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EX-31.1 - EX-31.1 - ZAYO GROUP LLCzgl-20160331ex311fb3751.htm
EX-32.2 - EX-32.2 - ZAYO GROUP LLCzgl-20160331ex322331e8c.htm
EX-32.1 - EX-32.1 - ZAYO GROUP LLCzgl-20160331ex3211fa08b.htm
EX-31.2 - EX-31.2 - ZAYO GROUP LLCzgl-20160331ex312558a9c.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q


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

For the quarterly period ended March 31, 2016

OR

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

Commission File Number: 333-169979


Zayo Group, LLC

(Exact Name of Registrant as Specified in Its Charter)


 

 

 

 

DELAWARE

 

26-2012549

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

1805 29th Street, Suite 2050,

Boulder, CO 80301

(Address of Principal Executive Offices)

(303) 381-4683

(Registrant’s Telephone Number, Including Area Code)


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      No  

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      No  

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

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

 

Smaller reporting company

 

 

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

 

 

 

 


 

 

ZAYO GROUP, LLC AND SUBSIDIARIES

INDEX 

 

 

 

 

 

 

Page

Part I. FINANCIAL INFORMATION 

 

 

Item 1. Financial Statements (Unaudited) 

 

1

Condensed Consolidated Balance Sheets as of March 31, 2016 and June 30, 2015 

 

1

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2016 and 2015 

 

2

Condensed Consolidated Statements of Comprehensive Income/(Loss) for the Three and Nine Months Ended March 31, 2016 and 2015 

 

3

Condensed Consolidated Statement of Member's Equity for the Nine Months Ended March 31, 2016 

 

4

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2016 and 2015 

 

5

Notes to Condensed Consolidated Financial Statements 

 

6

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

 

41

Item 3. Quantitative and Qualitative Disclosures about Market Risk 

 

63

Item 4. Controls and Procedures 

 

64

Part II. OTHER INFORMATION 

 

65

Item 1. Legal Proceedings 

 

65

Item 1A. Risk Factors 

 

65

Item 6. Exhibits 

 

67

Signatures 

 

68

 

 

 


 

ZAYO GROUP, LLC AND SUBSIDIARIES

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.   FINANCIAL STATEMENTS (UNAUDITED)

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in millions)

 

 

 

 

 

 

 

 

 

    

March 31, 

    

June 30, 

 

 

 

2016

    

2015

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

214.7

 

$

308.0

 

Trade receivables, net of allowance of $4.7 and $3.4 as of March 31, 2016 and June 30, 2015, respectively

 

 

134.8

 

 

88.0

 

Due from related parties

 

 

0.1

 

 

0.6

 

Prepaid expenses

 

 

58.0

 

 

37.3

 

Deferred income taxes, net

 

 

129.8

 

 

129.5

 

Other assets

 

 

16.2

 

 

3.9

 

Total current assets

 

 

553.6

 

 

567.3

 

Property and equipment, net

 

 

4,033.7

 

 

3,299.2

 

Intangible assets, net

 

 

936.1

 

 

948.3

 

Goodwill

 

 

1,219.6

 

 

1,224.4

 

Other assets

 

 

89.8

 

 

54.8

 

Total assets

 

$

6,832.8

 

$

6,094.0

 

Liabilities and member's equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

20.5

 

$

16.5

 

Accounts payable

 

 

75.1

 

 

40.0

 

Accrued liabilities

 

 

240.9

 

 

182.4

 

Accrued interest

 

 

59.5

 

 

57.2

 

Capital lease obligations, current

 

 

5.5

 

 

4.4

 

Due to related parties

 

 

1.3

 

 

1.3

 

Deferred revenue, current

 

 

127.6

 

 

86.6

 

Total current liabilities

 

 

530.4

 

 

388.4

 

Long-term debt, non-current

 

 

4,036.8

 

 

3,652.2

 

Capital lease obligation, non-current

 

 

32.8

 

 

28.3

 

Deferred revenue, non-current

 

 

782.4

 

 

612.7

 

Deferred income taxes, net

 

 

182.0

 

 

189.7

 

Other long-term liabilities

 

 

57.9

 

 

28.6

 

Total liabilities

 

 

5,622.3

 

 

4,899.9

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

Member's equity

 

 

 

 

 

 

 

Member's interest

 

 

1,740.5

 

 

1,699.1

 

Accumulated other comprehensive income/(loss)

 

 

12.4

 

 

(7.9)

 

Accumulated deficit

 

 

(542.4)

 

 

(497.1)

 

Total member's equity

 

 

1,210.5

 

 

1,194.1

 

Total liabilities and member's  equity

 

$

6,832.8

 

$

6,094.0

 

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

1


 

ZAYO GROUP, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in millions)  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  March 31, 

 

Nine months ended March 31, 

 

 

    

2016

    

2015

 

2016

    

2015

 

Revenue

 

$

478.0

 

$

340.7

 

$

1,214.4

 

$

985.2

 

Operating costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs (excluding depreciation and amortization and including stock-based compensation—Note 8)

 

 

170.8

 

 

100.9

 

 

396.0

 

 

306.0

 

Selling, general and administrative expenses (including stock-based compensation—Note 8)

 

 

112.5

 

 

83.0

 

 

282.1

 

 

271.7

 

Depreciation and amortization

 

 

137.2

 

 

100.1

 

 

368.0

 

 

293.0

 

Total operating costs and expenses

 

 

420.5

 

 

284.0

 

 

1,046.1

 

 

870.7

 

Operating income

 

 

57.5

 

 

56.7

 

 

168.3

 

 

114.5

 

Other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(57.7)

 

 

(60.7)

 

 

(162.7)

 

 

(161.0)

 

Loss on extinguishment of debt

 

 

 —

 

 

(54.9)

 

 

 —

 

 

(85.8)

 

Foreign currency loss on intercompany loans

 

 

(11.1)

 

 

(13.2)

 

 

(28.9)

 

 

(41.2)

 

Other expense, net

 

 

(0.2)

 

 

 —

 

 

(0.4)

 

 

(0.1)

 

Total other expenses, net

 

 

(69.0)

 

 

(128.8)

 

 

(192.0)

 

 

(288.1)

 

Loss from operations before income taxes

 

 

(11.5)

 

 

(72.1)

 

 

(23.7)

 

 

(173.6)

 

Provision/(benefit) for income taxes

 

 

7.8

 

 

(18.4)

 

 

21.6

 

 

(13.3)

 

Net loss

 

$

(19.3)

 

$

(53.7)

 

$

(45.3)

 

$

(160.3)

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

2


 

ZAYO GROUP, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (UNAUDITED)

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Nine months ended

 

 

 

March 31, 

 

March 31, 

 

 

    

2016

    

2015

    

2016

    

2015

    

Net loss

 

$

(19.3)

 

$

(53.7)

 

$

(45.3)

 

$

(160.3)

 

Foreign currency translation adjustments

 

 

32.0

 

 

(14.5)

 

 

20.3

 

 

(35.5)

 

Comprehensive income/(loss)

 

$

12.7

 

$

(68.2)

 

$

(25.0)

 

$

(195.8)

 

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

3


 

ZAYO GROUP, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF MEMBER’S EQUITY (UNAUDITED)

NINE MONTHS ENDED MARCH 31, 2016

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Member's
Interest

    

Accumulated

Other

Comprehensive

(Loss)/Income

    

Accumulated
Deficit

    

Total
Member's
Equity

Balance at June 30, 2015

 

$

1,699.1

 

$

(7.9)

 

$

(497.1)

 

$

1,194.1

Stock-based compensation

 

 

119.8

 

 

 —

 

 

 —

 

 

119.8

Tax benefits from stock-based compensation

 

 

1.3

 

 

 —

 

 

 —

 

 

1.3

Foreign currency translation adjustment

 

 

 —

 

 

20.3

 

 

 —

 

 

20.3

Capital distribution to parent

 

 

(81.1)

 

 

 —

 

 

 —

 

 

(81.1)

Other

 

 

1.4

 

 

 —

 

 

 —

 

 

1.4

Net loss

 

 

 —

 

 

 —

 

 

(45.3)

 

 

(45.3)

Balance at March 31, 2016

 

$

1,740.5

 

$

12.4

 

$

(542.4)

 

$

1,210.5

 

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

 

 

 

4


 

ZAYO GROUP, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in millions)

 

 

 

 

 

 

 

 

 

 

Nine months ended March 31, 

 

 

 

2016

    

2015

 

Cash flows from operating activities

    

 

 

    

 

 

 

Net loss

 

$

(45.3)

 

$

(160.3)

 

Adjustments to reconcile net loss to net cash provided by operating activities

 

 

 

 

 

 

 

Depreciation and amortization

 

 

368.0

 

 

293.0

 

Loss on extinguishment of debt

 

 

 —

 

 

85.8

 

Non-cash interest expense

 

 

9.1

 

 

16.3

 

Stock-based compensation

 

 

122.5

 

 

157.8

 

Amortization of deferred revenue

 

 

(66.6)

 

 

(52.9)

 

Additions to deferred revenue

 

 

145.4

 

 

123.6

 

Foreign currency loss on intercompany loans

 

 

28.9

 

 

41.2

 

Excess tax benefit from stock-based compensation

 

 

(7.9)

 

 

 —

 

Deferred income taxes

 

 

14.3

 

 

(20.0)

 

Provision for bad debts

 

 

3.1

 

 

1.3

 

Non-cash loss on investments

 

 

1.2

 

 

0.5

 

Changes in operating assets and liabilities, net of acquisitions

 

 

 

 

 

 

 

Trade receivables

 

 

15.3

 

 

(18.5)

 

Prepaid expenses

 

 

20.3

 

 

(3.5)

 

Receivables from related parties, net

 

 

0.5

 

 

(9.4)

 

Accounts payable and accrued liabilities

 

 

(44.7)

 

 

(46.4)

 

Other assets and liabilities

 

 

(26.2)

 

 

(6.4)

 

Net cash provided by operating activities

 

 

537.9

 

 

402.1

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(516.7)

 

 

(374.9)

 

Acquisition of Allstream, net of cash acquired

 

 

(297.6)

 

 

 —

 

Acquisition of Viatel, net of cash acquired

 

 

(102.7)

 

 

 —

 

Acquisition of Dallas Data Center, net of cash acquired

 

 

(16.7)

 

 

 —

 

Acquisition of Latysis Holdings, LLC, net of cash acquired

 

 

 —

 

 

(677.5)

 

Acquisition of IdeaTek Systems, Inc., net of cash acquired

 

 

 —

 

 

(53.6)

 

Acquisition of Neo Telecoms, net of cash acquired

 

 

 —

 

 

(73.9)

 

Acquisition of Atlanta Nap, net of cash acquired

 

 

 —

 

 

(52.5)

 

Acquisition of CoreXchange, LLC, net of cash acquired

 

 

 —

 

 

0.3

 

Other

 

 

 —

 

 

(0.1)

 

Net cash used in investing activities

 

 

(933.7)

 

 

(1,232.2)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Equity contributions

 

 

 —

 

 

279.7

 

Proceeds from debt

 

 

395.2

 

 

1,437.3

 

Principal payments on long-term debt

 

 

(13.4)

 

 

(939.8)

 

Payment of early redemption fees on debt extinguished

 

 

 —

 

 

(62.6)

 

Principal payments on capital lease obligations

 

 

(3.3)

 

 

(2.4)

 

Payment of debt issue costs

 

 

(2.9)

 

 

(18.8)

 

Contributions to parent

 

 

(81.1)

 

 

 —

 

Excess tax benefit from stock-based compensation

 

 

7.9

 

 

 —

 

Net cash provided by financing activities

 

 

302.4

 

 

693.4

 

Net cash flows

 

 

(93.4)

 

 

(136.7)

 

Effect of changes in foreign exchange rates on cash

 

 

0.1

 

 

(2.8)

 

Net decrease in cash and cash equivalents

 

 

(93.3)

 

 

(139.5)

 

Cash and cash equivalents, beginning of year

 

 

308.0

 

 

297.4

 

Cash and cash equivalents, end of period

 

$

214.7

 

$

157.9

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

Cash paid for interest, net of capitalized interest

 

$

145.0

 

$

176.9

 

Cash paid for income taxes

 

$

11.4

 

$

12.7

 

Non-cash purchases of equipment through capital leasing

 

$

5.9

 

$

6.2

 

Increase in accounts payable and accrued expenses for purchases of property and equipment

 

$

26.2

 

$

8.6

 

 

Refer to Note 2 — Acquisitions for details regarding the Company’s recent acquisitions.

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

 

 

5


 

Table of Contents

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

(1) BUSINESS AND BASIS OF PRESENTATION

Business

Zayo Group, LLC, a Delaware limited liability company, was formed on May 4, 2007, and is the operating parent company of a number of subsidiaries engaged in bandwidth infrastructure services. Zayo Group LLC and its subsidiaries are collectively referred to as “Zayo Group” or the “Company.” Headquartered in Boulder, Colorado, the Company operates bandwidth infrastructure assets, including fiber networks and data centers, in the United States, Canada and Europe to offer:

·

Dark Fiber Solutions, including dark fiber and mobile infrastructure services.

·

Colocation and Cloud Infrastructure, including cloud and colocation services.

·

Network Connectivity, wavelengths, Ethernet, IP and SONET services.

·

Other services, including Zayo Professional Services (“ZPS”), voice and unified communications.

Zayo Group is wholly owned by Zayo Group Holdings, Inc. (“Holdings” or “ZGH”).

Basis of Presentation

The accompanying condensed consolidated financial statements include all the accounts of the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. The accompanying condensed consolidated financial statements and related notes are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for quarterly reports on Form 10-Q, and do not include all of the note disclosures required by GAAP for complete financial statements. These condensed consolidated financial statements should, therefore, be read in conjunction with the consolidated financial statements and notes thereto for the year ended June 30, 2015 included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2015. In the opinion of management, all adjustments considered necessary for a fair presentation of financial position, results of operations and cash flows of the Company have been included herein. The results of operations for the three and nine months periods ended March 31, 2016 are not necessarily indicative of the operating results for any future interim period or the full year.

The Company’s fiscal year ends June 30 each year, and we refer to the fiscal year ended June 30, 2015 as “Fiscal 2015” and the fiscal year ending June 30, 2016 as “Fiscal 2016.”

Significant Accounting Policies

There have been no changes to the Company’s significant accounting policies described in its Annual Report on Form 10-K for the year ended June 30, 2015, except as noted below under “Employee Benefits”.

 

Employee Benefits

As a result of the Allstream acquisition (see Note 2 – Acquisitions) the Company acquired certain defined benefit pension plans, a defined contribution plan and other non-pension post-employment plans.  The cost of providing benefits under the defined benefit pension plans and other non-pension post-employment benefits is determined annually using the projected unit credit method. These actuarial valuations require the use of assumptions, including the discount rate and expected future salary increases to measure defined benefit obligations. The discount rate used to calculate the present values of the defined benefit obligation is determined by reference to market interest rates of high quality corporate bonds at the end of the reporting period. The net defined benefit liability (asset) recognized in our condensed

6


 

Table of Contents

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

consolidated balance sheet comprises the present value of the defined benefit obligations less the fair value of plan assets. Remeasurements of the net defined benefit liability (asset) are recognized immediately in other comprehensive loss. At each interim reporting period, the Company estimates actuarial gains and losses resulting from changes in the discount rate used to calculate the present value of the defined benefit pension obligations, and recognizes the actual return on plan assets excluding amounts included in net interest on the net defined benefit liability (asset). At year-end, all actuarial gains and losses arising from changes in the present value of the defined benefit obligations, and the changes in the fair value of plan assets, are determined in an accounting valuation prepared by an independent actuary. For funded defined benefit plans, when a net defined benefit asset is recognized, it is limited to the present value of the economic benefit in the form of reductions in future contributions to the plan. Any minimum funding requirements are considered in the calculation of the economic benefit. For plans recognized by a net defined benefit liability, minimum funding requirements can also result in an increase in the liability. An economic benefit is available to the Company if it is realizable during the life of the plan, or on settlement of the plan liabilities. The Company recognizes any decrease in an asset or increase in a liability as a result of the above in other comprehensive loss. The Company recognizes payments to the defined contribution plans as an expense in the period the employee service is incurred.

Use of Estimates

The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Significant estimates are used when establishing allowances for doubtful accounts and accruals for billing disputes, determining useful lives for depreciation and amortization and accruals for exit activities associated with real estate leases, assessing the need for impairment charges (including those related to intangible assets and goodwill), determining the fair values of assets acquired and liabilities assumed in business combinations, accounting for income taxes and related valuation allowances against deferred tax assets, determining the defined benefit costs and defined benefit obligations related to post-employment benefits and estimating the restricted stock unit grant fair values used to compute the stock-based compensation liability and expense. Management evaluates these estimates and judgments on an ongoing basis and makes estimates based on historical experience, current conditions, and various other assumptions that are believed to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions.

Recently Issued Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases. The new guidance supersedes existing guidance on accounting for leases in Topic 840 and is intended to increase the transparency and comparability of accounting for lease transactions. ASU 2016-02 requires most leases to be recognized on the balance sheet. Lessees will need to recognize a right-of-use asset and a lease liability for virtually all leases. The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Lessor accounting remains similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard (ASU 2014-09). The ASU will require both quantitative and qualitative disclosures regarding key information about leasing arrangements. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. The Company is evaluating the effect that ASU 2016-02 will

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Table of Contents

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

 

On March 30, 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which is intended to improve the accounting for share-based payment transactions as part of the FASB’s simplification initiative. The ASU changes five aspects of the accounting for share-based payment award transactions that will affect public companies, including: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. The Company is evaluating the effect that ASU 2016-09 will have on its consolidated financial statements and related disclosures. If adopted in the current fiscal year, among other changes, $7.9 million in excess tax benefits would be reclassified from a financing activity to an operating inflow.

In September 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which requires an entity to present deferred tax liabilities and assets as noncurrent. The ASU will replace the current classification and presentation requirements for deferred tax assets and liabilities.  The standard is effective for financial statements issued for annual periods beginning after December 15, 2016. Early adoption is permitted as of the original effective date or annual reporting periods and interim reporting periods within annual reporting periods beginning after December 15, 2016. The Company has not yet adopted ASU 2015-17 and it is not expected to have a material effect on the Company’s financial statements.

In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which requires acquirers who have reported provisional amounts for items in a business combination to recognize adjustments to provisional amounts that are identified during the measurement period, in the reporting period in which the adjustments are determined. The ASU also requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.  Prior to the issuance of ASU 2015-16, adjustments to provisional amounts were required to be retrospectively adjusted. The Company prospectively early-adopted ASU 2015-16 effective July 1, 2015. The adoption of this standard did not have a material impact on the financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. In July 2015, the FASB deferred the effective date to annual reporting periods and interim reporting periods within annual reporting periods beginning after December 15, 2017.  Early adoption is permitted as of the original effective date or annual reporting periods and interim reporting periods within annual reporting periods beginning after December 15, 2016. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

(2) ACQUISITIONS

Since its formation, the Company has consummated 37 transactions accounted for as business combinations. The acquisitions were executed as part of the Company’s business strategy of expanding through acquisitions. The acquisitions of these businesses have allowed the Company to increase the scale at which it operates, which in turn affords the Company the ability to increase its operating leverage, extend its network reach, and broaden its customer base.

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ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The accompanying condensed consolidated financial statements include the operations of the acquired entities from their respective acquisition dates.

Acquisitions Completed During Fiscal 2016

Allstream

On January 15, 2016, the Company acquired 100% of the equity interest in Allstream, Inc. and Allstream Fiber U.S. Inc. (together “Allstream”) from Manitoba Telecom Services Inc. (“MTS”) for cash consideration of CAD $422.9 million (or $297.6 million), net of cash acquired, subject to certain post-closing adjustments. The consideration paid is net of CAD $42.1 million (or $29.6 million) of working capital and other liabilities assumed by the Company in the acquisition. The acquisition was funded with Term Loan Proceeds (as defined below). The acquisition was considered a stock purchase for tax purposes.

The acquisition adds more than 18,000 route miles to the Company’s fiber network, including 12,500 miles of long-haul fiber connecting all major Canadian markets and 5,500 route miles of metro fiber network connecting approximately 3,300 on-net buildings concentrated in Canada’s top five metropolitan markets.

As part of the Allstream acquisition, MTS has agreed to retain Allstream’s former defined benefit pension obligations, and related pension plan assets, of retirees and other former employees of Allstream and has also agreed to reimburse Allstream for certain solvency funding payments related to the pension obligations of active Allstream employees as of January 15, 2016.  MTS will transfer assets from Allstream’s former defined benefit pension plans related to pre-closing service obligations for active employees to new Allstream defined benefit pension plans created by the Company, subject to regulatory approval. In addition, if the pre-closing benefit obligation for the January 15, 2016 active employees exceeds the fair value of assets transferred to the new Allstream pension plans, MTS has agreed to fund the funding deficiency at the later of the asset transfer date or the date at which it is determined that no further solvency deficit exists. Any required funding of the pension benefit obligation subsequent to January 15, 2016, will be the responsibility of the Company. This amount was not material to the financial statements as of March 31, 2016.

Also as part of the Allstream acquisition, the Company assumed the liabilities related to Allstream’s other non-pension unfunded post retirement benefits plans. The liability assumed on January 15, 2016 was approximately CAD $12.1 million (or $8.3 million). This liability is currently included in “Other long-term liabilities” on the condensed consolidated balance sheet.

 

Viatel

On December 31, 2015, the Company completed the acquisition of a 100% interest in Viatel Infrastructure Europe Ltd., Viatel (UK) Limited, Viatel France SAS, Viatel Deutschland GmbH and Viatel Nederland BV (collectively, “Viatel”) for cash consideration of €94.2 million (or $102.7 million), net of cash acquired. The final purchase consideration is subject to certain post-closing adjustments. The acquisition was funded with cash on hand. €5.0 million (or $5.5 million) of the purchase consideration is currently held in escrow pending expiration of the indemnification adjustment period. The acquisition was considered a stock purchase for tax purposes.

Dallas Data Center Acquisition (“Dallas Data Center”)

On December 31, 2015, the Company acquired a 36,000 square foot data center located in Dallas, Texas for cash consideration of $16.7 million. The acquisition was funded with cash on hand and was considered an asset purchase for tax purposes.

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ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Acquisitions Completed During Fiscal 2015

Colo Facilities Atlanta (“AtlantaNAP”)

On July 1, 2014, the Company acquired 100% of the equity interest in AtlantaNAP, a data center and managed services provider in Atlanta, for cash consideration of $51.9 million. The acquisition was considered an asset purchase for tax purposes.

Neo Telecoms (“Neo”)

On July 1, 2014, the Company acquired a 96% equity interest in Neo, a Paris-based bandwidth infrastructure company. The purchase agreement also includes a call option to acquire the remaining equity interest on or after December 31, 2015, which was exercised on April 18, 2016 (see Note 14 – Subsequent Events). The purchase consideration of €54.1 million (or $73.9 million), net of cash acquired, was in consideration of acquiring 96% equity ownership in Neo and a call option to purchase the remaining 4% equity interest in Neo. The fair value of the 4% non-controlling interest in Neo as of the acquisition date was $2.9 million and recorded in Other long-term liabilities. The consideration consisted of cash and was paid with cash on hand from the proceeds of the Term Loan Facility (as defined below). €8.7 million (or $11.9 million) of the purchase consideration is currently held in escrow pending the expiration of the indemnification adjustment period. The acquisition was considered a stock purchase for tax purposes.

IdeaTek Systems, Inc. (“IdeaTek”)

Effective January 1, 2015, the Company acquired all of the equity interest in IdeaTek. The purchase price, subject to certain post-closing adjustments, was $52.7 million and was paid with cash on hand. The acquisition was considered a stock purchase for tax purposes.

The IdeaTek acquisition added 1,800 route miles to the Company’s network in Kansas, and includes a dense metro footprint in Wichita, Kansas. The network spans across Kansas and connects to approximately 600 cellular towers and over 100 additional buildings.

Latisys Holdings, LLC (“Latisys”)

On February 23, 2015, the Company acquired the operating units of Latisys, a colocation and infrastructure as a service (“Iaas”) provider for a price of $677.8 million, net of cash acquired.  The Latisys acquisition was funded with the proceeds of the January 2015 Notes Offering (as defined in Note 5 – Long-Term Debt). The acquisition was considered a stock purchase for tax purposes.

Acquisition Method Accounting Estimates

The Company initially recognizes the assets and liabilities acquired from the aforementioned acquisitions based on its preliminary estimates of their acquisition date fair values. As additional information becomes known concerning the acquired assets and assumed liabilities, management may make adjustments to the opening balance sheet of the acquired company up to the end of the measurement period, which is no longer than a one year period following the acquisition date. The determination of the fair values of the acquired assets and liabilities assumed (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. As of March 31, 2016, the Company has not completed its fair value analysis and calculations in sufficient detail necessary to arrive at the final estimates of the fair value of certain working capital and non-working capital acquired assets and assumed liabilities, including the allocations to goodwill and intangible assets, deferred revenue and resulting deferred taxes related to its acquisitions of Allstream, Viatel and Dallas Data Center. All information presented with respect to certain working capital and non-working capital acquired assets and liabilities assumed as it relates to these acquisitions is preliminary and subject to revision pending the final fair value analysis.

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ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The table below reflects the Company's estimates of the acquisition date fair values of the assets and liabilities assumed from its Fiscal 2016 acquisitions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allstream

 

Viatel

 

Dallas Data
Center

 

Acquisition date

    

January 15, 2016

    

December 31, 2015

 

December 31, 2015

 

 

 

 

(in millions)

 

Cash

 

$

2.9

 

$

3.5

 

$

 —

 

Other current assets

 

 

103.0

 

 

8.0

 

 

 —

 

Property and equipment

 

 

268.7

 

 

160.6

 

 

14.9

 

Deferred tax assets, net

 

 

11.7

 

 

 —

 

 

 —

 

Intangibles

 

 

45.0

 

 

 —

 

 

1.8

 

Goodwill

 

 

 —

 

 

12.7

 

 

 —

 

Other assets

 

 

6.9

 

 

4.5

 

 

 —

 

Total assets acquired

 

 

438.2

 

 

189.3

 

 

16.7

 

Current liabilities

 

 

61.4

 

 

16.5

 

 

 —

 

Deferred revenue

 

 

46.4

 

 

61.5

 

 

 —

 

Deferred tax liability, net

 

 

 —

 

 

 —

 

 

 —

 

Other liabilities

 

 

29.9

 

 

5.1

 

 

 —

 

Total liabilities assumed

 

 

137.7

 

 

83.1

 

 

 —

 

Net assets acquired

 

 

300.5

 

 

106.2

 

 

16.7

 

Less cash acquired

 

 

(2.9)

 

 

(3.5)

 

 

 —

 

Net consideration paid

 

$

297.6

 

$

102.7

 

$

16.7

 

 

The table below reflects the Company's estimates of the acquisition date fair values of the assets and liabilities assumed from its Fiscal 2015 acquisitions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AtlantaNAP

 

 

Neo

 

 

IdeaTek

 

Latisys

 

Acquisition date

    

July 1, 2014

    

July 1, 2014

    

January 1, 2015

     

February 23, 2015

        

 

 

 

(in millions)

 

Cash

 

$

 —

 

$

4.2

 

$

 —

 

$

9.4

 

Other current assets

 

 

0.2

 

 

9.5

 

 

0.8

 

 

17.4

 

Property and equipment

 

 

7.0

 

 

31.3

 

 

32.3

 

 

222.9

 

Deferred tax assets, net

 

 

 —

 

 

 —

 

 

3.1

 

 

0.4

 

Intangibles

 

 

21.0

 

 

26.4

 

 

7.6

 

 

250.2

 

Goodwill

 

 

25.2

 

 

32.5

 

 

39.0

 

 

274.1

 

Other assets

 

 

 —

 

 

2.3

 

 

 —

 

 

5.0

 

Total assets acquired

 

 

53.4

 

 

106.2

 

 

82.8

 

 

779.4

 

Current liabilities

 

 

1.5

 

 

13.5

 

 

4.4

 

 

9.9

 

Deferred revenue

 

 

 —

 

 

3.7

 

 

25.7

 

 

3.2

 

Deferred tax liability, net

 

 

 —

 

 

7.6

 

 

 —

 

 

79.1

 

Other liabilities

 

 

 —

 

 

3.3

 

 

 —

 

 

 —

 

Total liabilities assumed

 

 

1.5

 

 

28.1

 

 

30.1

 

 

92.2

 

Net assets acquired

 

 

51.9

 

 

78.1

 

 

52.7

 

 

687.2

 

Less cash acquired

 

 

 —

 

 

(4.2)

 

 

 —

 

 

(9.4)

 

Net consideration paid

 

$

51.9

 

$

73.9

 

$

52.7

 

$

677.8

 


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ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

As of March 31, 2016 the acquisition accounting associated with the Company’s Fiscal 2015 acquisitions has been finalized.

 

The goodwill arising from the Company’s acquisitions results from synergies, anticipated incremental sales to the acquired company customer base and economies-of-scale expected from the acquisitions. The Company has allocated the goodwill to the reporting units (in existence on the respective acquisition dates) that were expected to benefit from the acquired goodwill. The allocation was determined based on the excess of the estimated fair value of the reporting unit over the estimated fair value of the individual assets acquired and liabilities assumed that were assigned to the reporting units. Note 3 - Goodwill, displays the allocation of the Company's acquired goodwill to each of its reporting units.

 

In each of the Company’s Fiscal 2016 and Fiscal 2015 acquisitions, the Company acquired certain customer relationships. These relationships represent a valuable intangible asset, as the Company anticipates continued business from the acquired customer bases. The Company’s estimate of the fair value of the acquired customer relationships is based on a multi-period excess earnings valuation technique that utilizes Level 3 inputs.

Transaction Costs

Transaction costs include expenses associated with professional services (i.e., legal, accounting, regulatory, etc.) rendered in connection with signed and/or closed acquisitions or disposals (including spin-offs), travel expense, severance expense incurred on the date of acquisition or disposal, and other direct expenses incurred that are associated with such acquisitions or disposals.  The Company incurred transaction costs of $14.2 million and $17.5 million for the three and nine months ended March 31, 2016, and $1.5 million and $6.0 million for the three and nine months ended March 31, 2015, respectively. Transaction costs have been included in selling, general and administrative expenses in the condensed consolidated statements of operations and in cash flows from operating activities in the condensed consolidated statements of cash flows during these periods.

Pro-forma Financial Information

The pro forma results presented below include the effects of the Company’s Fiscal 2016 and 2015 acquisitions as if the acquisitions occurred on July 1, 2014. The pro forma net loss for the periods ended March 31, 2016 and 2015 includes the additional depreciation and amortization resulting from the adjustments to the value of property and equipment and intangible assets resulting from purchase accounting and adjustment to amortized revenue during Fiscal 2016 and 2015 as a result of the acquisition date valuation of assumed deferred revenue. The pro forma results also include interest expense associated with debt used to fund the acquisitions. The pro forma results do not include any anticipated synergies or other expected benefits of the acquisitions. The unaudited pro forma financial information below is not necessarily indicative of either future results of operations or results that might have been achieved had the acquisitions been consummated as of July 1, 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  March 31, 

 

 

Nine months ended March 31, 

 

    

2016

    

2015

 

2016

 

2015

 

 

(in millions)

Revenue

 

$

493.5

 

$

494.3

 

$

1,476.0

 

$

1,498.9

Net loss

 

$

(20.5)

 

$

(64.4)

 

$

(51.6)

 

$

(173.5)

 

The Company is unable to determine the amount of revenue and net income associated with each acquisition recognized during the period as a result of integration activities.

(3) GOODWILL

The Company’s goodwill balance was $1,219.6 million and $1,224.4 million as of March 31, 2016 and June 30, 2015, respectively.

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ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The Company’s reporting units are comprised of its strategic product groups (“SPGs”): Zayo Dark Fiber (“Dark Fiber”), Zayo Wavelength Services (“Waves”), Zayo SONET Services (“SONET”), Zayo Ethernet Services (“Ethernet”), Zayo IP Services (“IP”), Zayo Mobile Infrastructure Group (“MIG”), Zayo Colocation (“zColo"), Zayo Cloud Services (“Cloud”), Allstream business (“Zayo Canada”) and Other (primarily ZPS).

The following reflects the changes in the carrying amount of goodwill during the nine months ended March 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product Group

    

As of
June 30, 2015

    

Fiscal 2016 Acquisitions

    

Adjustments to Fiscal 2015 Acquisitions

    

Foreign Currency Translation and Other

    

As of
March 31, 2016

 

 

 

(in millions)

 

Dark Fiber

 

$

299.1

 

$

1.4

 

$

 —

 

$

(7.8)

 

$

292.7

 

Waves

 

 

265.6

 

 

4.9

 

 

 —

 

 

(4.4)

 

 

266.1

 

Sonet

 

 

50.3

 

 

1.0

 

 

 —

 

 

 —

 

 

51.3

 

Ethernet

 

 

104.2

 

 

0.4

 

 

 —

 

 

 —

 

 

104.6

 

IP

 

 

86.3

 

 

1.5

 

 

 —

 

 

 —

 

 

87.8

 

MIG

 

 

73.4

 

 

 —

 

 

0.2

 

 

 —

 

 

73.6

 

zColo

 

 

273.2

 

 

3.5

 

 

(5.3)

 

 

(0.3)

 

 

271.1

 

Cloud

 

 

57.0

 

 

 —

 

 

 —

 

 

 —

 

 

57.0

 

Other

 

 

15.3

 

 

 —

 

 

0.1

 

 

 —

 

 

15.4

 

Total

 

$

1,224.4

 

$

12.7

 

$

(5.0)

 

$

(12.5)

 

$

1,219.6

 

 

During the nine months ended March 31, 2016, the Company recorded adjustments to its provisional accounting estimates primarily associated with deferred tax asset balances acquired from the IdeaTek and Latisys acquisitions, which resulted in a $5.0 million reduction to goodwill from Fiscal 2015 acquisitions.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

(4) INTANGIBLE ASSETS

Identifiable acquisition-related intangible assets as of March 31, 2016 and June 30, 2015 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Gross
Carrying
Amount

    

Accumulated
Amortization

    

Net

 

 

 

(in millions)

 

March 31, 2016

 

 

 

 

 

 

 

 

 

 

Finite-Lived Intangible Assets

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

1,125.5

 

$

(210.7)

 

$

914.8

 

Trade names

 

 

0.2

 

 

(0.2)

 

 

 —

 

Underlying rights

 

 

1.7

 

 

(0.3)

 

 

1.4

 

Total

 

 

1,127.4

 

 

(211.2)

 

 

916.2

 

Indefinite-Lived Intangible Assets

 

 

 

 

 

 

 

 

 

 

Certifications

 

 

3.5

 

 

 —

 

 

3.5

 

Underlying Rights

 

 

16.4

 

 

 —

 

 

16.4

 

Total

 

$

1,147.3

 

$

(211.2)

 

$

936.1

 

June 30, 2015

 

 

 

 

 

 

 

 

 

 

Finite-Lived Intangible Assets

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

1,080.3

 

$

(155.0)

 

$

925.3

 

Trade names

 

 

0.2

 

 

(0.1)

 

 

0.1

 

Underlying rights

 

 

1.7

 

 

(0.2)

 

 

1.5

 

Total

 

 

1,082.2

 

 

(155.3)

 

 

926.9

 

Indefinite-Lived Intangible Assets

 

 

 

 

 

 

 

 

 

 

Certifications

 

 

3.5

 

 

 —

 

 

3.5

 

Underlying Rights

 

 

17.9

 

 

 —

 

 

17.9

 

Total

 

$

1,103.6

 

$

(155.3)

 

$

948.3

 

 

 

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ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

(5) LONG-TERM DEBT

As of March 31, 2016 and June 30, 2015, long-term debt was as follows:

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

June 30, 

 

 

    

2016

    

2015

 

 

 

(in millions)

Term Loan Facility due 2021

 

$

2,033.4

 

$

1,646.8

 

10.125% Senior Unsecured Notes due 2020

 

 

325.6

 

 

325.6

 

6.00% Senior Unsecured Notes due 2023

 

 

1,430.0

 

 

1,430.0

 

6.375% Senior Unsecured Notes due 2025

 

 

350.0

 

 

350.0

 

Total debt obligations

 

 

4,139.0

 

 

3,752.4

 

Unamortized discount on Term Loan Facility

 

 

(22.0)

 

 

(19.8)

 

Unamortized premium on 6.00% Senior Unsecured Notes due 2023

 

 

6.5

 

 

7.1

 

Unamortized debt issuance costs

 

 

(66.2)

 

 

(71.0)

 

Carrying value of debt

 

 

4,057.3

 

 

3,668.7

 

Less current portion

 

 

(20.5)

 

 

(16.5)

 

Long-term debt, less current portion

 

$

4,036.8

 

$

3,652.2

 

 

Term Loan Facility due 2021 and Revolving Credit Facility

On May 6, 2015, the Company and Zayo Capital, Inc. (“Zayo Capital”) entered into an Amendment and Restatement Agreement whereby its Credit Agreement (the “Credit Agreement”) governing its senior secured term loan facility (the “Term Loan Facility”) and $450 million senior secured revolving credit facility (the “Revolver”) was amended and restated in its entirety. The amended and restated Credit Agreement extended the maturity date of its outstanding term loans under the Term Loan Facility to May 6, 2021. The interest rate margins applicable to the Term Loan Facility were decreased by 25 basis points to LIBOR plus 2.75% with a minimum LIBOR of 1.0%. In addition, the amended and restated Credit Agreement removed the fixed charge coverage ratio covenant and replaced such covenant with a springing senior secured leverage ratio maintenance requirement applicable only to the Revolver, increased certain lien and debt baskets, and removed certain covenants related to collateral. The terms of the Term Loan Facility require the Company to make quarterly principal payments of $5.1 million plus an annual payment of up to 50% of excess cash flow, as determined in accordance with the Credit Agreement (no such payment was required during the three and nine months ended March 31, 2016 or 2015). 

On January 15, 2016, the Company entered into an Incremental Amendment (the “Amendment”) to its Credit Agreement. Under the terms of the Amendment, the Term Loan Facility was increased by $400.0 million. The additional amounts borrowed bear interest at LIBOR plus 3.5% with a minimum LIBOR rate of 1.0%. The $400.0 million add-on was priced at 99.0% (the “Term Loan Proceeds”). The issue discount of $4.8 million on the Amendment is being accreted to interest expense over the term of the Term Loan Facility under the effective interest method. No other terms of the Credit Agreement were amended. The Term Loan Proceeds were used to fund the Allstream acquisition (see Note 2 – Acquisitions) and for general corporate purposes.

The Revolver matures at the earliest of (i) April 17, 2020, (ii) six months prior to the maturity date of the Term Loan Facility, subject to amendment thereof, and (iii) six months prior to the maturity date of the 2020 Unsecured Notes (as defined below), subject to repayment or amendment thereof.  The Credit Agreement also allows for letter of credit commitments of up to $50.0 million.  The Revolver is subject to a fee per annum of 0.25% to 0.375% (based on its current leverage ratio) of the weighted-average unused capacity, and the undrawn amount of outstanding letters of credit backed by the Revolver are subject to a 0.25% fee per annum. Outstanding letters of credit backed by the Revolver accrue interest at a rate ranging from LIBOR plus 2.0% to LIBOR plus 3.0% per annum based upon its leverage ratio.

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ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The weighted average interest rates (including margins) on the Term Loan Facility were approximately 3.9% and 3.75% at March 31, 2016 and June 30, 2015, respectively. Interest rates on the Revolver as of March 31, 2016 and June 30, 2015 were approximately 3.4% and 3.0%, respectively.

As of March 31, 2016, no amounts were outstanding under the Revolver. Standby letters of credit were outstanding in the amount of $7.9 million as of March 31, 2016, leaving $442.1 million available under the Revolver.

10.125% Senior Unsecured Notes due 2020

On July 2, 2012, the Company and Zayo Capital (together, the “Issuers”) issued $500.0 million aggregate principal amount of 10.125% senior unsecured notes due 2020 (the “2020 Unsecured Notes”).  On December 15, 2014, the Issuers redeemed $174.4 million of their outstanding 2020 Unsecured Notes at a price of 110.125% and $75.0 million of their then outstanding 8.125% senior secured notes due 2020 at a price of 108.125% (the “Partial Notes Redemption”). As part of the Partial Notes Redemption, the Company paid an early redemption call premium of $23.8 million, which was recorded as a loss on extinguishment of debt on the consolidated statements of operations during the nine months ended March 31, 2015.

6.00% Senior Unsecured Notes Due 2023 and 6.375% Senior Unsecured Notes due 2025

On January 23, 2015, the Issuers completed a private offering (the “January 2015 Notes Offering”) of $700.0 million aggregate principal amount of 6.00% senior unsecured notes due in 2023 (the “2023 Unsecured Notes”).  On March 9, 2015, the Issuers completed a private offering of an additional $730.0 million aggregate principal amount of 2023 Unsecured Notes at a premium of 1% (the “March 2015 Notes Offering”) resulting in aggregate gross proceeds for the 2023 Unsecured Notes of $1,437.3 million.  The issue premium of $7.3 million on the March 2015 Notes Offering is being accreted against interest expense over the term of the notes under the effective interest method.  The 2023 Unsecured Notes bear interest at the rate of 6.00% per year, which is payable on April 1 and October 1 of each year, beginning on October 1, 2015. The 2023 Unsecured Notes will mature on April 1, 2023.  The net proceeds from the January 2015 Notes Offering were used to fund the Latisys acquisition (see Note 2 – Acquisitions).   The net proceeds from the March 2015 Notes Offering were used to redeem the remaining $675.0 million of the Issuers’ then outstanding 8.125% senior secured notes due 2020 at a price of 105.75% (the “Second Notes Redemption”).  As part of the Second Notes Redemption, the Company paid an early redemption call premium of $38.8 million.  The call premium was recorded as a loss on extinguishment of debt on the consolidated statements of operations during the three and nine months ended March 31, 2015.

On May 6, 2015, the Issuers completed a private offering of $350.0 million aggregate principal amount of 6.375% senior unsecured notes due in 2025 (the “2025 Unsecured Notes”). Interest on the 2025 Unsecured Notes is payable on May 15 and November 15 of each year, beginning on November 15, 2015. The 2025 Unsecured Notes will mature on May 15, 2025.  The net proceeds from the 2025 Unsecured Notes were used to repay $344.5 million of borrowings under the Term Loan Facility. As a result of the repayment, the Company recorded a loss on extinguishment of debt of $8.4 million during the three months ended June 30, 2015.

Debt covenants

The indentures (the “Indentures”) governing the 2020 Unsecured Notes, the 2023 Unsecured Notes and the 2025 Unsecured Notes (collectively the “Notes”) contain covenants that, among other things, restrict the ability of the Company and its subsidiaries to incur additional indebtedness and issue preferred stock, pay dividends or make other distributions with respect to any equity interests, make certain investments or other restricted payments, create liens, sell assets, incur restrictions on the ability of the Company’s restricted subsidiaries to pay dividends or make other payments to the Company, consolidate or merge with or into other companies or transfer all or substantially all of their assets,

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

engage in transactions with affiliates, and enter into sale and leaseback transactions.  The terms of the Indentures include customary events of default.

The Credit Agreement contains customary events of default, including among others, non-payment of principal, interest, or other amounts when due, inaccuracy of representations and warranties, breach of covenants, cross default to certain other indebtedness, insolvency or inability to pay debts, bankruptcy, or a change of control. The Credit Agreement also contains a covenant, applicable only to the Revolver, that the Company maintain a senior secured leverage ratio below 5.25:1.00 at any time when the aggregate principal amount of loans outstanding under the Revolver is greater than 35% of the commitments under the Revolver.

The indenture governing the 2020 Unsecured Notes limits any increase in the Company’s secured indebtedness (other than certain forms of secured indebtedness expressly permitted under such indenture) to a pro forma secured debt ratio of 4.50 times the Company’s previous quarter’s annualized modified EBITDA, as defined in such indenture, and limits the Company’s incurrence of additional indebtedness to a total indebtedness ratio of 5.25 times the previous quarter’s annualized modified EBITDA. The indentures governing the 2023 Unsecured Notes and the 2025 Unsecured Notes limit any increase in the Company’s secured indebtedness (other than certain forms of secured indebtedness expressly permitted under such indentures) to a pro forma secured debt ratio of 4.50 times the Company’s previous quarter’s annualized modified EBITDA (as defined in such indentures), and limit the Company’s incurrence of additional indebtedness to a total indebtedness ratio of 6.00 times the previous quarter’s annualized modified EBITDA.

The Company was in compliance with all covenants associated with its debt agreements as of March 31, 2016.

Guarantees

The Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all of the Company’s current and future domestic restricted subsidiaries. The Notes were co-issued with Zayo Capital, which does not have independent assets or operations.

Debt issuance costs

In connection with the Credit Agreement (and subsequent amendments thereto), and the various Notes offerings, the Company incurred debt issuance costs of $102.1 million (net of extinguishments). These costs are being amortized to interest expense over the respective terms of the underlying debt instruments using the effective interest method, unless extinguished earlier, at which time the related unamortized costs are to be immediately expensed.

Unamortized debt issuance costs of $23.2 million associated with the Company’s previous indebtedness were recorded as part of the loss on extinguishment of debt during Fiscal 2015. 

The balance of debt issuance costs as of March 31, 2016 and June 30, 2015 was $66.2 million and $71.0 million, net of accumulated amortization of $35.9 million and $28.3 million, respectively. The amortization of debt issuance costs is included on the condensed consolidated statements of cash flows within the caption “Non-cash interest expense” along with the amortization or accretion of the premium and discount on the Company’s indebtedness and changes in the fair value of the Company’s interest rate derivatives.  Interest expense associated with the amortization of debt issuance costs was $2.6 million and $7.6 million for the three and nine months ended March 31, 2016 and $3.6 million and $11.1 million for the three and nine months ended March 31, 2015, respectively.

Debt issuance costs are presented in the condensed consolidated balance sheets as a reduction to “Long-term debt, non-current”.

 

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Loss on extinguishment of debt

In connection with the Partial Notes Redemption and Second Notes Redemption, the Company recorded early redemption call premiums of $62.6 million and recorded an expense of $23.2 million related to unamortized debt issuance costs associated with the notes redeemed. These expenses are included on the consolidated statements of operations during the nine months ended March 31, 2015. 

Interest rate derivatives

On August 13, 2012, the Company entered into forward-starting interest rate swap agreements with an aggregate notional value of $750.0 million, a maturity date of June 30, 2017, and a start date of June 30, 2013. There were no up-front fees for these agreements. The contracts state that the Company shall pay a 1.67% fixed rate of interest for the term of the agreements beginning on the start date. The counterparty will pay to the Company the greater of actual LIBOR or 1.25%. The Company entered into the forward-starting swap arrangements to reduce the risk of increased interest costs associated with potential changes in LIBOR rates.

Changes in the fair value of interest rate swaps are recorded in interest expense in the condensed consolidated statements of operations for the applicable period. The fair value of the interest rate swaps of $3.8 million and $4.1 million are included in “Other long term liabilities” in the Company’s condensed consolidated balance sheets as of March 31, 2016 and June 30, 2015, respectively. During the three and nine months ended March 31, 2016, respectively, $0.3 million and $(0.3) million was recorded as an increase/(decrease) in interest expense for the change in fair value of the interest rate swaps. During the three and nine months ended March 31, 2015, respectively, $2.3 million and $1.8 million was recorded as an increase in interest expense for the change in the fair value of the interest rate swaps.

 

(6) INCOME TAXES

The Company, a limited liability company, is taxed at the Holdings level.  All income tax balances resulting from the operations of Zayo Group, on a separate return basis, are reflected in these financial statements.    

 

The Company’s provision for income taxes from operations is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  March 31, 

 

Nine months ended March 31, 

 

 

    

2016

    

2015

    

2016

    

2015

 

Current Income Taxes

 

(in millions)

Federal

 

$

0.1

 

$

(1.7)

 

$

0.9

 

$

1.4

 

State

 

 

2.1

 

 

2.7

 

 

5.6

 

 

4.5

 

Foreign

 

 

(0.4)

 

 

 —

 

 

0.8

 

 

0.8

 

Total

 

$

1.8

 

$

1.0

 

$

7.3

 

$

6.7

 

Deferred Income Taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

$

4.7

 

$

(15.7)

 

$

14.6

 

$

(14.7)

 

State

 

 

1.2

 

 

(5.2)

 

 

(1.0)

 

 

(6.4)

 

Foreign

 

 

0.1

 

 

1.5

 

 

0.7

 

 

1.1

 

Total

 

 

6.0

 

 

(19.4)

 

 

14.3

 

 

(20.0)

 

Total provision/(benefit) for income taxes

 

$

7.8

 

$

(18.4)

 

$

21.6

 

$

(13.3)

 

 

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The United States and foreign components of loss from operations before income taxes for the three and nine months ended March 31, 2016 and 2015 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  March 31, 

 

Nine months ended March 31, 

 

 

    

2016

    

2015

    

2016

 

2015

 

 

 

(in millions)

 

United States

 

$

(3.5)

 

$

(76.9)

 

$

(15.6)

 

$

(169.1)

 

Foreign

 

 

(8.0)

 

 

4.8

 

 

(8.1)

 

 

(4.5)

 

Total

 

$

(11.5)

 

$

(72.1)

 

$

(23.7)

 

$

(173.6)

 

 

The Company’s effective income tax rate differs from what would be expected if the federal statutory rate were applied to earnings before income taxes primarily because of certain expenses that represent permanent differences between book and tax expenses and deductions, such as the stock-based compensation expense related to the common units of Communications Infrastructure Investments, LLC (“CII”) that is recorded as an expense for financial reporting purposes but is not deductible for tax purposes (see Note 7 – Equity).

A reconciliation of the actual income tax provision and the tax computed by applying the U.S. federal rate to the earnings before income taxes during the three and nine-month periods ended March 31, 2016 and 2015 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  March 31, 

 

Nine months ended March 31, 

 

    

2016

    

2015

    

2016

 

2015

 

 

(in millions)

Expected benefit at the statutory rate

 

$

(3.9)

 

$

(25.3)

 

$

(8.2)

 

$

(60.9)

Increase/(decrease) due to:

 

 

 

 

 

 

 

 

 

 

 

 

Non-deductible stock-based compensation

 

 

5.2

 

 

8.8

 

 

22.6

 

 

51.0

State income taxes benefit, net of federal benefit

 

 

(0.2)

 

 

(3.8)

 

 

(0.7)

 

 

(8.3)

Transactions costs not deductible for tax purposes

 

 

0.6

 

 

0.3

 

 

1.1

 

 

0.6

Foreign tax rate differential

 

 

0.5

 

 

(0.1)

 

 

0.8

 

 

0.7

Other, net

 

 

5.6

 

 

1.7

 

 

6.0

 

 

3.6

Provision/(benefit) for income taxes

 

$

7.8

 

$

(18.4)

 

$

21.6

 

$

(13.3)

 

Each interim period, management estimates the annual effective tax rate and applies that rate to its reported year-to-date earnings. The tax expense or benefit related to items for which management is unable to make reliable estimates or that are significant, unusual, or extraordinary items that will be separately reported, or reported net of their related tax effect, are individually computed and are recognized in the interim period in which those items occur. In addition, the effect of changes in enacted tax laws, tax rates or tax status is recognized in the interim period in which the change occurs.

The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgments, including but not limited to the expected operating income for the year, projections of the proportion of income earned and taxed in various jurisdictions, permanent differences, and the likelihood of realizing deferred tax assets generated in both the current year and prior years. The accounting estimates used to compute the interim provision for income taxes may change as new events occur, more experience is acquired, additional information is obtained, or the tax environment changes.

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(7) EQUITY

Zayo Group was initially formed on May 4, 2007, and is a wholly-owned subsidiary of Holdings. Prior to October 16, 2014, Holdings was a wholly owned subsidiary of CII. CII was organized on November 6, 2006, and subsequently capitalized on May 7, 2007, with capital contributions from various institutional and founder investors. Cash, property, and service proceeds from the capitalization of CII were contributed to the Company, and the contributions are reflected in the Company’s member’s interest. During Fiscal 2015, there was a deemed modification to the Company’s stock compensation arrangements with employees and directors.  The modification resulted in a reclassification of previously recorded stock-based compensation liability to member’s interest.

During the nine months ended March 31, 2016, the Company recorded an $119.8 million increase in member’s interest associated with stock-based compensation expense related to the Company’s equity classified stock-based compensation awards (See Note 8 – Stock-based Compensation).  Additionally, the Company recorded an increase to member’s interest of $1.3 million associated with a net tax benefit from stock-based compensation.  The net tax benefit is a result of the stock-based compensation deduction for tax purposes exceeding the stock-based compensation expense recorded in the Company’s condensed consolidated statement of operations.  As a result of this net benefit, the Company retained $0.6 million in cash during the nine months ended March 31, 2016 that would have otherwise been paid in income taxes during that period.  The remaining $0.7 million net tax benefit allowed the Company to preserve an equal amount of its federal net operating loss carryforward balance.  Under GAAP, the gross tax benefit recognized during the period of $7.9 million has been recorded on the condensed consolidated statement of cash flows as a cash inflow in the financing activities section and an offsetting outflow of $7.9 million has been recorded as a cash outflow in the cash provided by operating activities section.

During the nine months ended March 31, 2016, the Company repurchased 3,474,120 shares of ZGH common stock for $81.1 million. The stock repurchase on behalf of ZGH is included on the condensed consolidated statement of member’s equity as a Capital distribution to parent during the nine months ended March 31, 2016.

(8) STOCK-BASED COMPENSATION

The following table summarizes the Company’s stock-based compensation expense for liability and equity classified awards included on the condensed consolidated statements of operations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  March 31, 

 

Nine months ended March 31, 

 

 

    

2016

    

2015

    

2016

    

2015

 

Included in:

 

(in millions)

 

Operating costs

 

$

3.7

 

$

4.1

 

$

15.5

 

$

19.4

 

Selling, general and administrative expenses

 

 

29.8

 

 

36.6

 

 

107.0

 

 

138.4

 

Total stock-based compensation expense

 

$

33.5

 

$

40.7

 

$

122.5

 

$

157.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CII common and preferred units

 

$

13.6

 

$

23.7

 

$

59.5

 

$

133.5

 

Part A restricted stock units

 

 

12.7

 

 

3.5

 

 

32.9

 

 

6.1

 

Part B restricted stock units

 

 

6.9

 

 

13.5

 

 

29.3

 

 

18.2

 

Part C restricted stock units

 

 

0.3

 

 

 —

 

 

0.8

 

 

 —

 

Total stock-based compensation expense

 

$

33.5

 

$

40.7

 

$

122.5

 

$

157.8

 

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

CII Common  and Preferred Units

Prior to ZGH’s initial public offering (the “IPO”), the Company was given authorization by CII to award 625,000,000 of CII’s common units as profits interests to employees, directors, and affiliates of the Company.  The common units were historically considered to be stock-based compensation with terms that required the awards to be classified as liabilities due to cash settlement features. The vested portion of the awards was reported as a liability and the fair value was re-measured at each reporting date until the date of settlement, with a corresponding charge (or credit) to stock-based compensation expense.  In connection with ZGH’s IPO and the related amendment to the CII operating agreement, there was a deemed modification to the stock compensation arrangements with the Company’s employees and directors. As a result, previously issued common units which were historically accounted for as liability awards, became classified as equity awards.  Prior to reclassifying the common unit liability to equity, the Company re-measured the fair value of the CII common units factoring in the change in fair value since September 30, 2014 and the change in fair value caused by the modification.  The fair value of these previously vested common units was estimated to be $490.2 million on the modification date and this amount was recorded as an increase to additional-paid-in-capital during the year ended June 30, 2015.   The fair value of the unrecognized compensation expense associated with unvested CII common units is being recognized over the remaining vesting period of CII’s outstanding common units through May 15, 2017.

On October 9, 2014, the Company and CII’s board of managers approved a non-liquidating distribution by CII of shares of ZGH’s common stock held by CII to holders of CII vested common units. Employees and independent directors of the Company with vested CII common units received shares of ZGH’s common stock equal in value to the underlying value of their vested CII common units. The total number of shares of ZGH’s common stock that were distributed to CII common unit holders in connection with this non-liquidating distribution was 20,460,047 shares.

Employees with unvested CII common units at the time of the IPO have received and/or will continue to receive monthly distributions from CII of ZGH’s common stock as such common units vest under the original terms of the CII common unit grant agreements.  A total of 6,353,302 shares of ZGH’s common stock are associated with unvested CII common units that have or will be distributed subsequent to the IPO date. In addition, CII has and may in the future be required to distribute additional shares of ZGH’s common stock to CII common unit holders on a quarterly basis based on ZGH’s stock price performance through June 30, 2016, subject to the existing vesting provisions of the CII common units. The shares to be distributed to the common unit holders are based on a pre-existing distribution mechanism, whose primary input is ZGH’s stock price at each subsequent measurement date.  Any remaining shares of common stock owned by CII will be distributed to the existing CII preferred unit holders.  The total number of shares of ZGH’s common stock that have been or will be distributed to existing CII preferred or common unit holders subsequent to the IPO date is 10,294,867 shares.

CII has issued preferred units of CII to certain of the Company’s executives and independent directors as compensation. In connection with the non-liquidating distribution by CII approved on October 9, 2014, the Company’s CEO and independent directors with vested CII preferred units received 256,265 shares of ZGH’s common stock equal to the underlying value of their vested CII preferred units. A total of 29,555 shares of ZGH’s common stock associated with CII preferred units that were unvested at the time of the IPO have been distributed subsequent to the IPO date.

The valuation of the CII common units as of the IPO date was determined based on a Monte Carlo simulation.  The Monte Carlo valuation analysis attempts to approximate the probability of certain outcomes by running multiple trial runs, called simulations, using random variables to generate potential future stock prices. This valuation technique was used to estimate the fair value associated with future distributions of common stock to CII common unit holders. The Monte Carlo simulation first projects the number of shares to be distributed by CII to the common unit holders at each subsequent measurement date based on stock price projections under each simulation. Shares attributable to unvested CII common units are subject to the existing vesting provisions of the CII common unit awards.  The estimated future value of shares scheduled to be distributed by CII based on vesting provisions are calculated under each

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independent simulation. The present value of the number of shares of common stock to be distributed to common unit holders under each simulation is then computed, and the average of each simulation is the fair value of the Company’s common shares to be distributed by CII to the common unit holders. This value was then adjusted for prior non-liquidating distributions made by the Company to derive a value for CII common units by class and on per unit basis. These values were used to calculate the fair value of outstanding CII common units as of the IPO date. Various inputs and assumptions were utilized in the valuation method, including forfeiture behavior, vesting provisions, holding restrictions, peer companies’ historical stock volatility, and an appropriate risk-free rate.

On June 13, 2014, the Company completed a spin-off of Onvoy, LLC and its subsidiaries (“OVS”) to CII. The value of the CII common units is derived from the value of CII’s investments in the Company and OVS. As the value derived from each of these investments is separately determinable and there is a plan in place to distribute the value associated with the investment in ZGH shares separate from the value derived from OVS, the two components are accounted for separately.  The OVS component of the CII awards is adjusted to fair value each reporting period.  On December 31, 2015, CII entered into an agreement to sell OVS to a third party.  Based on the proposed sale price, the estimated fair value of OVS awards has been increased, resulting in an increase to stock based compensation expense and corresponding increase to member’s interest of $12.7 million for the nine months ended March 31, 2016.  Any proceeds from the sale to be distributed to the Company’s employees will be paid by CII.

During the three and nine months ended March 31, 2016, the Company recognized $13.6 million and $59.5 million, respectively, of stock-based compensation expense related to fair value adjustments and vesting of CII common and preferred units. During the three and nine months ended March 31, 2015, the Company recognized $23.7 million and $133.5 million, respectively, of stock-based compensation expense related to the vesting of CII common and preferred units. As of March 31, 2016, the unrecognized compensation associated with the ZGH component of unvested CII common units was $23.2 million.

Performance Incentive Compensation Plan (“PCIP”)

During October 2014, ZGH adopted the 2014 Performance Compensation Incentive Plan (“PCIP”).  The PCIP includes incentive cash compensation (ICC) and equity (in the form of restricted stock units or “RSUs”).  Grants under the PCIP RSU plans are made quarterly for all participants. The PCIP was effective on October 16, 2014 and will remain in effect for a period of 10 years (or through October 16, 2024) unless it is earlier terminated by ZGH’s Board of Directors.

The PCIP has the following components:

Part A

Under Part A of the PCIP, participants, including the Company’s executives, are eligible to earn quarterly awards of RSUs. Each participant in Part A of the PCIP has a RSU target annual award value. Twenty-five percent of this annual target award value is allocated to each fiscal quarter. The final Part A value awarded to a participant for any fiscal quarter is determined by the Compensation Committee subsequent to the end of the respective performance period taking into account ZGH’s measured value creation for the quarter, as well as such other subjective factors that it deems relevant (including group and individual level performance factors). The number of Part A RSUs granted is calculated based on the final award value determined by the Compensation Committee divided by the average closing price of ZGH’s common stock over the last ten trading days of the measured performance period. Part A RSUs vest based upon continued employment through one year after the last day of the quarter in which the Part A RSU grant is made, and at that time will be exchanged for an equal number of shares in ZGH’s common stock.

During the three and nine months ended March 31, 2016, the Company recognized $12.7 million and $32.9 million, respectively, of compensation expense associated with the vested portion of the Part A awards. During the three

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

and nine months ended March 31, 2015, the Company recognized $3.5 million and $6.1 million of compensation expense associated with the vested portion of the Part A awards. The March 2016 and June 2015 quarterly awards were recorded as liabilities totaling $1.9 million and $1.9 million, as of March 31, 2016 and June 30, 2015, respectively, as the awards represent an obligation denominated in a fixed dollar amount to be settled in a variable number of shares during the subsequent quarter.  The quarterly stock-based compensation liability is included in “Other long-term liabilities” in the accompanying condensed consolidated balance sheets. Upon the issuance of the RSUs, the liability is re-measured and then reclassified to member’s interest, with a corresponding charge (or credit) to stock based compensation expense. The value of the remaining unvested RSUs is expensed ratably through the vesting date. At March 31, 2016, the remaining unrecognized compensation cost to be expensed over the remaining vesting period for Part A awards is $24.9 million.

The following table summarizes the Company’s Part A RSU activity for the nine months ended March 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

    

Number of Part A
RSUs

    

Weighted average
grant-date fair value
per share

    

Weighted average
remaining contractual
term in months

 

Outstanding at July 1, 2015

 

933,217

 

$

26.25

 

7.1

 

Granted

 

1,636,462

 

$

25.36

 

 

 

Vested

 

(444,249)

 

$

26.25

 

 

 

Forfeited

 

(72,473)

 

$

n/a

 

 

 

Outstanding at March 31, 2016

 

2,052,957

 

$

25.50

 

8.0

 

 

Part B

Under Part B of the PCIP, participants, including the Company’s executives, are awarded quarterly grants of RSUs. The number of the RSUs earned by the participants is based on ZGH’s stock price performance over a performance period of one year with the starting price being the average closing price over the last ten trading days of the quarter immediately prior to the grant and vest, assuming continuous employment through the end of the measurement period. The existence of a vesting provision that is associated with the performance of ZGH’s stock price is a market condition, which affects the determination of the grant date fair value.  Upon vesting, RSUs earned convert to an equal number of shares of ZGH’s common stock.

The following table summarizes the Company’s Part B RSU activity for the nine months ended March 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

Number of Part B
RSUs

 

Weighted average
grant-date fair value
per unit

 

Weighted average
remaining contractual
term in months

 

Outstanding at July 1, 2015

 

1,249,873

 

$

42.91

 

5.5

 

Granted

 

806,309

 

$

22.86

 

 

 

Vested

 

(1,210,176)

 

$

43.47

 

 

 

Forfeited

 

(39,697)

 

$

n/a

 

 

 

Outstanding at March 31, 2016

 

806,309

 

$

22.86

 

6.1

 

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The table below reflects the total Part B RSUs granted during Fiscal 2016 and 2015, the maximum eligible shares of ZGH’s stock that the respective Part B RSU grant could be converted into, and the grant date fair value per Part B RSU:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

During the Three months ended 

 

 

March 31,
2016

    

December 31,
2015

    

September 30,
2015

Part B RSUs granted

 

 

284,773

 

 

282,074

 

 

272,813

Maximum eligible shares of the Company's stock

 

 

1,463,733

 

 

1,449,860

 

 

1,426,812

Grant date fair value per Part B RSU

 

$

25.12

 

$

18.08

 

$

17.83

Shares converted to the Company's stock

 

 

n/a

 

 

n/a

 

 

n/a

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

During the Three months ended 

 

 

June 30,
2015

    

March 31,
2015

 

December 31,

2014

 

 

 

 

 

 

 

 

 

 

Part B RSUs granted

 

 

316,353

 

 

359,658

 

 

575,660

Maximum eligible shares of the Company's stock

 

 

1,490,023

 

 

1,388,280

 

 

2,220,293

Grant date fair value per Part B RSU

 

$

27.10

 

$

24.36

 

$

63.12

Shares converted to the Company's stock

 

 

n/a

 

 

 —

 

 

2,220,293

The Company recognized stock-based compensation expense of $6.9 million and $29.3 million related to Part B awards for the three and nine months ended March 31, 2016, respectively, and $13.5 million and $18.2 million for the three and nine months ended March 31, 2015, respectively.

The grant date fair value of Part B RSU grants is estimated utilizing a Monte Carlo simulation.  This simulation estimates the ten-day average closing stock price ending on the vesting date, the stock price performance over the performance period, and the number of common shares to be issued at the vesting date. Various assumptions are utilized in the valuation method, including the target stock price performance ranges and respective share payout percentages, the Company’s historical stock price performance and volatility, peer companies’ historical volatility and an appropriate risk-free rate. The aggregate future value of the grant under each simulation is calculated using the estimated per share value of the common stock at the end of the vesting period multiplied by the number of common shares projected to be granted at the vesting date. The present value of the aggregate grant is then calculated under each of the simulations, resulting in a distribution of potential present values. The fair value of the grant is then calculated based on the average of the potential present values. The remaining unrecognized compensation cost associated with Part B RSU grants is $9.2 million at March 31, 2016.

Part C

Under Part C of the PCIP, independent directors of ZGH are eligible to receive quarterly awards of RSUs.  Independent directors electing to receive a portion of their annual director fees in the form of RSUs are granted a set dollar amount of Part C RSUs each quarter.  The quantity of Part C RSUs granted is based on the average closing price of ZGH’s common stock over the last ten trading days of the quarter ended immediately prior to the grant date and vest at the end of each quarter for which the grant was made.  During the nine months ended March 31, 2016, the Company’s independent directors were granted 29,805 Part C RSUs. Part C RSUs vest in the same quarter that they are issued. During the three and nine months ended March 31, 2016, the Company recognized $0.3 million and $0.8 million, respectively, of compensation expense associated with the Part C RSUs.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

(9) FAIR VALUE MEASUREMENTS

The Company’s financial instruments consist of cash and cash equivalents, restricted cash, trade receivables, accounts payable, interest rate swaps, long-term debt, certain post-employment plans and stock-based compensation liability. The carrying values of cash and cash equivalents, restricted cash, trade receivables and accounts payable approximated their fair values at March 31, 2016 and June 30, 2015 due to the short maturity of these instruments.

The carrying value of the Company’s Notes, excluding debt issuance costs, reflects the original amounts borrowed, inclusive of unamortized premium, and was $2,112.1 million and $2,112.7 million as of March 31, 2016 and June 30, 2015, respectively. Based on market interest rates for debt of similar terms and average maturities, the fair value of the Company's Notes as of March 31, 2016 and June 30, 2015 was estimated to be $2,107.9 million and $2,109.3 million, respectively. The Company’s fair value estimates associated with its Note obligations were derived utilizing Level 2 inputs – quoted prices for similar instruments in active markets.

The carrying value of the Company’s Term Loan Facility, excluding debt issuance costs, reflects the original amounts borrowed, net of the unamortized discounts, and was $2,011.4 million and $1,627.0 million as of March 31, 2016 and June 30, 2015, respectively. The Company’s Term Loan Facility accrues interest at variable rates based upon the one month, three month or six month LIBOR (with a LIBOR floor of 1.00%) plus a spread of 2.75% or 3.50% depending on the term loan tranche. Since management does not believe that the Company’s credit quality has changed significantly since the date when the Term Loan Facility was last amended on May 6, 2015, its carrying amount approximates fair value. Excluding any offsetting effect of the Company’s interest rate swaps, a hypothetical increase in the applicable interest rate on the Company’s Term Loan Facility of one percentage point above the 1.0% LIBOR floor would increase the Company’s annual interest expense by approximately $20.3 million.

The Company’s interest rate swaps are valued using discounted cash flow techniques that use observable market inputs, such as LIBOR-based yield curves, forward rates, and credit ratings. Changes in the fair value of the interest rate swaps of $0.3 million and $(0.3) million were recorded as an increase/(decrease) to interest expense during the three and nine months ended March 31, 2016, respectively, and $2.3 million and $1.8 million were recorded as an increase to interest expense during the three and nine months ended March 31, 2015, respectively.  A hypothetical increase in LIBOR rates of 100 basis points would favorably increase the fair value of the interest rate swaps by approximately $6.1 million.

As of March 31, 2016 and June 30, 2015, there was no balance outstanding under the Company's Revolver.

Financial instruments measured at fair value on a recurring basis are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

    

Level

    

March 31, 2016

    

June 30, 2015

 

Liabilities Recorded at Fair Value in the Financial Statements:

 

 

 

 

(in millions)

 

Interest rate swap

 

Level 2

 

$

3.8

 

$

4.1

 

 

 

(10) COMMITMENTS AND CONTINGENCIES

Purchase commitments

At March 31, 2016, the Company was contractually committed for $263.1 million of capital expenditures for construction materials and purchases of property and equipment. A majority of these purchase commitments are expected to be satisfied in the next twelve months. These purchase commitments are primarily success based; that is, the Company has executed customer contracts that support the future capital expenditures.

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Contingencies

In the normal course of business, the Company is party to various outstanding legal proceedings, asserted and unasserted claims, and carrier disputes. In the opinion of management, the ultimate disposition of these matters, both asserted and unasserted, will not have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.

(11) RELATED PARTY TRANSACTIONS

On June 13, 2014, the Company completed a spin-off of OVS to CII (see Note 7 – Equity). CII holds approximately 2.4% of ZGH’s outstanding common stock at March 31, 2016. The Company continues to have ongoing contractual relationships with OVS, whereby the Company provides OVS and its subsidiaries with bandwidth capacity and OVS provides the Company and its subsidiaries with voice services. The contractual relationships are based on agreements that were entered into at estimated market rates. Subsequent to the spin-off date, transactions with OVS are included in the Company’s results of operations.

 

The following table represents the revenue and expense transactions the Company recorded with OVS for the periods presented:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  March 31, 

 

Nine months ended March 31, 

 

 

    

2016

    

2015

 

2016

    

2015

 

 

 

(in millions)

 

Revenues

 

$

1.7

 

$

1.8

 

$

5.0

 

$

5.2

 

Operating costs

 

$

0.2

 

$

(0.1)

 

$

0.4

 

$

(0.8)

 

 

As of March 31, 2016 and June 30, 2015, the Company had outstanding balances of $0.1 million and $0.6 million, respectively, due from OVS.

Dan Caruso, the Company’s Chief Executive Officer and Chairman of the Board, is a party to an aircraft charter (or membership) agreement through his affiliate, Bear Equity LLC, for business and personal travel.  Under the terms of the charter agreement, all fees for the use of the aircraft are effectively variable in nature. For his business travel on behalf of the Company, Mr. Caruso is reimbursed for his use of the aircraft subject to quarterly and annual maximum reimbursement thresholds approved by the Company's Nominating and Governance Committee. During the three and nine months ended March 31, 2016 the Company reimbursed Mr. Caruso $0.1 million and $0.4 million, respectively, and during the three and nine months ended March 31, 2015, reimbursed $0.1 million and $0.7 million, respectively, for his business use of the aircraft.

On June 28, 2012, Matt Erickson, the President and COO of Global Sales & Customer Success, purchased $0.6 million in aggregate principal amount of 2020 Unsecured Notes at the offering price for such notes. Mr. Erickson qualifies as an “accredited investor” (as defined in Rule 501 under the Securities Act), and this purchase was on terms available to other investors. On December 15, 2014, in connection with the Partial Notes Redemption, approximately $0.2 million of Mr. Erickson’s notes were redeemed, and as of March 31, 2016, the principal amount of 2020 Unsecured Notes held by Mr. Erickson was $0.4 million.

(12) SEGMENT REPORTING

The Company uses the management approach to determine the segment financial information that should be disaggregated and presented separately in the Company's notes to its financial statements. The management approach is

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based on the manner by which management has organized the segments within the Company for making operating decisions, allocating resources, and assessing performance.

 

As the Company has increased in scope and scale, it has developed its management and reporting structure to support this growth. The Company’s dark fiber solutions, network connectivity, colocation and cloud infrastructure, Zayo Canada and other services are comprised of various related product groups generally defined around the type of service the customer is buying, referred to as Strategic Product Groups ("SPG" or "SPGs"). Each SPG is responsible for the revenue, costs and associated capital expenditures of their respective services. The SPGs enable sales, make pricing and product decisions, engineer networks and deliver services to customers, and support customers for their specific telecom and Internet infrastructure services.

 

With the continued increase in the Company’s scope and scale, effective October 1, 2015 the Company's chief operating decision maker ("CODM"), the Company's Chief Executive Officer, implemented certain organizational changes to the management and operation of the business that directly impacts how the CODM makes resource allocation decisions and manages the Company. The change in structure had the impact of establishing a new reportable segment and re-aligning the Company’s existing SPGs to the revised reportable segments.  Prior to this change, the operating segments were reported as Physical Infrastructure, which included the Company’s Dark Fiber, MIG and zColo SPGs, Cloud and Connectivity, which included the Company’s Waves, SONET, Ethernet, IP and Cloud SPGs, and Other, which primarily included ZPS.  The new structure has moved the zColo and Cloud SPGs out of the Physical Infrastructure and Cloud and Connectivity reporting segments, respectively, creating a new reportable segment named Zayo Colocation and Cloud Infrastructure. The Dark Fiber and MIG SPGs are now reported in the Dark Fiber Solutions operating segment, and Ethernet, IP, Waves, and SONET, are now reported in the Network Connectivity operating segment. SPGs report directly to the reportable segment managers who are responsible for the operations and financial results for the Dark Fiber Solutions, Network Connectivity, Colocation and Cloud Infrastructure, and Other reportable segments (collectively, the “Revised Segments”). The segment managers report directly to the CODM, and it is the financial results of those segments that are evaluated and drive the resource allocation decisions.

 

On January 15, 2016, the Company acquired Allstream. As a result of this acquisition, management determined to create a new reportable segment to account for the fact that this business is viewed as separate and distinct from the other segments for purposes of operating decisions, allocation of resources, and performance assessment. The Zayo Canada segment, which is composed primarily of Allstream’s legacy business, has some of the business products and services that are like those within the Company’s other SPGs but also has voice and unified communications and small enterprise businesses, which are additions to the Company’s service offerings. The Zayo Canada segment contains all financial information related to the acquired Allstream business, and to the extent products and services are included within the Zayo Canada segment, such products and services are not included within the Company’s historical SPGs.

The Company’s segments are further described below:

Dark Fiber Solutions. Through the Dark Fiber Solutions segment, the Company provides raw bandwidth infrastructure to customers that require more control of their internal networks. These services include dark fiber and mobile infrastructure (fiber-to-the-tower and small cell). Dark fiber is a physically separate and secure, private platform for dedicated bandwidth. The Company leases dark fiber pairs (usually 2 to 12 total fibers) to its customers, who “light” the fiber using their own optronics. The Company’s mobile infrastructure services provide direct fiber connections to cell towers, small cells, hub sites, and mobile switching centers. Dark Fiber Solutions customers include carriers and other communication service providers, Internet service providers, wireless service providers, major media and content companies, large enterprises, and other companies that have the expertise to run their own fiber optic networks or require interconnected technical space. The contract terms in the Dark Fiber Solutions segment tend to range from three to twenty years.

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Network Connectivity. The Network Connectivity segment provides bandwidth infrastructure solutions over the Company’s metro, regional, and long-haul fiber networks where it uses optronics to light the fiber and the Company’s customers pay for access based on the amount and type of bandwidth they purchase. The Company’s services within this segment include wavelength, Ethernet, IP and SONET. The Company targets customers who require a minimum of 10G of bandwidth across their networks. Network Connectivity customers include carriers, financial services companies, healthcare, government institutions, education institutions and other enterprises. The contract terms in this segment tend to range from two to five years.

Colocation and Cloud Infrastructure. The Colocation and Cloud Infrastructure segment provides data center infrastructure solutions to a broad range of enterprise, carrier, content and cloud customers. The Company’s services within this segment include colocation, interconnection, cloud, hosting and managed services, such as security and remote hands offerings. Solutions range in size from single cabinet and server support to comprehensive international outsourced IT infrastructure environments. The Company’s data centers also support a large component of the Company’s networking equipment for the purpose of aggregating and distributing data, voice, Internet, and video traffic. The contract terms in this segment tend to range from two to five years

Zayo Canada. The Zayo Canada segment is comprised of the Company’s recently acquired Allstream businesses. The services provided by this segment include the legacy dark fiber, network connectivity, cloud and colocation infrastructure, voice, unified communications, managed security services and small and medium businesses (“SMB”) of Allstream.  Voice provides a full range of local voice services allowing business customers to complete telephone calls in their local exchange, as well as make long distance, toll-free and related calls. Unified communications is the integration of real-time communication services such as telephony (including IP telephony), instant messaging and video conferencing with non-real-time communication services such as integrated voicemail and e-mail.  Unified communications provides a set of products that give users the ability to work and communicate across multiple devices, media types and geographies. Managed security services provide proactive services and solutions designed to enable organizations operate in an environment of constantly evolving threats from organized cyber-crime. The service provides real-time threat analysis and correlation of information security threats, response and mitigations services, secure access to the internet and the cloud, information risk and compliance services, and management of the IT security envelope.  Zayo Canada provides services to over 26,000 customers in the SMB market while leveraging its extensive network and product offerings. These include IP, internet, voice, IPT trunking, cloud private branch exchange, collaboration services and unified communications.

Other. The Other segment is primarily comprised of ZPS. ZPS provides network and technical resources to customers in designing, acquiring and maintaining their networks. Services are typically provided for a term of one year for a fixed recurring monthly fee in the case of network and on an hourly basis for technical resources (usage revenue).

Effective October 1, 2015 revenues for all of the Company’s products are included in one of the Company’s segments. The segment presentation has been recast for all prior periods presented for comparability. The results of operations for each segment include an allocation of certain indirect costs and corporate related costs, including overhead and third party-financed debt. The allocation is based on a percentage that represents management’s estimate of the relative burden each segment bears of indirect and corporate costs. Management has evaluated the allocation methods utilized to allocate these costs and determined they are systematic and rational. Identifiable assets for each reportable

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segment are reconciled to total consolidated assets including unallocated corporate assets and intersegment eliminations. Unallocated corporate assets consist primarily of cash and deferred taxes.

Segment Adjusted EBITDA

Segment Adjusted EBITDA is the primary measure used by the Company’s CODM to evaluate segment operating performance.

The Company defines Segment Adjusted EBITDA as earnings from operations before interest, income taxes, depreciation and amortization (“EBITDA”) adjusted to exclude acquisition or disposal-related transaction costs, losses on extinguishment of debt, stock-based compensation, unrealized foreign currency gains (losses) on intercompany loans, and non-cash income (loss) on equity and cost method investments. The Company uses Segment Adjusted EBITDA to evaluate operating performance, and this financial measure is among the primary measures used by management for planning and forecasting of future periods. The Company believes that the presentation of Segment Adjusted EBITDA is relevant and useful for investors because it allows investors to view results in a manner similar to the method used by management and facilitates comparison of the Company’s results with the results of other companies that have different financing and capital structures.

Segment Adjusted EBITDA results, along with other quantitative and qualitative information, are also utilized by the Company and its Compensation Committee for purposes of determining bonus payouts to employees.

Segment Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation from, or as a substitute for, analysis of the Company’s results from operations and operating cash flows as reported under GAAP. For example, Segment Adjusted EBITDA:

·

does not reflect capital expenditures, or future requirements for capital and major maintenance expenditures or contractual commitments;

·

does not reflect changes in, or cash requirements for, working capital needs;

·

does not reflect the significant interest expense, or the cash requirements necessary to service the interest payments, on the Company’s debt; and

·

does not reflect cash required to pay income taxes.

The Company’s computation of Segment Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies because all companies do not calculate segment Adjusted EBITDA in the same fashion.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the three months ended March 31, 2016

 

    

Dark Fiber
Solutions

    

Network
Connectivity

    

Colocation and Cloud
Infrastructure

 

Zayo Canada

    

Other

    

Corp/
Eliminations

    

Total

 

 

(in millions)

Revenue from external customers

  

$

144.3

 

$

172.5

 

$

60.3

 

$

96.1

 

$

4.8

 

$

 —

 

$

478.0

Segment Adjusted EBITDA

  

 

103.9

 

 

89.2

 

 

30.2

 

 

18.2

 

 

1.3

 

 

 —

 

 

242.8

Total assets

  

 

3,139.0

 

 

1,890.1

 

 

1,040.7

 

 

452.7

 

 

33.9

 

 

276.4

 

 

6,832.8

Capital expenditures

  

 

110.3

 

 

44.2

 

 

19.5

 

 

11.1

 

 

 —

 

 

 —

 

 

185.1

 

 

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the nine months ended March 31, 2016

 

 

    

Dark Fiber
Solutions

    

Network
Connectivity

    

Colocation and Cloud
Infrastructure

 

Zayo Canada

    

Other

    

Corp/
Eliminations

    

Total

 

 

 

(in millions)

 

Revenue from external customers

  

$

417.0

 

$

508.2

 

$

177.1

 

$

96.1

 

$

16.0

 

$

 —

 

$

1,214.4

 

Segment Adjusted EBITDA

  

 

299.6

 

 

267.8

 

 

87.6

 

 

18.2

 

 

3.9

 

 

 —

 

 

677.1

 

Capital expenditures

  

 

313.0

 

 

139.0

 

 

53.6

 

 

11.1

 

 

 —

 

 

 —

 

 

516.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

As of and for the three months ended March 31, 2015

 

 

    

Dark Fiber
Solutions

    

Network
Connectivity

    

Colocation and Cloud
Infrastructure

 

Zayo Canada

    

Other

    

Corp/
Eliminations

    

Total

 

 

 

(in millions)

 

Revenue from external customers

  

$

133.5

 

$

163.1

 

$

38.5

 

$

 —

 

$

5.6

 

$

 —

  

$

340.7

 

Segment Adjusted EBITDA

  

 

92.5

 

 

85.7

 

 

19.5

 

 

 —

 

 

1.3

 

 

 —

  

 

199.0

 

Total assets

  

 

2,754.2

  

 

1,794.0

 

 

1,013.6

 

 

 —

  

 

38.5

  

 

285.9

  

 

5,886.2

 

Capital expenditures

  

 

73.1

 

 

46.9

 

 

10.1

 

 

 —

 

 

 —

 

 

 —

  

 

130.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

As of and for the nine months ended March 31, 2015

 

 

    

Dark Fiber
Solutions

    

Network
Connectivity

    

Colocation and Cloud
Infrastructure

 

Zayo Canada

    

Other

    

Corp/
Eliminations

    

Total

 

 

 

(in millions)

 

Revenue from external customers

  

$

390.6

 

$

485.0

 

$

92.4

 

$

 —

 

$

17.2

 

$

 —

  

$

985.2

 

Segment Adjusted EBITDA

  

 

267.3

 

 

254.4

 

 

46.2

 

 

 —

 

 

3.8

 

 

 —

  

 

571.7

 

Capital expenditures

  

 

200.9

 

 

145.7

 

 

28.3

 

 

 —

 

 

 —

 

 

 —

  

 

374.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

As of June 30, 2015

 

 

    

Dark Fiber
Solutions

    

Network
Connectivity

    

Colocation and Cloud
Infrastructure

 

Zayo Canada

    

Other

    

Corp/
Eliminations

    

Total

 

 

 

(in millions)

 

Total assets

  

$

2,848.9

 

$

1,807.7

 

$

1,013.7

 

$

 —

 

$

35.0

 

$

388.7

  

$

6,094.0

 

 

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Reconciliation from Total Segment Adjusted EBITDA to net loss from operations:

 

 

 

 

 

 

 

 

 

 

 

Three months ended  March 31, 

 

 

    

2016

    

2015

 

 

 

 

(in millions)

 

Total Segment Adjusted EBITDA

  

$

242.8

 

$

199.0

 

Interest expense

  

 

(57.7)

 

 

(60.7)

 

Depreciation and amortization expense

  

 

(137.2)

 

 

(100.1)

 

Transaction costs

  

 

(14.2)

 

 

(1.5)

 

Stock-based compensation

  

 

(33.5)

 

 

(40.7)

 

Loss on extinguishment of debt

 

 

 —

 

 

(54.9)

 

Unrealized foreign currency loss on intercompany loans

  

 

(11.1)

 

 

(13.2)

 

Non-cash loss on investments

 

 

(0.6)

 

 

 —

 

Loss from operations before income taxes

 

$

(11.5)

 

$

(72.1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended March 31, 

 

 

    

2016

    

2015

 

 

 

 

(in millions)

 

Total Segment Adjusted EBITDA

  

$

677.1

 

$

571.7

 

Interest expense

  

 

(162.7)

 

 

(161.0)

 

Depreciation and amortization expense

  

 

(368.0)

 

 

(293.0)

 

Transaction costs

  

 

(17.5)

 

 

(6.0)

 

Stock-based compensation

  

 

(122.5)

 

 

(157.8)

 

Loss on extinguishment of debt

 

 

 —

 

 

(85.8)

 

Unrealized foreign currency loss on intercompany loans

  

 

(28.9)

 

 

(41.2)

 

Non-cash loss on investments

 

 

(1.2)

 

 

(0.5)

 

Loss from operations before income taxes

 

$

(23.7)

 

$

(173.6)

 

 

 

 

 

 

(13) CONDENSED CONSOLIDATING FINANCIAL INFORMATION

As discussed Note 5 – Long-Term Debt, as of March 31, 2016, the Company has outstanding $325.6 million 2020 Unsecured Notes, $1,430.0 million 2023 Unsecured Notes and $350.0 million 2025 Senior Unsecured Notes. The Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all of the Company’s current and future domestic restricted subsidiaries. Zayo Capital does not have independent assets or operations. The non-guarantor subsidiaries consist of the foreign subsidiaries that were acquired in conjunction with the Company's acquisitions.

The accompanying condensed consolidating financial information has been prepared and is presented to display the components of the Company’s balance sheets, statements of operations and statements of cash flows in a manner that allows an existing or future holder of the Company’s Notes to review and analyze the current financial position and recent operating results of the legal subsidiaries that guarantee the Company’s debt obligations.

The operating activities of the separate legal entities included in the Company’s consolidated financial statements are interdependent. The accompanying condensed consolidating financial information presents the results of operations, financial position and cash flows of each legal entity. Zayo Group and its guarantors provide services to each other during the normal course of business. These transactions are eliminated in the consolidated results of operations of the Company. Activity related to income taxes is included at the issuer, or Zayo Group level, and the Company's non-guarantor subsidiaries and is not allocated to the Company's guarantor subsidiaries in the condensed consolidated financial information presented below.

31


 

Table of Contents

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

Condensed Consolidating Balance Sheets (Unaudited)

March 31, 2016

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Zayo Group,

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

LLC

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

 

 

 

 

(Issuer)

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

130.5

 

$

4.2

 

$

80.0

 

$

 —

 

 

214.7

 

Trade receivables, net of allowance

 

 

84.1

 

 

17.0

 

 

33.7

 

 

 —

 

 

134.8

 

Due from related parties

 

 

33.0

 

 

 —

 

 

(5.9)

 

 

(27.0)

 

 

0.1

 

Prepaid expenses

 

 

28.5

 

 

6.2

 

 

23.3

 

 

 —

 

 

58.0

 

Deferred income taxes, net

 

 

128.8

 

 

 —

 

 

1.0

 

 

 —

 

 

129.8

 

Other assets

 

 

10.9

 

 

 —

 

 

5.3

 

 

 —

 

 

16.2

 

Total current assets

 

 

415.8

 

 

27.4

 

 

137.4

 

 

(27.0)

 

 

553.6

 

Property and equipment, net

 

 

2,923.7

 

 

351.4

 

 

758.6

 

 

 —

 

 

4,033.7

 

Intangible assets, net

 

 

567.5

 

 

227.7

 

 

140.9

 

 

 —

 

 

936.1

 

Goodwill

 

 

726.4

 

 

275.3

 

 

217.9

 

 

 —

 

 

1,219.6

 

Other assets

 

 

55.6

 

 

8.7

 

 

25.5

 

 

 —

 

 

89.8

 

Related party receivable

 

 

352.1

 

 

 —

 

 

 —

 

 

(352.1)

 

 

 

Investment in subsidiary

 

 

1,369.9

 

 

 —

 

 

 —

 

 

(1,369.9)

 

 

 

Total assets

 

$

6,411.0

 

$

890.5

 

$

1,280.3

 

$

(1,749.0)

 

$

6,832.8

 

Liabilities and member's equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

20.5

 

$

 —

 

$

 —

 

$

 —

 

$

20.5

 

Accounts payable

 

 

49.5

 

 

6.5

 

 

19.1

 

 

 —

 

 

75.1

 

Accrued liabilities

 

 

129.2

 

 

18.6

 

 

93.1

 

 

 —

 

 

240.9

 

Accrued interest

 

 

59.5

 

 

 —

 

 

 —

 

 

 —

 

 

59.5

 

Capital lease obligations, current

 

 

2.2

 

 

1.5

 

 

1.8

 

 

 —

 

 

5.5

 

Due to related parties

 

 

 —

 

 

 —

 

 

28.3

 

 

(27.0)

 

 

1.3

 

Deferred revenue, current

 

 

91.1

 

 

3.3

 

 

33.2

 

 

 —

 

 

127.6

 

Total current liabilities

 

 

352.0

 

 

29.9

 

 

175.5

 

 

(27.0)

 

 

530.4

 

Long-term debt, non-current

 

 

4,036.8

 

 

 —

 

 

 —

 

 

 —

 

 

4,036.8

 

Related party debt, long-term

 

 

 —

 

 

 —

 

 

352.1

 

 

(352.1)

 

 

 —

 

Capital lease obligation, non-current

 

 

4.7

 

 

17.5

 

 

10.6

 

 

 —

 

 

32.8

 

Deferred revenue, non-current

 

 

659.7

 

 

5.0

 

 

117.7

 

 

 —

 

 

782.4

 

Deferred income taxes, net

 

 

134.2

 

 

 —

 

 

47.8

 

 

 —

 

 

182.0

 

Other long-term liabilities

 

 

13.1

 

 

11.8

 

 

33.0

 

 

 —

 

 

57.9

 

Total liabilities

 

 

5,200.5

 

 

64.2

 

 

736.7

 

 

(379.1)

 

 

5,622.3

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Member's equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Member's interest

 

 

1,791.8

 

 

785.5

 

 

547.9

 

 

(1,384.7)

 

 

1,740.5

 

Accumulated other comprehensive loss

 

 

 —

 

 

 —

 

 

12.4

 

 

 —

 

 

12.4

 

Accumulated deficit

 

 

(581.3)

 

 

40.8

 

 

(16.7)

 

 

14.8

 

 

(542.4)

 

Total member's equity

 

 

1,210.5

 

 

826.3

 

 

543.6

 

 

(1,369.9)

 

 

1,210.5

 

Total liabilities and member's equity

 

$

6,411.0

 

$

890.5

 

$

1,280.3

 

$

(1,749.0)

 

$

6,832.8

 

 

32


 

Table of Contents

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Condensed Consolidating Balance Sheets (Unaudited)

June 30, 2015

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Zayo Group,

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

LLC

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

 

 

 

 

(Issuer)

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

274.3

 

$

4.7

 

$

29.0

 

$

 

 

308.0

 

Trade receivables, net of allowance

 

 

54.7

 

 

4.6

 

 

28.7

 

 

 

 

88.0

 

Due from related parties

 

 

(1.3)

 

 

0.4

 

 

2.9

 

 

(1.4)

 

 

0.6

 

Prepaid expenses

 

 

25.8

 

 

4.4

 

 

7.1

 

 

 

 

37.3

 

Deferred income taxes, net

 

 

128.5

 

 

 

 

1.0

 

 

 

 

129.5

 

Other assets

 

 

3.6

 

 

 

 

0.3

 

 

 

 

3.9

 

Total current assets

 

 

485.6

 

 

14.1

 

 

69.0

 

 

(1.4)

 

 

567.3

 

Property and equipment, net

 

 

2,622.9

 

 

335.5

 

 

340.8

 

 

 

 

3,299.2

 

Intangible assets, net

 

 

605.8

 

 

239.5

 

 

103.0

 

 

 

 

948.3

 

Goodwill

 

 

762.2

 

 

281.0

 

 

181.2

 

 

 

 

1,224.4

 

Other assets

 

 

36.2

 

 

8.3

 

 

10.3

 

 

 

 

54.8

 

Related party receivable

 

 

304.8

 

 

 

 

 

 

(304.8)

 

 

 

Investment in subsidiary

 

 

1,050.8

 

 

 

 

 

 

(1,050.8)

 

 

 

Total assets

 

$

5,868.3

 

$

878.4

 

$

704.3

 

$

(1,357.0)

 

$

6,094.0

 

Liabilities and member's equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

16.5

 

$

 

$

 

$

 

 

16.5

 

Accounts payable

 

 

26.6

 

 

4.0

 

 

9.4

 

 

 

 

40.0

 

Accrued liabilities

 

 

125.6

 

 

20.6

 

 

36.2

 

 

 

 

182.4

 

Accrued interest

 

 

57.2

 

 

 

 

 

 

 

 

57.2

 

Capital lease obligations, current

 

 

2.0

 

 

1.6

 

 

0.8

 

 

 

 

4.4

 

Due to related parties

 

 

1.7

 

 

 

 

1.0

 

 

(1.4)

 

 

1.3

 

Deferred revenue, current

 

 

73.2

 

 

2.8

 

 

10.6

 

 

 

 

86.6

 

Total current liabilities

 

 

302.8

 

 

29.0

 

 

58.0

 

 

(1.4)

 

 

388.4

 

Long-term debt, non-current

 

 

3,652.2

 

 

 

 

 

 

 

 

3,652.2

 

Related party debt, long-term

 

 

 

 

 

 

304.8

 

 

(304.8)

 

 

 

Capital lease obligation, non-current

 

 

5.6

 

 

18.6

 

 

4.1

 

 

 

 

28.3

 

Deferred revenue, non-current

 

 

559.4

 

 

4.6

 

 

48.7

 

 

 

 

612.7

 

Deferred income taxes, net

 

 

139.2

 

 

 

 

50.5

 

 

 

 

189.7

 

Other long-term liabilities

 

 

15.0

 

 

10.6

 

 

3.0

 

 

 

 

28.6

 

Total liabilities

 

 

4,674.2

 

 

62.8

 

 

469.1

 

 

(306.2)

 

 

4,899.9

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Member's equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Member's interest

 

 

1,730.1

 

 

778.1

 

 

251.2

 

 

(1,060.3)

 

 

1,699.1

 

Accumulated other comprehensive loss

 

 

 

 

 

 

(7.9)

 

 

 

 

(7.9)

 

Accumulated deficit

 

 

(536.0)

 

 

37.5

 

 

(8.1)

 

 

9.5

 

 

(497.1)

 

Total member's equity

 

 

1,194.1

 

 

815.6

 

 

235.2

 

 

(1,050.8)

 

 

1,194.1

 

Total liabilities and member's equity

 

$

5,868.3

 

$

878.4

 

$

704.3

 

$

(1,357.0)

 

$

6,094.0

 

 

33


 

Table of Contents

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Condensed Consolidating Statements of Operations

For the three months ended March 31, 2016

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Zayo Group,

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

LLC

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

 

 

 

 

(Issuer)

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

Revenue

 

$

283.2

 

$

53.0

 

$

141.8

 

$

 —

 

$

478.0

 

Operating costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs (excluding depreciation amortization and including stock-based compensation)

 

 

90.4

 

 

17.7

 

 

62.7

 

 

 —

 

 

170.8

 

Selling, general and administrative expenses (including stock-based compensation)

 

 

44.8

 

 

13.1

 

 

54.6

 

 

 —

 

 

112.5

 

Depreciation and amortization

 

 

90.6

 

 

20.0

 

 

26.6

 

 

 —

 

 

137.2

 

Total operating costs and expenses

 

 

225.8

 

 

50.8

 

 

143.9

 

 

 —

 

 

420.5

 

Operating income/(loss)

 

 

57.4

 

 

2.2

 

 

(2.0)

 

 

 —

 

 

57.5

 

Other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(52.2)

 

 

 —

 

 

(5.5)

 

 

 —

 

 

(57.7)

 

Foreign currency loss on intercompany loans

 

 

(11.0)

 

 

 —

 

 

(0.1)

 

 

 —

 

 

(11.1)

 

Other expense

 

 

(0.2)

 

 

 —

 

 

 —

 

 

 —

 

 

(0.2)

 

Equity in net earnings of subsidiaries

 

 

(5.3)

 

 

 —

 

 

 —

 

 

5.3

 

 

0.0

 

Total other expense, net

 

 

(68.7)

 

 

 —

 

 

(5.6)

 

 

5.3

 

 

(69.0)

 

(Loss)/income from operations before income taxes

 

 

(11.3)

 

 

2.2

 

 

(7.6)

 

 

5.3

 

 

(11.5)

 

Provision/(benefit) for income taxes

 

 

8.0

 

 

 —

 

 

(0.2)

 

 

 —

 

 

7.8

 

Net (loss)/income

 

$

(19.3)

 

$

2.2

 

$

(7.4)

 

$

5.3

 

$

(19.3)

 

 

34


 

Table of Contents

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Condensed Consolidating Statements of Operations

For the nine months ended March 31, 2016

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Zayo Group,

    

 

 

    

 

 

    

 

 

    

 

 

 

 

LLC

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

 

 

 

(Issuer)

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

Revenue

 

$

836.1

 

$

156.7

 

$

221.6

 

$

 —

 

$

1,214.4

Operating costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs (excluding depreciation amortization and including stock-based compensation)

 

 

254.1

 

 

53.5

 

 

88.4

 

 

 —

 

 

396.0

Selling, general and administrative expenses (including stock-based compensation)

 

 

164.9

 

 

41.1

 

 

76.1

 

 

 —

 

 

282.1

Depreciation and amortization

 

 

262.2

 

 

58.6

 

 

47.2

 

 

 —

 

 

368.0

Total operating costs and expenses

 

 

681.2

 

 

153.2

 

 

211.7

 

 

 —

 

 

1,046.1

Operating income

 

 

154.9

 

 

3.5

 

 

9.9

 

 

 —

 

 

168.3

Other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(146.5)

 

 

(0.2)

 

 

(16.0)

 

 

 —

 

 

(162.7)

Foreign currency loss on intercompany loans

 

 

(28.4)

 

 

 —

 

 

(0.5)

 

 

 

 

 

(28.9)

Other expense

 

 

 —

 

 

 —

 

 

(0.4)

 

 

 —

 

 

(0.4)

Equity in net earnings of subsidiaries

 

 

(5.3)

 

 

 —

 

 

 —

 

 

5.3

 

 

0.0

Total other expense, net

 

 

(180.2)

 

 

(0.2)

 

 

(16.9)

 

 

5.3

 

 

(192.0)

(Loss)/income from operations before income taxes

 

 

(25.3)

 

 

3.3

 

 

(7.0)

 

 

5.3

 

 

(23.7)

Provision/(benefit) for income taxes

 

 

20.0

 

 

 —

 

 

1.6

 

 

 —

 

 

21.6

Net (loss)/income

 

$

(45.3)

 

$

3.3

 

$

(8.6)

 

$

5.3

 

$

(45.3)

 

35


 

Table of Contents

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Condensed Consolidating Statements of Operations (Unaudited)

For the three months ended March 31, 2015

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Zayo Group,

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

LLC

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

 

 

 

 

Issuer

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

Revenue

 

$

264.1

 

$

38.3

 

$

38.3

 

$

 —

 

$

340.7

 

Operating costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs (excluding depreciation amortization and including stock-based compensation)

 

 

77.5

 

 

13.4

 

 

10.0

 

 

 —

 

 

100.9

 

Selling, general and administrative expenses (including stock-based compensation)

 

 

60.6

 

 

10.4

 

 

12.0

 

 

 —

 

 

83.0

 

Depreciation and amortization

 

 

80.8

 

 

12.4

 

 

6.9

 

 

 —

 

 

100.1

 

Total operating costs and expenses

 

 

218.9

 

 

36.2

 

 

28.9

 

 

 —

 

 

284.0

 

Operating income/(loss)

 

 

45.2

 

 

2.1

 

 

9.4

 

 

 —

 

 

56.7

 

Other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(56.5)

 

 

 —

 

 

(4.2)

 

 

 —

 

 

(60.7)

 

Loss on extinguishment of debt

 

 

(53.8)

 

 

(1.0)

 

 

(0.1)

 

 

 —

 

 

(54.9)

 

Foreign currency loss on intercompany loans

 

 

(12.6)

 

 

 —

 

 

(0.6)

 

 

 —

 

 

(13.2)

 

Other income, net

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Equity in net earnings of subsidiaries

 

 

4.4

 

 

 —

 

 

 —

 

 

(4.4)

 

 

 —

 

Total other expense, net

 

 

(118.5)

 

 

(1.0)

 

 

(4.9)

 

 

(4.4)

 

 

(128.8)

 

(Loss)/income from operations before income taxes

 

 

(73.3)

 

 

1.1

 

 

4.5

 

 

(4.4)

 

 

(72.1)

 

(Benefit)/provision for income taxes

 

 

(19.6)

 

 

 —

 

 

1.2

 

 

 —

 

 

(18.4)

 

Net (loss)/income

 

$

(53.7)

 

$

1.1

 

$

3.3

 

$

(4.4)

 

$

(53.7)

 

 

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Table of Contents

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Condensed Consolidating Statements of Operations (Unaudited)

For the nine months ended March 31, 2015

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Zayo Group,

    

 

 

    

 

 

    

 

 

    

 

 

 

 

LLC

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

 

 

 

Issuer

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

Revenue

 

$

770.9

 

$

98.8

 

$

115.5

 

$

 —

 

$

985.2

Operating costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs (excluding depreciation amortization and including stock-based compensation)

 

 

236.5

 

 

36.2

 

 

33.3

 

 

 —

 

 

306.0

Selling, general and administrative expenses (including stock-based compensation)

 

 

206.3

 

 

25.5

 

 

39.9

 

 

 —

 

 

271.7

Depreciation and amortization

 

 

238.4

 

 

23.2

 

 

31.4

 

 

 —

 

 

293.0

Total operating costs and expenses

 

 

681.2

 

 

84.9

 

 

104.6

 

 

 —

 

 

870.7

Operating income/(loss)

 

 

89.7

 

 

13.9

 

 

10.9

 

 

 —

 

 

114.5

Other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(148.3)

 

 

 —

 

 

(12.7)

 

 

 —

 

 

(161.0)

Loss on extinguishment of debt

 

 

(83.7)

 

 

(1.5)

 

 

(0.6)

 

 

 —

 

 

(85.8)

Foreign currency loss on intercompany loans

 

 

(39.7)

 

 

 —

 

 

(1.5)

 

 

 —

 

 

(41.2)

Other income, net

 

 

(0.1)

 

 

 —

 

 

 —

 

 

 —

 

 

(0.1)

Equity in net earnings of subsidiaries

 

 

6.6

 

 

 —

 

 

 —

 

 

(6.6)

 

 

 —

Total other expense, net

 

 

(265.2)

 

 

(1.5)

 

 

(14.8)

 

 

(6.6)

 

 

(288.1)

(Loss)/income from operations before income taxes

 

 

(175.5)

 

 

12.4

 

 

(3.9)

 

 

(6.6)

 

 

(173.6)

(Benefit)/provision for income taxes

 

 

(15.2)

 

 

0.4

 

 

1.5

 

 

 —

 

 

(13.3)

Net (loss)/income

 

$

(160.3)

 

$

12.0

 

$

(5.4)

 

$

(6.6)

 

$

(160.3)

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Table of Contents

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Condensed Consolidating Statements of Cash Flows

Nine months ended March 31, 2016

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Zayo Group,

    

 

 

    

 

 

    

 

 

 

 

 

LLC

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

 

(Issuer)

 

Subsidiaries

 

Subsidiaries

 

Total

 

Net cash provided by operating activities

 

$

425.7

 

 

40.0

 

 

72.2

 

$

537.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(438.7)

 

 

(36.5)

 

 

(41.5)

 

 

(516.7)

 

Acquisitions, net of cash acquired

 

 

(306.9)

 

 

(16.8)

 

 

(93.3)

 

 

(417.0)

 

Other

 

 

 —

 

 

 —

 

 

 

 

 

 —

 

Net cash used in investing activities

 

 

(745.6)

 

 

(53.3)

 

 

(134.8)

 

 

(933.7)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from debt

 

 

395.2

 

 

 —

 

 

 —

 

 

395.2

 

Principal payments on long-term debt

 

 

(13.4)

 

 

 —

 

 

 —

 

 

(13.4)

 

Principal repayments on capital lease obligations

 

 

(1.8)

 

 

(1.2)

 

 

(0.3)

 

 

(3.3)

 

Payment of debt issuance costs

 

 

(2.9)

 

 

 —

 

 

 —

 

 

(2.9)

 

Contributions to parent

 

 

(109.8)

 

 

14.0

 

 

14.7

 

 

(81.1)

 

Loan to parent

 

 

(99.1)

 

 

 —

 

 

99.1

 

 

 —

 

Excess tax benefit from stock-based compensation

 

 

7.9

 

 

 —

 

 

 —

 

 

7.9

 

Net cash provided by financing activities

 

 

176.1

 

 

12.8

 

 

113.5

 

 

302.4

 

Effect of changes in foreign exchange rates on cash

 

 

 —

 

 

 —

 

 

0.1

 

 

0.1

 

Net decrease in cash and cash equivalents

 

 

(143.8)

 

 

(0.5)

 

 

51.0

 

 

(93.3)

 

Cash and cash equivalents, beginning of period

 

 

274.3

 

 

4.7

 

 

29.0

 

 

308.0

 

Cash and cash equivalents, end of period

 

$

130.5

 

$

4.2

 

$

80.0

 

$

214.7

 

 

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Table of Contents

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Condensed Consolidating Statements of Cash Flows

Nine months ended March 31, 2015

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Zayo Group,

    

 

 

    

 

 

    

 

 

 

 

 

LLC

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

 

(Issuer)

 

Subsidiaries

 

Subsidiaries

 

Total

 

Net cash provided by operating activities

 

$

331.0

 

 

28.0

 

 

43.1

 

$

402.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(318.8)

 

 

(27.9)

 

 

(28.2)

 

 

(374.9)

 

Acquisitions, net of cash acquired

 

 

(182.4)

 

 

(601.0)

 

 

(73.9)

 

 

(857.3)

 

Net cash used in investing activities

 

 

(501.2)

 

 

(628.9)

 

 

(102.1)

 

 

(1,232.2)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from debt

 

 

1,437.3

 

 

 —

 

 

 —

 

 

1,437.3

 

Proceeds from equity offerings and contributions

 

 

(332.9)

 

 

606.7

 

 

5.9

 

 

279.7

 

Principal payments on long-term debt

 

 

(939.8)

 

 

 —

 

 

 —

 

 

(939.8)

 

Payment of early redemption fees on debt extinguished

 

 

(62.6)

 

 

 —

 

 

 —

 

 

(62.6)

 

(Payment of)/receipt from intercompany loans

 

 

(40.4)

 

 

 —

 

 

40.4

 

 

 —

 

Principal repayments on capital lease obligations

 

 

(1.1)

 

 

(1.1)

 

 

(0.2)

 

 

(2.4)

 

Payment of debt issuance costs

 

 

(18.8)

 

 

 —

 

 

 —

 

 

(18.8)

 

Net cash provided by financing activities

 

 

41.7

 

 

605.6

 

 

46.1

 

 

693.4

 

Effect of changes in foreign exchange rates on cash

 

 

(5.3)

 

 

 —

 

 

2.5

 

 

(2.8)

 

Net decrease in cash and cash equivalents

 

 

(133.8)

 

 

4.7

 

 

(10.4)

 

 

(139.5)

 

Cash and cash equivalents, beginning of period

 

 

260.8

 

 

1.0

 

 

35.6

 

 

297.4

 

Cash and cash equivalents, end of period

 

$

127.0

 

$

5.7

 

$

25.2

 

$

157.9

 

 

 

 

(14) SUBSEQUENT EVENTS

Unsecured Notes Offering

On April 14, 2016, the Issuers completed a private offering exempt from registration under the Securities Act of 1933, as amended, of $550 million aggregate principal amount of additional 2025 Unsecured Notes (the “New 2025 Notes”).  The net proceeds from the offering plus cash on hand (i) will be used to redeem the Issuers’ remaining $325.6 million 2020 Unsecured Notes, including the required make-whole premium and accrued interest, and (ii) were used to repay approximately $196 million of borrowings under its secured Term Loan Facility. Following the offering of the New 2025 Notes, $900 million aggregate principal amount of the 2025 Unsecured Notes is outstanding.

The New 2025 Notes will bear interest at the rate of 6.375% per year. Interest on the New 2025 Notes is payable on May 15 and November 15 of each year, beginning on May 15, 2016.  The interest payment on May 15, 2016 will include accrued interest from November 15, 2015. The New 2025 Notes will mature on May 15, 2025. At any time on or after May 15, 2020, the Issuers may redeem the New 2025 Notes, in whole or in part, at the applicable redemption prices set forth in the indenture governing the New 2025 Notes, plus accrued interest. Before May 15, 2020, the Issuers may redeem the New 2025 Notes, in whole or in part, at a redemption price equal to 100% of their principal amount, plus accrued interest and a “make-whole” premium. In addition, before May 15, 2018, the Issuers may redeem up to 40%

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Table of Contents

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

of the New 2025 Notes at a redemption price equal to 106.375% of their principal amount, plus accrued interest, using the proceeds of certain equity offerings.

Clearview Acquisition

On April 1, 2016, the Company entered into a Membership Interest Purchase Agreement with the sellers of Clearview International, LLC, a Texas based colocation and cloud infrastructure services provider for cash consideration of $18.9 million.  The acquisition was funded with cash on hand and was considered a stock purchase for tax purposes.

The acquisition consisted of two Texas data centers. The data centers, located at 6606 LBJ Freeway in Dallas, Texas and 700 Austin Avenue in Waco, Texas, added approximately 30,000 square feet of colocation space, as well as a robust set of hybrid cloud infrastructure services that complement the Company’s global cloud capabilities.   

 

 

 

 

 

40


 

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain Factors That May Affect Future Results

Information contained or incorporated by reference in this Quarterly Report on Form 10-Q (this “Report”) and in other filings by Zayo Group, LLC (“we” or “us”), with the Securities and Exchange Commission (the “SEC”) that is not historical by nature constitutes “forward-looking statements,” and can be identified by the use of forward-looking terminology such as “believes,” “expects,” “plans,” “intends,” “estimates,” “projects,” “could,” “may,” “will,” “should,” or “anticipates,” or the negatives thereof, other variations thereon or comparable terminology, or by discussions of strategy. No assurance can be given that future results expressed or implied by the forward-looking statements will be achieved, and actual results may differ materially from those contemplated by the forward-looking statements. Such statements are based on our current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, those relating to our financial and operating prospects, current economic trends, future opportunities, ability to retain existing customers and attract new ones, our acquisition strategy and ability to integrate acquired companies and assets, outlook of customers, reception of new products and technologies, and strength of competition and pricing. Other factors and risks that may affect our business and future financial results are detailed in our SEC filings, including, but not limited to, those described under “Risk Factors” in our Annual Report on Form 10-K (our “Annual Report”) filed with the SEC on September 24, 2015 and in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We caution you not to place undue reliance on these forward-looking statements, which speak only as of their respective dates. We undertake no obligation to publicly update or revise forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events, except as may be required by law.

The following discussion and analysis should be read together with our unaudited condensed consolidated financial statements and the related notes appearing in this Report and in our audited annual consolidated financial statements as of and for the year ended June 30, 2015, included in our Annual Report. 

Amounts presented in this Item 2 are rounded. As such, rounding differences could occur in period-over-period changes and percentages reported throughout this Item 2.

Overview

We are a large and fast-growing provider of bandwidth infrastructure in the United States, Canada and Europe. Our products and services enable mission-critical, high-bandwidth applications, such as cloud-based computing, video, mobile, social media, machine-to-machine connectivity, and other bandwidth-intensive applications. Key products include leased dark fiber, fiber to cellular towers and small cell sites, dedicated wavelength connections, Ethernet, IP connectivity, cloud services and other high-bandwidth offerings. We provide our services over a unique set of dense metro, regional, and long-haul fiber networks and through our interconnect-oriented data center facilities. Our fiber networks and data center facilities are critical components of the overall physical network architecture of the Internet and private networks. Our customer base includes some of the largest and most sophisticated consumers of bandwidth infrastructure services, such as wireless service providers; telecommunications service providers; financial services companies; social networking, media, and web content companies; education, research, and healthcare institutions; and governmental agencies. We typically provide our bandwidth infrastructure services for a fixed monthly recurring fee under contracts that vary between one and twenty years in length. As of March 31, 2016, we had $6.5 billion in revenue under contract with a weighted average remaining contract term of approximately 46 months. We operate our business with a unique focus on capital allocation and financial performance with the ultimate goal of maximizing equity value for Zayo Group Holdings, Inc. (“ZGH”) stockholders. Our core values center on partnership, alignment, and transparency with our three primary constituent groups-employees, customers, and ZGH stockholders.

We are a wholly-owned subsidiary of Zayo Group Holdings, Inc., a Delaware corporation, which prior to October 16, 2014, was wholly owned by Communications Infrastructure Investments, LLC, a Delaware limited liability company (“CII”).

41


 

On October 22, 2014, ZGH completed an initial public offering (“IPO”) of shares of its common stock, which were listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “ZAYO”. Our fiscal year ends June 30 each year, and we refer to the fiscal year ending June 30, 2016 as “Fiscal 2016” and the fiscal year ended June 30, 2015 as “Fiscal 2015.”

We are headquartered in Boulder, Colorado.

Our Segments

We use the management approach to determine the segment financial information that should be disaggregated and presented. The management approach is based on the manner by which management has organized the segments within the Company for making operating decisions, allocating resources, and assessing performance. Following the acquisition of Allstream (as discussed below), management decided to establish a new reportable segment in addition to the previously revised reportable segments. As of March 31, 2016, we have five reportable segments as described below:

Dark Fiber Solutions. Through the Dark Fiber Solutions segment, we provide raw bandwidth infrastructure to customers that require more control of their internal networks. These services include dark fiber and mobile infrastructure (fiber-to-the-tower and small cell). Dark fiber is a physically separate and secure, private platform for dedicated bandwidth. We lease dark fiber pairs (usually 2 to 12 total fibers) to our customers, who “light” the fiber using their own optronics. Our mobile infrastructure services provide direct fiber connections to cell towers, small cells, hub sites, and mobile switching centers. Dark Fiber Solutions customers include carriers and other communication service providers, Internet service providers, wireless service providers, major media and content companies, large enterprises, and other companies that have the expertise to run their own fiber optic networks or require interconnected technical space. The contract terms in the Dark Fiber Solutions segment tend to range from three to twenty years.

Network Connectivity. The Network Connectivity segment provides bandwidth infrastructure solutions over our metro, regional, and long-haul fiber networks where it uses optronics to light the fiber and our customers pay for access based on the amount and type of bandwidth they purchase. Our services within this segment include wavelength, Ethernet, IP and SONET. We target customers who require a minimum of 10G of bandwidth across their networks. Network Connectivity customers include carriers, financial services companies, healthcare, government institutions, education institutions and other enterprises. The contract terms in this segment tend to range from two to five years.

Colocation and Cloud Infrastructure. The Colocation and Cloud Infrastructure segment provides data center infrastructure solutions to a broad range of enterprise, carrier, content and cloud customers. The Company’s services within this segment include colocation, interconnection, cloud, hosting and managed services, such as security and remote hands offerings. Solutions range in size from single cabinet and server support to comprehensive international outsourced IT infrastructure environments. The Company’s data centers also support a large component of the Company’s networking equipment for the purpose of aggregating and distributing data, voice, Internet, and video traffic. The contract terms in this segment tend to range from two to five years.

Zayo Canada. The Zayo Canada segment is comprised of the Company’s recently acquired Allstream businesses. The services provided by this segment include legacy dark fiber, network connectivity, cloud and colocation infrastructure, voice and unified communications and small enterprise businesses. These include dark fiber, network connectivity, cloud and colocation infrastructure, voice, unified communications, managed security services and small and medium businesses (“SMB”) of Allstream.  Voice provides a full range of local voice services allowing business customers to complete telephone calls in their local exchange, as well as make long distance, toll-free and related calls. Unified communications is the integration of real-time communication services such as telephony (including IP telephony), instant messaging and video conferencing with non-real-time communication services such as integrated voicemail and e-mail.  Unified communications provides a set of products that give users the ability to work and communicate across multiple devices, media types and geographies. Managed security services provide proactive services and solutions designed to enable organizations to operate in an environment of constantly evolving threats from organized cyber-crime. The service provides real-time threat analysis and correlation of information security threats, response and mitigations services, secure access to the internet and the cloud, information risk and compliance services, and management of the IT security

42


 

envelope.  Zayo Canada provides services to over 26,000 customers in the SMB market while leveraging its extensive network and product offerings. These include IP, internet, voice, IPT trunking, cloud private branch exchange, collaboration services and unified communications.

Other. The Other segment is primarily comprised of Zayo Professional Services (“ZPS”). ZPS provides network and technical resources to customers in designing, acquiring and maintaining their networks. Services are typically provided for a term of one year for a fixed recurring monthly fee in the case of network and on an hourly basis for technical resources (usage revenue).

Prior to our Fiscal 2016 changes in reportable segments, the operating segments were reported as Physical Infrastructure, which included our Dark Fiber, MIG and Zayo Colocation (“zColo”) SPGs, Cloud and Connectivity, which included our Waves, Sonet, Ethernet, IP and Cloud SPGs, and Other, which primarily included ZPS.  The new structure has removed the zColo and Cloud SPGs out of the Physical Infrastructure and Cloud and Connectivity reporting segments, respectively, creating a new reportable segment named Zayo Colocation and Cloud Infrastructure. The Dark Fiber and MIG SPGs are now reported in the Dark Fiber Solutions operating segment, and Ethernet, IP, Waves, and SONET are now reported in the Network Connectivity operating segment.  In addition, following the acquisition of Allstream (as described below), the Company created a fifth reportable segment, the Zayo Canada segment, to include the legacy products and service offerings of that recently acquired entity. All prior period segment level financial and operating metrics included in this Report have been recast to conform to the current period presentation for comparability.

Factors Affecting Our Results of Operations

Business Acquisitions

We were founded in 2007 with the investment thesis of building a bandwidth infrastructure platform to take advantage of the favorable Internet, data, and wireless growth trends driving the ongoing demand for bandwidth infrastructure, and to be an active participant in the consolidation of the industry. These trends have continued in the years since our founding, despite volatile economic conditions, and we believe that we are well positioned to continue to capitalize on those trends. We have built a significant portion of our network and service offerings through 37 acquisitions through March 31, 2016.

As a result of the growth of our business from these acquisitions, and capital expenditures and the increased debt used to fund those investing activities, our results of operations for the respective periods presented and discussed herein are not comparable.

Recent Significant Acquisitions

Allstream

On January 15, 2016, we acquired 100% of the equity interest in Allstream, Inc. and Allstream Fiber U.S. Inc. (together “Allstream”) for cash consideration of CAD $422.9 million (or $297.6 million), net of cash acquired, subject to certain post-closing adjustments. The consideration paid is net of CAD $42.1 million (or $29.6 million) of working capital and other liabilities assumed by us in the acquisition. The acquisition was funded with an incremental borrowing under our Term Loan Facility (as defined below) and was considered a stock purchase for tax purposes.

The acquisition adds more than 18,000 route miles to our fiber network, including 12,500 miles of long-haul fiber connecting all major Canadian markets and 5,500 route miles of metro fiber network connecting approximately 3,300 on-net buildings concentrated in Canada’s top five metropolitan markets.

The operating results of the acquired Allstream business are included in our operating results beginning January 15, 2016.

43


 

Viatel

On December 31, 2015, we acquired 100% of the interest in Viatel Infrastructure Europe Ltd, Viatel (UK) Limited, Viatel France SAS, Viatel Deutschland GmbH and Viatel Nederland BV (collectively “Viatel”) for cash consideration of €94.2 million (or $102.7 million), net of cash acquired. The final purchase consideration is subject to certain post-closing adjustments.  The acquisition was funded with cash on hand. €5.0 million (or $5.5 million) of the purchase consideration is currently held in escrow pending expiration of the indemnification adjustment period. The acquisition was considered a stock purchase for tax purposes.

The Viatel acquisition provides us with Pan-European intercity and metro fiber capability via a 8,400 kilometer fiber network across eight countries. The transaction added 12 new metro networks, seven data centers and connectivity to 81 on-net buildings. Two wholly-owned subsea cable systems provide connectivity on two of Europe’s key routes – London-Amsterdam and London-Paris.

The operating results of the acquired Viatel business are included in our results beginning January 1, 2016.

Latisys Holdings, LLC

On February 23, 2015, we acquired all of the equity interest of the operating subsidiaries of Latisys Holdings, LLC (“Latisys”), a colocation and infrastructure as a service (“Iaas”) provider for a price of $677.8 million, net of cash acquired.  The Latisys acquisition was funded with the proceeds of our January 2015 Notes Offering (as defined below) and was considered a stock purchase for tax purposes.

The Latisys acquisition added colocation and IaaS services through eight data centers across five markets in Northern Virginia, Chicago, Denver, Orange County and London. The acquired data centers currently total over 185,000 square feet of billable space and 33 megawatts of critical power.

The results of the acquired Latisys business are included in our operating results beginning February 23, 2015.

Recently Closed Acquisition

On April 1, 2016, we entered into a Membership Interest Purchase Agreement with the sellers of Clearview International, LLC, a Texas based colocation and cloud infrastructure services provider for cash consideration of $18.9 million.  The acquisition was funded with cash on hand and was considered a stock purchase for tax purposes.

The acquisition consisted of two Texas data centers. The data centers, located at 6606 LBJ Freeway in Dallas, Texas and 700 Austin Avenue in Waco, Texas, added approximately 30,000 square feet of colocation space, as well as a robust set of hybrid cloud infrastructure services that complement the Company’s global cloud capabilities.

Debt and Equity Financing

On December 15, 2014, we and Zayo Capital, Inc. (together, the “Issuers”) redeemed $75.0 million of their outstanding 8.125% senior secured notes due 2020 at a price of 108.125% and $174.4 million of their outstanding 10.125% senior unsecured notes due 2020 (the “2020 Unsecured Notes”) at a price of 110.125% (collectively, the “Partial Notes Redemption”). As part of the Partial Notes Redemption, we recorded an early redemption call premium of $23.8 million which was recorded as a loss on extinguishment of debt on the consolidated statements of operations in Fiscal 2015.     

On January 23, 2015, the Issuers completed a private offering (the “January 2015 Notes Offering”) of $700.0 million aggregate principal amount of 6.00% senior unsecured notes due in 2023 (the “2023 Unsecured Notes”).  On March 9, 2015, the Issuers completed a private offering of an additional $730.0 million aggregate principal amount of 2023 Unsecured Notes at a premium of 1% (the “March 2015 Notes Offering”) resulting in aggregate gross proceeds for the 2023 Unsecured Notes of $1,437.3 million.  The issue premium of $7.3 million in connection with the March 2015 Notes Offering is being accreted as a reduction of interest expense over the term of the 2023 Unsecured Notes under the effective interest method.  The 2023 Unsecured Notes bear interest at the rate of 6.00% per year, which is payable on April 1 and October 1 of each year. The 2023 Unsecured Notes will mature on April 1, 2023.  The net proceeds from the

44


 

January 2015 Notes Offering were used to fund the Latisys acquisition (see Note 2 – Acquisitions).   The net proceeds from the March 2015 Notes Offering were used to redeem the Issuers’ remaining $675.0 million then outstanding 8.125% senior secured notes due 2020 (the “Second Notes Redemption”) at a price of 105.75%.  As part of the Second Notes Redemption, we recorded an early redemption call premium of $38.8 million.  The call premium was recorded as a loss on extinguishment of debt on the consolidated statements of operations in Fiscal 2015.

On April 17, 2015, we entered into a Seventh Amendment (the “Seventh Amendment”) to the credit agreement (the “Credit Agreement”) governing our senior secured term loan facility (the “Term Loan Facility”) and $450 million senior secured revolving credit facility (the “Revolver”). Under the terms of the Seventh Amendment, the Revolver was increased by $200.0 million to $450.0 million, and the maturity date of the Revolver was extended to the earliest of (i) five years after the effective date of the Seventh Amendment, (ii) six months prior to the maturity date of our Term Loan Facility, subject to repayment or amendment thereof, and (iii) six months prior to the maturity date of the 2020 Unsecured Notes, subject to repayment or amendment thereof.  The Seventh Amendment also increased the letter of credit commitment from $30.0 million to $50.0 million and provided that, in the event that the Term Loan Facility was amended or refinanced to remove all financial maintenance covenants, the Fixed Charge Coverage Ratio maintenance requirement would be replaced with a springing Senior Secured Leverage Ratio maintenance requirement applicable only to the Revolver. Further, pursuant to the Seventh Amendment, up to $50.0 million of revolving loans and letters of credit may be denominated in or issued in, as applicable, Euros or British Pound Sterling.

On May 6, 2015, the Issuers completed a private offering of $350.0 million aggregate principal amount of 6.375% senior unsecured notes due in 2025 (the “2025 Unsecured Notes”). Interest on the 2025 Unsecured Notes is payable on May 15 and November 15 of each year, beginning on November 15, 2015. The 2025 Unsecured Notes will mature on May 15, 2025.  The net proceeds from the 2025 Unsecured Notes were used to repay $344.5 million of borrowings under our Term Loan Facility. As a result of that repayment, we recorded a loss on extinguishment of debt of $8.4 million.

On May 6, 2015, we entered into an Amendment and Restatement Agreement whereby the Credit Agreement was amended and restated in its entirety. The amended and restated Credit Agreement extended the maturity date of all of the outstanding term loans under the Term Loan Facility to May 6, 2021. The interest rate margins applicable to the Term Loan Facility were decreased by 25 basis points to LIBOR plus 2.75% with a minimum LIBOR of 1.0%. In addition, the amended and restated Credit Agreement removed the Fixed Charge Coverage Ratio covenant and replaced such covenant with a springing Senior Secured Leverage Ratio maintenance requirement applicable only to the Revolver, increased certain lien and debt baskets, and removed certain covenants related to collateral.

On January 15, 2016, we entered into an Incremental Amendment (the “Amendment”) to our Credit Agreement. Pursuant to the terms of the Amendment, our Term Loan Facility was increased by $400.0 million, and the additional amounts will bear interest at LIBOR plus 3.5% with a minimum LIBOR rate of 1.0%. The $400.0 million add-on was priced at 99.0%. No other terms of the Credit Agreement were amended.

The weighted average interest rates (including margin) on the Term Loan Facility and Revolver as of March 31, 2016 were approximately 3.9% and 3.4%, respectively.

As of March 31, 2016, no amounts were outstanding under the Revolver.

Recently Closed Notes Offering

On April 14, 2016, the Issuers completed a private offering (the “April 2016 Notes Offering”) exempt from registration under the Securities Act of 1933, as amended, of $550 million aggregate principal amount of additional 2025 Unsecured Notes. The net proceeds from the offering plus cash on hand (i) will be used to redeem the Issuers’ remaining $325.6 million 2020 Unsecured Notes, including the required make-whole premium and accrued interest, and (ii) were

45


 

used to repay approximately $196 million of borrowings under our secured Term Loan Facility. Following the April 2016 Notes Offering, $900 million aggregate principal amount of 2025 Unsecured Notes is outstanding.

Capital Expenditures

During the nine months ended March 31, 2016 and 2015, we invested $516.7 million and $374.9 million, respectively, in capital expenditures primarily to expand our fiber network to support new customer contracts. We expect to continue to make significant capital expenditures in future periods.

Critical Accounting Policies and Estimates

For a description of our critical accounting policies and estimates, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report for the year ended June 30, 2015.

Background for Review of Our Results of Operations

Revenue

Our revenue is comprised predominately of monthly recurring revenue (“MRR”). MRR is related to an ongoing service that is generally fixed in price and paid by the customer on a monthly basis. We also report monthly amortized revenue (“MAR”), which represents the amortization of previously collected upfront charges to customers. Upfront charges are typically related to indefeasible rights of use (“IRUs”) structured as pre-payments rather than monthly recurring payments (though we structure IRUs as both prepaid and recurring, largely dependent on the customers’ preference) and installation fees. The last category of revenue we report is other revenue. Other revenue primarily includes credits and adjustments, termination revenue, construction services, and equipment sales.

Our consolidated reported revenue in any given period is a function of our beginning revenue under contract and the impact of organic growth and acquisition activity. Our organic activity is driven by net new sales (“bookings”), gross installed revenue (“installs”) and churn processed (“churn”) as further described below.

Net New Sales.   Net new sales (“bookings”) represent the dollar amount of orders, to be recorded as MRR and MAR upon installation, in a period that have been signed by the customer and accepted by our service delivery organization. The dollar value of bookings is equal to the monthly recurring price that the customer will pay for the services and/or the monthly amortized amount of the revenue that we will recognize for those services. To the extent a booking is cancelled by the customer prior to it being installed, it is subtracted from the total bookings number in the period that it is cancelled. Bookings do not immediately impact revenue until they are installed (gross installed revenue).

Gross Installed Revenue.   Installs are the amount of MRR and MAR for services that have been installed, tested, accepted by the customer, and have been recognized in revenue during a given period.   Installs include new services, price increases, and upgrades.

Churn Processed.   Churn is any negative change to MRR and MAR. Churn includes disconnects, negative price changes, and disconnects associated with upgrades or replacement services. For each period presented, disconnects associated with attrition and upgrades or replacement services are the drivers of churn, accounting for more than 80% of negative changes in MRR and MAR while price changes account for less than 20%. Monthly churn is also presented as a percentage of MRR and MAR (“churn percentage”).

Given the size and amount of acquisitions we have completed, we have estimated the revenue growth rate associated with our organic activity in each period reported. Our estimated organic growth rate is calculated by adding an estimate of the acquired companies’ revenue for the reporting period prior to the date of inclusion in our results of operations, and then calculating the growth rate between the two reported periods. The estimate of acquired annual revenue is based on the acquired companies’ revenues for the most recent quarter prior to close (including estimated purchase accounting adjustments) multiplied by four. If, in calculating our estimated organic growth rates, we were to use the actual revenue results for the four quarters preceding the closing of each of our acquisitions, our estimated organic growth rates would be higher than the estimated organic growth rates presented. If we were to use acquired

46


 

annualized revenue, calculated by taking each acquired company’s revenues for the most recent quarter prior to the closing of such acquisition and multiplying by four, our estimated organic growth rates would be lower than the estimated organic growth rates presented.

We have foreign subsidiaries that enter into contracts with customers and vendors in currencies other than the United States Dollar (“USD”) – principally the Great British Pound (“GBP”) and Canadian Dollar (“CAD”) and to a lesser extent the Euro and Swiss Franc (“CHF”). Changes in foreign currency exchange rates impact our revenue and expenses each period. The comparisons excluding the impact of foreign currency exchange rates assume exchange rates remained constant at the comparative period rate.

Operating Costs and Expenses

Our operating costs and expenses consist of network expense (“Netex”), compensation and benefits, network operations expense (“Netops”), stock-based compensation expense, other expenses, and depreciation and amortization.

Netex consists of third-party network service costs resulting from our leasing of certain network facilities, primarily leases of circuits and dark fiber, from carriers to augment our owned infrastructure, for which we are generally billed a fixed monthly fee. Netex also includes colocation facility costs for rent and license fees paid to the landlords of the buildings in which our colocation business operates, along with the utility costs to power those facilities. While increases in demand for our services will drive additional operating costs in our business, consistent with our strategy of leveraging our owned infrastructure assets, we expect to primarily utilize our existing network infrastructure or build new network infrastructure to meet the demand. In limited circumstances, we will augment our network with additional circuits or services from third-party providers. Third-party network service costs include the upfront cost of the initial installation of such circuits. Such costs are included in operating costs in our condensed consolidated statements of operations over the respective service period.

Compensation and benefits expenses include salaries, wages, incentive compensation and benefits. Employee-related costs that are directly associated with network construction, service installations (and development of business support systems) are capitalized and amortized to operating costs and expenses. Compensation and benefits expenses related to the departments attributed to generating revenue are included in our operating costs line item while compensation and benefits expenses related to the sales, product, and corporate departments are included in our selling, general and administrative expenses line item of our condensed consolidated statements of operations.

Netops expense includes all of the non-personnel related expenses of operating and maintaining our network infrastructure, including contracted maintenance fees, right-of-way costs, rent for cellular towers and other places where fiber is located, pole attachment fees, and relocation expenses. Such costs are included in operating costs in our condensed consolidated statements of operations.

Prior to the ZGH IPO, our stock-based compensation expense contained two components, CII common unit awards classified as liabilities and, to a lesser extent, CII preferred unit awards classified as equity. For the CII common units granted to employees and directors, we recognized an expense equal to the fair value of all of those common units that vest during the period plus the change in fair value of previously vested units, and recorded a liability in respect of those amounts. Following the IPO, our stock-based compensation expense contains three components: previously granted CII common unit awards, CII preferred unit awards and restricted stock unit awards made under the new ZGH equity compensation program. For previously granted CII common unit awards, following the IPO, we amortize the offering date fair value of those units (including unvested units) over the vesting period based on expected settlement behavior with a corresponding adjustment to equity, as the awards no longer have cash settlement features. For previously granted CII preferred units, we use the straight line method, over the vesting period, to amortize the fair value of those units, as determined on the date of grant. We recognize stock-based compensation expense for restricted stock unit awards granted to employees, members of management, and directors based on their estimated grant date fair value on a straight line basis over the requisite service period, as adjusted for an estimate of forfeitures. These restricted stock unit awards are primarily equity classified, except certain awards that have not yet been granted to employees. Following ZGH’s IPO, subsequent changes in the fair value of the CII preferred and common units and restricted stock unit awards granted generally do not affect the amount of expense we recognize.

47


 

Stock-based compensation expense is included, based on the responsibilities of the awarded recipient, in either our operating costs or selling, general and administrative expenses in our condensed consolidated statements of operations.

Other expenses include expenses such as property tax, franchise fees, colocation facility maintenance, travel, office expense and other administrative costs. Other expenses are included in both operating costs and selling, general and administrative expenses depending on their relationship to generating revenue or association with sales and administration.

Transaction costs include expenses associated with professional services (i.e. legal, accounting, regulatory, etc.) rendered in connection with acquisitions or disposals (including spin-offs), travel expense, severance expense incurred on the date of acquisition or disposal, and other direct expenses incurred that are associated with signed and/or closed acquisitions or disposals. Transaction costs are included in selling, general and administrative expenses in our condensed consolidated statements of operations.

Three Months Ended March 31, 2016 Compared to the Three Months Ended March 31, 2015

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended
March 31,

 

 

 

 

 

 

 

 

    

2016

    

2015

    

$ Variance

    

% Variance

 

 

 

 

 

(in millions)

 

 

Segment and consolidated revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Dark Fiber Solutions

 

$

144.3

 

$

133.5

 

$

10.8

 

8

%

 

Network Connectivity

 

 

172.5

 

 

163.1

 

 

9.4

 

6

%

 

Colocation and Cloud Infrastructure

 

 

60.3

 

 

38.5

 

 

21.8

 

57

%

 

Zayo Canada

 

 

96.1

 

 

 —

 

 

96.1

 

 

*

 

Other

 

 

4.8

 

 

5.6

 

 

(0.8)

 

(14)

%

 

Consolidated

 

$

478.0

 

$

340.7

 

$

137.3

 

40

%

 


* not meaningful

 

Our total revenue increased by $137.3 million, or 40%, to $478.0 million for the three months ended March 31, 2016, from $340.7 million for the three months ended March 31, 2015. The increase in revenue was driven by our organic growth as well as Fiscal 2016 and 2015 acquisitions.

We estimate that the period-over-period organic growth was approximately 4%. Our organic growth was driven by installs that exceeded churn over the course of both periods, resulting from continued strong demand for bandwidth infrastructure services broadly across our service territory and customer verticals. Additional underlying revenue drivers included:

·

Bookings remained consistent period over period at $7.0 million in combined MRR and MAR. The total contract value associated with bookings, for the three months ended March 31, 2016 was approximately $392.0 million.

·

During the three months ended March 31, 2016, we recognized net installs of $2.1 million as compared to $1.7 million during the three months ended March 31, 2015.

·

Monthly churn percentage decreased to 1.0% for the three months ended March 31, 2016 from 1.3% for the three months ended March 31, 2015.

We estimate that the period-over-period acquisition-related revenue growth was approximately 36%.

The average exchange rate between the USD and GBP strengthened by 4.4% during the three months ended March 31, 2016 as compared to the three months ended March 31, 2015.  The average exchange rate between the USD

48


 

and Euro strengthened by 1.6%. Normalizing our revenue to exclude the impact of foreign currency exchange rate fluctuations, we estimate that revenue would have increased between the three months ended March 31, 2016 and March 31, 2015 by an additional $0.7 million for a total period-over-period increase of $138.0 million, or 41%.

Dark Fiber Solutions.   Revenue from our Dark Fiber Solutions segment increased by $10.8 million, or 8%, to $144.3 million from $133.5 million for the three months ended March 31, 2016 and 2015, respectively.

Dark Fiber is the largest SPG within the segment and benefited from continued growth in infrastructure demand. Our Mobile Infrastructure products also contributed to the segment’s growth. Bookings of MRR and MAR for the three months ended March 31, 2016 were $2.2 million (with a total contract value of approximately $245.5 million), a decrease from the $2.8 million in bookings for the same period in the prior year. Gross installs were $1.7 million for the three months ended March 31, 2016, compared to $1.8 million for the same period in the prior year. The monthly churn percentage decreased between the two periods from 0.8% for the three months ended March 31, 2015 to 0.5% for the three months ended March 31, 2016, with total churn processed of $0.7 million for the three months ended March 31, 2016 compared to $1.0 million for the three months ended March 31, 2015.

Network Connectivity.   Revenue from our Network Connectivity segment increased by $9.4 million, or 6%, to $172.5 million from $163.1 million for the three months ended March 31, 2016 and 2015, respectively. The increase was a result of both organic and acquisition related growth.

Growth was strongest in the segment’s Waves SPG, driven by customer demand and increased effectiveness in marketing these products, including price concessions that were proactively offered in exchange for customer contract extensions in Fiscal 2015. SONET is a legacy product, and its revenue declined between the two periods, consistent with our expectations.

Bookings of MRR and MAR increased to $3.8 million from $3.2 million between the two comparative periods, with a total contract value of approximately $115.2 million for the three months ended March 31, 2016. Gross installs were $3.3 million for the three months ended March 31, 2016, compared to $3.0 million in the prior year. The monthly churn percentage decreased from 1.6% for the three months ended March 31, 2015 to 1.5% for the three months ended March 31, 2016, with a total churn processed of $2.5 million for the three months ended March 31, 2016 compared to $2.6 million for the three months ended March 31, 2015.

Colocation and Cloud Infrastructure.   Revenue from our Colocation and Cloud Infrastructure segment increased by $21.8 million, or 57%, to $60.3 million from $38.5 million for the three months ended March 31, 2016 and 2015, respectively. The increase was a result of both acquisition related and organic growth.

zColo is the largest SPG within the segment and benefited from continued growth in infrastructure demand. Bookings of MRR and MAR increased to $1.0 million from $0.9 million between the two comparative periods, with a total contract value of approximately $31.1 million for the three months ended March 31, 2016. Gross installs were $0.8 million for the three months ended March 31, 2016, compared to $1.1 million in the prior year. The monthly churn percentage decreased from 1.3% for the three months ended March 31, 2015 to 0.8% for the three months ended March 31, 2016, resulting in total churn processed of $0.4 million for the three months ended March 31, 2016 compared to $0.5 million for the three months ended March 31, 2015.

Zayo Canada. Revenue from our Zayo Canada segment was $96.1 million for the three months ended March 31, 2016. 

Other.   Revenue from our Other segment decreased by $0.8 million, or 14%, to $4.8 million from $5.6 million, for the three months ended March 31, 2016 and 2015, respectively. The Other segment represented approximately 1.0% of our total revenue during the three months ended March 31, 2016.

49


 

The following table reflects the stratification of our revenues during these periods. The substantial majority of our revenue continued to come from recurring payments from customers under contractual arrangements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 

 

 

    

2016

    

2015

 

 

 

 

(in millions)

 

Monthly recurring revenue

 

$

427.1

    

89

%

$

303.3

    

89

%

Amortization of deferred revenue

 

 

24.7

 

5

%

 

18.3

 

5

%

Other revenue

 

 

26.2

 

6

%

 

19.1

 

6

%

Total Revenue

 

$

478.0

 

100

%

$

340.7

 

100

%

 

Operating Costs and Expenses 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended
March 31,

 

 

 

 

 

 

 

    

2016

    

2015

    

$ Variance

    

% Variance

 

 

 

 

(in millions)

 

Segment and consolidated operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Dark Fiber Solutions

 

$

116.5

 

$

113.3

 

$

3.2

 

3

%

Network Connectivity

 

 

135.8

 

 

129.3

 

 

6.5

 

5

%

Colocation and Cloud Infrastructure

 

 

62.3

 

 

36.5

 

 

25.8

 

71

%

Zayo Canada

 

 

101.7

 

 

 —

 

 

101.7

 

 

*

Other

 

 

4.2

 

 

4.9

 

 

(0.7)

 

 

*

Consolidated

 

$

420.5

 

$

284.0

 

$

136.5

 

48

%


* not meaningful

 

Our operating costs increased by $136.5 million, or 48%, to $420.5 million for the three months ended March 31, 2016 from $284.0 million for the three months ended March 31, 2015. The increase in consolidated operating costs was primarily due to a $37.1 million increase in depreciation and amortization and other increased costs as a result of our Fiscal 2016 and 2015 acquisitions and organic growth of our network, offset by a $7.2 million decrease in stock-based compensation.

Dark Fiber Solutions.    Dark Fiber Solutions operating costs increased by $3.2 million, or 3%, to $116.5 million for the three months ended March 31, 2016 from $113.3 million for the three months ended March 31, 2015. The increase in operating costs and expenses was primarily a result of a $5.6 million decrease in stock-based compensation, offset by an $8.2 million increase in depreciation and amortization and other increased costs as a result of Fiscal 2016 and 2015 acquisitions and organic growth of our network.

Network Connectivity.    Network Connectivity operating costs increased by $6.5 million, or 5%, to $135.8 million for the three months ended March 31, 2016 from $129.3 million for the three months ended March 31, 2015. The increase in operating costs and expenses was primarily a result of a $3.3 million decrease in stock-based compensation, offset by $2.2 million increase in depreciation and amortization and other increased costs as a result of Fiscal 2016 and 2015 acquisitions and organic growth of our network.

Colocation and Cloud Infrastructure.    Colocation and Cloud Infrastructure operating costs increased by $25.8 million, or 71%, to $62.3 million for the three months ended March 31, 2016 from $36.5 million for the three months ended March 31, 2015. The increase in operating costs and expenses was primarily a result of a $1.5 million increase in stock-based compensation, a $13.7 million increase in depreciation and amortization expense and other increased operating costs as a result of Fiscal 2016 and 2015 acquisitions and organic growth of our network.

Zayo Canada. Zayo Canada operating costs were $101.7 million for the three months ended March 31, 2016. 

50


 

Other.    Other operating costs decreased to $4.2 million for the three months ended March 31, 2016, as compared to $4.9 million for the three months ended March 31, 2015.

The table below sets forth the components of our operating costs and expenses during the three months ended March 31, 2016 and 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

March 31,

 

 

 

 

 

 

 

 

    

2016

    

2015

    

$ Variance

    

% Variance

 

 

 

 

 

(in millions)

 

 

Netex

 

$

88.2

 

$

44.9

 

$

43.3

 

96

%

 

Compensation and benefits expenses

 

 

67.5

 

 

40.2

 

 

27.3

 

68

%

 

Network operations expense

 

 

54.2

 

 

37.5

 

 

16.7

 

45

%

 

Other expenses

 

 

25.7

 

 

19.1

 

 

6.6

 

35

%

 

Transaction costs

 

 

14.2

 

 

1.5

 

 

12.7

 

 

*

 

Stock-based compensation

 

 

33.5

 

 

40.7

 

 

(7.2)

 

(18)

%

 

Depreciation and Amortization

 

 

137.2

 

 

100.1

 

 

37.1

 

37

%

 

Total operating costs and expenses

 

$

420.5

 

$

284.0

 

$

136.5

 

48

%

 


* not meaningful

 

Netex.    Our Netex increased by $43.3 million, or 96%, to $88.2 million for the three months ended March 31, 2016 from $44.9 million for the three months ended March 31, 2015. The increase in Netex was primarily due to increased facility costs related to the colocation acquisitions completed in Fiscal 2016 and 2015, partially offset by cost savings, as planned network related synergies were realized. Netex as a percentage of total revenue increased to 18% for the three months ended March 31, 2016 from 13% for the three months ended March 31, 2015.

Compensation and Benefits Expenses.    Compensation and benefits expenses increased by $27.3 million, or 68%, to $67.5 million for the three months ended March 31, 2016 from $40.2 million for the three months ended March 31, 2015.

The increase in compensation and benefits expenses reflected the increase in headcount during Fiscal 2016 to support our growing business, including certain employees retained from businesses acquired during Fiscal 2015 and Fiscal 2016, and was partially offset by a decrease in bonus expense.

Headcount as of the end of the respective periods was:

 

 

 

 

 

 

 

 

 

March 31, 

 

March 31, 

 

 

    

2016

    

2015

 

Dark Fiber Solutions

 

815

 

836

 

Network Connectivity

 

799

 

661

 

Colocation and Cloud Infrastructure

 

343

 

277

 

Zayo Canada

 

1,394

 

 —

 

Other

 

28

 

29

 

Total

 

3,379

 

1,803

 

 

Network Operations Expenses.    Network operations expenses increased by $16.7 million, or 45%, to $54.2 million for the three months ended March 31, 2016 from $37.5 million for the three months ended March 31, 2015. The increase principally reflected the growth of our network assets and the related expenses of operating that expanded network. Our total network route miles increased approximately 33% to 111,693 miles at March 31, 2016 from 84,161 miles at March 31, 2015.

51


 

Other Expenses.    Other expenses increased by $6.6 million, or 35%, to $25.7 million for the three months ended March 31, 2016, from $19.1 million for the three months ended March 31, 2015. The increase was primarily the result of additional expenses attributable to our Fiscal 2016 and 2015 acquisitions.

Transaction Costs.    Transaction costs increased by $12.7 million to $14.2 million for the three months ended March 31, 2016 from $1.5 million for the three months ended March 31, 2015.  The increase was due to higher transaction-related costs for our acquisitions of Allstream and Viatel.  

Stock-Based Compensation.    Stock-based compensation expense decreased by $7.2 million, or 18%, to $33.5 million for the three months ended March 31, 2016 from $40.7 million for the three months ended March 31, 2015. The decrease in stock-based compensation expense was primarily driven by certain tranches of the Company’s pre-IPO common unit grants becoming fully vested prior to the three months ended March 31, 2016. This decrease was partially offset by an increase in the number of post-IPO RSU grants vesting during the three months ended March 31, 2016 as compared to the three months ended March 31, 2015.

Depreciation and Amortization

Depreciation and amortization expense increased by $37.1 million, or 37%, to $137.2 million for the three months ended March 31, 2016 from $100.1 million for the three months ended March 31, 2015.  The increase was primarily a result of depreciation related to increased capital expenditures and increased amortization expense associated with our Fiscal 2016 and 2015 acquisitions.   

Total Other Expense, Net

The table below sets forth the components of our total other expense, net for the three months ended March 31, 2016 and 2015, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

March 31,

 

 

 

 

 

 

 

    

2016

    

2015

    

$ Variance

    

% Variance

 

 

 

 

(in millions)

 

Interest expense

 

$

(57.7)

 

$

(60.7)

 

$

3.0

 

5

%

Loss on extinguishment of debt

 

 

 —

 

 

(54.9)

 

 

54.9

 

 

*

Foreign currency loss on intercompany loans

 

 

(11.1)

 

 

(13.2)

 

 

2.1

 

16

%

Other expense, net

 

 

(0.2)

 

 

 —

 

 

(0.2)

 

 

*

Total other expenses, net

 

$

(69.0)

 

$

(128.8)

 

$

59.8

 

46

%


* not meaningful

Interest expense.   Interest expense decreased by $3.0 million, or 5%, to $57.7 million from $60.7 million for the three months ended March 31, 2016 and 2015, respectively. The decrease was primarily a result of changes in the fair value of our interest rate swaps, and reduced interest rates on our outstanding indebtedness as a result of our Fiscal 2015 debt transactions, partially offset by an increase in indebtedness from the comparative period.

Loss on extinguishment of debt.   As part of our notes redemptions in Fiscal 2015, we paid an early redemption call premium of $38.8 million and recorded an expense of $16.1 million related to unamortized debt issuance costs associated with the notes redeemed.  These expenses were recorded as a loss on extinguishment of debt during the three months ended March 31, 2015.

Foreign currency loss on intercompany loans.   Foreign currency loss on intercompany loans decreased $2.1 million, or 16%, to $11.1 million for the three months ended March 31, 2016, from $13.2 million for the three months ended March 31, 2015.  This non-cash loss was primarily driven by the strengthening of the USD against the GBP period-over-period and the related impact on intercompany loans entered into by foreign subsidiaries in their functional currency.

52


 

Provision for Income Taxes

Income tax expense increased over the prior year by $26.2 million, to $7.8 million for the three months ended March 31, 2016 from a tax benefit of $18.4 million for the three months ended March 31, 2015. Our provision for income taxes included both the current provision and a provision for deferred income tax expense resulting from timing differences between tax and financial reporting accounting bases. As a result of our stock-based compensation related to the CII common and preferred units and certain transaction costs not being deductible for income tax purposes, our effective tax rate was higher than the statutory rate.

The following table reconciles an expected tax provision based on a statutory federal tax rate applied to our earnings before income tax to our actual provision for income taxes:

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 

 

    

2016

    

2015

 

 

 

(in millions)

Expected benefit at the statutory rate

 

$

(3.9)

 

$

(25.3)

Increase/(decrease) due to:

 

 

 

 

 

 

Non-deductible stock-based compensation

 

 

5.2

 

 

8.8

State income taxes benefit, net of federal benefit

 

 

(0.2)

 

 

(3.8)

Transactions costs not deductible for tax purposes

 

 

0.6

 

 

0.3

Foreign tax rate differential

 

 

0.5

 

 

(0.1)

Other, net

 

 

5.6

 

 

1.7

Provision/(benefit) for income taxes

 

$

7.8

 

$

(18.4)

 

Nine Months Ended March 31, 2016 Compared to the Nine Months Ended March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended

March 31,

 

 

 

 

 

 

 

 

    

2016

    

2015

    

$ Variance

    

% Variance

 

 

 

 

 

(in millions)

 

 

Segment and consolidated revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Dark Fiber Solutions

 

$

417.0

 

$

390.6

 

$

26.4

 

7

%

 

Network Connectivity

 

 

508.2

 

 

485.0

 

 

23.2

 

5

%

 

Colocation and Cloud Infrastructure

 

 

177.1

 

 

92.4

 

 

84.7

 

92

%

 

Zayo Canada

 

 

96.1

 

 

 —

 

 

96.1

 

 

*

 

Other

 

 

16.0

 

 

17.2

 

 

(1.2)

 

(7)

%

 

Consolidated

 

$

1,214.4

 

$

985.2

 

$

229.2

 

23

%

 

 

Our total revenue increased by $229.2 million, or 23%, to $1,214.4 million for the nine months ended March 31, 2016, from $985.2 million for the nine months ended March 31, 2015. The increase in revenue was driven by our organic growth as well as Fiscal 2016 and 2015 acquisitions.

We estimate that the period-over-period organic growth was approximately 8%. Our organic growth was driven by installs that exceeded churn over the course of both periods, resulting from continued strong demand for bandwidth infrastructure services broadly across our service territory and customer verticals. Additional underlying revenue drivers included:

·

Bookings increased period over period to $20.1 million from $18.0 million in combined MRR and MAR. The total contract value associated with bookings, for the nine months ended March 31, 2016, was approximately $1,270.3 million.

·

During the nine months ended March 31, 2016, we recognized net installs of $6.6 million as compared to $5.0 million during the nine months ended March 31, 2015.

·

Monthly churn percentage decreased between the two periods to 1.1% from 1.3%.

53


 

We estimate that the period-over-period acquisition-related revenue growth was approximately 15%.

The average exchange rate between the USD and GBP strengthened by 1.2% during the nine months ended March 31, 2016 as compared to the nine months ended March 31, 2015.  The average exchange rate between the USD and Euro strengthened by 6.1%. Normalizing our revenue to exclude the impact of foreign currency exchange rate fluctuations, we estimate that revenue would have increased between the nine months ended March 31, 2016 and March 31, 2015 by an additional $1.9 million, or 23%, for a total period-over-period increase of $231.1 million.

Dark Fiber Solutions.  Revenue from our Dark Fiber Solutions segment increased by $26.4 million, or 7%, to $417.0 million from $390.6 million for the nine months ended March 31, 2016 and 2015, respectively.

Dark Fiber is the largest SPG within the segment and benefited from continued growth in infrastructure demand. Our Mobile Infrastructure product also contributed to the segment’s growth. Bookings of MRR and MAR for the nine months ended March 31, 2016 were $6.7 million (with a total contract value of approximately $858.3 million), a decrease from the $6.8 million in bookings for the same period in the prior year. Gross installs were $5.9 million for the nine months ended March 31, 2016, compared to $5.7 million for the same period in the prior year. The monthly churn percentage increased from 0.6% for the nine months ended March 31, 2015 to 0.7% for the nine months ended March 31, 2016, with total churn processed of $2.5 million for the nine months ended March 31, 2016, compared to $2.8 million for the nine months ended March 31, 2015.

Network Connectivity.   Revenue from our Network Connectivity segment increased by $23.2 million, or 5%, to $508.2 million from $485.0 million for the nine months ended March 31, 2016 and 2015, respectively. The increase was a result of both organic and acquisition related growth.

Growth was strongest in the segment’s Ethernet and IP SPGs, driven by customer demand and increased effectiveness in marketing these products. Wavelength revenue growth also increased, driven by customer demand and increased effectiveness in marketing these products, including price concessions that were proactively offered in exchange for customer contract extensions in Fiscal 2015. SONET is a legacy product, and its revenue declined between the two periods, consistent with our expectations.

Bookings of MRR and MAR increased to $10.2 million from $9.2 million between the two comparative periods, with a total contract value of approximately $320.2 million for the nine months ended March 31, 2016. Gross installs were $9.9 million for the nine months ended March 31, 2016, compared to $8.9 million in the prior year. The monthly churn percentage decreased from 1.6% for the nine months ended March 31, 2015 to 1.5% for the nine months ended March 31, 2016, resulting in total churn processed of $7.2 million for the nine months ended March 31, 2016, compared to $7.6 million for the nine months ended March 31, 2015.

Colocation and Cloud Infrastructure.   Revenue from our Colocation and Cloud Infrastructure segment increased by $84.7 million, or 92%, to $177.1 million from $92.4 million for the nine months ended March 31, 2016 and 2015, respectively. The increase was a result of both organic and acquisition related growth.

zColo is the largest SPG within the segment and benefited from continued growth in infrastructure demand. Bookings of MRR and MAR increased to $3.1 million from $2.0 million between the two comparative periods, with a total contract value of approximately $90.7 million for the nine months ended March 31, 2016. Gross installs were $2.3 million for the nine months ended March 31, 2016, compared to $2.1 million in the prior year. The monthly churn percentage decreased from 1.2% for the nine months ended March 31, 2015 to 1.0% for the nine months ended March 31, 2016, resulting in total churn processed of $1.7 million for the nine months ended March 31, 2016, compared to $1.0 million for the nine months ended March 31, 2015.

Zayo Canada. Revenue from our Zayo Canada segment was $96.1 million for the nine months ended March 31, 2016. 

54


 

Other.   Revenue from our Other segment decreased by $1.2 million, or 7%, to $16.0 million from $17.2 million, for the nine months ended March 31, 2016 and 2015, respectively. The Other segment represented approximately 1.3% of our total revenue during the nine months ended March 31, 2016.

The following table reflects the stratification of our revenues during these periods. The substantial majority of our revenue continued to come from recurring payments from customers under contractual arrangements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended March 31, 

 

 

    

2016

    

2015

 

 

 

 

(in millions)

 

Monthly recurring revenue

 

$

1,095.8

    

90

%

$

884.7

    

90

%

Amortization of deferred revenue

 

 

66.6

 

6

%

 

52.9

 

5

%

Other revenue

 

 

52.0

 

4

%

 

47.6

 

5

%

Total Revenue

 

$

1,214.4

 

100

%

$

985.2

 

100

%

 

Operating Costs and Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended
March 31,

 

 

 

 

 

 

 

    

2016

    

2015

    

$ Variance

    

% Variance

 

 

 

 

(in millions)

 

Segment and consolidated operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Dark Fiber Solutions

 

$

342.6

 

$

370.0

 

$

(27.4)

 

(7)

%

Network Connectivity

 

 

403.1

 

 

402.0

 

 

1.1

 

 

*

Colocation and Cloud Infrastructure

 

 

184.9

 

 

82.5

 

 

102.4

 

 

*

Zayo Canada

 

 

101.7

 

 

 —

 

 

101.7

 

 

*

Other

 

 

13.8

 

 

14.2

 

 

(0.4)

 

(3)

%

Corporate

 

 

 —

 

 

2.0

 

 

(2.0)

 

 

*

Consolidated

 

$

1,046.1

 

$

870.7

 

$

175.4

 

20

%


* not meaningful

 

Our operating costs increased by $175.4 million, or 20%, to $1,046.1 million for the nine months ended March 31,  2016 from $870.7 million for the nine months ended March 31, 2015. The increase in consolidated operating costs was primarily due to a $75.0 million increase in depreciation and amortization expense and a $57.6 million increase in Netex as a result of Fiscal 2016 and 2015 acquisitions and organic growth of our network, partially offset by a $35.3 million decrease in stock-based compensation.

Dark Fiber Solutions.    Dark Fiber Solutions operating costs decreased by $27.4 million, or 7%, to $342.6 million for the nine months ended March 31, 2016 from $370.0 million for the nine months ended March 31, 2015. The decrease in operating costs and expenses was primarily a result of a $31.8 million decrease in stock-based compensation, partially offset by an $9.3 million increase in depreciation and amortization expense and increased costs as a result of Fiscal 2016 and 2015 acquisitions and organic growth of our network.

Network Connectivity.    Network Connectivity operating costs increased by $1.1 million to $403.1 million for the nine months ended March 31, 2016 from $402.0 million for the nine months ended March 31, 2015. The increase in operating costs and expenses was primarily a result of increased operating costs as a result of Fiscal 2016 and 2015 acquisitions and organic growth of our network, offset by a $12.9 million decrease in stock-based compensation.

Colocation and Cloud Infrastructure.    Colocation and Cloud Infrastructure operating costs increased by $102.4 million, to $184.9 million for the nine months ended March 31, 2016 from $82.5 million for the nine months ended March 31, 2015. The increase in operating costs and expenses was primarily a result of a $51.2 million increase in

55


 

depreciation and amortization expense, a $8.4 million increase in stock-based compensation and increased costs as a result of Fiscal 2016 and 2015 acquisitions, and organic growth.

Zayo Canada. Zayo Canada operating costs were $101.7 million for the nine months ended March 31, 2016. 

Other.    Other operating costs decreased by $0.4 million, or 3%, to $13.8 million for the nine months ended March 31, 2016 from $14.2 million for the nine months ended March 31, 2015.

The table below sets forth the components of our operating costs and expenses during the nine months ended March 31, 2016 and 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended

March 31,

 

 

 

 

 

 

 

    

2016

    

2015

    

$ Variance

    

% Variance

 

 

 

 

(in millions)

 

Netex

 

$

187.8

 

$

130.2

 

$

57.6

 

44

%

Compensation and benefits expenses

 

 

148.6

 

 

116.3

 

 

32.3

 

28

%

Network operations expense

 

 

135.2

 

 

112.4

 

 

22.8

 

20

%

Other expenses

 

 

66.5

 

 

55.0

 

 

11.5

 

21

%

Transaction costs

 

 

17.5

 

 

6.0

 

 

11.5

 

 

*

Stock-based compensation

 

 

122.5

 

 

157.8

 

 

(35.3)

 

(22)

%

Depreciation and Amortization

 

 

368.0

 

 

293.0

 

 

75.0

 

26

%

Total operating costs and expenses

 

$

1,046.1

 

$

870.7

 

$

175.4

 

20

%


* not meaningful

 

Netex.    Our Netex increased by $57.6 million, or 44%, to $187.8 million for the nine months ended March 31, 2016 from $130.2 million for the nine months ended March 31, 2015. The increase in Netex was primarily due to increased facility costs related to the colocation acquisitions completed in Fiscal 2016 and 2015, partially offset by cost savings, as planned network related synergies were realized. Netex as a percentage of total revenue was 15% and 13% for the nine months ended March 31, 2016 and 2015, respectively.

Compensation and Benefits Expenses.    Compensation and benefits expenses increased by $32.3 million, or 28%, to $148.6 million for the nine months ended March 31, 2016 from $116.3 million for the nine months ended March 31, 2015.

The increase in compensation and benefits expenses reflected the increase in headcount during Fiscal 2016 to support our growing business, including certain employees retained from businesses acquired during Fiscal 2016 and 2015, and was partially offset by a decrease in bonus expense.

Network Operations Expenses.    Network operations expenses increased by $22.8 million, or 20%, to $135.2 million for the nine months ended March 31, 2016 from $112.4 million for the nine months ended March 31, 2015. The increase principally reflected the growth of our network assets and the related expenses of operating that expanded network. Our total network route miles increased approximately 33% to 111,693 miles at March 31, 2016 from 84,161 miles at March 31, 2015.

Other Expenses.    Other expenses increased by $11.5 million, or 21%, to $66.5 million for the nine months ended March 31, 2016, from $55.0 million for the nine months ended March 31, 2015. The increase was primarily the result of additional expenses attributable to our Fiscal 2016 and 2015 acquisitions.

Transaction Costs.    Transaction costs increased by $11.5 million, to $17.5 million for the nine months ended March 31, 2016 from $6.0 million for the nine months ended March 31, 2015. The increase was primarily the result of higher transaction-related costs associated with the Fiscal 2016 acquisitions of Allstream and Viatel.

Stock-Based Compensation.    Stock-based compensation expense decreased by $35.3 million, or 22%, to $122.5 million for the nine months ended March 31, 2016 from $157.8 million for the nine months ended March 31, 2015.

56


 

Prior to ZGH’s IPO, we recognized changes in the fair value of the CII common units through increases or decreases in stock-based compensation expense and adjustments to the related stock-based compensation liability. This liability was impacted by changes in the estimated value of the common units, number of vested common units, and distributions made to holders of the common units. In connection with the IPO, we re-measured the fair value of the common units at the offering date based on various projections involving future stock performance, vesting and forfeitures. The fair value of unvested common units on the offering date is recognized as stock-based compensation expense ratably over the remaining vesting period. For restricted stock unit awards, expense is recognized based on the estimated fair value of the units awarded over the requisite service period.  The estimated fair value of the restricted stock unit awards is impacted by various factors, including market and performance-based targets, expectations regarding future stock performance, the measurement or performance period, and forfeiture rates.    

Depreciation and Amortization

Depreciation and amortization expense increased by $75.0 million, or 26%, to $368.0 million for the nine months ended March 31, 2016 from $293.0 million for the nine months ended March 31, 2015. The increase was primarily a result of depreciation related to increased capital expenditures and increased amortization expense associated with our Fiscal 2016 and 2015 acquisitions. 

Total Other Expense, Net

The table below sets forth the components of our total other expense, net for the nine months ended March 31, 2016 and 2015, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended

March 31,

 

 

 

 

 

 

 

    

2016

    

2015

    

$ Variance

    

% Variance

 

 

 

 

(in millions)

 

Interest expense

 

$

(162.7)

 

$

(161.0)

 

$

(1.7)

 

(1)

%

Loss on extinguishment of debt

 

 

 —

 

 

(85.8)

 

 

85.8

 

 

*

Foreign currency loss on intercompany loans

 

 

(28.9)

 

 

(41.2)

 

 

12.3

 

30

%

Other expense, net

 

 

(0.4)

 

 

(0.1)

 

 

(0.3)

 

 

*

Total other expenses, net

 

$

(192.0)

 

$

(288.1)

 

$

96.1

 

33

%


* not meaningful

Interest expense.   Interest expense increased by $1.7 million, or 1%, to $162.7 million from $161.0 million for the nine months ended March 31, 2016 and 2015, respectively. The increase was primarily a result of our increased indebtedness, partially offset by reduced interest rates on our outstanding indebtedness as a result of our Fiscal 2015 and 2016 debt transactions.

Loss on extinguishment of debt.   As part of our notes redemptions in Fiscal 2015, we paid early redemption call premiums of $62.6 million and recorded an expense of $23.2 million related to unamortized debt issuance costs associated with the notes redeemed.  These expenses were recorded as a loss on extinguishment of debt during the nine months ended March 31, 2015.

Foreign currency loss on intercompany loans.   Foreign currency loss on intercompany loans decreased $12.3 million, or 30%, to $28.9 million for the nine months ended March 31, 2016, from $41.2 million for the nine months ended March 31, 2015. This non-cash loss was driven primarily by the strengthening of the USD against the GBP period over period and the related impact on intercompany loans entered into by foreign subsidiaries in their functional currency.

57


 

Provision for Income Taxes

Income tax expense increased over the prior year by $34.9 million to $21.6 million for the nine months ended March 31, 2016 from a tax benefit of $13.3 million for the nine months ended March 31, 2015. Our provision for income taxes included both the current provision and a provision for deferred income tax expense resulting from timing differences between tax and financial reporting accounting bases. As a result of our stock-based compensation related to the CII common and preferred units and certain transaction costs not being deductible for income tax purposes, our effective tax rate was higher than the statutory rate.

The following table reconciles our expected tax provision based on the statutory federal tax rate applied to our earnings before income taxes to our actual provision for income taxes:

 

 

 

 

 

 

 

 

 

For the nine months ended March 31, 

 

    

2016

    

2015

 

 

(in millions)

Expected benefit at the statutory rate

 

$

(8.2)

 

$

(60.9)

Increase/(decrease) due to:

 

 

 

 

 

 

Non-deductible stock-based compensation

 

 

22.6

 

 

51.0

State income taxes benefit, net of federal benefit

 

 

(0.7)

 

 

(8.3)

Transactions costs not deductible for tax purposes

 

 

1.1

 

 

0.6

Foreign tax rate differential

 

 

0.8

 

 

0.7

Other, net

 

 

6.0

 

 

3.6

Provision/(benefit) for income taxes

 

$

21.6

 

$

(13.3)

Adjusted EBITDA

We define Adjusted EBITDA as earnings/(loss) from operations before interest, income taxes, depreciation and amortization (“EBITDA”) adjusted to exclude acquisition or disposal-related transaction costs, losses on extinguishment of debt, stock-based compensation, unrealized foreign currency gains/(losses) on intercompany loans, and non-cash income/(loss) on equity and cost method investments. We use Adjusted EBITDA to evaluate operating performance, and this financial measure is among the primary measures used by management for planning and forecasting for future periods. We believe that the presentation of Adjusted EBITDA is relevant and useful for investors because it allows investors to view results in a manner similar to the method used by management and facilitates comparison of our results with the results of other companies that have different financing and capital structures.

We also monitor Adjusted EBITDA because our subsidiaries have debt covenants that restrict their borrowing capacity that are based on a leverage ratio, which utilizes a modified EBITDA, as defined in our Credit Agreement and the indentures governing our outstanding Notes. The modified EBITDA is consistent with our definition of Adjusted EBITDA; however, it includes the pro forma Adjusted EBITDA of and expected cost synergies from the companies acquired by us during the quarter for which the debt compliance certification is due.

Adjusted EBITDA results, along with other quantitative and qualitative information, are also utilized by management and our compensation committee for purposes of determining bonus payouts to employees.

Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation from, or as a substitute for, analysis of our results as reported under GAAP. For example, Adjusted EBITDA:

·

does not reflect capital expenditures, or future requirements for capital and major maintenance expenditures or contractual commitments;

·

does not reflect changes in, or cash requirements for, our working capital needs;

·

does not reflect the significant interest expense, or the cash requirements necessary to service the interest payments, on our debt; and

·

does not reflect cash required to pay income taxes.

58


 

Our computation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies because all companies do not calculate Adjusted EBITDA in the same fashion.

Reconciliations from segment and consolidated Adjusted EBITDA to net (loss)/earnings from operations are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2016

 

 

    

Dark Fiber Solutions

    

Network Connectivity

 

Colocation and Cloud Infrastructure

 

Zayo Canada

 

Other

    

Corp/ Eliminations

    

Total

 

 

 

 

(in millions)

 

Segment and consolidated Adjusted EBITDA

 

$

103.9

 

$

89.2

 

$

30.2

 

$

18.2

 

$

1.3

 

$

 —

 

$

242.8

 

Interest expense

 

 

(25.2)

 

 

(17.1)

 

 

(11.0)

 

 

(0.1)

 

 

 —

 

 

(4.3)

 

 

(57.7)

 

Depreciation and amortization expense

 

 

(61.5)

 

 

(35.6)

 

 

(26.6)

 

 

(13.0)

 

 

(0.5)

 

 

 —

 

 

(137.2)

 

Transaction costs

 

 

(1.3)

 

 

(1.6)

 

 

(0.7)

 

 

(10.6)

 

 

 —

 

 

 —

 

 

(14.2)

 

Stock-based compensation

 

 

(13.1)

 

 

(15.2)

 

 

(5.0)

 

 

(0.1)

 

 

(0.1)

 

 

 —

 

 

(33.5)

 

Unrealized foreign currency loss on intercompany loans

 

 

 —

 

 

0.3

 

 

 —

 

 

 —

 

 

 —

 

 

(11.4)

 

 

(11.1)

 

Non-cash loss on investments

 

 

(0.7)

 

 

 —

 

 

0.1

 

 

 —

 

 

 —

 

 

 —

 

 

(0.6)

 

(Loss)/income from operations before income taxes

 

$

2.1

 

$

20.0

 

$

(13.0)

 

$

(5.6)

 

$

0.7

 

$

(15.7)

 

$

(11.5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended March 31, 2016

 

 

    

Dark Fiber Solutions

    

Network Connectivity

 

Colocation and Cloud Infrastructure

 

Zayo Canada

 

Other

    

Corp/ Eliminations

    

Total

 

 

 

 

(in millions)

 

Segment and consolidated Adjusted EBITDA

 

$

299.6

 

$

267.8

 

$

87.6

 

$

18.2

 

$

3.9

 

$

 —

 

$

677.1

 

Interest expense

 

 

(75.4)

 

 

(51.8)

 

 

(30.1)

 

 

(0.1)

 

 

 —

 

 

(5.3)

 

 

(162.7)

 

Depreciation and amortization expense

 

 

(174.4)

 

 

(103.1)

 

 

(76.1)

 

 

(13.0)

 

 

(1.4)

 

 

 —

 

 

(368.0)

 

Transaction costs

 

 

(2.4)

 

 

(3.6)

 

 

(0.9)

 

 

(10.6)

 

 

 —

 

 

 —

 

 

(17.5)

 

Stock-based compensation

 

 

(48.1)

 

 

(55.8)

 

 

(18.3)

 

 

(0.1)

 

 

(0.2)

 

 

 —

 

 

(122.5)

 

Unrealized foreign currency gain/(loss) on intercompany loans

 

 

0.1

 

 

0.4

 

 

 —

 

 

 —

 

 

 —

 

 

(29.4)

 

 

(28.9)

 

Non-cash loss on investments

 

 

(1.1)

 

 

 —

 

 

(0.1)

 

 

 —

 

 

 —

 

 

 —

 

 

(1.2)

 

(Loss)/income from operations before income taxes

 

$

(1.7)

 

$

53.9

 

$

(37.9)

 

$

(5.6)

 

$

2.3

 

$

(34.7)

 

$

(23.7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2015

 

 

    

Dark Fiber Solutions

    

Network Connectivity

 

Colocation and Cloud Infrastructure

 

Zayo Canada

 

Other

    

Corp/ Eliminations

    

Total

 

 

 

 

(in millions)

 

Segment and consolidated Adjusted EBITDA

 

$

92.5

 

$

85.7

 

$

19.5

 

$

 —

 

$

1.3

 

$

 —

 

$

199.0

 

Interest expense

 

 

(31.8)

 

 

(20.6)

 

 

(8.3)

 

 

 —

 

 

 —

 

 

 —

 

 

(60.7)

 

Depreciation and amortization expense

 

 

(53.3)

 

 

(33.4)

 

 

(12.9)

 

 

 —

 

 

(0.5)

 

 

 —

 

 

(100.1)

 

Transaction costs

 

 

(0.3)

 

 

 —

 

 

(1.2)

 

 

 —

 

 

 —

 

 

 —

 

 

(1.5)

 

Stock-based compensation

 

 

(18.7)

 

 

(18.5)

 

 

(3.5)

 

 

 —

 

 

 —

 

 

 —

 

 

(40.7)

 

Loss on extinguishment of debt

 

 

(31.3)

 

 

(22.8)

 

 

(0.8)

 

 

 —

 

 

 —

 

 

 —

 

 

(54.9)

 

Unrealized foreign currency loss on intercompany loans

 

 

 —

 

 

0.1

 

 

 —

 

 

 —

 

 

 —

 

 

(13.3)

 

 

(13.2)

 

(Loss)/income from operations before income taxes

 

$

(42.9)

 

$

(9.5)

 

$

(7.2)

 

$

 —

 

$

0.8

 

$

(13.3)

 

$

(72.1)

 

59


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended March 31, 2015

 

 

    

Dark Fiber Solutions

    

Network Connectivity

 

Colocation and Cloud Infrastructure

 

Zayo Canada

 

Other

    

Corp/ Eliminations

    

Total

 

 

 

 

(in millions)

 

Segment and consolidated Adjusted EBITDA

 

$

267.3

 

$

254.4

 

$

46.2

 

$

 —

 

$

3.8

 

$

 —

 

$

571.7

 

Interest expense

 

 

(89.7)

 

 

(58.1)

 

 

(13.2)

 

 

 —

 

 

 —

 

 

 —

 

 

(161.0)

 

Depreciation and amortization expense

 

 

(165.1)

 

 

(101.6)

 

 

(24.9)

 

 

 —

 

 

(1.4)

 

 

 —

 

 

(293.0)

 

Transaction costs

 

 

(1.8)

 

 

(0.6)

 

 

(1.6)

 

 

 —

 

 

 —

 

 

(2.0)

 

 

(6.0)

 

Stock-based compensation

 

 

(79.9)

 

 

(68.7)

 

 

(9.9)

 

 

 —

 

 

0.7

 

 

 —

 

 

(157.8)

 

Loss on extinguishment of debt

 

 

(48.7)

 

 

(35.7)

 

 

(1.4)

 

 

 —

 

 

 —

 

 

 —

 

 

(85.8)

 

Unrealized foreign currency loss on intercompany loans

 

 

 —

 

 

(0.1)

 

 

 —

 

 

 —

 

 

 —

 

 

(41.1)

 

 

(41.2)

 

Non-cash loss on investments

 

 

(0.5)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(0.5)

 

(Loss)/income from operations before income taxes

 

$

(118.4)

 

$

(10.4)

 

$

(4.8)

 

$

 —

 

$

3.1

 

$

(43.1)

 

$

(173.6)

 

 

Liquidity and Capital Resources

Our primary sources of liquidity have been cash provided by operations, equity contributions, and incurrence of debt. Our principal uses of cash have been for acquisitions, capital expenditures, and debt service requirements. We anticipate that our principal uses of cash in the future will be for acquisitions, capital expenditures, working capital, and debt service.

We have financial covenants under the indentures governing our 2020 Unsecured Notes, 2023 Unsecured Notes, and 2025 Unsecured Notes (collectively, the “Notes”) and our Credit Agreement that, under certain circumstances, restrict our ability to incur additional indebtedness. The indenture governing the 2020 Unsecured Notes limits any increase in our secured indebtedness (other than certain forms of secured indebtedness expressly permitted under such indenture) to a pro forma secured debt ratio of 4.50 times our previous quarter’s annualized modified EBITDA (as defined in the indenture) and limits our incurrence of additional indebtedness to a total indebtedness ratio of 5.25 times the previous quarter’s annualized modified EBITDA. The indentures governing the 2023 Unsecured Notes and the 2025 Unsecured Notes limit any increase in our secured indebtedness (other than certain forms of secured indebtedness expressly permitted under such indentures) to a pro forma secured debt ratio of 4.50 times our previous quarter’s annualized modified EBITDA (as defined in the indentures), and limit our incurrence of additional indebtedness to a total indebtedness ratio of 6.00 times the previous quarter’s annualized modified EBITDA.  The Credit Agreement also contains a covenant, applicable only to the Revolver, that we maintain a senior secured leverage ratio below 5.25:1.00 at any time when the aggregate principal amount of loans outstanding under the Revolver is greater than 35% of the commitments under the Revolver. The Credit Agreement also requires we and our subsidiaries comply with customary affirmative and negative covenants, including covenants restricting the ability of us and our subsidiaries, subject to specified exceptions, to incur additional indebtedness, make additional guaranties, incur additional liens on assets, or dispose of assets, pay dividends, or make other distributions, voluntarily prepay certain other indebtedness, enter into transactions with affiliated persons, make investments and amend the terms of certain other indebtedness.

As of March 31, 2016, we had $214.7 million in cash and cash equivalents and a working capital surplus of $23.2 million. Cash and cash equivalents consist of amounts held in bank accounts and highly-liquid U.S. treasury money market funds. Additionally, as of March 31, 2016, we had $442.1 million available under our Revolver, subject to certain conditions.

Our capital expenditures increased by $141.8 million, or 38%, during the nine months ended March 31, 2016 as compared to the nine months ended March 31, 2015, to $516.7 million from $374.9 million, respectively. The increase in capital expenditures is a result of meeting the needs of our larger customer base resulting from our acquisitions and

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organic growth. We expect to continue to invest in our network for the foreseeable future. These capital expenditures, however, are expected to primarily be success-based; that is, in most situations, we will not invest the capital until we have an executed customer contract that supports the investment.

As part of our corporate strategy, we continue to be regularly involved in discussions regarding potential acquisitions of companies and assets, some of which may be quite large. We expect to fund such acquisitions with cash from operations, debt issuances (including available borrowings under our $450.0 million Revolver), and available cash on hand. We regularly assess our projected capital requirements to fund future growth in our business, repay our debt obligations, and support our other general corporate and operational needs, and we regularly evaluate our opportunities to raise additional capital. As market conditions permit, we may refinance existing debt, issue new debt through the capital markets, or obtain additional bank financing to fund our projected capital requirements or provide additional liquidity.

On January 15, 2016, we acquired 100% of the equity interest in Allstream for cash consideration of CAD $422.9 million (or $297.6 million), subject to certain post-closing adjustments. The consideration paid is net of CAD $42.1 million (or $29.6 million) of working capital and other liabilities assumed by us in the acquisition. The acquisition was funded with an incremental borrowing under our Term Loan Facility.

On January 15, 2016, we entered into an Incremental Amendment to our Credit Agreement. Under the terms of the amendment, our Term Loan Facility was increased by $400.0 million, and the additional amounts bear interest at LIBOR plus 3.5% with a minimum LIBOR rate of 1.0%. The $400.0 million add-on was priced at 99.0%. No other terms of the Credit Agreement were amended.

On April 14, 2016, the Issuers completed a private offering of $550.0 million aggregate principal amount of additional 2025 Unsecured Notes.  The net proceeds from the offering plus cash on hand (i) will be used to redeem the Issuers’ remaining $325.6 million 2020 Secured Notes, including the required make-whole premium and accrued interest, and (ii) were used to repay approximately $196 million of borrowings under our secured Term Loan Facility. Following the April 2016 Notes Offering, $900 million aggregate principal amount of 2025 Unsecured Notes is outstanding.

Cash Flows

We believe that our cash flows from operating activities, in addition to cash and cash equivalents currently on-hand, will be sufficient to fund our operating activities and capital expenditures for the foreseeable future, and in any event for at least the next 12 to 18 months. Given the generally volatile global economic climate, no assurance can be given that this will be the case.

We regularly consider acquisitions and additional strategic opportunities, including large acquisitions, which may require additional debt or equity financing.

The following table sets forth components of our cash flow for the nine months ended March 31, 2016 and 2015.

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

 

    

2016

    

2015

 

 

 

(in millions)

 

Net cash provided by operating activities

 

$

537.9

 

$

402.1

 

Net cash used in investing activities

 

$

(933.7)

 

$

(1,232.2)

 

Net cash provided by financing activities

 

$

302.4

 

$

693.4

 

 

Net Cash Flows from Operating Activities

Net cash flows from operating activities increased by $135.8 million, or 34%, to $537.9 million from $402.1 million during the nine months ended March 31, 2016 and 2015, respectively. Net cash flows from operating activities during the nine months ended March 31, 2016 include our net loss of $45.3 million, plus the add backs of non-cash items deducted in the determination of net loss, principally depreciation and amortization of $368.0 million, stock-based

61


 

compensation expense of $122.5 million, foreign currency loss on intercompany loans of $28.9 million, non-cash interest expense of $9.1 million and deferred income taxes of $14.3 million. Also contributing to the cash provided by operating activities were additions to deferred revenue of $145.4 million, partially offset by amortization of deferred revenue of $66.6 million, and an excess tax benefit from stock-based compensation of $7.9 million.  Cash flow during the period was decreased by the net change in working capital components of $34.8 million. The $34.8 million cash outflow associated with the change in working capital components was primarily driven by a working capital deficit acquired as a result of the Allstream acquisition, mainly due to timing of payments and the related accounts payable amounts.

Net cash flows from operating activities during the nine months ended March 31, 2015 represents our net loss of $160.3 million, plus the add back to our net loss of non-cash items deducted in the determination of net loss, principally depreciation and amortization of $293.0 million, stock-based compensation expense of $157.8 million, foreign currency loss on intercompany loans of $41.2 million and non-cash interest expense of $16.3 million.  Also contributing to the cash provided by operating activities were additions to deferred revenue of $123.6 million, less amortization of deferred revenue of $52.9 million. Cash flow during the period was reduced by the net change in working capital components of $84.2 million. The $84.2 million cash outflow associated with the change in working capital components was primarily driven by $176.9 million in interest payments made during the period and $12.7 million in income tax payments.

The increase in net cash flows from operating activities during the nine months ended March 31, 2016 as compared to the nine months ended March 31, 2015 is primarily a result of additional earnings and synergies realized from our Fiscal 2016 and 2015 acquisitions, and a $31.9 million decrease in cash paid for interest, net of capitalized interest and organic growth.

Cash Flows used in Investing Activities

We used cash in investing activities of $933.7 million and $1,232.2 million during the nine months ended March 31, 2016 and 2015, respectively. During the nine months ended March 31, 2016, our principal uses of cash for investing activities were $516.7 million in additions to property and equipment, $297.6 million acquisition of Allstream and $102.7 million related to our Viatel acquisition.

During the nine months ended March 31, 2015, our principal uses of cash for investing activities were $374.9 million in additions to property and equipment, and $857.2 million in net cash paid for Fiscal 2015 acquisitions.

Cash Flows provided by Financing Activities

Our net cash provided by financing activities was $302.4 million and $693.4 million during the nine months ended March 31, 2016 and 2015, respectively.

Our cash flows provided by financing activities during the nine months ended March 31, 2016 were primarily comprised of $395.2 million in proceeds from our Incremental Amendment to the Term Loan Facility and $7.9 million excess tax benefit from stock-based compensation, offset by $81.1 million in contributions to parent, $13.4 million in principal payments on long-term debt, $3.3 million in principal payments on capital lease obligations and $2.9 million in payment of debt issuance costs.

During the nine months ended March 31, 2015, our cash flows provided by financing activities were $1,437.3 million from debt proceeds, $279.7 million in equity contributions offset by $939.8 million of principal payments on debt, the related $62.6 million of early redemption fees on debt extinguished and $18.8 million in debt issuance costs.

Off-Balance Sheet Arrangements

We do not have any special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support and we do not engage in leasing, hedging, or other similar activities that expose us to any significant liabilities that are not (i) reflected on the face of the condensed consolidated financial statements, (ii) disclosed in Note 10 - Commitments and Contingencies to the condensed consolidated financial statements, or in the

62


 

Future Contractual Obligations table included in Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report or (iii) discussed under “Item 3: Quantitative and Qualitative Disclosures About Market Risk”  below.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk consists of changes in interest rates from time to time and market risk arising from changes in foreign currency exchange rates that could impact our cash flows and earnings.

As of March 31, 2016, we had outstanding $350.0 million 2025 Unsecured Notes, $1,430.0 million 2023 Unsecured Notes and $325.6 million 2020 Unsecured Notes (collectively, the “Notes”), a balance of $2,033.4 million on our Term Loan Facility, and $38.3 million of capital lease obligations. As of March 31, 2016, we had $442.1 million available for borrowing under our Revolver, subject to certain conditions.

On April 14, 2016, the Issuers closed the private offering of $550 million of 2025 Unsecured Notes, which was an additional issuance of the 2025 Unsecured Notes. Upon completion of that offering, $900 million aggregate principal amount of 2025 Unsecured Notes is outstanding. The net proceeds of the offering plus cash on hand (i) were used to repay approximately $196 million of borrowings under the Term Loan Facility, and (ii) will be used to redeem the approximately $326 million of remaining Unsecured 2020 Notes, including the required make-whole premium and accrued interest.

Based on current market interest rates for debt of similar terms and average maturities and based on recent transactions, we estimate the fair value of our Notes to be $2,107.9 million as of March 31, 2016. Our 2025 Unsecured Notes, 2023 Unsecured Notes and 2020 Unsecured Notes accrue interest at fixed rates of 6.375%, 6.00% and 10.125%, respectively.

Both our Revolver and our Term Loan Facility accrue interest at floating rates subject to certain conditions. As of March 31, 2016, the weighted average interest rates (including margin) on the Term Loan Facility and our Revolver were approximately 3.9% and 3.4%, respectively. A hypothetical increase in the applicable interest rate on our Term Loan Facility of one percentage point would increase our annual interest expense by only 0.6% or $12.2 million, which is limited as a result of the applicable interest rate as of March 31, 2016 being below the Credit Agreement’s 1.0% LIBOR floor. A hypothetical increase of one percentage point above the LIBOR floor would increase the Company’s annual interest expense by approximately $20.3 million before considering the offsetting effects of our interest rate swaps.

In August 2012, we entered into interest rate swap agreements with an aggregate notional value of $750.0 million and a maturity date of June 30, 2017. The contracts state that we pay a 1.67% fixed rate of interest for the term of the agreements, beginning June 30, 2013. The counterparties pay to us the greater of actual LIBOR or 1.25%. We entered into the swap arrangements to reduce the risk of increased interest costs associated with potential future increases in LIBOR rates. A hypothetical increase in LIBOR rates of 100 basis points would increase the fair value of our interest rate swaps by approximately $6.1 million.

We are exposed to the risk of changes in interest rates if it is necessary to seek additional funding to support the expansion of our business and to support acquisitions. The interest rate that we may be able to obtain on future debt financings will be dependent on market conditions.

We have exposure to market risk arising from foreign currency exchange rates. During the three and nine months ended March 31, 2016, our foreign activities accounted for 30% and 18% of our consolidated revenue, respectively. We monitor foreign markets and our commitments in such markets to assess currency and other risks. Currently, fluctuations in foreign exchange rates do not pose a material risk; a 1% increase in foreign exchange rates would change consolidated revenue by approximately $1.4 million and $2.2 million for the three and nine months ended March 31, 2016, respectively. To date, we have not entered into any hedging arrangement designed to limit exposure to foreign currencies. As a result of our recent European expansion related to our acquisitions of Geo Networks Limited and Neo Telecoms as well as our recently closed acquisitions of Viatel and Allstream our level of foreign activities is expected to

63


 

increase and if it does, we may determine that such hedging arrangements would be appropriate and will consider such arrangements to minimize our exposure to foreign exchange risk.

We do not have any material commodity price risk.

ITEM 4. CONTROLS AND PROCEDURES

Changes in Internal Controls over Financial Reporting

Management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, whether any changes in our internal control over financial reporting that occurred during our last fiscal quarter have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Management has implemented changes in the accounting and technology areas as a result of our Sarbanes Oxley compliance program. Such changes have included but are not limited to formalizing existing and establishing new internal controls, implementation of technology solutions, and hiring additional accounting and technology personnel.

Management believes the changes that have been implemented and other ongoing enhancements will continue to have a material impact on our internal control over financial reporting in future periods as we continue to make improvements to our Sarbanes Oxley compliance program implementation.

Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 15d-15. Based on our evaluation under the framework in Internal Control-Integrated Framework, our management concluded that our disclosure controls and procedures were effective as of March 31, 2016.

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the ordinary course of business, we are from time to time party to various litigation matters that we believe are incidental to the operation of our business. We record an appropriate provision when the occurrence of loss is probable and can be reasonably estimated. We cannot estimate with certainty our ultimate legal and financial liability with respect to any such pending litigation matters and it is possible one or more of them could have a material adverse effect on us. However, we believe that the outcome of such pending litigation matters will not have a material adverse effect upon our results of operations, our consolidated financial condition or our liquidity.

ITEM 1A. RISK FACTORS

Item 1A of our Annual Report on Form 10-K for the year ended June 30, 2015 sets forth information relating to other important risks and uncertainties that could materially adversely affect our business, financial condition or operating results. Those risk factors, in addition to the other information set forth in this report, continue to be relevant to an understanding of our business, financial condition and operating results for the quarter ended March 31, 2016.

Other than the additional and/or amended risk factors below, there have been no material changes in our risk factors from those disclosed in our Annual Report.

Our international operations are subject to the laws and regulations of the U.S. and many foreign countries, including the U.S. Foreign Corrupt Practices Act, the Canadian Corruption of Foreign Public Officials Act and the U.K. Bribery Act.

We are subject to a variety of laws regarding our international operations, including the U.S. Foreign Corrupt Practices Act, the Canadian Corruption of Foreign Public Officials Act and the U.K. Bribery Act of 2010, and regulations issued by U.S. Customs and Border Protection, the U.S. Bureau of Industry and Security, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) and various foreign governmental agencies. We cannot predict the nature, scope or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing laws might be administered or interpreted. Actual or alleged violations of these laws could lead to enforcement actions and financial penalties that could result in substantial costs.

The U.S. Foreign Corrupt Practices Act, the Canadian Corruption of Foreign Public Officials Act, the U.K. Bribery Act and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments for the purpose of obtaining or retaining business. Recent years have seen a substantial increase in anti-bribery law enforcement activity with more frequent and aggressive investigations and enforcement proceedings by both the Department of Justice and the U.S. Securities and Exchange Commission, increased enforcement activity by non-U.S. regulators and increases in criminal and civil proceedings brought against companies and individuals. We have created and implemented a program for compliance with anti-bribery laws. Because our anti-bribery internal control policies and procedures have been recently implemented, we may have increased exposure to reckless or criminal acts committed by our employees or third-party intermediaries. Violations of these anti-bribery laws may result in criminal or civil sanctions, which could have a material adverse effect on our business, financial condition, results of operations and liquidity.

Our international operations expose us to currency risk.

We conduct a portion of our business using the British Pound Sterling, the Canadian Dollar and the Euro. Appreciation of the U.S. Dollar adversely affects our consolidated revenue. For example, the U.S. Dollar has appreciated significantly against the Euro in recent periods.  Since we tend to incur costs in the same currency in which those operations realize revenue, the effect on operating income and operating cash flow is largely mitigated. However, if the U.S. Dollar continues to appreciate significantly, future revenues, operating income and operating cash flows could be materially affected.

65


 

Certain of our services are subject to regulation that could change or otherwise impact us in an adverse manner.

Communications services are subject to domestic and international regulation at the federal, state, and local levels. These regulations affect our business and our existing and potential competitors. Our electronic communications services and electronic communications networks in Europe, Canada and elsewhere are subject to regulatory oversight by national communications regulators, such as the United Kingdom’s Office of Communications (“Ofcom”) and France’s Autorité de Régulation des Communications Electroniques et des Postes (“ARCEP”).  In addition, in the United States, both the Federal Communications Commission (“FCC”) and the state public utility commissions or similar regulatory authorities (the “State PUCs”) typically require us to file periodic reports, pay various regulatory fees and assessments, and to comply with their regulations. Similarly, in Canda, we are subject to the rules and oversight of the Canadian Radio-television and Telecommunications Commission (“CRTC”) as well as the laws and regulations of other federal and provincial bodies. Such compliance can be costly and burdensome and may affect the way we conduct our business. Delays in receiving required regulatory approvals (including approvals relating to acquisitions or financing activities or for interconnection agreements with other carriers), the enactment of new and adverse international or domestic legislation or regulations (including those pertaining to broadband initiatives and net-neutrality), or the denial, modification or termination by a regulator of any approval or authorization, could have a material adverse effect on our business. Further, the current regulatory landscape is subject to change through judicial review of current legislation and rulemaking by the FCC, Ofcom, ARCEP, CRTC and other domestic, foreign, and international rulemaking bodies. These bodies regularly consider changes to their regulatory framework and fee obligations. Changes in current regulation may make it more difficult to obtain the approvals necessary to operate our business, significantly increase the regulatory fees to which we are subject, or have other adverse effects on our future operations in the United States, Canada and Europe.

 

If we are unable to renew collective bargaining agreements on satisfactory terms, or we experience strikes, work stoppages or labor unrest, our business could suffer. 

Certain of the employees that we acquired in our Allstream acquisition are covered by collective bargaining agreements. There can be no assurance that such agreements will be renewed on terms favorable to us. If we are unable to renew such agreements on satisfactory terms, our labor costs could increase, which would affect our profit margins. Further, changes in governmental regulations relating to labor relations, or otherwise in our relationship with our employees, including our unionized employees, may result in strikes, lockouts or other work stoppages, any of which could have an adverse effect on our business, results of operations and financial condition.

 

Item 1A of our Annual Report on Form 10-K for the year ended June 30, 2015 sets forth information relating to other important risks and uncertainties that could materially adversely affect our business, financial condition or operating results. Those risk factors, in addition to the other information set forth in this report, continue to be relevant to an understanding of our business, financial condition and operating results for the quarter ended March 31, 2016. 

 

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ITEM 6. EXHIBITS

 

Exhibit No.

    

Description of Exhibit

 

 

 

3.1**

 

Certificate of Formation of Zayo Group, LLC, as amended (incorporated by reference to Exhibit 43.1 of our Registration Statement on Form S-4 filed with the SEC on July 12, 2014, File No. 333-169979).

 

 

3.2**

 

Amended and Restated Operating Agreement of Zayo Group LLC (incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K filed with the SEC on December 9, 2014, File No. 333-169979).

 

 

4.1**

 

Unsecured Notes Indenture, dated as of June 28, 2012 between Zayo Escrow Corporation and The Bank of New York Mellon Trust Company N.A., as trustee (incorporated by reference to Exhibit 4.2 of our Current Report on Form 8-K filed with the SEC on July 2, 2012, File No. 333-169979).

 

 

4.2**

 

Unsecured Notes First Supplemental Indenture, dated as of July 2, 2012, among Zayo Group, LLC, Zayo Capital, Inc., Zayo Escrow Corp, the guarantors party thereto, and The Bank of New York Mellon Trust Company N.A., as trustee (incorporated by reference to Exhibit 4.4 of our Current Report on Form 8-K filed with the SEC on July 2, 2012, File No. 333-169979).

 

 

4.3**

 

Indenture, dated as of January 23, 2015, among Zayo Group, LLC, Zayo Capital, Inc., the guarantors party thereto and The Bank of New York Mellon Trust Company N.A., as trustee (incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K filed with the SEC on January 23, 2015, File No. 333-169979).

 

 

4.4**

 

Indenture, dated as of May 6, 2015, between Zayo Group, LLC, Zayo Capital, Inc., the guarantors party thereto and The Bank of New York Mellon Trust Company N.A., as trustee (incorporated by reference to Exhibit 4.1 of Zayo Group Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on May 7, 2015, File No. 333-169979).

 

 

 

31.1*

 

Certification of Chief Executive Officer of the Registrant, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

 

 

31.2*

 

Certification of Chief Financial Officer of the Registrant, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

 

 

32.1*

 

Certification of Chief Executive Officer of the Registrant, 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 of the Registrant, pursuant to 18 U.S.C. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

101*

 

Financial Statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Loss, (iv) Consolidated Statement of Member’s Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements.

 


*        Filed/furnished herewith.

**      Previously filed and incorporated herein by reference.

 

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SIGNATURES

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

 

 

 

 

 

 

 

 

Zayo Group, LLC

 

 

 

Date: May 5, 2016

 

By:

 

/s/ Dan Caruso

 

 

 

 

Dan Caruso

 

 

 

 

Chief Executive Officer

 

 

 

 

 

 

 

Date: May 5, 2016

 

By:

 

/s/ Ken desGarennes

 

 

 

 

Ken desGarennes

 

 

 

 

Chief Financial Officer

 

 

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