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 March 31, 2015
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 April 30, 2015, 103,088,130 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 March 31, 2015
TABLE OF CONTENTS
 


PART I

 Item 1.  Financial Statements.

EARTHLINK HOLDINGS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
December 31,
2014
 
March 31,
2015
 
(in thousands, except per share data)
 
 
 
(unaudited)
ASSETS
Current assets:
 

 
 

Cash and cash equivalents
$
134,133

 
$
108,053

Accounts receivable, net of allowance of $6,211 and $5,832 as of December 31, 2014 and March 31, 2015, respectively
92,616

 
90,942

Prepaid expenses
13,761

 
17,767

Other current assets
13,671

 
13,848

Total current assets
254,181

 
230,610

Property and equipment, net
404,713

 
391,840

Goodwill
137,751

 
137,751

Other intangible assets, net
91,490

 
74,810

Other long-term assets
22,026

 
21,107

Total assets
$
910,161

 
$
856,118

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 

 
 

Accounts payable
$
23,726

 
$
18,474

Accrued payroll and related expenses
50,197

 
26,887

Other accrued liabilities
85,181

 
92,602

Deferred revenue
43,940

 
45,599

Current portion of long-term debt and capital lease obligations
1,537

 
6,528

Deferred income taxes, net
751

 
772

Total current liabilities
205,332

 
190,862

Long-term debt and capital lease obligations
606,284

 
580,592

Long-term deferred income taxes, net
2,448

 
2,612

Other long-term liabilities
21,313

 
21,579

Total liabilities
835,377

 
795,645

 
 
 
 
Stockholders’ equity:
 

 
 

Preferred stock, $0.01 par value, 100,000 shares authorized, 0 shares issued and outstanding as of December 31, 2014 and March 31, 2015
—

 
—

Common stock, $0.01 par value, 300,000 shares authorized, 198,623 and 199,318 shares issued as of December 31, 2014 and March 31, 2015, respectively, and 102,296 and 102,991 shares outstanding as of December 31, 2014 and March 31, 2015, respectively
1,986

 
1,993

Additional paid-in capital
2,035,382

 
2,031,547

Accumulated deficit
(1,217,727
)
 
(1,228,210
)
Treasury stock, at cost, 96,327 shares as of December 31, 2014 and March 31, 2015
(744,857
)
 
(744,857
)
Total stockholders’ equity
74,784

 
60,473

Total liabilities and stockholders’ equity
$
910,161

 
$
856,118


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

1

EARTHLINK HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 
 
Three Months Ended March 31,
 
2014
 
2015
 
(in thousands, except per share data)
(unaudited)
Revenues
$
297,320

 
$
282,447

Operating costs and expenses:
 

 
 

Cost of revenues (exclusive of depreciation and amortization shown separately below)
145,876

 
129,462

Selling, general and administrative (exclusive of depreciation and amortization shown separately below)
106,484

 
95,258

Depreciation and amortization
46,855

 
47,264

Impairment of long-lived assets
5,334

 
—

Restructuring, acquisition and integration-related costs
4,977

 
5,372

Total operating costs and expenses
309,526

 
277,356

Income (loss) from operations
(12,206
)
 
5,091

Interest expense and other, net
(13,956
)
 
(15,223
)
Loss from continuing operations before income taxes
(26,162
)
 
(10,132
)
Income tax provision
(363
)
 
(351
)
Loss from continuing operations
(26,525
)
 
(10,483
)
Gain from discontinued operations, net of tax
55

 
—

Net loss and comprehensive loss
$
(26,470
)
 
$
(10,483
)
 
 
 
 
Basic and diluted net loss per share
 

 
 

Continuing operations
$
(0.26
)
 
$
(0.10
)
Discontinued operations
—

 
—

Basic and diluted net loss per share
$
(0.26
)
 
$
(0.10
)
Basic and diluted weighted average common shares outstanding
102,312

 
102,611

 
 
 
 
Dividends declared per share
$
0.05

 
$
0.05

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

2

EARTHLINK HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Three Months Ended March 31,
 
2014
 
2015
Cash flows from operating activities:
(in thousands)
(unaudited)
Net loss
$
(26,470
)
 
$
(10,483
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
46,855

 
47,264

Impairment of long-lived assets
5,334

 
—

Non-cash income taxes
210

 
185

Stock-based compensation
4,943

 
3,415

Amortization of debt discount and debt issuance costs
1,016

 
1,029

Loss on extinguishment of debt
—

 
1,286

Other operating activities
(145
)
 
(90
)
Decrease in accounts receivable, net
2,414

 
1,674

Increase in prepaid expenses and other assets
(3,175
)
 
(4,537
)
Decrease in accounts payable and accrued and other liabilities
(9,619
)
 
(22,437
)
(Decrease) increase in deferred revenue
(57
)
 
1,559

Net cash provided by operating activities
21,306

 
18,865

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(23,384
)
 
(17,529
)
Net cash used in investing activities
(23,384
)
 
(17,529
)
Cash flows from financing activities:
 
 
 
Repayment of debt and capital lease obligations
(338
)
 
(21,938
)
Payment of dividends
(5,707
)
 
(5,478
)
Net cash used in financing activities
(6,045
)
 
(27,416
)
Net decrease in cash and cash equivalents
(8,123
)
 
(26,080
)
Cash and cash equivalents, beginning of period
116,636

 
134,133

Cash and cash equivalents, end of period
$
108,513

 
$
108,053

 
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 managed 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 29,000 route fiber miles, 90 metro fiber rings and 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 12, “Segment Information.”
 
2.  Summary of Significant Accounting Policies
 
Basis of Presentation
 
The condensed consolidated financial statements of EarthLink for the three months ended March 31, 2014 and 2015 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, 2014 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 months ended March 31, 2015 are not necessarily indicative of the results anticipated for the entire year ending December 31, 2015.
 
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.

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.

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 three months ended March 31, 2014, the Company recorded $5.3 million for impairment of long-lived assets, which consisted of impairment of work in progress for information technology projects not expected to be used. The impairment loss is classified within impairment of long-lived assets in the Condensed Consolidated Statement of Comprehensive Loss.


4
EARTHLINK HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - (Continued)

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. On August 2, 2013, the Company sold its telecom systems business. 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.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (the "FASB") 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. In April 2015, the FASB proposed a one-year deferral of the effective date. Under the proposal, the standard would be required to be adopted by public business entities in annual periods beginning on or after December 15, 2017. The FASB also proposed to permit early adoption at the original effective date. The Company is evaluating the impact of the implementation of this standard on its financial statements.

In August 2014, the FASB 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.

In April 2015, the FASB issued authoritative guidance to simplify the presentation of debt issuance costs. The new guidance requires an entity to present debt issuance costs as a direct deduction from the related debt liability rather than as an asset. Entities would apply the new guidance retrospectively to all prior periods. The new standard is effective for financial statements issued for fiscal years beginning after December 15, 2015. Early adoption is permitted. The adoption of this standard will require the Company to reclassify its debt issuance costs from other long-term assets to a direct deduction of long-term debt and capital lease obligations in its Consolidated Balance Sheets. As of March 31, 2015, the Company had $11.5 million of debt issuance costs.

In April 2015, the FASB issued authoritative guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. Entities could apply the new guidance either prospectively or retrospectively to all prior periods. The new standard is effective for financial statements issued for fiscal years beginning after December 15, 2015. 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 months ended March 31, 2014 and 2015 because such inclusion would have an anti-dilutive effect due to the Company's net loss. As of March 31, 2014 and 2015, the Company had 10.9 million and 11.2 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 consisted of the following during the three months ended March 31, 2014 and 2015:
 
Three Months Ended
 
March 31,
 
2014
 
2015
 
(in thousands)
Integration-related costs
$
3,953

 
$
1,317

Severance, retention and other employee costs
1,008

 
2,901

Facility-related costs
16

 
1,154

Restructuring, acquisition and integration-related costs
$
4,977

 
$
5,372


Restructuring, acquisition and integration-related costs consist of costs related to the Company'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; and 3) facility-related costs, such as lease termination and asset impairments. The Company recognizes a liability for costs associated with an exit or disposal activity when the liability is incurred. The Company recognizes severance costs when they are both probable and reasonably estimable.

During the three months ended March 31, 2015, the Company recorded $4.1 million of restructuring costs in connection with changes in the Company's business strategy. The restructuring costs consisted of $2.9 million of severance and other employee costs due to reductions in workforce and $1.2 million of facilities-related costs primarily due to the closing of certain sales offices. Restructuring costs for the three months ended March 31, 2015 are included in restructuring, acquisition and integration-related costs in the Condensed Consolidated Statement of Comprehensive Loss.

The following table summarizes activity for liability balances associated with facility exit and restructuring liabilities for the three months ended March 31, 2015:
 
Severance and Benefits
 
Facilities
 
Total
 
(in thousands)
Balance as of December 31, 2014
$
5,373

 
$
4,713

 
$
10,086

Accruals
2,901

 
1,154

 
4,055

Payments
(4,430
)
 
(334
)
 
(4,764
)
Balance as of March 31, 2015
$
3,844

 
$
5,533

 
$
9,377



6
EARTHLINK HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - (Continued)

As of December 31, 2014, $6.8 million of facility exit and restructuring liabilities were classified within current liabilities and $3.3 million were classified as other long-term liabilities. As of March 31, 2015, $5.7 million of facility exit and restructuring liabilities were classified within current liabilities and $3.7 million were classified as other long-term liabilities.
 
5.  Goodwill and Other Intangible Assets
 
Goodwill
 
There were no changes in the carrying amount of goodwill during the three months ended March 31, 2015.

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, 2014 and March 31, 2015:
 
As of December 31, 2014
 
As of March 31, 2015
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net
Carrying
Value
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net
Carrying
Value
 
(in thousands)
Customer relationships
$
359,187

 
$
(271,968
)
 
$
87,219

 
$
359,187

 
$
(287,967
)
 
$
71,220

Developed technology and software
26,261

 
(22,096
)
 
4,165

 
26,261

 
(22,671
)
 
3,590

Trade name
1,521

 
(1,521
)
 
—

 
1,521

 
(1,521
)
 
—

Other
1,800

 
(1,694
)
 
106

 
1,800

 
(1,800
)
 
—

Other intangible assets, net
$
388,769

 
$
(297,279
)
 
$
91,490

 
$
388,769

 
$
(313,959
)
 
$
74,810

  
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 March 31, 2015, the weighted average amortization periods were 5.2 years for customer relationships, 3.8 years for developed technology and software, 5.0 years for trade name and 3.6 years for other identifiable intangible assets. As a result of a change in estimate for the estimated useful lives of certain customer relationships, the results of operations for the three months ended March 31, 2015 include additional amortization expense of $1.4 million, or $0.01 per share.
 
Amortization of intangible assets, which is included in depreciation and amortization in the Condensed Consolidated Statements of Comprehensive Loss, for the three months ended March 31, 2014 and 2015 was as follows:
 
Three Months Ended
 
March 31,
 
2014
 
2015
 
(in thousands)
Amortization expense
$
16,427

 
$
16,680

 
Based on the current amount of definite-lived intangible assets, the Company expects to record amortization expense of approximately $49.5 million during the remaining nine months in the year ending December 31, 2015 and $23.6 million, $1.3 million and $0.4 million during the years ending December 31, 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.
 

7
EARTHLINK HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - (Continued)

6.  Other Accrued Liabilities
 
The Company's other accrued liabilities consisted of the following as of December 31, 2014 and March 31, 2015:
 
As of December 31, 2014
 
As of March 31, 2015
 
(in thousands)
Accrued taxes and surcharges
$
17,801

 
$
18,081

Accrued communications costs
25,917

 
24,608

Amounts due to customers
9,565

 
9,019

Accrued interest
5,251

 
16,706

Accrued dividends
6,780

 
6,769

Other
19,867

 
17,419

Total other accrued liabilities
$
85,181

 
$
92,602


7.  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, 2014 and March 31, 2015:
 
As of December 31, 2014
 
As of March 31, 2015
 
(in thousands)
Senior secured notes due June 2020
$
300,000

 
$
300,000

Senior notes due May 2019
300,000

 
278,925

Unamortized discount on senior notes due May 2019
(6,601
)
 
(5,851
)
Capital lease obligations
14,422

 
14,046

Carrying value of debt and capital lease obligations
607,821

 
587,120

Less current portion of debt and capital lease obligations
(1,537
)
 
(6,528
)
Long-term debt and capital lease obligations
$
606,284

 
$
580,592

 
2015 Repurchases

In October 2014, the Board of Directors authorized the Company’s management to repurchase up to $30.0 million of the Company’s outstanding 7.375% Senior Secured Notes due 2020 (the “Senior Secured Notes”) or 8.875% Senior Notes due 2019 (the “Senior Notes”), so long as it is in compliance with the Company’s indenture and credit agreement covenants. In November 2014, the Company amended its Credit Agreement to permit the repurchase of up to $30.0 million of its Senior Secured Notes or Senior Notes, as long as such purchases otherwise comply with the terms of the Credit Agreement and the terms of the applicable indentures. Such repurchases were required to be entered into by March 31, 2015.

During the three months ended March 31, 2015, the Company repurchased $21.1 million outstanding principal of its Senior Notes in the open market for $21.6 million, plus accrued and unpaid interest. Upon completion of the repurchase, $278.9 million aggregate principal amount of its Senior Notes remained outstanding. The Company recognized a $1.3 million loss on the repurchase, consisting of $0.5 million for premiums paid on the repurchase and $0.8 million for the write-off of unamortized discount on debt and debt issuance costs. This loss is included in interest expense and other, net, in the Condensed Consolidated Statement of Comprehensive Loss. The payment of the premium is included in repayment of debt and capital lease obligations in the Condensed Consolidated Statement of Cash Flows.

During the three months ended March 31, 2015, the Company initiated an additional repurchase of $5.0 million outstanding principal of its Senior Notes that settled subsequent to quarter end in April 2015. As a result, the Company reclassified $5.0 million of its outstanding debt from long-term debt and capital lease obligations to current portion of debt and capital lease obligations in its Condensed Consolidated Balance Sheet as of March 31, 2015.


8
EARTHLINK HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - (Continued)

Debt 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 March 31, 2015, the Company was in compliance with these 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 March 31, 2015, the Company was in compliance with these covenants.

The indentures governing the Senior Secured Notes and Senior Notes contain covenants regarding the Company's ability to make Restricted Payments (as defined in the indentures), including certain dividends, stock purchases, debt repayments and investments.  The indentures governing the Company's Senior Secured Notes and Senior Notes currently permit approximately $93.9 million and $219.6 million, respectively, 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.  The Company has a 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. 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 March 31, 2015, the Company’s Commitment Fee was 0.5% and the Company’s borrowing cost would be LIBOR plus 3.50% for LIBOR Rate Loans and the Base Rate plus 2.50% for Base Rate Loans. No loans were outstanding under the senior secured revolving credit facility as of March 31, 2015. However, $1.8 million of letters of credit were outstanding under the facility’s Letter of Credit Sublimit as of March 31, 2015.

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 March 31, 2015.
 
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,

9
EARTHLINK HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - (Continued)

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.
 
8.  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 March 31, 2015, 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 SEC’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 did not repurchase any of its common stock during the three months ended March 31, 2014 and 2015.

Dividends
 
During the three months ended March 31, 2014 and 2015, cash dividends declared were $0.05 and $0.05 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 $5.7 million and $5.5 million during the three months ended March 31, 2014 and 2015, respectively. 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.


9.  Stock-Based Compensation
 
Stock-based compensation expense was $4.9 million and $3.4 million during the three months ended March 31, 2014 and 2015, 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.
 
Options Outstanding
 
The following table summarizes stock option activity as of and for the three months ended March 31, 2015:
 
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, 2014
2,475

 
$
7.26

 
 
 
 

Granted
—

 
—

 
 
 
 

Forfeited and expired
(15
)
 
10.32

 
 
 
 

Outstanding as of March 31, 2015
2,460

 
7.24

 
5.9
 
$
—

Vested and expected to vest as of March 31, 2015
2,334

 
7.30

 
5.8
 
—

Exercisable as of March 31, 2015
1,617

 
7.80

 
4.8
 
—


10
EARTHLINK HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - (Continued)

 
The aggregate intrinsic value amounts in the table above represent the closing price of the Company’s common stock on March 31, 2015 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 March 31, 2015. As of March 31, 2015, there was $1.0 million of total unrecognized compensation cost related to stock options. That cost is expected to be recognized over a weighted-average period of 1.9 years.

The following table summarizes the status of the Company’s stock options as of March 31, 2015:
Stock Options Outstanding
 
Stock Options 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

 
8.8
 
$
4.97

 
75

 
$
4.97

6.08

 
to
 
6.08

 
845

 
7.9
 
6.08

 
423

 
6.08

6.90

 
to
 
7.51

 
660

 
6.3
 
7.45

 
515

 
7.44

7.64

 
to
 
11.82

 
655

 
1.6
 
9.57

 
604

 
9.67

4.97

 
to
 
11.82

 
2,460

 
5.9
 
7.24

 
1,617

 
7.80

 
There were no stock options granted during the three months ended March 31, 2015. The fair value of stock options granted during the three months ended March 31, 2014 was estimated using the Black-Scholes option-pricing model with the following assumptions:
 
Three Months Ended March 31, 2014
Dividend yield
4.02%
Expected volatility
46.77%
Risk-free interest rate
1.60%
Expected life
5 years

The weighted average grant date fair value of options granted during the three months ended March 31, 2014 was $1.48 per share. 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.


11
EARTHLINK HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - (Continued)

Restricted Stock Units
 
The following table summarizes restricted stock unit activity as of and for the three months ended March 31, 2015: 
 
Restricted
Stock Units
 
Weighted
Average
Grant Date
Fair Value
 
(in thousands)
 
 
Outstanding as of December 31, 2014
5,810

 
$
4.74

Granted
4,228

 
4.45

Vested
(1,082
)
 
5.46

Forfeited
(230
)
 
5.76

Outstanding as of March 31, 2015
8,726

 
$
4.48

 
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 three months ended March 31, 2014 and 2015 was $4.29 and $4.45, respectively.  As of March 31, 2015, there was $29.5 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 2.4 years. The total fair value of shares vested during the three months ended March 31, 2014 and 2015 was $6.6 million and $5.0 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.

10.  Income Taxes
 
During the three months ended March 31, 2015, the Company recorded an income tax provision of $0.4 million, resulting in an effective tax rate for the three months ended March 31, 2015 of approximately (3.5)%. During the three months ended March 31, 2014, the Company recorded an income tax provision of $0.4 million, resulting in an effective tax rate for the three months ended March 31, 2014 of approximately (1.4)%.

The difference between the effective tax rate and the federal statutory rate during the three months ended March 31, 2015 primarily relates to changes in the valuation allowance on net deferred tax assets. The income tax provision for the three months ended March 31, 2015 includes tax expense for foreign and state taxes, amortization of intangibles with indefinite useful lives and a discrete expense of $0.1 million primarily for state taxes. The difference between the effective tax rate and the federal statutory rate during the three months ended March 31, 2014 primarily relates to changes in the valuation allowance on net deferred tax assets. The tax provision for the three months ended March 31, 2014 was due to current year foreign and state tax expense and amortization of intangibles with indefinite useful lives.

As of March 31, 2015, the Company had a valuation allowance of $337.6 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 March 31, 2015, 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.


11.  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.
 

12
EARTHLINK HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - (Continued)

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, 2014 and March 31, 2015:
 
As of December 31, 2014
 
As of March 31, 2015
 
Carrying
 
 
 
Carrying
 
 
 
Amount
 
Fair Value
 
Amount
 
Fair Value
 
(in thousands)
Senior Secured Notes
$
300,000

 
$
301,503

 
$
300,000

 
$
310,500

Senior Notes
293,399

 
300,300

 
273,074

 
286,038

Total debt, excluding capital leases
$
593,399

 
$
601,803

 
$
573,074

 
$
596,538

 
12.  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 managed 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.



13
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 months ended March 31, 2014 and 2015 is as follows:
 
Three Months Ended
 
March 31,
 
2014
 
2015
 
(in thousands)
Business Services
 

 
 

Revenues
$
234,003

 
$
226,317

Cost of revenues (excluding depreciation and amortization)
123,264

 
109,462

Gross margin
110,739

 
116,855

Direct segment operating expenses
85,611

 
81,248

Segment operating income
$
25,128

 
$
35,607

Consumer Services
 

 
 

Revenues
$
63,317

 
$
56,130

Cost of revenues (excluding depreciation and amortization)
22,612

 
20,000

Gross margin
40,705

 
36,130

Direct segment operating expenses
11,560

 
8,361

Segment operating income
$
29,145

 
$
27,769

Consolidated
 

 
 

Revenues
$
297,320

 
$
282,447

Cost of revenues
145,876

 
129,462

Gross margin
151,444

 
152,985

Direct segment operating expenses
97,171

 
89,609

Segment operating income
54,273

 
63,376

Depreciation and amortization
46,855

 
47,264

Impairment of long-lived assets
5,334

 
—

Restructuring, acquisition and integration-related costs
4,977

 
5,372

Corporate operating expenses
9,313

 
5,649

Income (loss) from operations
$
(12,206
)
 
$
5,091

 
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.
 


14
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 months ended March 31, 2014 and 2015 is as follows:
 
Three Months Ended
 
March 31,
 
2014
 
2015
 
(in thousands)
Business Services
 

 
 

Retail services
$
192,520

 
$
188,496

Wholesale services
36,442

 
32,972

Other services
5,041

 
4,849

Total revenues
234,003

 
226,317

Consumer Services
 

 
 

Access services
52,635

 
45,046

Value-added services
10,682

 
11,084

Total revenues
63,317

 
56,130

Total Revenues
$
297,320

 
$
282,447

 
The Company’s Business Services segment earns revenue by providing a broad range of data, voice and managed 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 managed services provided to business customers; (2) wholesale services, which includes the sale of transmission capacity and other services to other telecommunications carriers and businesses; and (3) other services, which primarily consists of web hosting. 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 dial-up and high-speed Internet access services; and (2) value-added services, which includes revenues from ancillary services sold as add-on features to the Company'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; usage fees; installation fees; termination fees; and fees for equipment.
 
13. 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. As of December 31, 2014, the Company had a $2.2 million liability for a loss contingency that became probable and estimable during the year. During the three months ended March 31, 2015, a settlement was reached and payment was made for the recorded amount.
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 liabilities,

15
EARTHLINK HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - (Continued)

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 revenues are determinable and it is reasonably assured of the collection of these claims. 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 $2.1 million of net favorable disputes related to its billings to other carriers during the three months ended March 31, 2015, which is included in Business Services revenues in the Condensed Consolidated Statement 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 $7.1 million for unrecorded disputed amounts. The Company recognized $2.8 million and $3.6 million for favorable disputes with telecommunication vendors during the three months ended March 31, 2014 and 2015, respectively, 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. 

16

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, 2014.

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 managed 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 29,000 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 three months ended March 31, 2015 are described below:

•
Generated revenues of $282.4 million, a 5% decrease compared to the three months ended March 31, 2014, primarily driven by declines in traditional voice and data products for business and consumer services. However, these declines were partially offset by increased sales of our growth products, targeted price increases, successful efforts to re-term customers coming out of contract and a one-time favorable revenue settlement during the quarter.

•
Reduced cost of revenues 11% during the three months ended March 31, 2015, primarily related to the decline in revenues noted above as well as successful efforts to manage cost of revenues through network grooming, auditing telecommunications vendor invoices and other cost saving initiatives.

•
Generated a net loss of $10.5 million, compared to a net loss of $26.5 million during the three months ended March 31, 2014, primarily due to an increase in Adjusted EBITDA as described below and a decrease in impairment of long-lived assets.

•
Generated Adjusted EBITDA (a non-GAAP measure, see “Non-GAAP Financial Measures” in this Item 2) of $61.1 million, an increase from $49.9 million in the prior year period, primarily due to improvements in our cost of revenues and operating expenses, offset by the decrease in revenues from traditional voice and data products. The decrease in cost of revenues and operating expenses was driven by cost savings initiatives, including the reduction in force implemented in the fourth quarter of 2014 and first quarter of 2015.

•
Generated cash flows from operating activities of $18.9 million, a decrease from $21.3 million during the three months ended March 31, 2014.

•
Generated Unlevered Free Cash Flow (a Non-GAAP measure, see “Non-GAAP Financial Measures” in this Item 2) of $43.6 million, an increase from $26.5 million in prior year period primarily due to the increase in Adjusted EBITDA noted above and reduced capital expenditures.


17

•
Repurchased $21.1 million of outstanding debt in the open market for $21.6 million during the three months ended March 31, 2015 and initiated an additional repurchase of $5.0 million of outstanding debt that settled subsequent to quarter end in April 2015.

•
Made $5.5 million of dividend payments to shareholders during the three months ended March 31, 2015.

Business Strategy
Our business strategy is to be a leading managed network, security and cloud services provider for multi-location retail and service businesses. We believe there is a market opportunity for managed services due to the changing technological and business landscape, which is experiencing increased demand for data. Evolving security threats, changing regulatory standards, increased use of outsourcing and tightening budgets are also contributing to businesses' needs for managed services. We are positioning our company to focus on this opportunity. The key elements of our business strategy and transformation are as follows:

•
Align our organization and operating model around four customer categories. We are currently in the process of aligning our organization around four distinct customer categories, which are consumer, small business, mid-market/enterprise and wholesale. We believe this will target our resources and investments into areas that will drive growth and deliver improved performance, enable our growth businesses to compete more successfully in the market and provide strategic optionality. We are currently making various organization changes and implementing value-optimizing strategies for each customer category.

•
Optimize our cost structure and cash flows. We are focused on optimizing the cost structure of our business and maximizing the cash flows generated from our business through a lower and more variable cost structure, including reducing the cost structure for our traditional voice and data products provided to small businesses. This includes managing our cost of revenues and operating expenses, streamlining our internal processes and aligning our workforce to current revenue trends.

•
Invest in growth business products, marketing and sales. Our growth business products are MultiProtocol Label Switching ("MPLS"), hosted voice and managed services (Managed IP VPN, Managed Network, Managed Security and Managed Cloud, among others). We are focused on investing in products, marketing and sales to support these growth products. We are also simplifying and rationalizing our suite of products to focus on products that are strategically aligned with being a managed network services provider.

•
Evaluate potential strategic transactions. We continue to evaluate our business, which could lead us to discontinue or divest non-strategic products, assets or customers based on management's assessment of their strategic value to our business. In addition, we continue to evaluate potential strategic transactions in order to accelerate our transformation. We believe that targeted corporate acquisitions, when available at the right economics, can be an effective means for growth and targeted capability building.

18


Challenges and Risks

The primary challenges we face in executing on our business strategy are growing revenues from our growth products and services; reducing churn in our existing customer base; responding to competition from other providers; aligning costs with trends in our revenues; and ensuring adequate resources to invest in growth. To address these challenges we are taking the following actions:

•
Implementing a business and operating model around customer categories to optimize operations
•
Simplifying and rationalizing our product portfolio to focus our investments in growth products such as MPLS, hosted voice and managed services
•
Targeting larger multi-location retail and service businesses which have a need for our product and services, as well as lower churn profiles
•
Focusing on re-term efforts, retention offers and targeted price increases
•
Implementing cost efficiencies, such as network grooming and workforce alignment, and seeking to make costs more variable
•
Managing our investment in cloud and IT services and in data centers to invest in services that are most relevant to managed network services
•
Considering the divestiture of non-strategic products, assets or customers in order to further simplify our operations and use the proceeds of divestiture transactions to reduce debt and make cash available for other strategic needs

Trends in our Business
 
Our financial results are impacted by several significant trends, which are described below.
 
•
Industry factors. The communications industry is characterized by intense competition, industry consolidation resulting in larger competitors and fewer suppliers, an evolving regulatory environment, changing technology and changes in customer needs. We expect these trends to continue. More recently, trends in the industry have included increased demand for data, evolving security threats, the adoption of cloud computing and the increased use of outsourcing.
•
Traditional business services revenues. Our traditional business voice and data service revenues have been declining due to competition and migration to more advanced integrated voice and data services, and we expect this trend to continue. We have also experienced an increase in churn for these products, especially as customers come out of contract term and as we implement targeted price increases.
•
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. However, we are focused on customer retention and, as a result, the rate of churn and revenue decline has generally declined as our customer base becomes longer tenured.
•
Dispute settlements. Due to the nature of our industry, we are periodically involved in disputes related to our billings to other carriers for access to our network and network access charges that we are assessed by other companies. The disputes often take significant time to resolve, and they may be resolved or require adjustment in future periods although they relate to costs and revenues in prior periods. We have experienced an increase in dispute settlements impacting revenues and cost of revenues over the past few years, and this trend is likely continue.
Business Outlook

We expect continued declines in Business Services revenues from traditional voice and data products. In addition, we expect revenues to decline as we simplify and rationalize our product portfolio and as we limit sales to small business customers. However, we are increasing revenues from our growth products services. As a result, we expect the mix of our Business Service revenues to change over time, from traditional products to growth products and services. We also recently implemented various price increases which will offset some of the revenue decline. 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 to continue to generally decline as our customer base becomes longer tenured. We expect cost of revenues and operating expense to decline due to our cost saving initiatives and lower sales of traditional voice and data products, which will partially offset the revenue declines.


19

Consolidated Results of Operations
 
The following table sets forth statement of operations data for the three months ended March 31, 2014 and 2015:
 
Three Months Ended
 
March 31,
 
2014
 
2015
 
(in thousands)
Revenues
$
297,320

 
$
282,447

Operating costs and expenses:
 

 
 

Cost of revenues (exclusive of depreciation and amortization shown separately below)
145,876

 
129,462

Selling, general and administrative (exclusive of of depreciation and amortization shown separately below)
106,484

 
95,258

Depreciation and amortization
46,855

 
47,264

Impairment of long-lived assets
5,334

 
—

Restructuring, acquisition and integration-related costs
4,977

 
5,372

Total operating costs and expenses
309,526

 
277,356

Income (loss) from operations
(12,206
)
 
5,091

Interest expense and other, net
(13,956
)
 
(15,223
)
Loss from continuing operations before income taxes
(26,162
)
 
(10,132
)
Income tax provision
(363
)
 
(351
)
Loss from continuing operations
(26,525
)
 
(10,483
)
Gain from discontinued operations, net of tax
55

 
—

Net loss
$
(26,470
)
 
$
(10,483
)

Revenues
 
The following table presents revenues by groups of similar services and by segment for the three months ended March 31, 2014 and 2015:
 
Three Months Ended March 31,
 
Change
 
2014
 
2015
 
Dollar
 
Percent
 
(dollars in thousands)
Business Services
 

 
 

 
 

 
 

Retail services
$
192,520

 
$
188,496

 
$
(4,024
)
 
(2
)%
Wholesale services
36,442

 
32,972

 
(3,470
)
 
(10
)%
Other
5,041

 
4,849

 
(192
)
 
(4
)%
Total revenues
234,003

 
226,317

 
(7,686
)
 
(3
)%
Consumer Services
 

 
 

 
 

 
 

Access services
52,635

 
45,046

 
(7,589
)
 
(14
)%
Value-added services
10,682

 
11,084

 
402

 
4
 %
Total revenues
63,317

 
56,130

 
(7,187
)
 
(11
)%
Total revenues
$
297,320

 
$
282,447

 
$
(14,873
)
 
(5
)%

Our Business Services segment earns revenue by providing a broad range of data, voice and managed 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 managed services provided to business customers; (2) wholesale services, which includes the sale of transmission capacity and other services to other telecommunications carriers and businesses; and (3) other services, which primarily consists of web hosting. Revenues generally consist of recurring monthly charges for such services; usage fees; installation fees; termination fees; and administrative fees.
 

20

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 dial-up and high-speed Internet access services; and (2) value-added services, which includes 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. Revenues generally consist of recurring monthly charges for such services.

Business Services

The following table presents the primary reasons for the change in Business Services revenues for the three months ended March 31, 2015 compared to the prior year period:
 
Three Months Ended
 
2015 vs 2014
 
(in millions)
Due to growth products (a)
$
5.4

Due net favorable settlements and reserve adjustments (b)
2.1

Due to decline in traditional voice and data products (c)
(12.5
)
Due to decline in wholesale products (d)
(2.7
)
   Total change in Business Services revenues
$
(7.7
)
______________

(a)
Increase due to sales of growth products, including MPLS, hosted voice and IT services due to an increased emphasis on selling these products and services. Revenues for growth products also increased due to price increases implemented during the three months ended March 31, 2015.
(b)
Increase due to a favorable settlements and reserve adjustments, primarily related to our billings to other carriers for access to our network, for which revenue had not been previously recognized.
(c)
Decrease due to decline in 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. Partially offsetting the decline in revenues for traditional voice and data products was price increases implemented during the three months ended March 31, 2015.
(d)
Decrease due to decline in wholesale products primarily due to a deemphasis on certain non-strategic products, an increase in customer churn and continued rate reductions as a result of FCC rules regarding intercarrier compensation. These decreases were partially offset by an increase in transport revenues as we capitalize on unique fiber routes.


Consumer Services
 
Consumer Services revenues decreased during the three months ended March 31, 2015 compared to the prior year period primarily due to the following:

•
Decreases in average consumer access subscribers, which were 1.0 million and 0.8 million during the three months ended March 31, 2014 and 2015, respectively. The decrease resulted from limited sales and marketing activities, the continued maturation of the market for Internet access and competitive pressures in the industry. However, as we continue to focus on the retention of customers, our monthly consumer subscriber churn rates were 2.1% and 2.3% during the three months ended March 31, 2014 and 2015, respectively, which moderated the decline in average consumer subscribers.

•
Partially offset by an increase in our average revenue per subscriber, which was $22.06 and $23.24 during the three months ended March 31, 2014 and 2015, respectively. The increase was due to targeted price increases and a change in mix of subscribers. In addition, we began billing certain broadband subscribers for modem equipment rental in April 2014 which also contributed to the increase in average revenue per subscriber from the three months ended March 31, 2014 to the three months ended March 31, 2015.


21

Cost of revenues
 
The following table presents cost of revenues by segment for the three months ended March 31, 2014 and 2015:
 
Three Months Ended
 
 
 
 
 
March 31,
 
Change
 
2014
 
2015
 
Dollar
 
Percent
 
(dollars in thousands)
Business Services
$
123,264

 
$
109,462

 
$
(13,802
)
 
(11)%
Consumer Services
22,612

 
20,000

 
(2,612
)
 
(12)%
Total cost of revenues
$
145,876

 
$
129,462

 
$
(16,414
)
 
(11)%
 
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; and the cost of equipment sold to customers.

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.

Business Services
 
The following table presents the primary reasons for the change in Business Services cost of revenues for the three months ended March 31, 2015 compared to the prior year period:
 
Three Months Ended
 
2015 vs 2014
 
(in millions)
Due to cost saving initiatives and declines in traditional products (a)
$
(13.8
)
Due to change in favorable dispute settlements (b)
(0.8
)
Due to favorable adjustment in the prior year (c)
0.8

   Total change in Business Services cost of revenues
$
(13.8
)
______________

(a)
Decrease due to a concentrated effort to manage cost of revenues through network grooming, auditing telecommunications vendor invoices and other cost saving initiatives and declines in traditional voice and data products. Partially offsetting these declines were increased sales of growth products.
(b)
Decrease due to change in estimates for favorable dispute and other settlements as $3.6 million of favorable settlements were recognized during the three months ended March 31, 2015 compared to $2.8 million during the three months ended March 31, 2014.
(c)
Increase due to an $0.8 million favorable adjustment related to Universal Service Fund payments recorded during the three months ended March 31, 2014.

Consumer Services
 
Consumer Services cost of revenues decreased during the three months ended March 31, 2015 compared to the prior year period primarily due to the following:

•
The decrease in average consumer services subscribers noted above under Consumer Services Revenues.

•
Partially offset by an increase in our average cost per subscriber. This was due to a shift in the mix to customers with higher costs associated with delivering services and higher unit costs 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 from the three months ended March 31, 2014 to the three months ended March 31, 2015 was costs associated with modem equipment rental which we began billing to certain broadband customers beginning in April 2014.

22


Selling, general and administrative
 
The following table presents our selling, general and administrative expenses for the three months ended March 31, 2014 and 2015: 
 
Three Months Ended
 
 
 
 
 
March 31,
 
Change
 
2014
 
2015
 
Dollar
 
Percent
 
(dollars in thousands)
Selling, general and administrative expenses
$
106,484

 
$
95,258

 
$
(11,226
)
 
(11)%
 
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 months ended March 31, 2015 compared to the prior year period:
 
Three Months Ended
 
2015 vs 2014
 
(in millions)
Due to decrease in people costs (a)
$
(6.0
)
Due to decrease in stock-based compensation expense (b)
(1.5
)
Due to decrease in rent and occupancy costs (c)
(1.1
)
Due to decrease in other selling, general and administrative costs (d)
(2.6
)
   Total change in selling, general and administrative expenses
$
(11.2
)
______________

(a)
Decrease in people costs as employee headcount decreased from 2,994 full-time equivalents as of March 31, 2014 to 2,402 full-time equivalents as of March 31, 2015. The decrease was primarily due to a reduction in workforce implemented in the fourth quarter of 2014 driven by changes in our business strategy that eliminated approximately 450 positions.
(b)
Decrease in stock-based compensation expense primarily due to the acceleration of vesting of equity awards during the three months ended March 31, 2014 in connection with the retirement of our former chief executive officer.
(c)
Decrease in rent and occupancy costs primarily due to cost savings from moving our corporate headquarters location in September 2014 and from the closing of several sales offices over the past year in connection with changes to our business strategy.
(d)
Decrease in other selling, general and administrative costs such as bad debt and payment processing, commissions, outsourced labor, travel, insurance and advertising due to increased focus on optimizing our cost structure.

Depreciation and amortization
 
The following table presents our depreciation and amortization expense for the three months ended March 31, 2014 and 2015:
 
Three Months Ended
 
 
 
 
 
March 31,
 
Change
 
2014
 
2015
 
Dollars
 
Percent
 
(dollars in thousands)
Depreciation expense
$
30,428

 
$
30,584

 
$
156

 
1%
Amortization expense
16,427

 
16,680

 
253

 
2%
Total
$
46,855

 
$
47,264

 
$
409

 
1%
 
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.

23


The increase in depreciation expense during the three months ended March 31, 2015 compared to the prior year period was primarily due to an increase in work in progress placed into service over the past year and accelerated depreciation on certain assets, offset by a decrease in capital expenditures. The increase in amortization expense during the three months ended March 31, 2015 compared to the prior period was primarily due to the shortening of useful lives for certain customer base intangible assets, which increased amortization expense by $1.4 million during the three months ended March 31, 2015, partially offset by definite-lived intangible assets becoming fully amortized over the year.
 
Impairment of long-lived assets

During the three months ended March 31, 2014, we recorded $5.3 million for impairment of long-lived assets, primarily related to impairment of work in progress for information technology projects not expected to be used. The impairment was classified within impairment of long-lived assets in the Condensed Consolidated Statement of Comprehensive Loss for the three months ended March 31, 2014.

Restructuring, acquisition and integration-related costs
 
Restructuring, acquisition and integration-related costs consisted of the following during the three months ended March 31, 2014 and 2015:
 
Three Months Ended
 
 
 
 
 
March 31,
 
Change
 
2014
 
2015
 
Dollars
 
Percent
 
(dollars in thousands)
Integration-related costs
$
3,953

 
$
1,317

 
$
(2,636
)
 
(67)%
Severance, retention and other employee costs
1,008

 
2,901

 
1,893

 
188%
Facility-related costs
16

 
1,154

 
1,138

 
*
Restructuring, acquisition and integration-related costs
$
4,977

 
$
5,372

 
$
395

 
8%
______________
* Percentage is not meaningful.

Restructuring, acquisition and integration-related costs consist of costs related to our 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; and 3) facility-related costs, such as lease termination and asset impairments.
 
The increase in restructuring, acquisition and integration-related costs during the three months ended March 31, 2015 compared to the prior year period was primarily due to $4.1 million of restructuring costs recorded during the three months ended March 31, 2015 in connection with changes in our business strategy. The restructuring costs consisted of $2.9 million of severance and other employee costs due to reductions in workforce and $1.2 million of facilities-related costs due to the closing of certain sales offices. Such costs were included in restructuring, acquisition and integration-related costs in the Condensed Consolidated Statement of Comprehensive Loss during the three months ended March 31, 2015. Partially offsetting the increase was a decrease in integration costs as we completed several integration milestones over the past year.
Interest expense and other, net
 
The following table presents our interest expense and other, net, for the three months ended March 31, 2014 and 2015:
 
Three Months Ended
 
 
 
 
 
March 31,
 
Change
 
2014
 
2015
 
Dollars
 
Percent
 
(dollars in thousands)
Interest expense
$
14,071

 
$
13,791

 
$
(280
)
 
(2)%
Loss on extinguishment of debt
—

 
1,286

 
1,286

 
100%
Other, net
(115
)
 
146

 
261

 
(227)%
Total
$
13,956

 
$
15,223

 
1,267

 
9%

24

 
Interest expense and other, net, is primarily comprised of interest expense incurred on our debt and capital leases, amortization of debt issuance costs and debt discounts and other miscellaneous income and expense items.

The increase in interest expense and other, net, during the three months ended March 31, 2015 compared to the prior period was primarily due to a $1.3 million loss on repayment of debt. During the three months ended March 31, 2015, we repurchased $21.1 million outstanding principal of our senior notes due 2019 in the open market. We recognized a $1.3 million loss on the repurchase, consisting of $0.5 million for premiums paid on the repurchase and $0.8 million for the write-off of unamortized discount on debt and debt issuance costs. Partially offsetting this loss was interest expense savings as a result of lower outstanding debt.

Income tax provision
 
The income tax provision of $0.4 million for the three months ended March 31, 2015 represents an effective rate of -3.5%. The difference between the effective tax rate and the federal statutory rate during the three months ended March 31, 2015 primarily relates to changes in the valuation allowance on net deferred tax assets. The income tax provision for the three months ended March 31, 2015 includes tax expense for foreign and state taxes, amortization of intangibles with indefinite useful lives and a discrete expense of $0.1 million primarily for state taxes. The income tax provision of $0.4 million for the three months ended March 31, 2014 represents an effective rate of -1.4%. 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. The tax provision for the three months ended March 31, 2014 was due to current year foreign and state tax expense and amortization of intangibles indefinite useful lives.

As of March 31, 2015, we had deferred tax assets of approximately $334.2 million, of which $271.1 million relates to federal and state net operating loss carryforwards. EarthLink maintains a valuation allowance of $337.6 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 March 31, 2015, 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.

Segment Results of Operations
 
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.


25

Business Services Segment

Business Services Operating Results
 
The following table sets forth operating results for our Business Services segment for the three months ended March 31, 2014 and 2015:
 
Three Months Ended
 
 
 
 
 
March 31,
 
Change
 
2014
 
2015
 
Dollars
 
Percent
 
(dollars in thousands)
Segment revenues
$
234,003

 
$
226,317

 
$
(7,686
)
 
(3)%
Segment operating income
25,128

 
35,607

 
10,479

 
42%
 
The increase in Business Services operating income during the three months ended March 31, 2015 compared to the prior year period was primarily due to efforts to manage cost of revenues and operating expenses, including benefits from a reduction in workforce implemented in the fourth quarter of 2014, and efforts to protect our revenue base, such as targeted price increases and re-terms. Partially offsetting this was declines in revenues for our traditional voice and data products.

Consumer Services Segment

Consumer Services Operating Metrics
 
The following table sets forth subscriber and operating data for our Consumer Services segment for the three months ended March 31, 2014 and 2015:
 
Three Months Ended
 
March 31,
 
2014
 
2015
Consumer Subscriber Activity
 

 
 

Subscribers at beginning of period
976,000

 
821,000

Gross organic subscriber additions
22,000

 
20,000

Churn
(60,000)

 
(56,000)

Subscribers at end of period (a)
938,000

 
785,000

 
 
 
 
Consumer Metrics
 

 
 

Average narrowband subscribers (b)
536,000

 
475,000

Average broadband subscribers (b)
421,000

 
330,000

Average consumer subscribers (b)
957,000

 
805,000

 
 
 
 
ARPU (c)
$
22.06

 
$
23.24

Churn rate (d)
2.1
%
 
2.3
%
 _________

(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.

(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.
 

26

(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.
 
Consumer Services Operating Results
 
The following table sets forth operating results for our Consumer Services segment for the three months ended March 31, 2014 and 2015:
 
Three Months Ended
 
 
 
 
 
March 31,
 
Change
 
2014
 
2015
 
Dollars
 
Percent
 
(dollars in thousands)
Segment revenues
$
63,317

 
$
56,130

 
$
(7,187
)
 
(11)%
Segment operating income
29,145

 
27,769

 
(1,376
)
 
(5)%
 
The decrease in Consumer Services operating income during the three months ended March 31, 2015 compared to the prior year period was primarily due to limited sales and marketing activities, the continued maturation of the market for Internet access and competitive pressures in the industry. The decrease was partially offset by decreases in operating expenses as our consumer subscriber base has decreased and become longer-tenured. Our longer tenured customers require less customer service and technical support and have a lower frequency of non-payment.

Liquidity and Capital Resources
 
The following table sets forth summarized cash flow data for the three months ended March 31, 2014 and 2015:
 
Three Months Ended
 
 
 
 
 
March 31,
 
Change
 
2014
 
2015
 
Dollars
 
Percent
 
(dollars in thousands)
Net cash provided by operating activities
$
21,306

 
$
18,865

 
$
(2,441
)
 
(11
)%
Net cash used in investing activities
(23,384
)
 
(17,529
)
 
5,855

 
25
 %
Net cash used in financing activities
(6,045
)
 
(27,416
)
 
(21,371
)
 
(354
)%
Net decrease in cash and cash equivalents
$
(8,123
)
 
$
(26,080
)
 
$
(17,957
)
 
(221
)%

Operating activities
 
The decrease in cash provided by operating activities during the three months ended March 31, 2015 compared to the prior year period was primarily due to an increase in our annual bonus payment which is paid annually in February, offset by lower operating costs and expenses during the three months ended March 31, 2015 compared to the prior year period.

Investing activities
 
The decrease in net cash used in investing activities during the three months ended March 31, 2015 compared to the prior year period was due to a $5.9 million decrease in capital expenditures. The decrease was primarily driven by an increased focus on managing our cash flows by improving our processes and being more efficient, a decrease in customer additions and timing of certain projects. Capital expenditures for the three months ended March 31, 2014 and 2015 primarily related to enhancing our network and technology infrastructure and the acquisition of new customers.
 
Financing activities
 
The increase in net cash used in financing activities during the three months ended March 31, 2015 compared to the prior year period was primarily due to a $21.6 million increase in repayment of debt and capital lease transactions, partially offset by a $0.2 million decrease in dividends paid. During the three months ended March 31, 2015, we repurchased $21.1 million outstanding principal of our Senior Notes due May 2019 in the open market for $21.6 million, plus accrued and unpaid interest. During the three months ended March 31, 2014 and 2015, cash dividends declared were $0.05 per share resulting in dividend payments of $5.7 million and $5.5 million, respectively.

27


Future Uses of cash
 
Our cash requirements depend on numerous factors, including the costs required to maintain our network infrastructure, the outcome of various telecommunications-related disputes and proceedings, the pricing of our services, the level of resources used for our sales and marketing activities, the level of restructuring activities, interest payments on outstanding debt, the costs incurred to redeem or repurchase debt and the size and types of future acquisitions in which we may engage, among others. The following is a summary of our primary future cash requirements:
 
•
Debt and interest. We expect to use cash to service our outstanding indebtedness, including our $273.9 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. During the three months ended March 31, 2015, we repurchased $21.1 million outstanding principal of our Senior Notes for $21.6 million. We also initiated an additional repurchase of $5.0 million outstanding principal of our Senior Notes that settled subsequent to the quarter in April 2015. We may repurchase or redeem additional debt.
 
•
Capital expenditures. We expect to incur capital expenditures of approximately $85.0 million to $95.0 million during 2015. 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 growth Business Services. We expect to invest cash in sales and marketing efforts and other resources required to support our strategy related to our growth Business Services products.
 
•
Dividends. We have historically used cash for dividends. 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 or to repurchase common stock. We expect to use cash for current restructuring liabilities. Payments for restructuring liabilities incurred to date will primarily be paid in 2015 and will be funded through operating cash flows. In addition, we continue to evaluate our business, including evaluating ways to reduce the cost structure of our business, and may use cash for additional restructuring activities.

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 three months ended March 31, 2014 and 2015, we generated $21.3 million and $18.9 million in cash from operations, respectively. As of March 31, 2015, we had $108.1 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.

We also have a credit agreement providing for a senior secured revolving credit facility with aggregate revolving commitments of $135.0 million. Our senior secured revolving credit facility terminates in May 2017, and at that time any amounts outstanding thereunder shall be due and payable in full. As of March 31, 2015, no amounts had been drawn or were outstanding under the senior secured revolving credit facility.

Our available cash and cash equivalents, together with our results of operations, are expected to be sufficient to meet our operating expenses, debt service payments, capital requirements 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.


28

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 were in compliance with all covenants as of March 31, 2015. We expect to be in compliance with the maintenance covenants in our credit agreement for the next 12 months.

Off-Balance Sheet Arrangements
 
As of March 31, 2015, 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 March 31, 2015, 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.

Recently Issued Accounting Pronouncements

For information about recently issued accounting pronouncements, refer to Note 2 to our Condensed Consolidated 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.
 

29

The following table presents a reconciliation of Adjusted EBITDA to the most closely related financial measure reported under GAAP for the three months ended March 31, 2014 and 2015:
 
Three Months Ended
 
March 31,
 
2014
 
2015
 
(in thousands)
Net loss
$
(26,470
)
 
$
(10,483
)
Interest expense and other, net
13,956

 
15,223

Income tax provision
363

 
351

Depreciation and amortization
46,855

 
47,264

Impairment of long-lived assets
5,334

 
—

Stock-based compensation expense
4,943

 
3,415

Restructuring, acquisition and integration-related costs
4,977

 
5,372

Gain from discontinued operations, net of tax
(55
)
 
—

Adjusted EBITDA
$
49,903

 
$
61,142

 
The following table presents a reconciliation of Unlevered Free Cash Flow to the most closely related financial measure reported under GAAP for the three months ended March 31, 2014 and 2015:
 
Three Months Ended
 
March 31,
 
2014
 
2015
 
(in thousands)
Net loss
$
(26,470
)
 
$
(10,483
)
Interest expense and other, net
13,956

 
15,223

Income tax provision
363

 
351

Depreciation and amortization
46,855

 
47,264

Impairment of long-lived assets
5,334

 
—

Stock-based compensation expense
4,943

 
3,415

Restructuring, acquisition and integration-related costs
4,977

 
5,372

Gain from discontinued operations, net of tax
(55
)
 
—

Purchases of property and equipment
(23,384
)
 
(17,529
)
Unlevered Free Cash Flow
$
26,519

 
$
43,613

 

30

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 months ended March 31, 2014 and 2015:
 
Three Months Ended
 
March 31,
 
2014
 
2015
 
(in thousands)
Net cash provided by operating activities
$
21,306

 
$
18,865

Income tax provision
363

 
351

Non-cash income taxes
(210
)
 
(185
)
Interest expense and other, net
13,956

 
15,223

Amortization of debt discount and issuance costs
(1,016
)
 
(1,029
)
Restructuring, acquisition and integration-related costs
4,977

 
5,372

Changes in operating assets and liabilities
10,437

 
23,741

Purchases of property and equipment
(23,384
)
 
(17,529
)
Other, net
90

 
(1,196
)
Unlevered Free Cash Flow
$
26,519

 
$
43,613

 
 
 
 
Net cash used in investing activities
$
(23,384
)
 
$
(17,529
)
Net cash used in financing activities
$
(6,045
)
 
$
(27,416
)


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) that we may not be able to execute our strategy to successfully transition to a leading managed network, security and cloud services provider, which could adversely affect our results of operations and cash flows; (2) that 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) that failure to achieve operating efficiencies would adversely affect our results of operations and cash flows; (4) that we may have to undertake further restructuring plans that would require additional charges; (5) that is 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; (6) that we may be unable to successfully divest non-strategic products, which could adversely affect our results of operations(7) that we may be unable to successfully make or integrate acquisitions, which could adversely affect our results of operations; (8) that we face significant competition in the communications and managed services industry that could reduce our profitability; (9) that failure to retain existing customers could adversely affect our results of operations and cash flows; (10) that 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; (11) that 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; (12) that our operating performance will suffer if we are not offered competitive rates for the access services we need to provide our long distance services; (13) that we may experience reductions in switched access and reciprocal compensation revenue; (14) that failure to obtain and maintain necessary permits and rights-of-way could interfere with our network infrastructure and operations; (15) that 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; (16) that we obtain a majority of our network equipment and software from a limited number of third-party suppliers; (17) that our commercial and alliance arrangements may not be renewed or may not generate expected benefits, which could adversely affect our results of operations; (18) our consumer business is dependent on the availability of third-party network service providers; (19) that we face significant competition in the Internet access industry that could reduce our profitability; (20) that the continued decline of our consumer access subscribers will adversely affect our results of operations; (21) that potential regulation of Internet service providers could adversely affect our operations; (22) that

31

cyber security breaches could harm our business; (23) that privacy concerns relating to our business could damage our reputation and deter current and potential users from using our services; (24) that 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; (25) that our business depends on effective business support systems and processes; (26) that 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; (27) that 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; (28) that we may not be able to protect our intellectual property; (29) that 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; (30) that unfavorable general economic conditions could harm our business; (31) that government regulations could adversely affect our business or force us to change our business practices; (32) that our business may suffer if third parties are unable to provide services or terminate their relationships with us; (33) that we may be required to recognize impairment charges on our goodwill and other intangible assets, which would adversely affect our results of operations and financial position; (34) that 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; (35) that our indebtedness could adversely affect our financial health and limit our ability to react to changes in our business and industry; (36) that we may require substantial capital to support business growth, and this capital may not be available to us on acceptable terms, or at all; (37) that our debt agreements include restrictive covenants, and failure to comply with these covenants could trigger acceleration of payment of outstanding indebtedness; (38) that we may reduce, or cease payment of, quarterly cash dividends; (39) that our stock price may be volatile; (40) that 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 (41) that 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, 2014.
 

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, 2014.
 
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 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 March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

32

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, 2014.
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.
 
None.

Item 5.  Other Information.
 
None.

33

Item 6.   Exhibits.
 
(a)          Exhibits.   The following exhibits are filed as part of this report:
 
10.1
 
2015 Short-Term Incentive Plan.
 
 
 
10.2
 
Form of 2015 Performance-Based Restricted Stock Unit Agreement.
 
 
 
10.3
 
Form of 2015 Service-Based Restricted Stock Unit Agreement.
 
 
 
10.4
 
2015 EarthLink Access Management Save-Sharing Executive Bonus Plan.
 
 
 
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.

34

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:
May 5, 2015
 
/s/ JOSEPH F. EAZOR
 
 
 
Joseph F. Eazor, Chief Executive Officer and President (principal executive officer)
 
 
 
 
 
 
 
 
Date:
May 5, 2015
 
/s/ LOUIS M. ALTERMAN
 
 
 
Louis M. Alterman, Chief Financial Officer
 
 
 
(principal financial officer)
 
 
 
 
 
 
 
 
Date:
May 5, 2015
 
/s/ R. MICHAEL THURSTON
 
 
 
R. Michael Thurston, Vice President and Controller
 
 
 
(principal accounting officer)

35




EARTHLINK SHARED SERVICES, LLC
2015 SHORT-TERM INCENTIVE BONUS PLAN

THIS 2015 SHORT-TERM INCENTIVE BONUS PLAN (this “Plan”) of EarthLink Shared Services, LLC, a Delaware limited liability company (the “Company”), for the benefit of the eligible employees described herein, is adopted as of the 17th day of February 2015. This Plan replaces and supersedes the terms of the EarthLink Shared Services, LLC 2014 Short-Term Incentive Bonus Plan (the “2014 Plan”) as in effect prior to the adoption of this Plan.

WITNESSETH:

WHEREAS, the Board of Directors of the Company has approved the Plan as set forth herein.

NOW, THEREFORE, the Company hereby establishes the Plan as set forth below.
1.STATEMENT OF PURPOSE
1.1    Statement of Purpose. The purpose of the Plan is to encourage the creation of shareholder value by establishing a direct link between Adjusted EBITDA (as defined below), Free Cash Flow (as defined below), Revenue (as defined below) and other Corporate Performance Objectives (as defined below) achieved and the incentive compensation of Participants in the Plan.
Participants contribute to the success of EarthLink Holdings Corp (“Earthlink”) and its Affiliates (as defined below) through the application of their skills and experience in fulfilling the responsibilities associated with their positions. EarthLink and its Affiliates desire to benefit from the contributions of the Participants and to provide an incentive bonus plan that encourages the sustained creation of shareholder value.
2.    DEFINITIONS
2.1    Definitions. Capitalized terms used in the Plan shall have the following meanings:
“Adjusted EBITDA” means earnings (or losses) from continuing operations before interest income or expense and other, net, income tax provision (benefit), depreciation and amortization, excluding stock-based compensation expense, impairment of goodwill and intangible assets, restructuring, acquisition and integration-related costs, and loss from discontinued operations, net of tax, of EarthLink and its Affiliates. The calculation of Adjusted EBITDA shall include any compensation expense attributable to the Bonus Awards to be paid under the Plan.
“Affiliate” means any entity that is part of a controlled group of corporations or is under common control with EarthLink within the meaning of Code Sections 1563(a), 414(b) or 414(c), except that, in making any such determination, fifty percent (50%) shall be substituted for eighty percent (80%) each place it appears under such Code Sections and related regulations.
“Bonus Award” means the sum of (a) the Participant’s Performance Bonus and (b) the Participant’s Discretionary Bonus, if any, for the Bonus Period.

 


“Bonus Period” means the period beginning January 1 and ending December 31 of the calendar year, in respect of which the Corporate Performance Objectives are measured and the Participants’ Bonus Awards, if any, are to be determined.
“Cause” has the same definition as under any employment or service agreement between the Employer and the Participant or, if no such employment or service agreement exists or if such employment or service agreement does not contain any such definition, Cause means (i) the Participant’s willful and repeated failure to comply with the lawful directives of the Board of Directors of EarthLink or any of its Affiliates or any supervisory personnel of the Participant; (ii) any criminal act or act of dishonesty or willful misconduct by the Participant that has a material adverse effect on the property, operations, business or reputation of EarthLink or any of its Affiliates; (iii) the material breach by the Participant of the terms of any confidentiality, non-competition, non-solicitation or other such agreement that the Participant has with EarthLink or any of its Affiliates or (iv) acts by the Participant of willful malfeasance or gross negligence in a matter of material importance to EarthLink or any of its Affiliates.
“Change in Control” means the occurrence of any of the following events:
(a)    the accumulation in any number of related or unrelated transactions by any person of beneficial ownership (as such term is used in Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended) of more than fifty percent (50%) of the combined voting power of EarthLink’s voting stock; provided that, for purposes of this subsection (a), a Change in Control will not be deemed to have occurred if the accumulation of more than fifty percent (50%) of the voting power of EarthLink’s voting stock results from any acquisition of voting stock (i) directly from EarthLink that is approved by the Incumbent Board, (ii) by EarthLink, (ii) by any employee benefit plan (or related trust) sponsored or maintained by EarthLink or any of its Affiliates, or (iv) by any person pursuant to a merger, consolidation, or reorganization (a "Business Combination") that would not cause a Change in Control under clauses (i) and (ii) of subsection (b) below; or
(b)    consummation of a Business Combination, unless, immediately following that Business Combination, (i) all or substantially all of the persons who are the beneficial owners of voting stock of EarthLink immediately prior to that Business Combination beneficially own, directly or indirectly, at least fifty percent (50%) of the then outstanding shares of common stock and at least fifty percent (50%) of the combined voting power of the then outstanding voting stock entitled to vote generally in the election of directors of the entity resulting from that Business Combination (including, without limitation, an entity that as a result of that transaction owns EarthLink or all or substantially all of EarthLink’s assets either directly or through one or more subsidiaries), in substantially the same proportions relative to each other as their ownership, immediately prior to that Business Combination, of the voting stock of EarthLink, and (ii) at least sixty percent (60%) of the members of the Board of Directors of the entity resulting from that Business Combination holding at least sixty percent (60%) of the voting power of such Board of Directors were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board of Directors providing for that Business Combination and, as a result of or in connection with such Business Combination, no person has the right to dilute either such percentages by appointing additional members to the Board of Directors or otherwise without election or action by the shareholders; or

2


(c)    a sale or other disposition of all or substantially all the assets of EarthLink, except pursuant to a Business Combination that would not cause a Change in Control under clauses (i) and (ii) of subsection (b) above, or
(d)    approval by the shareholders of EarthLink of a complete liquidation or dissolution of EarthLink, except pursuant to a Business Combination that would not cause a Change in Control under clauses (i) and (ii) of subsection (b) above; or
(e)    the acquisition by any person, directly or indirectly, of the power to direct or cause the direction of the management and policies of EarthLink (i) through the ownership of securities which provide the holder with such power, excluding voting rights attendant with such securities, or (ii) by contract; provided the Change in Control will not be deemed to have occurred if such power was acquired (x) directly from EarthLink in a transaction approved by the Incumbent Board, (y) by any employee benefit plan (or related trust) sponsored or maintained by EarthLink or any of its Affiliates or (z) by any person pursuant to a Business Combination that would not cause a Change in Control under clauses (i) and (ii) of subsection (b) above.
“Code” means the Internal Revenue Code of 1986, as amended.
“Committee” means the Leadership and Compensation Committee of the Board of Directors of EarthLink which will administer the Plan.
“Compensation” means the Participant’s actual wages earned during the Bonus Period, excluding incentive payments, salary continuation, bonuses, income from equity awards, stock options, restricted stock, restricted stock units, deferred compensation, commissions, and any other forms of compensation over and above the Participant’s actual wages earned during the Bonus Period.
“Corporate Performance Objectives” means Adjusted EBITDA, Free Cash Flow and Revenue, in such amounts as the Committee shall determine in its sole discretion for the Bonus Period that must be achieved for the Participant’s Performance Bonus Multiplier for the Bonus Period to be greater than zero (0). Notwithstanding the foregoing, the Committee may establish Corporate Performance Objectives based upon any of the business criteria with respect to which Awards (as defined therein) that are intended to constitute qualified performance-based compensation under EarthLink’s 2011 Equity and Cash Incentive Plan may be based. The Committee shall adjust the Corporate Performance Objectives as the Committee in its sole discretion may determine is appropriate in the event of unbudgeted acquisitions or divestitures or other unexpected fundamental changes in the business of EarthLink, any business unit or any product to fairly and equitably determine the Bonus Awards and to prevent any inappropriate enlargement or dilution of the Bonus Awards. In that respect, the Corporate Performance Objectives may be adjusted to reflect, by way of example and not of limitation, (i) unanticipated asset write-downs or impairment charges, (ii) litigation or claim judgments or settlements thereof, (iii) changes in tax laws, accounting principles or other laws or provisions affecting reported results, (iv) accruals for reorganization or restructuring programs, or extraordinary non-reoccurring items as described in Accounting Principles Board Opinion No. 30 or as described in management’s discussion and analysis of the financial condition and results of operations appearing in EarthLink’s Annual Report on Form 10-K for the applicable year, (v) acquisitions or dispositions or (vi) foreign exchange gains or losses. To the extent any such adjustments affect any Bonus Award, the intent is that the adjustments shall

3


be in a form that allows the Bonus Award to continue to meet the requirements of Section 162(m) of the Code for deductibility to the extent intended to constitute qualified performance-based compensation.
“Disability” has the same definition as under any employment or service agreement between the Employer and the Participant or, if no such employment or service agreement exists or if such employment or service agreement does not contain any such definition, Disability means where the Participant is “disabled” or has incurred a “disability” in accordance with the policies of the Employer that employs the Participant in effect at the applicable time.
“Discretionary Bonus” means the Participant’s Maximum Potential Discretionary Bonus or such lesser amount as the Committee in its sole discretion may determine based upon the Committee’s assessment of the Participant’s desired individual performance for the Bonus Period and any reductions pursuant to Section 5.2(e).
“Distribution” means the payment of the Bonus Award under the Plan.
“Distribution Date” means the date on which the Distribution occurs.
“Effective Date” means January 1, 2015.
“Employee” means a common law employee of an Employer who is classified as “exempt” on the Employer’s payroll, personnel or tax records. A common law employee of an Employer only includes an individual who renders personal services to the Employer and who, in accordance with the established payroll, accounting and personnel policies of the Employer, is characterized by the Employer as an “exempt” common law employee. An Employee does not include (i) any person whom the Employer has identified on its payroll, personnel or tax records as an independent contractor or (ii) any person who has acknowledged in writing to the Employer that such person is an independent contractor, whether or not in case of both (i) and (ii) a court, the Internal Revenue Service or any other authority ultimately determines such classification to be correct or incorrect as a matter of law or (iii) any person who is classified other than as “exempt” on the Employer’s payroll, personnel or tax records.
“Employer” means EarthLink, the Company and any Affiliate of EarthLink who employs one or more Employees.
“Free Cash Flow” means Adjusted EBITDA less cash used for purchases of property and equipment and less acquisition, restructuring and integration-related costs.
“Incumbent Board” means a Board of Directors of EarthLink at least a majority of whom consist of individuals who either are (a) members of EarthLink’s Board of Directors as of the Effective Date of the adoption of this Plan or (b) members who become members of EarthLink’s Board of Directors subsequent to the date of the adoption of this Plan whose election, or nomination for election by EarthLink’s shareholders, was approved by a vote of at least sixty percent (60%) of the directors then comprising the Incumbent Board (either by specific vote or by approval of a proxy statement of EarthLink in which that person is named as a nominee for director, without objection to that nomination), but excluding, for that purpose, any individual whose initial assumption of office occurs as a result of an actual or threatened election contest (within the meaning of Rule 14a-11 of the Securities Exchange Act of 1934, as amended) with respect to the election or removal

4


of directors or other action or threatened solicitation of proxies or consents by or on behalf of a person other than the Board of Directors of EarthLink.
“Management” means the Employees or Participants, as applicable, who are the executive officers of EarthLink, the Company or any other Affiliate of EarthLink, individually or as a group, as designated by the Board of Directors of EarthLink.
“Maximum Bonus Award” means the maximum Bonus Award, denoted as a dollar amount, which can be earned and paid to the Participant for the Bonus Period as established by the Committee, which cannot exceed in any event the dollar amount which results from multiplying the Participant’s Compensation for the Bonus Period by the product of (a) the Participant’s Performance Target Bonus Percent, (b) the Participant’s Performance Bonus Multiplier and (c) one hundred and twenty percent (120%).
“Maximum Potential Discretionary Bonus” means the dollar amount which results from multiplying the Participant’s Compensation for the Bonus Period by the product of (a) the Participant’s Target Bonus Percent, (b) the Participant’s Performance Bonus Multiplier and (c) forty percent (40%) (fifty percent (50%) for Management Participants).
“Participant” means an Employee of an Employer who is selected to participate in the Plan.
“Performance Bonus” means the dollar amount which results from multiplying the Participant’s Compensation for the Bonus Period by the product of (a) the Participant’s Performance Target Bonus Percent, (b) the Participant’s Performance Bonus Multiplier and (c) eighty percent (80%) (seventy percent (70%) for Management Participants).
“Performance Bonus Multiplier” means either (i) zero (0) or (ii) the percentage from fifty percent (50%) to two hundred percent (200%) that applies to determine the Participant’s Bonus Award for the Bonus Period. The Committee shall establish the Performance Bonus Multipliers that relate to the levels of Corporate Performance Objectives that must be achieved during the Bonus Period to calculate the Participant’s Bonus Award.
“Performance Target Bonus Percent” means the percent of the Participant’s Compensation that will be earned as a Performance Bonus (using one hundred percent (100%) in lieu of eighty percent (80%) (seventy percent (70%) for Management Participants)) where the Corporate Performance Objectives that are achieved for the Bonus Period result in a Performance Bonus Multiplier of one hundred percent (100%). The Performance Target Bonus Percent for each Participant shall be established consistent with the Participant’s position in the Employer’s compensation structure.
“Plan” means this EarthLink Shared Services, LLC 2015 Short-Term Incentive Bonus Plan, in its current form and as it may be hereafter amended.
“Revenue” means gross revenue from operations of EarthLink and its Affiliates.
“Target Potential Discretionary Bonus” means the dollar amount which results from calculating the Participant’s Maximum Potential Discretionary Bonus using twenty percent (20%) in lieu of the forty percent (40%) (fifty percent (50%) for Management Participants).

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3.    ADMINISTRATION OF THE PLAN
3.1    Administration of the Plan. The Committee shall be the sole administrator of the Plan and shall have full authority to formulate adjustments and make interpretations under the Plan as it deems appropriate. The Committee shall also be empowered to make any and all of the determinations not herein specifically authorized which may be necessary or desirable for the effective administration of the Plan. Any decision or interpretation of any provision of this Plan adopted by the Committee shall be final and conclusive. Benefits under this Plan shall be paid only if the Committee determines, in its sole discretion, that the Participant or Beneficiary is entitled to them. None of the members of the Committee shall be liable for any act done or not done in good faith with respect to this Plan. The Company shall bear all expenses of administering this Plan.
4.    ELIGIBILITY
4.1    Establishing Participation. Each Employee whose position in the Employer’s compensation structure entitles him or her to participate in the Plan shall participate in the Plan for the applicable Bonus Period except that (a) the Committee must approve the members of Management, if any, who shall be entitled to participate in the Plan for the Bonus Period and (b) no Employee who is eligible for commission or incentive-based compensation (in lieu of wages or base salary) shall be eligible to participate in the Plan. The Committee shall retain the discretion to name as a Participant any otherwise-eligible member of Management hired or promoted after the commencement of the Bonus Period.
5.    AMOUNT OF BONUS AWARDS
5.1    Establishment of Bonuses.
(a)    Initial Determinations. The Committee shall establish generally for each Participant the Performance Target Bonus Percent, the Performance Bonus Multiplier and the Maximum Bonus Award that will apply with respect to the designated levels of achievement of the Corporate Performance Objectives for the Bonus Period. The Performance Bonus Multiplier and Maximum Bonus Award for each Participant will be based on the achievement of such Corporate Performance Objectives as the Committee shall designate, which may include the achievement of one or more Corporate Performance Objectives or any combination of Corporate Performance Objectives as the Committee may select.
(b)    Corporate Performance Objectives. The Committee shall establish the Corporate Performance Objectives that must be achieved to determine each Participant’s Performance Bonus Multiplier for the Bonus Period. To the extent the Corporate Performance Objectives are not achieved, the Performance Bonus Multiplier shall be zero (0). The Corporate Performance Objectives to be achieved must take into account and be calculated with respect to the full accrual and payment of the Bonus Awards under the Plan.
The Corporate Performance Objectives must be established in writing no later than the earlier of (i) ninety (90) days after the beginning the period of service to which they relate and (ii) before the lapse of twenty-five percent (25%) of the period of service to which they relate; they must be uncertain of achievement at the time they are established; and the achievement of the

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Corporate Performance Objectives must be determinable by a third party with knowledge of the relevant facts. The Corporate Performance Objectives may be stated with respect to EarthLink’s, an Affiliate’s, a product’s, and/or a business unit’s Adjusted EBITDA, Free Cash Flow, Revenue or other Corporate Performance Objectives and/or any combination of the foregoing as the Committee may designate. The Corporate Performance Objectives may, but need not, be based upon an increase or positive result under the aforementioned business criteria and could include, for example and not by way of limitation, maintaining the status quo or limiting the economic losses (measured, in each case, by reference to the specific business criteria). The Corporate Performance Objectives may not include solely the mere continued employment of the Participant. However, Bonus Awards may become payable contingent on the Participant’s continued employment at the time the Bonus Award becomes payable, in addition to the Corporate Performance Objectives described above.
(c)    Individual Performance Levels. The Committee shall establish the individual performance levels that must be achieved to determine each Participant’s Discretionary Bonus for the Bonus Period. The individual performance levels may be established at the same time as the Committee establishes the Corporate Performance Objectives or any other time during the Bonus Period or the Committee may determine each Participant’s Discretionary Bonus after review of the Participant’s individual performance level for the Bonus Period.
5.2    Calculation of Bonus Awards.
(a)    Timing of the Calculation. The calculations necessary to determine the Bonus Awards for the Bonus Period shall be made no later than the fifteenth day of the third month following the end of the Bonus Period for which the Bonus Awards are to be calculated. Such calculation shall be carried out in accordance with this Section 5.2.
(b)    Calculation. Following the end of the Bonus Period, each Participant’s Performance Bonus, if any, shall be calculated, as the Committee in its sole discretion may determine. Following the end of the Bonus Period, each Participant’s Discretionary Bonus, if any, also shall be calculated, and the Participant’s Discretionary Bonus for the Bonus Period shall be either the Participant’s Maximum Potential Discretionary Bonus or such lesser amount as the Committee in its sole discretion may determine as set forth in Section 5.2(d) and (e) below. Notwithstanding any other provision of the Plan, the Participant’s Bonus Award may not exceed the Participant’s Maximum Bonus Award.
(c)    Written Determination. For purposes of the Bonus Awards, the Committee shall certify in writing whether the Corporate Performance Objectives have been achieved. The Bonus Awards payable under this Plan are intended to constitute Awards (as defined therein) under EarthLink’s 2011 Equity and Cash Incentive Plan or under any other plan under which Bonus Awards may be paid (as the Committee shall designate), to the maximum extent possible. Accordingly, the Bonus Awards hereunder also will be subject to the terms of EarthLink’s 2011 Equity and Cash Incentive Plan or such other plan, to the extent applicable, including without limitation with respect to the maximum dollar amount of the Bonus Awards that may be paid to any Participant with respect to any particular time period. Any Bonus Awards or portions thereof that do not constitute Awards (as defined therein) under EarthLink’s 2011 Equity and Cash Incentive Plan or such other plan shall be deemed separate Bonus Awards that are granted under this Plan but outside of EarthLink’s 2011 Equity and Cash Incentive Plan or any other such plan.

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(d)    Negative Discretion. Notwithstanding any other provision of the Plan, the Participant’s Maximum Potential Discretionary Bonus may be reduced, but not below zero (0), if the Participant’s individual performance for the Bonus Period falls below that expected of such Participant. Management may determine, for Participants who are not Management Participants, if any such Participant’s Maximum Potential Discretionary Bonus should be reduced based upon Management’s assessment of the Participant’s individual performance for the Bonus Period. The Committee shall determine in its discretion whether any Maximum Potential Discretionary Bonus for any Management Participant should be reduced based upon the Committee’s assessment of the Management Participant’s individual performance for the Bonus Period. Any reduction of a Participant’s Maximum Potential Discretionary Bonus under this Section 5.2(d) shall be at the sole and absolute discretion of the Committee.
(e)    Mandatory Reduction of Maximum Potential Discretionary Bonuses. Notwithstanding any other provision of the Plan, in no event will the sum of all Discretionary Bonuses to be paid under the Plan for the Bonus Period exceed the sum of all Participants’ Target Potential Discretionary Bonuses that could be paid under the Plan for the Bonus Period. So, it is expected that some or all Participants’ Maximum Potential Discretionary Bonuses will be reduced as necessary in order to satisfy the foregoing limitation. To the extent one or more Participants are to receive a Discretionary Bonus that exceeds the sum of such Participants’ Target Potential Discretionary Bonuses, one or more other Participants will have to receive Discretionary Bonuses that are less than the sum of such Participants’ Target Potential Discretionary Bonuses by the same aggregate amount. If the total of all Discretionary Bonuses to be paid under the Plan for the Bonus Period, after reductions by the Committee, still exceed the sum of all Participant’s Target Potential Discretionary Bonuses for the Bonus Period, all Discretionary Bonuses will be reduced, pro rata, but not below zero (0), as necessary to satisfy such limitation.
6.    PAYMENT OF AWARDS
6.1    Eligibility for Payment. Except as otherwise set forth in Sections 7.1 and 8.1 of this Plan, Bonus Awards shall not be paid to any Participant who is not employed by an Employer on the date the Distribution is to be made, and a Participant who terminates employment with all Employers shall not be eligible to receive any Distribution for (i) the Bonus Period that includes such termination of employment, (ii) any prior Bonus Period to the extent not paid before such termination of employment nor (iii) any future Bonus Periods.
6.2    Timing of Payment. Any Distribution to be paid for a Bonus Period shall be paid no later than the 15th day of the third month following the end of the Bonus Period.
6.3    Payment of Award. The amount of the Bonus Award to be paid pursuant to this Section 6 to a Participant who is employed by the Company shall be paid in one lump sum cash payment by the Employer.
6.4    Taxes; Withholding. To the extent required by law, the Employer shall withhold from all Distributions made hereunder any amount required to be withheld by Federal and state or local government or other applicable laws. Each Participant shall be responsible for satisfying in

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cash or cash equivalent acceptable to the Committee any income and employment tax withholdings applicable to any Distribution to the Participant under the Plan.
7.    CHANGE IN CONTROL
7.1    Payment upon Termination of Employment on or after a Change in Control. If at any time on or after a Change in Control occurs the Participant’s employment with all Employers is terminated by an Employer for any reason other than Cause, death or Disability, then, the Participant shall be entitled to receive for the Bonus Period that includes the date of the Participant’s termination of employment the Bonus Award that would result based on actual business results for the entire Bonus Period taking into account the Corporate Performance Objectives achieved during the Bonus Period, calculated on the same basis as other similarly-situated Participants, and assuming for each Management Participant a Discretionary Bonus of no less than the Participant’s Target Potential Discretionary Bonus, or such greater or lesser percent if established prior to the Change in Control, except that the Bonus Award for that Bonus Period shall be based solely upon the Participant’s Compensation for that Bonus Period through the time of termination of employment; provided, however, that Participant shall only be entitled to receive such Bonus Award for the Bonus Period that includes the date of the Participant’s termination of employment if the Participant’s termination of employment occurs after the first calendar quarter of the Bonus Period and prior to payment of the Bonus Award for the Bonus Period in which the Participant’s employment is so terminated. Each Participant described above also shall be entitled to receive any Bonus Award payable for any Bonus Period that ended before the termination of the Participant’s employment on the same basis as the Bonus Award for the Bonus Period that includes the date of the Participant’s termination of employment. Such Bonus Awards shall be paid at the normal time of the bonus payout as if the Participant had remained employed but in no event later than the 15th day of the third month following the end of the Bonus Period. If at any time on or after a Change in Control occurs the Participant’s employment with all Employers is terminated by an Employer for any reason other than Cause, death or Disability, the Participant shall not be entitled to receive a Bonus Award for the Bonus Period that includes the date of the Participant’s termination of employment if the Participant’s termination of employment occurs during the first calendar quarter of the Bonus Period.
8.    TERMINATION OF EMPLOYMENT
8.1    Payment after Termination of Employment. If before a Change in Control occurs the Participant’s employment with all Employers is terminated by an Employer, such that the Participant is entitled to receive benefits under any severance plan maintained by an Employer, or pursuant to any agreement between the Employer and the Participant, then, if the Participant’s employment is terminated by an Employer after the first calendar quarter of the Bonus Period and prior to payment of the Bonus Award for the Bonus Period in which the Participant’s employment is terminated, the Participant shall be entitled to receive for the Bonus Period that includes the date of the Participant’s termination of employment the Bonus Award that would result based on actual business results for the entire Bonus Period, taking into account the Corporate Performance Objectives achieved during the Bonus Period, and actual individual performance levels achieved for the entire Bonus Period, calculated on the same basis as other similarly-situated Participants,

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except that the Bonus Award for that Bonus Period shall be based solely upon the Participant’s Compensation for that Bonus Period through the time of termination of employment. Each Participant described above also shall be entitled to receive any Bonus Award payable for any Bonus Period that ended before the termination of the Participant’s employment on the same basis as the Bonus Award for the Bonus Period that includes the date of the Participant’s termination of employment. Such Bonus Awards shall be paid at the normal time of the bonus payout as if the Participant had remained employed but in no event later than the 15th day of the third month following the end of the Bonus Period. If before a Change in Control occurs the Participant’s employment with all Employers is terminated by an Employer, such that the Participant is entitled to receive benefits under any severance plan maintained by an Employer, if the Participant’s employment is terminated by an Employer during the first calendar quarter of the Bonus Period, the Participant shall not be entitled to receive any Bonus Award for the Bonus Period that includes the date of the Participant’s termination of employment.
9.    MISCELLANEOUS
9.1    Unsecured General Creditor. Participants and their beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interests, or other claim in any property or assets of the Employer. Any and all assets shall remain general, unpledged, unrestricted assets of the Employer. The Employer’s obligation under the Plan shall be that of an unfunded and unsecured promise to pay cash or shares of Common Stock in the future, and there shall be no obligation to establish any fund, any security or any other restricted asset in order to provide for the payment of amounts under the Plan.
9.2    Obligations to the Employer. If a Participant becomes entitled to a Distribution under the Plan, and, if, at the time of the Distribution, such Participant has outstanding any debt, obligation or other liability representing an amount owed to any Employer, then the Employer may offset such amounts owing to it or any other Employer against the amount of any Distribution. Such determination shall be made by the Committee. Any election by the Committee not to reduce any Distribution payable to a Participant shall not constitute a waiver of any claim for any outstanding debt, obligation, or other liability representing an amount owed to the Employer.
9.3    Nonassignability. Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are, expressly declared to be unassignable and nontransferable. No part of a Distribution, prior to actual Distribution, shall be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, nor shall it be transferable by operation of law in the event of the Participant’s or any other persons bankruptcy or insolvency, except as set forth in Section 9.2 above.
9.4    Employment or Future Pay or Compensation Not Guaranteed. Nothing contained in this Plan nor any action taken hereunder shall be construed as a contract of employment or as giving any Participant or any former Participant any right to be retained in the employ of an Employer or receive or continue to receive any rate of pay or other compensation, nor shall it interfere in any

10


way with the right of an Employer to terminate the Participant’s employment at any time without assigning a reason therefore.
9.5    Gender, Singular and Plural. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, or neuter, as the identity of the person or persons may require. As the context may require, the singular may be read as the plural and the plural as the singular.
9.6    Captions. The captions to the articles, sections, and paragraphs of this Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions.
9.7    Applicable Law. This Plan shall be governed and construed in accordance with the laws of the State of Georgia.
9.8    Validity. In the event any provision of the Plan is held invalid, void, or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provision of the Plan.
9.9    Notice. Any notice or filing required or permitted to be given to the Committee shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, to the principal office of EarthLink, directed to the attention of the President and CEO of EarthLink. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification.
9.10    Compliance. No Distribution shall be made hereunder except in compliance with all applicable laws and regulations (including, without limitation, withholding tax requirements), any listing agreement with any stock exchange to which EarthLink is a party, and the rules of all domestic stock exchanges on which EarthLink’s shares of capital stock may be listed. The Committee shall have the right to rely on an opinion of its or EarthLink’s counsel as to such compliance. No Distribution shall be made hereunder unless the Employer has obtained such consent or approval as the Employer may deem advisable from regulatory bodies having jurisdiction over such matters.
9.11    No Duplicate Payments. The Distributions payable under the Plan are the maximum to which the Participant is entitled in connection with the Plan. To the extent the Participant and the Employer are parties to any other agreements or arrangements relating to the Participant’s employment that provide for payments of any bonuses under this Plan on termination of employment, this Plan shall be construed and interpreted so that the Bonus Awards and Distributions payable under the Plan and such other agreements or arrangements are only paid once; it being the intent of this Plan not to provide the Participant any duplicative payments of Bonus Awards. To the extent a Participant is entitled to a bonus payment calculated under this Plan and under any other agreement or arrangement, which would result in a duplicative payment of the Bonus Award or Distribution, no Bonus Award or Distribution will be payable hereunder if the payment under the other agreement or arrangement is not reduced by any duplicative payment under this Plan.
9.12    Confidentiality. The terms and conditions of this Plan and the Participant’s participation hereunder shall remain strictly confidential. The Participant may not discuss or disclose any terms of this Plan or its benefits with anyone except for Participant’s attorneys, accountants

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and immediate family members who shall be instructed to maintain the confidentiality agreed to under this Plan, except as may be required by law.
9.13    Temporary Leaves of Absence. The Committee in its sole discretion may decide to what extent leaves of absence for government or military service, illness, temporary disability or other reasons shall, or shall not be, deemed an interruption or termination of employment.
9.14    Clawback Provision. Notwithstanding any other provision of the Plan, the Participant shall reimburse or return to the Employer the gross aggregate amount of any cash Distribution that the Participant previously received under the Plan, to the extent required under applicable law or any clawback or compensation recoupment policy that the Employer may adopt as long as such requirement to reimburse or return is triggered by action of the Committee or the Board that is taken prior to a Change in Control.
10.    AMENDMENT AND TERMINATION OF THE PLAN
10.1    Amendment. Except as set forth in Section 10.3 below, the Committee in its sole discretion may at any time amend the Plan in whole or in part.
10.2    Termination of the Plan.
(a)    Employer’s Right to Terminate. Except as set forth in Section 10.3 below, the Committee may at any time terminate the Plan, if it determines in good faith that the continuation of the Plan is not in the best interest of EarthLink and its shareholders. No such termination of the Plan shall reduce any Distributions already made.
(b)    Payments upon Termination of the Plan. Upon the termination of the Plan under this Section, Awards for future Bonus Periods shall not be made. With respect to the Bonus Period in which such termination takes place, the Employer will pay to each Participant the Participant’s Bonus Award, if any, for such Bonus Period, less any applicable withholdings, only to the extent the Committee provides for any such payments on termination of the Plan (in which case all such payments will be made no later than the 15th day of the third month following the end of the Bonus Period that includes the effective date of termination of the Plan).
10.3    Amendment or Termination after a Change in Control. Notwithstanding any other provision of the Plan, the Committee may not amend or terminate the Plan in whole or in part, or change eligibility for participation in the Plan, on or after a Change in Control to the extent any such amendment or termination, or change in eligibility for participation in the Plan, would adversely affect the Participants’ rights hereunder or result in Bonus Awards not being paid consistent with the terms of the Plan in effect prior to such amendment or termination for the Bonus Period in which the amendment or termination of the Plan takes place and any prior Bonus Period, and assuming for each Management Participant a Discretionary Bonus of no less than the Participant’s Target Potential Discretionary Bonus, or such greater or lesser percent if established prior to the Change in Control, for any such Bonus Period.
11.    COMPLIANCE WITH SECTION 409A

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11.1    Tax Compliance. This Plan is intended to be exempt from the applicable requirements of Section 409A of the Code and shall be construed and interpreted in accordance therewith. The Committee may at any time amend, suspend or terminate this Plan, or any payments to be made hereunder, as necessary to be exempt from Section 409A of the Code. Notwithstanding the preceding, no Employer shall be liable to any Employee or any other person if the Internal Revenue Service or any court or other authority having jurisdiction over such matter determines for any reason that any Bonus Award or Distribution to be made under this Plan is subject to taxes, penalties or interest as a result of failing to comply with Section 409A of the Code. The Distributions under the Plan are intended to satisfy the exemption from Section 409A of the Code for “short-term deferrals.”
12.    CLAIMS PROCEDURES
12.1    Filing of Claim. If a Participant becomes entitled to a Bonus Award or a Distribution has otherwise become payable, and the Participant has not received the benefits to which the Participant believes he is entitled under such Bonus Award or Distribution, then the Participant must submit a written claim for such benefits to the Committee within ninety (90) days of the date the Bonus Award would have become payable (assuming the Participant is entitled to the Bonus Award) or the claim will be forever barred.
12.2    Appeal of Claim. If a claim of a Participant is wholly or partially denied, the Participant or his duly authorized representative may appeal the denial of the claim to the Committee. Such appeal must be made at any time within thirty (30) days after the Participant receives written notice from the Committee of the denial of the claim. In connection therewith, the Participant or his duly authorized representative may request a review of the denied claim, may review pertinent documents and may submit issues and comments in writing. Upon receipt of an appeal, the Committee shall make a decision with respect to the appeal and, not later than sixty (60) days after receipt of such request for review, shall furnish the Participant with a decision on review in writing, including the specific reasons for the decision, as well as specific references to the pertinent provisions of the Plan upon which the decision is based. Notwithstanding the foregoing, if the Committee has not rendered a decision on appeal within sixty (60) days after receipt of such request for review, the Participant’s appeal shall be deemed to have been denied upon the expiration of the sixty (60)-day review period.
12.3    Final Authority. The Committee has discretionary and final authority under the Plan to determine the validity of any claim. Accordingly, any decision the Committee makes on the Participant’s appeal shall be final and binding on all parties. If a Participant disagrees with the Committee’s final decision, the Participant may bring suit, but only after the claim on appeal has been denied or deemed denied. Any such lawsuit must be filed within ninety (90) days of the Committee’s denial (or deemed denial) of the Participant’s claim or the claim will be forever barred.
13.    COMPLIANCE WITH SECTION 162(M)
13.1    Section 162(m) Compliance. It is the intent of the Company that the Plan and any Bonus Awards payable under the Plan to Participants who are or may become persons whose compensation is subject to Section 162(m) of the Code and that are intended to constitute qualified

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performance-based compensation satisfy any applicable requirements of Section 162(m) of the Code to qualify as qualified performance-based compensation. Any provision, application or interpretation of the Plan inconsistent with this intent shall be disregarded or deemed to be amended to the extent necessary to conform to such requirements. Bonus Awards may only become payable if the applicable Corporate Performance Objectives are achieved. No Bonus Awards may become payable if the applicable threshold levels of the Corporate Performance Objectives are not achieved, and the Maximum Bonus Award that can become payable to any Participant for any Bonus Period is based on the applicable levels of the Corporate Performance Objectives that are achieved. Any Bonus Award that is intended to constitute qualified performance-based compensation that is only nominally or partially contingent on achieving the Corporate Performance Objectives may not be awarded under the Plan. However, an Employer may pay a bonus, or other types of compensation, inside or outside the Plan, which may or may not be deductible. In no event, however, may any Management Participant be entitled to a Bonus Award under the Plan under two arrangements, where payment of the other bonus that is not intended to be qualified performance-based compensation is contingent upon the failure to meet the Corporate Performance Objectives upon which the Participant’s Bonus Award that is intended to constitute qualified performance-based compensation is based. The provisions of the Plan may be bifurcated by the Committee at any time, so that certain provisions of the Plan required in order to satisfy the requirements of Section 162(m) of the Code are only applicable to Participants whose compensation is subject to 162(m) of the Code.


 

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2015 Performance-Based RSUs

EARTHLINK HOLDINGS CORP.
2011 EQUITY AND CASH INCENTIVE PLAN

Restricted Stock Unit Agreement
No. of Restricted Stock
Units Awarded Hereunder: ______
THIS RESTRICTED STOCK UNIT AGREEMENT (this "Agreement") dated as of the 19th day of February, 2015, between EarthLink Holdings Corp., a Delaware corporation (the "Company"), and _______________ (the "Participant") is made pursuant and subject to the provisions of the Company's 2011 Equity and Cash Incentive Plan (the "Plan"). All terms used herein that are defined in the Plan have the same meaning given them in the Plan.
1.     Grant of Restricted Stock Units. Pursuant to the Plan, the Company, on February 19, 2015 (the "Date of Grant"), granted to the Participant ____________ Restricted Stock Units, each Restricted Stock Unit corresponding to one share of the Common Stock of the Company (this "Award"). Subject to the terms and conditions of the Plan, each Restricted Stock Unit represents an unsecured promise of the Company to deliver, and the right of the Participant to receive, one share of the Common Stock of the Company at the time and on the terms and conditions set forth herein. As a holder of Restricted Stock Units, the Participant has only the rights of a general unsecured creditor of the Company.
2.    Terms and Conditions. This Award is subject to the following terms and conditions:
(a)    Expiration Date. This Award shall expire at 11:59 p.m. on February 18, 2025 (the "Expiration Date"). In no event shall the Expiration Date be later than 10 years from the Date of Grant.
(b)    Vesting of Award.
(i)    In General. Except as otherwise provided below, the outstanding Restricted Stock Units shall be considered "Performance-Based" and shall become eligible to become earned and payable with respect to that number of Performance-Based Restricted Stock Units set forth above that correlates to the performance objectives achieved for the Company’s fiscal year ending December 31, 2015 as set forth on the attached Exhibit A as determined by the Committee in its sole discretion. The Performance-Based Restricted Stock Units that are eligible to become earned and payable based on the Committee’s determination of the performance objectives achieved for the Company’s fiscal year ending December 31, 2015 shall then become earned and payable on the third anniversary of the Date of Grant, provided the Participant has been continuously employed by, or providing services to, the Company or an Affiliate from the Date of Grant until such time. Notwithstanding any other provision of this Agreement, none of the Performance-Based Restricted Stock Units shall become eligible to become earned and payable if the performance objectives set forth on the attached Exhibit A are not achieved above the designated levels set forth therein. For purposes of this Agreement, the number of Performance-Based Restricted Stock Units that the Committee determines to have become eligible to become earned and payable shall be deemed to have become eligible to become earned and payable as of December 31, 2015.
(ii)    Eligible for Severance. Notwithstanding the foregoing, if the Participant's employment or service is terminated by the Company or an Affiliate and the Participant is entitled to receive severance benefits under any severance or change in control plan maintained by the Company or an Affiliate or pursuant to any agreement between the Company or an Affiliate and the Participant, then, to the extent not earned and payable previously, the Performance-Based Restricted Stock Units that are eligible to become earned and payable at that time shall become earned and payable on termination of the Participant’s employment or service by the Company or an Affiliate under circumstances in which the Participant is entitled to receive such severance benefits, on the same basis they would have become earned and payable if the Performance-Based Restricted Stock Units that are eligible to become earned and payable at that time had been scheduled to become earned and payable pro rata as of each monthly anniversary of the Date of Grant, from the Date of Grant through the third anniversary of the Date of Grant, based upon the Participant’s continued employment or service from the Date of Grant until the termination of the Participant's employment with or service to the Company and its Affiliates (giving the Participant

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credit for continuous employment or service from the Date of Grant until the termination of the Participant's employment or service) (rounded to the nearest whole share). Notwithstanding the foregoing, none of the Performance-Based Restricted Stock Units that are not then eligible to become earned and payable shall become earned and payable on termination of the Participant's employment or service by the Company or an Affiliate under circumstances in which the Participant is entitled to receive severance benefits under any severance plan maintained by the Company or an Affiliate.
(iii)    Change in Control. Notwithstanding the foregoing, in the event no provision is made for the continuance, assumption or substitution by the Company or its successor in connection with a Change in Control of the Performance-Based Restricted Stock Units, then, contemporaneously with the Change in Control, the Performance-Based Restricted Stock Units shall become earned and payable in full, to the extent not earned and payable previously, provided the Participant has remained continuously employed by, or providing services to, the Company or any Affiliate from the Date of Grant until the Change in Control; except that the Performance-Based Restricted Stock Units shall not become earned and payable in connection with the Change in Control if the Change of Control occurs after December 31, 2015 and the Performance-Based Restricted Stock Units have not become eligible to become earned and payable as of December 31, 2015. If provision is made for the continuance, assumption or substitution by the Company or its successor in connection with the Change in Control of the Performance-Based Restricted Stock Units, the Performance-Based Restricted Stock Units shall become earned and payable in full, to the extent not earned and payable previously, contemporaneously with the termination of the Participant’s employment with, or service to, the Company and its Affiliates, if the Participant’s employment with, or service to, the Company and its Affiliates is terminated by the Company or any Affiliate for any reason other than Cause, death or Disability or by the Participant for Good Reason, on or within twenty-four (24) months after the Change in Control; except that the Performance-Based Restricted Stock Units shall not become earned and payable upon such termination of the Participant’s employment with, or service to, the Company and its Affiliates if the Change of Control occurs after December 31, 2015 and the Performance-Based Restricted Stock Units have not become eligible to become earned and payable as of December 31, 2015. “Good Reason” means the Participant’s voluntary termination of employment or service with the Company and its Affiliates other than on death or Disability and based on:
(1)    The assignment to the Participant of duties materially inconsistent with the Participant's position and status with the Company or Affiliate as they existed immediately prior to the Change in Control, or a substantial diminution in the Participant's title, offices or authority, or in the nature of the Participant's other responsibilities, as they existed immediately prior to the Change in Control, except in connection with the Participant’s termination of employment or service by the Company or an Affiliate for Cause or on account of Disability or death or by the Participant other than for Good Reason; or
(2)    A material reduction by the Company or an Affiliate in the Participant’s base salary as in effect immediately prior to the Change in Control or as the Participant's base salary may be increased from time to time, without the Participant’s written consent; or
(3)    A material reduction by the Company or an Affiliate in the target cash bonus payable to the Participant under any incentive compensation plan(s), as it (or they) may be modified from time to time, in effect immediately prior to the Change in Control, or a failure by the Company or an Affiliate to continue the Participant as a participant in such incentive compensation plan(s) on a basis that is not materially less than the Participant’s participation immediately prior to the Change in Control or to pay the Participant the amounts that the Participant would be entitled to receive in accordance with such plan(s); or
(4)    The Company or an Affiliate requiring the Participant to be based more than thirty-five (35) miles from the location where the Participant is based immediately prior to the Change in Control, except for travel on the Company’s or Affiliate’s business that is required or necessary to performance of the Participant's job and substantially consistent with the Participant's business travel obligations prior to the Change in Control.
Additionally, the Participant must give the Company or Affiliate which employs the Participant notice of any event or condition that would constitute "Good Reason" within thirty (30) days of the event or condition which would constitute "Good Reason," and upon receipt of such notice the Company or Affiliate shall have thirty (30) days to remedy such event or condition, and if such event or condition is not remedied within

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such thirty (30)-day period, any termination of employment by the Participant for "Good Reason" must occur within sixty (60) days after the period for remedying such condition or event has expired.
(iv)    Vesting Date. Outstanding Performance-Based Restricted Stock Units shall be forfeitable until they become earned and payable as described above. Each date upon which the respective Restricted Stock Units become earned and payable shall be referred to as a "Vesting Date" with respect to such number of Restricted Stock Units.
(c)    Settlement of Award. Subject to the terms of this Section 2 and Section 3 below, the Company shall issue to the Participant one share of Common Stock for each Performance-Based Restricted Stock Unit that has become earned and payable under Section 2(b) above and shall deliver to the Participant such shares as soon as practicable after (and within thirty (30) days of) the respective Vesting Date. As a condition to the settlement of the Award, the Participant shall be required to pay any required withholding taxes attributable to the Award in cash or cash equivalent acceptable to the Committee. However, the Company in its discretion may, but is not required to, allow the Participant to satisfy any such applicable withholding taxes (but only for the minimum required withholding) (i) by allowing the Participant to surrender shares of Common Stock that the Participant already owns, (ii) through a cashless transaction through a broker, (iii) by means of a “net settlement” procedure, (iv) by such other medium of payment as the Committee shall authorize or (v) by any combination of the allowable methods of payment set forth herein.
3.    Termination of Award. Notwithstanding any other provision of this Agreement, outstanding Restricted Stock Units that have not become earned and payable prior to the Expiration Date shall expire and may not become earned and payable after such time. Additionally, any Performance-Based Restricted Stock Units that have not become earned and payable on or before the termination of the Participant's employment with the Company and its Affiliates, and any Performance-Based Restricted Stock Units with respect to which the applicable performance period has passed without achievement of the related performance objective, shall expire and may not become earned and payable after such time.
4.    Shareholder Rights. Except as set forth in Section 6 below, the Participant shall not have any rights as a shareholder with respect to shares of Common Stock subject to any Performance-Based Restricted Stock Units until issuance of the shares of Common Stock. The Company may include on any certificates or notations representing shares of Common Stock issued pursuant to this Award such legends referring to any representations, restrictions or any other applicable statements as the Company, in its discretion, shall deem appropriate.
5.    Transferability. Except as provided herein, this Award is nontransferable except by will or the laws of descent and distribution. If this Award is transferred by will or the laws of descent and distribution, the Award must be transferred in its entirety to the same person or persons or entity or entities. Notwithstanding the foregoing, the Participant, at any time prior to the Participant's death, may transfer all or any portion of this Award to the Participant's children, grandchildren, spouse, one or more trusts for the benefit of such family members or a partnership in which such family members are the only partners, on such terms and conditions as are appropriate for such transferees to be included in the class of transferees who may rely on a Form S-8 registration statement under the Securities Act of 1933 to sell shares received pursuant to the Award. Any such transfer will be permitted only if (i) the Participant does not receive any consideration for the transfer and (ii) the Committee expressly approves the transfer. Any transferee to whom this Award is transferred shall be bound by the same terms and conditions that governed the Award during the time it was held by the Participant (which terms and conditions shall still be read from the perspective of the Participant); provided, however, that such transferee may not transfer the Award except than by will or the laws of descent and distribution. Any such transfer shall be evidenced by an appropriate written document that the Participant executes and the Participant shall deliver a copy thereof to the Committee on or before the effective date of the transfer. No right or interest of the Participant or any transferee in this Award shall be liable for, or subject to, any lien, liability or obligation of the Participant or transferee.
6.    Cash Dividends. For so long as the Participant holds outstanding Performance-Based Restricted Stock Units under this Award, if the Company pays any cash dividends on its Common Stock, then the Company will pay the Participant in cash for each outstanding Performance-Based Restricted Stock Unit covered by this Award as of the record date for such dividend, less any required withholding taxes, the per share amount of such dividend that the Participant would have received had the Participant owned the underlying shares of Common Stock as of the record date of the dividend if, and only if, the Performance-Based Restricted Stock Units become

3

earned and payable and the related shares of Common Stock are issued to the Participant. In that case, the Company shall pay such cash amounts to the Participant, less any required withholding taxes, at the same time the related shares of Common Stock are delivered. The additional payments pursuant to this Section 6 shall be treated as a separate arrangement.
7.    Change in Capital Structure. The terms of this Award shall be adjusted in accordance with the terms and conditions of the Plan as the Committee determines is equitably required in the event the Company effects one or more stock dividends, stock splits, subdivisions or consolidations of shares or other similar changes in capitalization.
8.    Notice. Any notice or other communication given pursuant to this Agreement, or in any way with respect to the Award, shall be in writing and shall be personally delivered or mailed by United States registered or certified mail, postage prepaid, return receipt requested, to the following addresses:
If to the Company:
 
EarthLink Holdings Corp.
1170 Peachtree Street
Suite 900
Atlanta, Georgia 30309
Attention: General Counsel
 
 
If to the Participant:
 
 
   

   

   

 
 
10.    No Right to Continued Employment or Service. Neither the Plan, the granting of this Award nor any other action taken pursuant to the Plan or this Award constitutes or is evidence of any agreement or understanding, express or implied, that the Company or any Affiliate will retain the Participant as an employee or other service provider for any period of time or at any particular rate of compensation.
11.    Agreement to Terms of Plan and Agreement. The Participant has received a copy of the Plan, has read and understands the terms of the Plan and this Agreement, and agrees to be bound by their terms and conditions.
12.    Tax Consequences. The Participant acknowledges that (i) there may be tax consequences upon acquisition or disposition of the shares of Common Stock issued pursuant to this Award or the receipt of cash dividends hereunder and (ii) Participant should consult a tax adviser prior to such acquisition or disposition or receipt. The Participant is solely responsible for determining the tax consequences of the Award and for satisfying the Participant's tax obligations with respect to the Award (including, but not limited to, any income or excise taxes resulting from the application of Code Sections 409A or 4999), and the Company shall not be liable if this Award is subject to Code Sections 409A or 4999.
13.    Binding Effect. Subject to the limitations stated above and in the Plan, this Agreement shall be binding upon and inure to the benefit of the distributees, legatees and personal representatives of the Participant and the successors of the Company.
14.    Conflicts. In the event of any conflict between the provisions of the Plan and the provisions of this Agreement, the provisions of the Plan shall govern. All references herein to the Plan shall mean the Plan as in effect on the date hereof.
15.    Counterparts. This Agreement may be executed in a number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one in the same instrument.
16.    Miscellaneous. The parties agree to execute such further instruments and take such further actions as may be necessary to carry out the intent of the Plan and this Agreement. This Agreement and the Plan shall constitute the entire agreement of the parties with respect to the subject matter hereof.

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17.    Section 409A. Notwithstanding any other provision of this Agreement, it is intended that payments hereunder will not be considered deferred compensation within the meaning of Section 409A of the Code. For purposes of this Agreement, all rights to payments hereunder shall be treated as rights to receive a series of separate payments and benefits to the fullest extent allowed by Section 409A of the Code. Payments hereunder are intended to satisfy the exemption from Section 409A of the Code for "short-term deferrals." Notwithstanding the preceding, neither the Company nor any Affiliate shall be liable to the Participant or any other person if the Internal Revenue Service or any court or other authority having jurisdiction over such matter determines for any reason that any payments hereunder are subject to taxes, penalties or interest as a result of failing to be exempt from, or comply with, Section 409A of the Code.
18.    Clawback Provision. Notwithstanding any other provision of this Agreement, the Participant shall reimburse or return to the Company the gross number of shares of Common Stock that the Participant was entitled to receive on settlement of the Restricted Stock Units under this Agreement or, if greater, the amount of gross proceeds from any earlier sale of any such shares of Common Stock, to the extent any reimbursement or return is required under applicable law or any clawback or compensation recoupment policy that the Company may adopt as long as such requirement to reimburse or return is triggered by action of the Committee or the Board that is taken prior to a Change in Control.
19.    Governing Law. This Agreement shall be governed by the laws of the State of Delaware, except to the extent federal law applies.

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IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by a duly authorized officer, and the Participant has affixed his signature hereto.
 
COMPANY:
 
EARTHLINK HOLDINGS CORP.
 
 
By: _______________________________________________
Name: ____________________________________________
Title: _____________________________________________

 
 
 
PARTICIPANT:
__________________________________________________
[Participant's Name]
 


6


        

2015 Service-Based RSUs

EARTHLINK HOLDINGS CORP.
2011 EQUITY AND CASH INCENTIVE PLAN

Restricted Stock Unit Agreement
No. of Restricted Stock
Units Awarded Hereunder: ______
THIS RESTRICTED STOCK UNIT AGREEMENT (this “Agreement”) dated as of the 19th day of February, 2015, between EarthLink Holdings Corp., a Delaware corporation (the “Company”), and _______________ (the “Participant”) is made pursuant and subject to the provisions of the Company's 2011 Equity and Cash Incentive Plan (the “Plan”). All terms used herein that are defined in the Plan have the same meaning given them in the Plan.
1.    Grant of Restricted Stock Units. Pursuant to the Plan, the Company, on February 19, 2015 (the “Date of Grant”), granted to the Participant ____________ Restricted Stock Units, each Restricted Stock Unit corresponding to one share of the Common Stock of the Company (this “Award”). Subject to the terms and conditions of the Plan, each Restricted Stock Unit represents an unsecured promise of the Company to deliver, and the right of the Participant to receive, one share of the Common Stock of the Company at the time and on the terms and conditions set forth herein. As a holder of Restricted Stock Units, the Participant has only the rights of a general unsecured creditor of the Company.
2.    Terms and Conditions. This Award is subject to the following terms and conditions:
(a)    Expiration Date. This Award shall expire at 11:59 p.m. on February 18, 2025 (the “Expiration Date”). In no event shall the Expiration Date be later than 10 years from the Date of Grant.
(b)    Vesting of Award.
(i)    In General. Except as otherwise provided below, the outstanding Restricted Stock Units shall be considered “Service-Based” and shall become earned and payable with respect to one-third (1/3) of the Service-Based Restricted Stock Units (rounded to the nearest whole share) on each of the first and second anniversaries of the Date of Grant, and with respect to the remaining Service-Based Restricted Stock Units on the third anniversary of the Date of Grant, provided in each case the Participant has been continuously employed by, or providing services to, the Company or an Affiliate from the Date of Grant until such time.
(ii)    Eligible for Severance. Notwithstanding the foregoing, if the Participant's employment or service is terminated by the Company or an Affiliate and the Participant is entitled to receive severance benefits under any severance or change in control plan maintained by the Company or an Affiliate or pursuant to any agreement between the Company or an Affiliate and the Participant, then, to the extent not earned and payable previously, the Service-Based Restricted Stock Units shall become earned and payable on termination of the Participant’s employment or service by the Company or an Affiliate under circumstances in which the Participant is entitled to receive such severance benefits, to the same extent they would have become earned and payable if the Service-Based Restricted Stock Units had been scheduled to become earned and payable pro rata as of each monthly anniversary of the Date of Grant, from the Date of Grant through the third anniversary of the Date of Grant, based upon the Participant’s continued employment or service from the Date of Grant until the termination of the Participant's employment or service (rounded to the nearest whole share).
(iii)    Change in Control. Notwithstanding the foregoing, in the event no provision is made for the continuance, assumption or substitution by the Company or its successor in connection with a Change in Control of the Service-Based Restricted Stock Units, then, contemporaneously with the Change in Control, the Service-Based Restricted Stock Units shall become earned and payable in full, to the extent not earned and payable previously, provided the Participant has remained continuously employed by, or providing services to, the Company or any Affiliate from the Date of Grant until the Change in Control. If provision is made for the continuance, assumption or substitution by the Company or its successor in connection with the Change in Control of the Service-Based Restricted Stock Units, the Service-Based Restricted Stock Units shall become earned and payable in full, to the extent not earned and payable previously, contemporaneously with the termination of the Participant’s

1

employment with, or service to, the Company and its Affiliates, if the Participant’s employment with, or service to, the Company and its Affiliates is terminated by the Company or any Affiliate for any reason other than Cause, death or Disability or by the Participant for Good Reason, on or within twenty-four (24) months after the Change in Control. For purposes of this Agreement, “Good Reason” means the Participant’s voluntary termination of employment with or service to the Company and its Affiliates other than on death or Disability and based on:
(1)    The assignment to the Participant of duties materially inconsistent with the Participant’s position and status with the Company or Affiliate as they existed immediately prior to the Change in Control, or a substantial diminution in the Participant’s title, offices or authority, or in the nature of the Participant’s other responsibilities, as they existed immediately prior to the Change in Control, except in connection with the Participant’s termination of employment or service by the Company or any Affiliate for Cause or on account of the Participant’s death or Disability or by the Participant other than for Good Reason; or
(2)    A material reduction by the Company or an Affiliate in the Participant’s base salary as in effect immediately prior to the Change in Control or as the Participant’s base salary may be increased from time to time, without the Participant’s written consent; or
(3)    A material reduction by the Company or an Affiliate in the target cash bonus payable to the Participant under any incentive compensation plan(s), as it (or they) may be modified from time to time, as in effect immediately prior to the Change in Control, or a failure by the Company or an Affiliate to continue the Participant as a participant in such incentive compensation plan(s) on a basis that is not materially less than the Participant’s participation immediately prior to the Change in Control or to pay the Participant the amounts that Participant would be entitled to receive in accordance with such plan(s); or
(4)    The Company or an Affiliate requiring the Participant to be based more than fifty (50) miles from the location where the Participant is based immediately prior to the Change in Control, except for travel on the Company’s or Affiliate’s business that is required or necessary to performance of the Participant’s job and substantially consistent with the Participant’s business travel obligations prior to the Change in Control.
Additionally, Participant must give the Company or Affiliate which employs the Participant notice of any event or condition that would constitute “Good Reason” within thirty (30) days of the event or condition which would constitute “Good Reason,” and upon receipt of such notice the Company or Affiliate shall have thirty (30) days to remedy such event or condition, and if such event or condition is not remedied within such thirty (30)-day period, any termination of employment or service by the Participant for “Good Reason” must occur within sixty (60) days after the period for remedying such condition or event has expired.
(iv)    Vesting Date. Outstanding Service-Based Restricted Stock Units shall be forfeitable until they become earned and payable as described above. Each date upon which the respective Service-Based Restricted Stock Units become earned and payable shall be referred to as a “Vesting Date” with respect to such number of Service-Based Restricted Stock Units.
(c)    Settlement of Award. Subject to the terms of this Section 2 and Section 3 below, the Company shall issue to the Participant one share of Common Stock for each Service-Based Restricted Stock Unit that has become earned and payable under Section 2(b) above and shall deliver to the Participant such shares as soon as practicable after (and within thirty (30) days of) the respective Vesting Date. As a condition to the settlement of the Award, the Participant shall be required to pay any required withholding taxes attributable to the Award in cash or cash equivalent acceptable to the Committee. However, the Company in its discretion may, but is not required to, allow the Participant to satisfy any such applicable withholding taxes (but only for the minimum required withholding) (i) by allowing the Participant to surrender shares of Common Stock that the Participant already owns, (ii) through a cashless transaction through a broker, (iii) by means of a “net settlement” procedure, (iv) by such other medium of payment as the Committee shall authorize or (v) by any combination of the allowable methods of payment set forth herein.
3.    Termination of Award. Notwithstanding any other provision of this Agreement, outstanding Service-Based Restricted Stock Units that have not become earned and payable prior to the Expiration Date shall expire and may not become earned and payable after such time. Additionally, any Service-Based Restricted Stock Units that have not become earned and payable on or before the termination of the Participant's employment with the Company and its Affiliates shall expire and may not become earned and payable after such time.

2

4.    Shareholder Rights. Except as set forth in Section 6 below, the Participant shall not have any rights as a shareholder with respect to shares of Common Stock subject to any Service-Based Restricted Stock Units until issuance of the shares of Common Stock. The Company may include on any certificates or notations representing shares of Common Stock issued pursuant to this Award such legends referring to any representations, restrictions or any other applicable statements as the Company, in its discretion, shall deem appropriate.
5.    Transferability. Except as provided herein, this Award is nontransferable except by will or the laws of descent and distribution. If this Award is transferred by will or the laws of descent and distribution, the Award must be transferred in its entirety to the same person or persons or entity or entities. Notwithstanding the foregoing, the Participant, at any time prior to the Participant's death, may transfer all or any portion of this Award to the Participant's children, grandchildren, spouse, one or more trusts for the benefit of such family members or a partnership in which such family members are the only partners, on such terms and conditions as are appropriate for such transferees to be included in the class of transferees who may rely on a Form S-8 registration statement under the Securities Act of 1933 to sell shares received pursuant to the Award. Any such transfer will be permitted only if (i) the Participant does not receive any consideration for the transfer and (ii) the Committee expressly approves the transfer. Any transferee to whom this Award is transferred shall be bound by the same terms and conditions that governed the Award during the time it was held by the Participant (which terms and conditions shall still be read from the perspective of the Participant); provided, however, that such transferee may not transfer the Award except than by will or the laws of descent and distribution. Any such transfer shall be evidenced by an appropriate written document that the Participant executes and the Participant shall deliver a copy thereof to the Committee on or before the effective date of the transfer. No right or interest of the Participant or any transferee in this Award shall be liable for, or subject to, any lien, liability or obligation of the Participant or transferee.
6.    Cash Dividends. For so long as the Participant holds outstanding Service-Based Restricted Stock Units under this Award, if the Company pays any cash dividends on its Common Stock, then the Company will pay the Participant in cash for each outstanding Service-Based Restricted Stock Unit covered by this Award as of the record date for such dividend, less any required withholding taxes, the per share amount of such dividend that the Participant would have received had the Participant owned the underlying shares of Common Stock as of the record date of the dividend if, and only if, the Service-Based Restricted Stock Units become earned and payable and the related shares of Common Stock are issued to the Participant. In that case, the Company shall pay such cash amounts to the Participant, less any required withholding taxes, at the same time the related shares of Common Stock are delivered. The additional payments pursuant to this Section 6 shall be treated as a separate arrangement.
7.    Change in Capital Structure. The terms of this Award shall be adjusted in accordance with the terms and conditions of the Plan as the Committee determines is equitably required in the event the Company effects one or more stock dividends, stock splits, subdivisions or consolidations of shares or other similar changes in capitalization.
8.    Notice. Any notice or other communication given pursuant to this Agreement, or in any way with respect to the Award, shall be in writing and shall be personally delivered or mailed by United States registered or certified mail, postage prepaid, return receipt requested, to the following addresses:


If to the Company:
 
EarthLink Holdings Corp.
1170 Peachtree Street
Suite 900
Atlanta, Georgia 30309
Attention: General Counsel
 
 
If to the Participant:


10.    No Right to Continued Employment or Service. Neither the Plan, the granting of this Award nor any other action taken pursuant to the Plan or this Award constitutes or is evidence of any agreement or

3

understanding, express or implied, that the Company or any Affiliate will retain the Participant as an employee or other service provider for any period of time or at any particular rate of compensation.
11.    Agreement to Terms of Plan and Agreement. The Participant has received a copy of the Plan, has read and understands the terms of the Plan and this Agreement, and agrees to be bound by their terms and conditions.
12.    Tax Consequences. The Participant acknowledges that (i) there may be tax consequences upon acquisition or disposition of the shares of Common Stock issued pursuant to this Award or the receipt of cash dividends hereunder and (ii) Participant should consult a tax adviser prior to such acquisition or disposition or receipt. The Participant is solely responsible for determining the tax consequences of the Award and for satisfying the Participant's tax obligations with respect to the Award (including, but not limited to, any income or excise taxes resulting from the application of Code Sections 409A or 4999), and the Company shall not be liable if this Award is subject to Code Sections 409A or 4999.
13.    Binding Effect. Subject to the limitations stated above and in the Plan, this Agreement shall be binding upon and inure to the benefit of the distributees, legatees and personal representatives of the Participant and the successors of the Company.
14.    Conflicts. In the event of any conflict between the provisions of the Plan and the provisions of this Agreement, the provisions of the Plan shall govern. All references herein to the Plan shall mean the Plan as in effect on the date hereof.
15.    Counterparts. This Agreement may be executed in a number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one in the same instrument.
16.    Miscellaneous. The parties agree to execute such further instruments and take such further actions as may be necessary to carry out the intent of the Plan and this Agreement. This Agreement and the Plan shall constitute the entire agreement of the parties with respect to the subject matter hereof.
17.    Section 409A. Notwithstanding any other provision of this Agreement, it is intended that payments hereunder will not be considered deferred compensation within the meaning of Section 409A of the Code. For purposes of this Agreement, all rights to payments hereunder shall be treated as rights to receive a series of separate payments and benefits to the fullest extent allowed by Section 409A of the Code. Payments hereunder are intended to satisfy the exemption from Section 409A of the Code for “short-term deferrals.” Notwithstanding the preceding, neither the Company nor any Affiliate shall be liable to the Participant or any other person if the Internal Revenue Service or any court or other authority having jurisdiction over such matter determines for any reason that any payments hereunder are subject to taxes, penalties or interest as a result of failing to be exempt from, or comply with, Section 409A of the Code.
18.    Governing Law. This Agreement shall be governed by the laws of the State of Delaware, except to the extent federal law applies.

4


IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by a duly authorized officer, and the Participant has affixed his signature hereto.
 
COMPANY:
 
EARTHLINK HOLDINGS CORP.
 
 
By: _______________________________________________
Name: ____________________________________________
Title: _____________________________________________

 
 
 
PARTICIPANT:
__________________________________________________
[Participant's Name]
 


 

5



2015 EarthLink Access Management Save-Sharing Executive Bonus Plan

Eligible Employees

Regular EarthLink employees, classified as Executive Vice President, Network Services and specifically identified as eligible to participate in this bonus plan provided they meet the criteria below.

•
EarthLink Employees: This includes all EarthLink employees under the common law employer, EarthLink Shared Services, LLC. as well as new hires into this legal entity (so long as they meet the New Hire Eligibility outlined below).
•
Employment Status: Eligible employees must be actively employed on the date of the bonus payment to receive a bonus. Exceptions to this policy include any employee whose position was eliminated after March 31, 2015 and who is otherwise eligible to receive severance under one of the Company’s severance plans. In this case, the employee will remain eligible to participate in the bonus plan based on duration of employment to the date of termination, and based on company and individual performance during the applicable performance period.
•
Alternative Incentive Plans: Employees are eligible to participate in the Access Management Save-Sharing Bonus Plan in addition to the EarthLink Corporate bonus plan. Employees may be eligible for a pro-rata Save-Sharing bonus in addition to Corporate Bonus if they are in an Access Management position for at least two months during the year.
•
Performance Conditions: Employees whose performance is assessed as “Inconsistent” or “Requires Improvement” or “Does Not Meet All Expectations” or the equivalent of any of these will have a reduced or no bonus payout for the performance period.

2015 Access Management Save-Sharing Bonus Plan Design & Corporate Priorities
EarthLink’s 2015 Access Management Save-Sharing Bonus Plan establishes performance metrics for the 2015 calendar year. If established performance metrics required for bonus payment are achieved, payment will be made after final results are determined, and typically in February following the conclusion of the performance period, but not later than March 15, 2016.

The 2015 Access Management Save Sharing Bonus Plan performance metrics are established by management. The Performance Metrics are measureable outcomes that demonstrate achievement against the following

2015 Plan Performance Metric
The 2015 Plan is funded based on the over-achievement of a stretch goal of $__ million dollars in access savings or other margin improvement initiatives included CABS settlements, with a cap of $__ million dollars in access savings, and is designed to be achieved during the performance period of January 1, 2015 through December 31, 2015. All eligible employees are aligned to these metrics, subject to further differentiation by role, level, and degree of expected impact on the saving.


How the Access Management Save Sharing Bonus Plan Works
For each $1.00 achieved over the $__ million dollar stretch goal, up to $__ million, $.05 per $1.00 will be used to fund the bonus pool at maximum ($__). Savings determination and calculation will be tracked and verified by EarthLink corporate Finance. The final amount of the bonus may be adjusted by Earthlink based on achievement of Earthlink’s revenue target as well as other factors including but not limited to equipment sales. All payments under this plan will be made only after Earthlink has had an opportunity to complete financial audits and evaluations necessary to calculate the compensation under the plan.
 
How the Bonus Plan Works: Calculating Individual Bonus Payments and Timing of Payments
Assuming the Performance Metric is achieved to fund the bonus plan as outlined


above, eligible employees may receive a bonus payout based on the bonus pool multiplied by their personal eligibility percent.

Minimum Performance Requirements:
In order to receive a payout based on this calculation, employees must be, at a minimum, “Meeting Expectations” as assessed by management. Performance reviews will be required prior to the bonus payout. Employees whose performance is assessed as, “Inconsistent” or “Requires Improvement” or “Does Not Meet All Expectations” or the equivalent of any of these will have a reduced or no bonus payout for the performance period.

Timing of Payments:
The Save-Sharing Bonus payment, if any, will be made after final results are determined, and typically in February 2016, but not later than March 15, 2016.

Method of Payments:
Manager and above level participants: will receive cash payments for the Access Management Save-Sharing Bonus based on actual savings results up to 50% of the payment, and can be paid in restricted shares of company stock for the remaining amount of payment.

If paid in shares of stock, the total number of shares issued would be calculated by dividing the total payment due (in dollars) by EarthLink’s share price, and then rounded to the nearest whole share. Any shares awarded as payment will be fully vested at the time of the award.

EarthLink’s Board of Directors maintains the ultimate discretion on the final form of payment.

Finally, all bonus payments are subject to required State, Federal or other applicable tax withholdings, Social Security and Medicare. Bonuses paid in cash will be eligible
for 401(k) deferrals.

Helpful Definitions

Eligible Earnings:
The Save-Sharing bonus amount is calculated in part based on regular earnings paid during the calendar year. Regular earnings include base pay, on-call pay, and paid time off (holiday pay, eTime pay, ABC leave, bereavement pay, jury duty and supplemental military leave pay). Regular earnings specifically exclude bonuses of any kind, incentive compensation payments or value of incentive goods or services, relocation allowances, rideshare reimbursements, severance pay, WARN pay (or “in lieu of” pay), and payment of eTime and/or sabbatical that is paid in a lump sum.


Bonus Opportunity:
Each bonus-eligible position has a Bonus Opportunity determined by their Pay Band, role and level of impact to the Access Management Savings results. Bonus Opportunity is communicated to employees in a memo of understanding. The Bonus Opportunity refers to the calculation that will be used to determine individual bonus payout. In the case of changes to the employee’s position or position level, Bonus Opportunity will be pro-rated for the period of time in which the employee was in an eligible role.


Exceptions to the Plan
Exceptions to the EarthLink Employee Bonus Plan because of an employee’s disability, death, retirement, or other extenuating circumstances, require the approval of the Vice President Human Resources and the executive leader of the employee’s business unit, providing at least two levels of line approval.






Exhibit 31.1
 
CERTIFICATION OF CEO PURSUANT TO

SECURITIES EXCHANGE ACT RULES 13a-14 AND 15d-14

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Joseph F. Eazor, certify that:
 
1.        I have reviewed this quarterly report on Form 10-Q for the period ended March 31, 2015 of EarthLink Holdings Corp.;
 
2.        Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.        Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.        The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a)         designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b)         designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c)          evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d)         disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
 
5.        The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)         all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
 
(b)         any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
 
Date:
May 5, 2015
By:
/s/ JOSEPH F. EAZOR
 
 
 
Joseph F. Eazor
 
 
 
Chief Executive Officer






Exhibit 31.2
 
CERTIFICATION OF CFO PURSUANT TO

SECURITIES EXCHANGE ACT RULES 13a-14 AND 15d-14

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Louis M. Alterman, certify that:
 
1.        I have reviewed this quarterly report on Form 10-Q for the period ended March 31, 2015 of EarthLink Holdings Corp.;
 
2.        Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.        Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.        The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a)         designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b)         designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c)      evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d)         disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
 
5.        The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)         all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
(b)         any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
 
Date:
May 5, 2015
By:
/s/ LOUIS M. ALTERMAN
 
 
 
Louis M. Alterman
 
 
 
Chief Financial Officer






Exhibit 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
 
In connection with the Quarterly Report on Form 10-Q of EarthLink Holdings Corp. (the “Company”) for the period ended March 31, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joseph F. Eazor, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge that:
 
(1)         the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2)         the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
/s/ JOSEPH F. EAZOR
 
Joseph F. Eazor
Chief Executive Officer
May 5, 2015






Exhibit 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
 
In connection with the Quarterly Report on Form 10-Q of EarthLink Holdings Corp. (the “Company”) for the period ended March 31, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Louis M. Alterman, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge that:
 
(1)   the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2)   the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
/s/ LOUIS M. ALTERMAN
 
Louis M. Alterman
Chief Financial Officer
May 5, 2015


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