revenue per subscriber due to targeted price increases implemented over the past year and a change in mix of subscribers. In addition, effective April 2014 we began billing certain broadband subscribers for modem equipment rental. As a result of the price increases, our monthly consumer subscriber churn rates remained constant at 2.2% during the three and nine months ended September 30, 2013 and 2014.

Value-added services revenues. Value-added services revenues consist of revenues from ancillary services sold as add-on features to our Internet access services, such as security products, premium email only, home networking and email storage; search revenues; and advertising revenues.We derive these revenues from fees charged for ancillary services; fees generated through revenue sharing arrangements with online partners whose products and services can be accessed through our web properties, such as the Google™ search engine; and fees charged for advertising on our various web properties.

The decrease in value-added services revenues during the nine months ended September 30, 2014 compared to the prior year period was due primarily to a decrease in revenues from our security and home networking services and a decrease in search and advertising revenues. These decreases were attributable to the overall decline in average consumer subscribers.

Cost of revenues

The following table presents cost of revenues by segment for the three and nine months ended September 30, 2013 and 2014:

	Three Months Ended								Nine Months Ended
	September 30,				Change				September 30,				Change
	2013		2014		Dollar			Percent	2013		2014		Dollar			Percent
	(dollars in thousands)
Business Services	$	121,429	$	113,785	$	(7,644	)	(6)%	$	378,946	$	358,604	$	(20,342	)	(5	)%
Consumer Services	23,331		21,910		(1,421		)	(6)%	71,618		67,155		(4,463		)	(6	)%
Total cost of revenues	$	144,760	$	135,695	$	(9,065	)	(6)%	$	450,564	$	425,759	$	(24,805	)	(6	)%

Business Services

Cost of revenues for our Business Services segment primarily consists of the cost of connecting customers to our networks via leased facilities; the costs of leasing components of our network facilities; costs paid to third-party providers for interconnect access and transport services; the costs of providing IT services; and the cost of equipment sold to customers.

The following table presents the primary reasons for the change in Business Services cost of revenues for the three and nine months ended September 30, 2014 compared to the prior year periods:

25

	Three Months Ended			Nine Months Ended
	September 30, 2014			September 30, 2014
	(in millions)
Due to decline in traditional voice and data products, offset by growth (a)	$	(11.1	)	$	(25.5	)
Due to change in favorable dispute adjustments (b)	(3.7		)	(6.9		)
Due to favorable USF adjustments in the current year (c)	—			(0.8		)
Due to change in reserves for regulatory audits (d)	7.2			7.2
Due to favorable settlements in the prior year (e)	—			2.7
Due to CenterBeam acquisition (f)	—			3.0
Total change in Business Services cost of revenues	$	(7.6	)	$	(20.3	)

______________

(a) Decrease due to decline in certain traditional voice and data products, including traditional voice, lower-end, single site broadband services and web hosting, partially offset by sales of growth products which include MPLS and hosted VoIP. Also contributing is reduced costs from optimizing our cost structure.

(b) Decrease due to change in estimates for favorable dispute settlements with telecommunication vendors during the three and nine months ended September 30, 2014 compared to the prior year periods.

(c) Decrease due to a $0.8 million favorable adjustment related to Universal Service Fund payments during the nine months ended September 30, 2014.

(d) Increase due to a $7.2 million favorable adjustment recorded in the third quarter of 2013 to decrease our reserves for regulatory audits resulting from final interpretation and resolution of certain regulatory audits, primarily the audit by the Universal Service Administrative Company.

(e) Increase due to certain favorable settlements recognized during 2013, including a $1.8 million favorable adjustment due to the renegotiation of an IRU agreement recorded as a liability in purchase accounting for ITC^DeltaCom and a $0.9 million favorable adjustment for an arbitrator's final decision with respect to post-closing working capital adjustments relating to the One Communications acquisition.

(f) Increase due to inclusion of CenterBeam cost of revenues beginning in July 2013.

Consumer Services

Cost of revenues for our Consumer Services segment primarily consists of telecommunications fees and network operations costs incurred to provide our Internet access services; fees paid to suppliers of our value-added services; fees paid to content providers for information provided on our online properties; and the cost of equipment sold to customers for use with our services. Our principal providers for narrowband services are AT&T, Inc., GlobalPOPs and Windstream Holdings, Inc. We also purchase lesser amounts of narrowband services from certain regional and local providers. Our principal providers of broadband connectivity are AT&T Inc., Bright House Networks, CenturyLink, Inc., Comcast Corporation, Megapath, Time Warner Cable and Verizon Communications, Inc. Many of our agreements have a short term or operate on a month-to-month basis. We cannot be certain of renewal or non-termination of our contracts or that legislative or regulatory factors will not affect our contracts.

The decreases in Consumer Services cost of revenues during the three and nine months ended September 30, 2014 compared to the prior year periods were primarily due to the decline in average consumer services subscribers. Partially offsetting the decrease was an increase in our average cost per subscriber. This was due to costs associated with modem equipment rental revenue which we began billing to certain broadband customers beginning in April 2014. In addition, our agreements with certain service providers generally have volume based tiered pricing which is leading to higher unit costs as we see a decline in subscribers over time. Also contributing to the increase was a shift in the mix to customers with higher costs associated with delivering services.

Selling, general and administrative

The following table presents our selling, general and administrative expenses for the three and nine months ended September 30, 2013 and 2014: 

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	Three Months Ended								Nine Months Ended
	September 30,				Change				September 30,				Change
	2013		2014		Dollar			Percent	2013		2014		Dollar			Percent
	(dollars in thousands)
Selling, general and administrative expenses	$	108,911	$	105,948	$	(2,963	)	(3)%	$	320,469	$	317,030	$	(3,439	)	(1)%

Selling, general and administrative expenses consist of expenses related to sales and marketing, customer service, network operations, information technology, regulatory, billing and collections, corporate administration, and legal and accounting. Such costs include salaries and related employee costs (including stock-based compensation), outsourced labor, professional fees, property taxes, travel, insurance, occupancy costs, advertising and other administrative expenses.

The following table presents the primary reasons for the change in selling, general and administrative expenses for the three and nine months ended September 30, 2014 compared to the prior year periods:

	Three Months Ended			Nine Months Ended
	September 30, 2014			September 30, 2014
	(in millions)
Due to change in favorable settlements and adjustments (a)	$	(1.3	)	$	2.8
Due to acquisition of CenterBeam (b)	—			2.6
Due to reserves for loss contingencies (c)	1.9			(1.1		)
Due to bad debt and payment processing (d)	(1.0		)	(1.7		)
Due to decrease in other selling, general and administrative costs (e)	(2.6		)	(6.0		)
Total change in selling, general and administrative expenses	$	(3.0	)	$	(3.4	)

______________

(a) Change due to favorable settlements in the prior year including: a $1.1 million favorable adjustment recognized during the nine months ended September 30, 2013 for an arbitrator's final decision with respect to post-closing working capital adjustments relating to the One Communications acquisition; a $1.7 million favorable adjustment recognized during the nine months ended September 30, 2013 for resolution of a state sales and use tax audit; and a $1.3 million favorable adjustment recognized during the nine months ended September 30, 2013 related to the release of unused employee-related accruals. These were partially offset by a $1.3 million favorable settlement during the three and nine months ended September 30, 2014 for resolution of a state sales audit.

(b) Increase due to the inclusion of CenterBeam selling, general and administrative expenses beginning in July 2013.

(c) Change in reserves for loss contingencies due to a $2.2 million increase in reserves during the three and nine months ended September 30, 2014 and a $0.3 million and $3.3 million increase in reserves during the three and nine months ended September 30, 2013, respectively.

(d) Decrease in bad debt and payment processing expenses.

(e) Decrease in other selling, general and administrative costs such as people costs, professional fees, property taxes, commissions, outsourced labor, travel, insurance, occupancy costs and advertising.

Depreciation and amortization

The following table presents our depreciation and amortization expense for the three and nine months ended September 30, 2013 and 2014:

	Three Months Ended								Nine Months Ended
	September 30,				Change				September 30,				Change
	2013		2014		Dollars			Percent	2013		2014		Dollars			Percent
	(dollars in thousands)
Depreciation expense	$	29,894	$	31,216	$	1,322		4%	$	84,627	$	91,758	$	7,131		8%
Amortization expense	16,795		15,500		(1,295		)	(8)%	49,687		47,428		(2,259		)	(5)%
Total	$	46,689	$	46,716	$	27		—%	$	134,314	$	139,186	$	4,872		4%

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Depreciation and amortization includes depreciation of property and equipment and amortization of definite-lived intangible assets acquired in purchases of businesses and purchases of customer bases from other companies. Property and equipment is depreciated using the straight-line method over the estimated useful lives of the various asset classes. Customer installation and acquisition costs are amortized over the actual weighted average initial contract terms of contracts initiated each month, assuming a customer churn factor. Leasehold improvements are depreciated using the straight-line method over the shorter of the estimated useful life or the remaining term of the lease. Definite-lived intangible assets, which primarily consist of subscriber bases and customer relationships, acquired software and technology, trade names and other assets, are amortized on a straight-line basis over their estimated useful lives, which range from three to six years.

The increase in depreciation expense during the three and nine months ended September 30, 2014 compared to the prior year periods was primarily due to capital expenditures over the past year related to the acquisition of new customers and to maintain and upgrade our network and technology infrastructure. The decrease in amortization expense during the three and nine months ended September 30, 2014 compared to the prior year periods was primarily due to definite-lived intangible assets becoming fully amortized over the past year.

Impairment of goodwill and long-lived assets

Impairment of goodwill. During the first quarter of 2013, we recognized a $256.7 million non-cash impairment charge to goodwill related to our Business Services reporting unit, of which $255.6 million is included in continuing operations and $1.1 million is reflected in discontinued operations. We test our goodwill annually during the fourth quarter of each fiscal year or when events or changes in circumstances indicate that goodwill might be impaired. Our stock price and market capitalization declined during the three months ended March 31, 2013 following the announcement in mid-February 2013 of our fourth quarter 2012 earnings and 2013 financial guidance. As a result of the sustained decrease in stock price and market capitalization, we performed an interim goodwill test in conjunction with the preparation of our financial statements for the three months ended March 31, 2013. The primary factor contributing to the impairment was a change in the discount rate and market multiples as a result of the change in these market conditions, both key assumptions used in the determination of fair value.

Impairment testing of goodwill is required at the reporting unit level and involves a two-step process. We identified two reporting units, Business Services and Consumer Services, for evaluating goodwill. Each of these reporting units constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results. The first step of the impairment test involves comparing the estimated fair values of our reporting units with the reporting units' carrying amounts, including goodwill. We estimated the fair values of our reporting units based on weighting of the income and market approaches. These models use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. Under the income approach, the fair value of the reporting unit was estimated based on the present value of estimated cash flows using a discounted cash flow method. The significant assumptions used in the discounted cash flow method included internal forecasts and projections developed by management for planning purposes, available industry/market data, strategic plans, discount rates and the growth rate to calculate the terminal value. Under the market approach, the fair value was estimated using the guideline company method. We selected guideline companies in the industry in which each reporting unit operates.

Upon completion of the first step, we determined that the carrying value of our Business Services reporting unit exceeded its estimated fair value as of March 31, 2013, so a second step was performed to compare the carrying amount of goodwill to the implied fair value of that goodwill. The implied fair value of goodwill for the Business Services reporting unit was determined in the same manner as utilized to recognize goodwill in a business combination. To determine the implied value of goodwill, fair values were allocated to the assets and liabilities of the Business Services reporting unit as of March 31, 2013. The implied fair value of goodwill was measured as the excess of the fair value of the Business Services reporting unit over the fair value of its assets and liabilities. The impairment loss of $256.7 million during the first quarter of 2013 was measured as the amount the carrying value of goodwill exceeded the implied fair value of the goodwill.

Approximately $48.9 million of goodwill attributable to our Business Services reporting unit and $88.9 million of goodwill attributable to our Consumer Services reporting unit remains as of September 30, 2014. Deterioration in market conditions or estimated future cash flows in our reporting units could result in future goodwill impairment. We continue to monitor events and circumstances which may affect the fair value of our reporting units.

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Impairment of long-lived assets. During the nine months ended September 30, 2014, we recorded $11.4 million for impairment of long-lived assets. The impairment primarily related to $5.3 million recorded during the the three months ended March 31, 2014 for impairment of work in progress for an information technology project not expected to be used, $5.4 million recorded during the the three months ended June 30, 2014 for impairment of additional work in progress and software licenses not expected to be used and $0.6 million recorded during the the three months ended September 30, 2014 for other impairments. The impairments were classified within impairment of goodwill and long-lived assets in the Condensed Consolidated Statement of Comprehensive Loss for the three and nine months ended September 30, 2014.

Restructuring, acquisition and integration-related costs

Restructuring, acquisition and integration-related costs consisted of the following during the three and nine months ended September 30, 2013 and 2014:

	Three Months Ended									Nine Months Ended
	September 30,					Change				September 30,				Change
	2013		2014			Dollars			Percent	2013		2014		Dollars			Percent
	(dollars in thousands)
Integration-related costs	$	5,192	$	1,270		$	(3,922	)	(76)%	$	15,678	$	7,985	$	(7,693	)	(49	)%
Severance, retention and other employee costs	4,029		39			(3,990		)	(99)%	9,718		2,005		(7,713		)	(79	)%
Facility-related costs	37		(203		)	(240		)	(649)%	1,872		999		(873		)	(47	)%
Transaction-related costs	670		2			(668		)	(100)%	985		4		(981		)	(100	)%
Legacy plan restructuring costs	—		—			—			—%	215		—		(215		)	(100	)%
Restructuring, acquisition and integration-related costs	$	9,928	$	1,108		$	(8,820	)	(89)%	$	28,468	$	10,993	$	(17,475	)	(61	)%

Restructuring, acquisition and integration-related costs consist of costs related to EarthLink’s restructuring, acquisition and integration-related activities. Such costs include: 1) integration-related costs, such as system conversion, rebranding costs and integration-related consulting and employee costs; 2) severance, retention and other employee termination costs associated with acquisition and integration activities and with certain voluntary employee separations; 3) facility-related costs, such as lease termination and asset impairments; and 4) transaction-related costs, which are direct costs incurred to effect a business combination, such as advisory, legal, accounting, valuation and other professional fees. Restructuring, acquisition and integration-related costs are expensed in the period in which the costs are incurred and the services are received and are included in restructuring, acquisition and integration-related costs in the Condensed Consolidated Statements of Comprehensive Loss.

The decrease in restructuring, acquisition and integration-related costs during the three and nine months ended September 30, 2014 compared to the prior year periods was primarily due to a decrease in costs as we completed several acquisition and integration milestones over the past year. In addition, the nine months ended September 30, 2013 includes $2.2 million of severance costs and $0.6 million of facility-related costs in connection with restructuring our sales organization in order to better meet the needs of the IT services market, which resulted in a reduction in our sales workforce and some offices closing. Such costs were included in restructuring, acquisition and integration-related costs in the Condensed Consolidated Statement of Comprehensive Loss during the nine months ended September 30, 2013.

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Interest expense and other, net

The following table presents our interest expense and other, net, for the three and nine months ended September 30, 2013 and 2014:

	Three Months��Ended								Nine Months Ended
	September 30,				Change				September 30,						Change
	2013		2014		Dollars			Percent	2013			2014			Dollars			Percent
	(dollars in thousands)
Interest expense	$	13,785	$	13,957	$	172		1%	$	46,694		$	42,150		$	(4,544	)	(10	)%
Interest income	—		—		—			—%	(85		)	(125		)	(40		)	47	%
Other, net	200		13		(187		)	94%	105			(17		)	(122		)	(116	)%
Total	$	13,985	$	13,970	(15		)	—%	$	46,714		$	42,008		$	(4,706	)	(10	)%

Interest expense and other, net, is primarily comprised of interest expense incurred on our debt and capital leases, amortization of debt issuance costs, debt premiums, and debt discounts; interest earned on our cash, cash equivalents and marketable securities; and other miscellaneous income and expense items.

The decrease in interest expense and other, net, during the nine months ended September 30, 2014 compared to the prior year period was primarily due to lower interest expense resulting from the issuance of 7.375% senior secured notes and repayment of all outstanding principal of our 10.5% ITC^DeltaCom Notes (the "ITC^DeltaCom Notes") in May 2013 and a $2.0 million loss on repayment of debt recorded during the nine months ended September 30, 2013 in connection with the redemption of our ITC^DeltaCom Notes.

Income tax benefit

The income tax benefit of $3.6 million for the nine months ended September 30, 2014 represents an effective rate of 6.7%. The difference between the effective tax rate and the federal statutory rate primarily relates to changes in the valuation allowance on net deferred tax assets and reduction of liabilities for uncertain tax positions. The net income tax benefit includes tax expense for includes tax expense for foreign and state taxes, amortization of intangibles with indefinite useful lives, and a discrete benefit primarily for expirations of statutes related to uncertain tax positions of $4.4 million including related interest and penalties. The income tax benefit of $40.0 million for the nine months ended September 30, 2013 represents an effective rate of 13.0%. The difference between the effective tax rate and the federal statutory rate primarily relates to the impairment of non-deductible goodwill, as well as state taxes. The tax benefit was primarily due to net operating loss carryforwards and the impairment of tax deductible goodwill.

As of September 30, 2014, we had deferred tax assets of approximately $322.5 million, of which $267.7 million relates to federal and state net operating loss carryforwards. EarthLink maintains a valuation allowance of $325.5 million against our net deferred tax assets, exclusive of our deferred tax liabilities with indefinite useful lives. We continually review the adequacy of the valuation allowance and recognize the benefits of deferred tax assets only as the reassessment indicates that it is more likely than not that the deferred tax assets will be realized. As of September 30, 2014, we do not believe it is more likely than not that the remaining net deferred tax assets will be realized. Should our assessment change in a future period we may release all or a portion of the valuation allowance at such time, which would result in a deferred tax benefit in the period of adjustment.

To the extent we report income in future periods, we intend to use our net operating loss carryforwards to the extent available to offset taxable income and reduce cash outflows for income taxes. Our ability to use our federal and state net operating loss carryforwards and federal and state tax credit carryforwards may be subject to restrictions attributable to equity transactions in the future resulting from changes in ownership as defined under the Internal Revenue Code.

Gain (loss) from discontinued operations, net of tax

(Gain) loss from discontinued operations, net of tax, for the three and nine months ended September 30, 2013 and 2014 reflects our telecom systems business acquired as part of ITC^DeltaCom. On August 2, 2013, we sold our telecom systems business. We received $0.6 million of cash and recorded an $0.8 million receivable for contingent consideration expected to be received over the next four years. No gain or loss was recognized on the sale. We have no significant continuing involvement in the operations or significant continuing direct cash flows. The telecom systems results of operations were previously included in our Business Services segment.

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The following table presents summarized results of operations related to our discontinued operations for the three and nine months ended September 30, 2013 and 2014:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2013			2014		2013			2014
	(in thousands)
Revenues	$	774		$	—	$	5,922		$	116
Operating costs and expenses	(1,036		)	—		(7,777		)	(22		)
Income tax benefit (provision)	37			—		233			(33		)
Gain (loss) from discontinued operations, net of tax	$	(225	)	$	—	$	(1,622	)	$	61

Segment Results of Operations

We operate two reportable segments, Business Services and Consumer Services. We present our segment information along the same lines that our chief executive officer reviews our operating results in assessing performance and allocating resources. Our Business Services segment earns revenue by providing a broad range of data, voice and IT services to businesses and communications carriers. Our Consumer Services segment provides nationwide Internet access and related value-added services to residential customers.

We evaluate the performance of our operating segments based on segment operating income. Segment operating income includes revenues from external customers, related cost of revenues and operating expenses directly attributable to the segment, which include expenses over which segment managers have direct discretionary control, such as advertising and marketing programs, customer support expenses, operations expenses, product development expenses, certain technology and facilities expenses, billing operations and provisions for doubtful accounts. Segment operating income excludes other income and expense items and certain expenses over which segment managers do not have discretionary control. Costs excluded from segment operating income include various corporate expenses (consisting of certain costs such as corporate management, human resources, finance and legal), depreciation and amortization, impairment of goodwill and intangible assets, restructuring, acquisition and integration-related costs and stock-based compensation expense, as they are not considered in the measurement of segment performance.

Business Services Segment

Business Services Operating Results

The following table sets forth operating results for our Business Services segment for the three and nine months ended September 30, 2013 and 2014:

	Three Months Ended								Nine Months Ended
	September 30,				Change				September 30,				Change
	2013		2014		Dollars			Percent	2013		2014		Dollars			Percent
	(dollars in thousands)
Segment revenues	$	240,626	$	237,054	$	(3,572	)	(1)%	$	728,497	$	705,273	$	(23,224	)	(3	)%
Segment operating income	32,341		35,191		2,850			9%	94,901		86,146		(8,755		)	(9	)%

The decrease in Business Services revenues during the three and nine months ended September 30, 2014 compared to the prior year period was due to a decline in revenues for certain traditional voice and data products, including traditional voice, lower-end, single site broadband services and web hosting resulting from competitive pressures in industry and increased customer churn. The decrease was partially offset by an increase in revenues from our growth products, including MPLS, hosted VoIP and IT services; an increase due to the inclusion of revenues from the acquisition of CenterBeam beginning in July 2013; favorable dispute settlements related to our billings to other carriers for access to our network for which revenue had not been previously recognized; and targeted rate increases implemented during the year.

The increase in Business Services operating income during the three months ended September 30, 2014 compared to the prior year period was primarily due to the favorable dispute settlements in both Business Services revenues and Business Services cost of revenues. The decrease in Business Services operating income during the nine months ended September 30, 2014 compared

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to the prior year period was primarily due to the decrease in revenues discussed above. However, partially offsetting this was a decline in operating costs and favorable dispute adjustments with telecommunications providers.

Consumer Services Segment

Consumer Services Operating Metrics

The following table sets forth subscriber and operating data for our Consumer Services segment for the three and nine months ended September 30, 2013 and 2014:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2014			2013			2014
Consumer Subscriber Activity
Subscribers at beginning of period	1,055,000			893,000			1,139,000			976,000
Gross organic subscriber additions	27,000			18,000			85,000			59,000
Churn	(69,000)			(57,000)			(211,000)			(181,000)
Subscribers at end of period (a)	1,013,000			854,000			1,013,000			854,000
Consumer Metrics
Average narrowband subscribers (b)	571,000			501,000			591,000			518,000
Average broadband subscribers (b)	463,000			372,000			483,000			397,000
Average consumer subscribers (b)	1,034,000			873,000			1,074,000			915,000
ARPU (c)	$	21.91		$	23.18		$	21.74		$	22.73
Churn rate (d)	2.2		%	2.2		%	2.2		%	2.2		%

 _________

(a) Subscriber counts do not include new nonpaying customers. Customers receiving service under promotional programs that include periods of free service at inception are not included in subscriber counts until they become paying customers.

(b) Average subscribers for the three month periods is calculated by averaging the ending monthly subscribers or accounts for the four months preceding and including the end of the period. Average subscribers for the nine month periods is calculated by averaging the ending monthly subscribers or accounts for the ten months preceding and including the end of the period.

(c) ARPU represents the average monthly revenue per user (subscriber). ARPU is computed by dividing revenue for the period by the average number of subscribers for the period. Revenue used to calculate ARPU includes recurring service revenue as well as nonrecurring revenues associated with equipment and other one-time charges associated with initiating or discontinuing services.

(d) Churn rate is used to measure the rate at which subscribers discontinue service on a voluntary or involuntary basis.  Churn rate is computed by dividing the average monthly number of subscribers that discontinued service during the period by the average subscribers for the period.

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Consumer Services Operating Results

The following table sets forth operating results for our Consumer Services segment for the three and nine months ended September 30, 2013 and 2014:

	Three Months Ended								Nine Months Ended
	September 30,				Change				September 30,				Change
	2013		2014		Dollars			Percent	2013		2014		Dollars			Percent
	(dollars in thousands)
Segment revenues	$	67,952	$	60,691	$	(7,261	)	(11)%	$	210,270	$	187,150	$	(23,120	)	(11	)%
Segment operating income	31,882		28,208		(3,674		)	(12)%	100,034		86,461		(13,573		)	(14	)%

The decrease in Consumer Services revenues and operating income compared to the prior year periods was primarily due to the continued maturation of and competition in the market for consumer Internet access and competitive pressures in the industry. In addition, we also experienced an increase in our average cost per subscriber as our agreements with certain service providers generally have volume based tiered pricing which is leading to higher unit costs as we see a decline in subscribers over time. Also contributing to the increase in costs was a shift in the mix of customers to certain customer that have higher costs associated with delivering services. Partially offsetting these decreases was revenue for modem equipment rental we began billing to certain broadband subscribers effective April 2014, net of associated costs, and additional revenue due to targeted price increases.

Liquidity and Capital Resources

The following table sets forth summarized cash flow data for the nine months ended September 30, 2013 and 2014:

	Nine Months Ended
	September 30,						Change
	2013			2014			Dollars		Percent
	(dollars in thousands)
Net cash provided by operating activities	$	83,430		$	101,338		$	17,908	21	%
Net cash used in investing activities	(78,533		)	(74,153		)	4,380		(6	)%
Net cash used in financing activities	(46,615		)	(14,209		)	32,406		(70	)%
Net (decrease) increase in cash and cash equivalents	$	(41,718	)	$	12,976		$	54,694	(131	)%

Operating activities

The increase in cash provided by operating activities during the nine months ended September 30, 2014 compared to the prior year period was primarily due to reduced payables resulting from favorable disputes with vendors, improved collection efforts on accounts receivables and a decrease in cash interest paid.

Investing activities

The decrease in net cash used in investing activities during the nine months ended September 30, 2014 compared to the prior year period was primarily due to a $35.4 million decrease in capital expenditures and a $16.8 million decrease in cash used for acquisitions. During the nine months ended September 30, 2013, capital expenditures were $109.6 million and included cash to expand our fiber network and upgrade our network and technology infrastructure, which was substantially complete by the end of 2013. During the nine months ended September 30, 2014, capital expenditures were $74.2 million and primarily related to enhancing our network and technology infrastructure and the acquisition of new customers. The decrease in net cash used in investing activities was partially offset by a $46.9 million change in net cash from purchases and sales of marketable securities, as we generated $46.9 million of cash from sales and maturities of marketable securities, net of purchases during the nine months ended September 30, 2013.

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Financing activities

The decrease in net cash used in financing activities during the nine months ended September 30, 2014 compared to the prior year period was primarily due to a $24.2 million decrease in net cash used for debt and capital lease transactions (more fully described below), a $4.8 million decrease in dividends paid and a $3.4 million decrease in repurchases of common stock. The decrease in dividends paid was due to the timing of our quarterly dividend payment to shareholders. During the nine months ended September 30, 2013 and 2014, cash dividends declared were $0.15 per share. However, our third quarter 2013 payment was paid to shareholders within the quarter and our third quarter 2014 was paid to shareholders subsequent to the quarter in October 2014. We repurchased 1.1 million shares of our common stock pursuant to our share repurchase program for $5.6 million during the nine months ended September 30, 2013, compared to 0.7 million shares of our common stock pursuant to our share repurchase program for $2.2 million during the nine months ended September 30, 2014.

In May 2013, we completed a private placement of $300.0 million aggregate principal amount of Senior Secured Notes, resulting in net proceeds of $292.6 million after deducting transaction fees of $7.4 million. We used proceeds from the private placement, together with available cash, to fund a tender offer and redemption of our ITC^DeltaCom Notes. We used approximately $314.8 million to repay the ITC^DeltaCom Notes, which consisted of $292.3 million of outstanding principal amount, $16.2 million of premiums and $6.3 million of accrued and unpaid interest. In May 2013, we also amended and restated our revolving credit facility and paid $1.9 million of transaction fees and expenses. Finally, in connection with our acquisition of CenterBeam in July 2013, we assumed and repaid $6.5 million of debt.

Future Uses of cash

Our primary future cash requirements relate to outstanding indebtedness, capital expenditures and investments in our Business Services segment. In addition, we have historically used cash for dividends and we may use cash in the future to make strategic acquisitions or repurchase common stock or debt.

Debt and interest. We expect to use cash to service our outstanding indebtedness, including our $300.0 million aggregate principal amount of Senior Notes due in May 2019, our $300.0 million aggregate principal amount of Senior Secured Notes due in June 2020 and any future borrowings under our $135.0 million revolving credit facility.

Capital expenditures. We expect to incur capital expenditures of approximately $100.0 million to $105.0 million during 2014. The capital expenditures primarily relate to the acquisition of new customers and to maintain and upgrade our network and technology infrastructure. The actual amount of capital expenditures may fluctuate due to a number of factors which are difficult to predict and could change significantly over time. Additionally, technological advances may require us to make capital expenditures to develop or acquire new equipment or technology in order to replace aging or obsolete equipment.

Investments in our Business Services segment. One of our key strategies is to grow our MPLS and hosted voice revenue within our Business Services segment. We expect to invest cash in sales and marketing efforts and resources required to support our these services, including investments in marketing and advertising to increase brand awareness.

Dividends. During the nine months ended September 30, 2013 and 2014, cash dividends declared were $0.15 per common share. The decision to declare future dividends is made at the discretion of the Board of Directors and will depend on, among other things, our results of operations, financial condition, cash requirements, investment opportunities, restrictions on dividends under the agreements governing our indebtedness and other factors the Board of Directors may deem relevant.

Other. We may also use cash to invest in or acquire other companies, to repurchase common stock or to repurchase or redeem debt. We expect to continue to evaluate and consider potential strategic transactions that we believe may complement or grow our business. Although we continue to consider and evaluate potential strategic transactions, there can be no assurance that we will be able to consummate any such transaction. In addition, we continue to evaluate our business, including evaluating ways to reduce the cost structure of our business, and may incur costs for additional restructuring activities.

Our cash requirements depend on numerous factors, including costs required to integrate our acquisitions, costs incurred to redeem or repurchase debt, the size and types of future acquisitions in which we may engage, the costs required to maintain our network infrastructure, the outcome of various telecommunications-related disputes and proceedings, the pricing of our services and the level of resources used for our sales and marketing activities, among others. In addition, our use of cash in connection with acquisitions may limit other potential uses of our cash, including stock repurchases, debt repayments or repurchases and dividend payments.

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Future sources of cash

Our principal sources of liquidity are our cash and cash equivalents, as well as the cash flow we generate from our operations. During the nine months ended September 30, 2013 and 2014, we generated $83.4 million and $101.3 million in cash from operations, respectively. As of September 30, 2014, we had $129.6 million in cash and cash equivalents. Our cash and cash equivalents are subject to general credit, liquidity, market and interest rate risks, which may be exacerbated by unfavorable economic conditions.

Another source of liquidity is our revolving credit facility. We have a credit agreement providing for a senior secured revolving credit facility with aggregate revolving commitments of $135.0 million. The senior secured revolving credit facility terminates in May 2017, and at that time any amounts outstanding thereunder shall be due and payable in full. The revolving credit facility contains certain restrictive covenants, and a breach of any of these covenants could limit our ability to incur indebtedness under the facility. As of September 30, 2014, no amounts had been drawn or were outstanding under the senior secured revolving credit facility. We currently have no plans to draw under this facility.

Our available cash and cash equivalents, together with our results of operations, are expected to be sufficient to meet our operating expenses, service outstanding indebtedness, capital requirements and investment and other obligations for at least the next 12 months. However, to increase available liquidity or to fund acquisitions or other strategic activities, we may seek additional financing. We have no commitments for any additional financing and have no lines of credit or similar sources of financing, other than the $135.0 million credit facility. We cannot be sure that we can obtain additional financing on favorable terms, if at all, through the issuance of equity securities or the incurrence of additional debt. Additional equity financing may dilute our stockholders, and debt financing, if available, may restrict our ability to repurchase common stock or debt, declare and pay dividends and raise future capital. If we are unable to obtain additional needed financing, it may prohibit us from refinancing existing indebtedness and making acquisitions, capital expenditures and/or investments, which could materially and adversely affect our business.

Debt Covenants

The credit agreement for our senior secured revolving credit facility requires us to maintain a consolidated net leverage ratio of not greater than 3.5 to 1.0 (with restrictions on cash netting) and a consolidated interest coverage ratio of not less than 3.0 to 1.0 in order to borrow under the agreement. Additionally, the credit agreement requires us to maintain a consolidated net leverage ratio of not greater than 3.0 to 1.0 in order to repurchase common stock and to make dividend payments in excess of the $0.05 per share regular quarterly dividend. We expect to be in compliance with the maintenance covenants in our credit agreement for the remainder of 2014. We were in compliance with all covenants as of September 30, 2014 as well as maintaining a consolidated net leverage ratio of not greater than 3.0 to 1.0.

Off-Balance Sheet Arrangements

As of September 30, 2014, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Share Repurchase Program

The Board of Directors has authorized a total of $750.0 million to repurchase our common stock under our share repurchase program. As of September 30, 2014, we had utilized approximately $684.3 million pursuant to the authorizations and had $65.7 million available under the current authorization. We may repurchase our common stock from time to time in compliance with the Securities and Exchange Commission’s regulations and other legal requirements, and subject to market conditions and other factors. The share repurchase program does not require us to acquire any specific number of shares and may be terminated by the Board of Directors at any time. In addition, the agreements governing our Senior Secured Notes, Senior Notes and senior secured revolving credit facility contain restrictions on our ability to repurchase common stock.

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Recently Issued Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board issued authoritative guidance on reporting discontinued operations. The new guidance changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods.

In May 2014, the Financial Accounting Standards Board issued authoritative guidance on revenue from contracts with customers. The new guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard requires significantly expanded disclosures about revenue contract assets and liabilities. The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2016, and interim periods within those annual periods, and may be applied on a full retrospective or modified retrospective approach. Early adoption is prohibited. We are evaluating the impact of implementation of this standard on our financial statements.

In August 2014, the Financial Accounting Standards Board issued authoritative guidance related to the disclosure of uncertainties about an entity's ability to continue as a going concern. The new guidance requires management to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements and to provide related footnote disclosures if so. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on our financial statements.

Non-GAAP Financial Measures

In addition to our financial information presented in accordance with U.S. generally accepted accounting principles (“GAAP”), management uses certain “non-GAAP financial measures” within the meaning of the SEC Regulation G, to clarify and enhance understanding of past performance and prospects for the future. Generally, a non-GAAP financial measure is a numerical measure of a company’s operating performance, financial position or cash flows that excludes or includes amounts that are included in or excluded from the most directly comparable measure calculated and presented in accordance with GAAP. Set forth below is a discussion of the presentation and use of Adjusted EBITDA and Unlevered Free Cash Flow, the non-GAAP financial measures used by management.

Adjusted EBITDA is defined as net income (loss) before interest expense and other, net, income tax provision (benefit), depreciation and amortization, stock-based compensation expense, impairment of goodwill and long-lived assets, restructuring, acquisition and integration-related costs, and gain (loss) from discontinued operations, net of tax.  Unlevered Free Cash Flow is defined as net income (loss) before interest expense and other, net, income tax provision (benefit), depreciation and amortization, stock-based compensation expense, impairment of goodwill and long-lived assets, restructuring, acquisition and integration-related costs, and gain (loss) from discontinued operations, net of tax, less cash used for purchases of property and equipment.

These non-GAAP financial measures are commonly used in the industry and are presented because management believes they provide relevant and useful information to investors. Management uses these non-GAAP financial measures to evaluate the performance of its business. Management also uses Unlevered Free Cash Flow to assess its ability to fund capital expenditures, fund growth and service debt. Management believes that excluding the effects of certain non-cash and non-operating items enables investors to better understand and analyze the current period’s results and provides a better measure of comparability.

There are limitations to using these non-GAAP financial measures. Adjusted EBITDA and Unlevered Free Cash Flow are not indicative of cash provided or used by operating activities and may differ from comparable information provided by other companies.  Adjusted EBITDA and Unlevered Free Cash Flow should not be considered in isolation, as an alternative to, or more meaningful than measures of financial performance determined in accordance with U.S. GAAP.

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The following table presents a reconciliation of Adjusted EBITDA to the most closely related financial measure reported under GAAP for the three and nine months ended September 30, 2013 and 2014:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2014			2013			2014
	(in thousands)
Net loss	$	(11,338	)	$	(1,952	)	$	(258,954	)	$	(50,260	)
Interest expense and other, net	13,985			13,970			46,714			42,008
Income tax benefit	(4,582		)	(4,329		)	(40,029		)	(3,592		)
Depreciation and amortization	46,689			46,716			134,314			139,186
Impairment of goodwill and long-lived assets	—			589			255,599			11,360
Stock-based compensation expense	1,238			2,930			9,218			10,208
Restructuring, acquisition and integration-related costs	9,928			1,108			28,468			10,993
(Gain) loss from discontinued operations, net of tax	225			—			1,622			(61		)
Adjusted EBITDA	$	56,145		$	59,032		$	176,952		$	159,842

The following table presents a reconciliation of Unlevered Free Cash Flow to the most closely related financial measure reported under GAAP for the three and nine months ended September 30, 2013 and 2014:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2014			2013			2014
	(in thousands)
Net loss	$	(11,338	)	$	(1,952	)	$	(258,954	)	$	(50,260	)
Interest expense and other, net	13,985			13,970			46,714			42,008
Income tax benefit	(4,582		)	(4,329		)	(40,029		)	(3,592		)
Depreciation and amortization	46,689			46,716			134,314			139,186
Impairment of goodwill and long-lived assets	—			589			255,599			11,360
Stock-based compensation expense	1,238			2,930			9,218			10,208
Restructuring, acquisition and integration-related costs	9,928			1,108			28,468			10,993
(Gain) loss from discontinued operations, net of tax	225			—			1,622			(61		)
Purchases of property and equipment	(32,792		)	(24,890		)	(109,647		)	(74,239		)
Unlevered Free Cash Flow	$	23,353		$	34,142		$	67,305		$	85,603

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The following table presents a reconciliation of Unlevered Free Cash Flow, as a liquidity measure, to net cash provided by operating activities for the three and nine months ended September 30, 2013 and 2014:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2014			2013			2014
	(in thousands)
Net cash provided by operating activities	$	39,890		$	62,063		$	83,430		$	101,338
Income tax benefit	(4,582		)	(4,329		)	(40,029		)	(3,592		)
Non-cash income taxes	4,603			4,391			40,206			3,939
Interest expense and other, net	13,985			13,970			46,714			42,008
Amortization of debt discount, premium and issuance costs	(996		)	(1,029		)	(1,044		)	(3,067		)
Restructuring, acquisition and integration-related costs	9,928			1,108			28,468			10,993
Changes in operating assets and liabilities	(6,910		)	(16,918		)	19,274			8,251
Purchases of property and equipment	(32,792		)	(24,890		)	(109,647		)	(74,239		)
Other, net	227			(224		)	(67		)	(28		)
Unlevered Free Cash Flow	$	23,353		$	34,142		$	67,305		$	85,603
Net cash used in investing activities	$	(20,311	)	$	(25,390	)	$	(78,533	)	$	(74,153	)
Net cash used in financing activities	$	(17,576	)	$	(5,513	)	$	(46,615	)	$	(14,209	)

Cautionary Note Concerning Factors That May Affect Future Results

The Management’s Discussion and Analysis and other portions of this Quarterly Report on Form 10-Q include “forward-looking” statements (rather than historical facts) that are subject to risks and uncertainties that could cause actual results to differ materially from those described. Although we believe that the expectations expressed in these forward-looking statements are reasonable, we cannot promise that our expectations will turn out to be correct. Our actual results could be materially different from and worse than our expectations. With respect to such forward-looking statements, we seek the protections afforded by the Private Securities Litigation Reform Act of 1995. These risks and uncertainties include: (1) we may not be able to execute our strategy to be a leading managed network services provider, which could adversely affect our results of operations and cash flows; (2) we may not be able to grow revenues from our growth products and services to offset declining revenues from our traditional products and services, which could adversely affect our results of operations and cash flows; (3) our failure to achieve operating efficiencies will adversely affect our results of operations; (4) as a result of our continuing review of our business, we may determine to undertake further restructuring plans that would require additional charges, including incurring facility exit and restructuring charges; (5) we may be unsuccessful integrating acquisitions into our business, which could result in operating difficulties, losses and other adverse consequences; (6) if we are unable to adapt to changes in technology and customer demands, we may not remain competitive, and our revenues and operating results could suffer; (7) unfavorable general economic conditions could harm our business; (8) we may be unable to successfully identify, manage and assimilate future acquisitions, which could adversely affect our results of operations; (9) we face significant competition in the communications and IT services industry that could reduce our profitability; (10) failure to retain existing customers could adversely affect our results of operations and cash flows; (11) decisions by legislative or regulatory authorities, including the Federal Communications Commission relieving incumbent carriers of certain regulatory requirements, and possible further deregulation in the future, may restrict our ability to provide services and may increase the costs we incur to provide these services; (12) if we are unable to interconnect with AT&T, Verizon and other incumbent carriers on acceptable terms, our ability to offer competitively priced local telephone services will be adversely affected; (13) our operating performance will suffer if we are not offered competitive rates for the access services we need to provide our long distance services; (14) we may experience reductions in switched access and reciprocal compensation revenue; (15) failure to obtain and maintain necessary permits and rights-of-way could interfere with our network infrastructure and operations; (16) we have substantial business relationships with several large telecommunications carriers, and some of our customer agreements may not continue due to financial difficulty, acquisitions, non-renewal or other factors, which could adversely affect our wholesale revenue and results of operations; (17) we obtain a majority of our network equipment and software from a limited number of third-party suppliers; (18) work stoppages experienced by other communications companies on whom we rely for service could adversely impact our ability to provision and service our customers; (19) our commercial and alliance arrangements may not be renewed or may not generate expected benefits, which could adversely affect our results of operations; (20) our consumer business is dependent on the availability of third-party network service providers; (21) we face significant competition in the Internet access

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industry that could reduce our profitability; (22) the continued decline of our consumer access subscribers will adversely affect our results of operations; (23) potential regulation of Internet service providers could adversely affect our operations; (24) cyber security breaches could harm our business; (25) privacy concerns relating to our business could damage our reputation and deter current and potential users from using our services; (26) interruption or failure of our network, information systems or other technologies could impair our ability to provide our services, which could damage our reputation and harm our operating results; (27) our business depends on effective business support systems and processes; (28) if we, or other industry participants, are unable to successfully defend against disputes or legal actions, we could face substantial liabilities or suffer harm to our financial and operational prospects; (29) we may be accused of infringing upon the intellectual property rights of third parties, which is costly to defend and could limit our ability to use certain technologies in the future; (30) we may not be able to protect our intellectual property; (31) we may be unable to hire and retain sufficient qualified personnel, and the loss of any of our key executive officers could adversely affect us; (32) government regulations could adversely affect our business or force us to change our business practices; (33) our business may suffer if third parties are unable to provide services or terminate their relationships with us; (34) 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; (35) we may not realize our deferred tax assets, 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; (36) our indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry; (37) we may require substantial capital to support business growth, and this capital may not be available to us on acceptable terms, or at all; (38) our debt agreements include restrictive covenants, and failure to comply with these covenants could trigger acceleration of payment of outstanding indebtedness or limit our ability to draw on our revolving credit facility; (39) we may reduce, or cease payment of, quarterly cash dividends; (40) our stock price may be volatile; (41) provisions of our certificate of incorporation, bylaws and other elements of our capital structure could limit our share price and delay a change of control of the company; and (42) our bylaws designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ flexibility in obtaining a judicial forum for disputes with us or our directors, officers or employees. These risks and uncertainties, as well as other risks and uncertainties that could cause our actual results to differ significantly from management’s expectations, are not intended to represent a complete list of all risks and uncertainties inherent in our business, and should be read in conjunction with the more detailed cautionary statements and risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2013.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes in market risk from the information provided in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2013.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we carried out an evaluation, with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and

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communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II

Item 1. Legal Proceedings.

The Company is party to various legal and regulatory proceedings and other disputes arising from normal business activities. The Company’s management believes that there are no disputes, litigation or other legal or regulatory proceedings asserted or pending against the Company that could have, individually or in the aggregate, a material adverse effect on its financial position, results of operations or cash flows, and believes that adequate provision for any probable and estimable losses has been made in the Company’s condensed consolidated financial statements. However, the result of any current or future disputes, litigation or other legal or regulatory proceedings is inherently unpredictable and could result in liabilities that are higher than currently predicted.

Item 1A.  Risk Factors.

There were no material updates to the risk factors discussed in EarthLink’s Annual Report on Form 10-K for the year ended December 31, 2013.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 5.  Other Information.

None.

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Item 6.   Exhibits.

(a)Exhibits.   The following exhibits are filed as part of this report:

31.1	Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document*
101.SCH	XBRL Taxonomy Extension Schema Document*
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB	XBRL Taxonomy Extension Label Linkbase Document*
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document*

* Pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for the purposes of section 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities and Exchanges Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		EARTHLINK HOLDINGS CORP.
Date:	November 5, 2014	/s/ JOSEPH F. EAZOR
		Joseph F. Eazor, Chief Executive Officer and President (principal executive officer)
Date:	November 5, 2014	/s/ BRADLEY A. FERGUSON
		Bradley A. Ferguson, Chief Financial Officer
		(principal financial and accounting officer)

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