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

2

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

3

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

4

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

5

SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS

Business

Scott-Rice Telephone Co. (“Scott-Rice” or the “Company”) is a subsidiary of Allstream Business US, LLC (“Allstream”). Allstream is part of an operating segment within Zayo Group Holdings, Inc. (“Zayo”). Scott-Rice provides Voice, IPTV Service and Broadband services using a variety of technologies for residential and business customers in the areas of Scott and Rice counties southwest of Minneapolis, Minnesota.

Scott-Rice was acquired as a part of the acquisition of the voice business of Electric Lightwave, Inc. (“ELI”) on March 1, 2017.

Basis of Presentation

Scott-Rice has historically operated as an integrated business of Zayo and not as a standalone entity. Financial statements representing historical operations of Scott-Rice’s bandwidth infrastructure provision and services have been derived from Zayo’s historical accounting records and are presented on a carve-out basis. All revenues and costs as well as assets and liabilities directly associated with the business activity of Scott-Rice are included in the financial statements. The historical costs and expenses reflected in the Scott-Rice financial statements include an allocation of certain corporate functions historically provided by Zayo, including, but not limited to, executive oversight, accounting, treasury, tax, legal, human resources, occupancy, procurement, and information technology. These expenses have been allocated to Scott-Rice on the basis of direct usage when identifiable, with the remainder allocated on a pro rata basis of  sales, headcount, tangible assets, or other measures considered to be a reasonable reflection of historical utilization levels of these services.

As these financial statements represent the combination of a separate legal entity wholly-owned by Zayo, the net assets of Scott-Rice have been presented as Zayo’s net investment. Zayo’s net investment in Scott-Rice is primarily composed of: (i) the initial investment to establish the net assets (and any subsequent adjustments thereto); (ii) the accumulated net earnings; (iii) net transfers to or from Zayo, including those related to cash management functions performed by Zayo; (iv) non-cash changes in financing arrangements, including the conversion of certain related party liabilities into Zayo’s net investment; and (v) corporate cost allocations

Management believes that the assumptions underlying Scott-Rice’s financial statements, including the assumptions regarding the allocation of general corporate expenses from Zayo, are reasonable. Nevertheless, Scott-Rice’s financial statements may not include all of the actual expenses that would have been incurred had the Company operated as a standalone company during the periods presented. Actual costs that would have been incurred had Scott-Rice operated as a standalone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure. Scott-Rice may incur additional costs associated with being a standalone, publicly listed company that were not included in the expense allocations and, therefore, would result in additional costs that are not reflected in Scott-Rice’s historical results of operations, financial position, and cash flows.

6

SCOTT-RICE TELEPHONE CO.

NOTES TO FINANCIAL STATEMENTS

Scott-Rice is dependent upon Zayo for all working capital and financing requirements as Zayo uses a centralized approach to cash management and financing of its operations. Financial transactions related to Scott-Rice are accounted for through the Net Zayo investment account. Accordingly, none of Zayo’s cash or debt at the corporate level has been assigned to Scott-Rice in the financial statements. Net Zayo investment represents Zayo’s interest in the recorded net assets of Scott-Rice. All significant transactions between Scott-Rice and Zayo have been included in the accompanying financial statements. Transactions with Zayo are reflected in the accompanying Statement of Invested Equity as “Net transfers from Zayo” and in the accompanying Balance Sheet within “Zayo’s net investment”.

Scott-Rice carve-out special purpose financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Cash management

Cash in the balance sheet comprises the cash of Scott-Rice’s business. None of Zayo’s cash and cash equivalents has been allocated to Scott-Rice in the financial statements.

Income taxes

Income taxes are calculated as if all of Scott-Rice’s operations had been separate tax-paying legal entities, each filing a separate tax return in its local jurisdiction. Scott-Rice’s income tax amounts currently payable or receivable by it are included in Zayo’s net investment, because the net liabilities (receivables) for the taxes due (refundable) are recorded in the financial statements of Zayo’s non-group entities that file the tax returns. As a result of the aforementioned structure, substantially all of Scott-Rice’s tax liabilities (refunds) are also paid (collected) by Zayo’s various non-group entities. These net changes in income tax amounts currently payable or receivable are included in the net cash transfers (to) from Zayo in the accompanying financial statements. No adjustments have been made in these carve-out financial statements to eliminate a tax structure that was put into place during the period of the historical financial statements, as more fully described in Note 6.

(2) SIGNIFICANT ACCOUNTING POLICIES

a. Use of Estimates

The preparation of Scott-Rice’s 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 accounting for income taxes and related valuation allowances against deferred tax assets. 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.

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SCOTT-RICE TELEPHONECO.
NOTES TO FINANCIAL STATEMENTS

b. Cash and Cash Equivalents

Scott-Rice considers all highly liquid investments with original maturities of three months or less to be cash and cash equivalents.

c. Trade Receivables

Trade receivables are recorded at the invoiced amount and do not bear interest. Scott-Rice maintains an allowance for doubtful accounts for estimated losses inherent in its trade receivable portfolio. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and the customer’s financial condition, and the age of receivables and current payment patterns. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Expected losses on accounts receivable were not significant at December 31, 2017.

d. Property and Equipment

Scott-Rice’s property and equipment includes assets in service and under construction or development.

Property and equipment is recorded at historical cost or acquisition date fair value. Costs associated directly with network construction, service installations, and development of business support systems, including employee-related costs, is capitalized. Depreciation is calculated on a straight-line basis over the asset’s estimated useful life from the date placed into service or acquired. Management periodically evaluates the estimates of the useful life of property and equipment by reviewing historical usage, with consideration given to technological changes, trends in the industry, and other economic factors that could impact the network architecture and asset utilization.

Scott-Rice uses the group life method (mass asset accounting) to depreciate the telephone related assets. Telephone plant acquired in a given year is grouped into similar categories and depreciated over the remaining estimated useful life of the group. Due to rapid changes in technology, selecting the estimated economic life of telecommunications plant and equipment requires a significant amount of judgment. Management periodically reviews data on expected utilization of new equipment, asset retirement activity, and net salvage values to determine adjustments to the depreciation rates. Scott-Rice has not made any significant changes to the lives of these assets during the period March 1, 2017 to December 31, 2017.

Management reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying value of its property and equipment may not be recoverable. An impairment loss is recognized when the assets’ carrying value exceeds both the assets’ estimated undiscounted future cash flows and the assets’ estimated fair value. Measurement of the impairment loss is then based on the estimated fair value of the assets. Considerable judgment is required to project such future cash flows and, if required, to estimate the fair value of the property and equipment and the resulting amount of the impairment. No impairment charges were recorded for property and equipment during the period March 1, 2017 to December 31, 2017.

8

SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS

e. Revenue Recognition

Scott-Rice recognizes revenues derived from switched local and long distance voice service, broadband and IPTV services in which the fees are tariffed when the service has been provided and there is persuasive evidence of an arrangement the fee is fixed or determinable, customer acceptance has been obtained with relevant contract terms, and the collection of the receivable is reasonably assured. Taxes collected from customers and remitted to a governmental authority are reported on a net basis and are excluded from revenue.

Most revenue is billed in advance on a fixed-rate basis and the remainder is billed in arrears on a transactional basis determined by customer usage. Scott-Rice often bills customers for upfront charges, which are non-refundable. These charges relate to activation fees, installation charges or service order charges for future services.

In determining the appropriate amount of revenue and related reserves to reflect in its financial statements, management evaluates payment history, credit ratings, customer financial performance, and historical or potential billing disputes and related estimates are based on these factors and assumptions.

f. Operating Costs and Expenses

Scott-Rice’s operating costs and expenses consist primarily of Operating costs and Selling, general and administrative expenses, and depreciation and amortization.

Operating costs consist of third-party network service costs resulting from the leasing of certain network facilities, primarily leases of circuits and dark fiber, from carriers to augment Scott-Rice’s owned infrastructure, for which it is generally billed a fixed monthly fee. Operating costs sold also includes IPTV programming fees, carrier access billing, and long distance costs.

Selling, general and administrative expenses include salaries and wages, and operating expenses.

Salaries and wages 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 over the customer life.

Operating expenses include all of the non-personnel-related expenses of operating and maintaining the network infrastructure. In addition, travel, training, advertising, professional fees, taxes, office supplies, and corporate allocation are included within operating expenses.

Depreciation and amortization include the expense of long-term assets over the asset’s estimated useful life from the date placed into service or acquired.

9

SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS

g. Legal Costs

Costs incurred to hire and retain external legal counsel to advise us on regulatory, litigation, and other matters are expensed as the related services are received.

h. Advertising

12

SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classifications of Certain Cash Receipts and Cash Payments. The new standard provides guidance for eight changes with respect to how cash receipts and cash payments are classified in the statement of cash flows, with the objective of reducing diversity in practice. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2017, with early adoption permitted. Scott-Rice does not plan to early adopt, nor does it expect the adoption of this new standard to have a material impact on its financial statements.

In February 2016, the FASB issued 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 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. Scott-Rice does not plan to early adopt and is evaluating the impact of the adoption of this new standard on its 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.

Although Scott-Rice is still assessing the impact of this standard on its financial statements, it has preliminarily determined that due to changes in the timing of recognition of certain installation services, discounts, and promotional credits given to customers, there may be additional contract assets and liabilities recorded in the balance sheet upon adoption. Additionally, the requirement to defer incremental costs incurred to acquire a contract including sales commissions, and recognize such costs over the contract period or expected customer life may result in additional deferred charges recognized in the balance sheets and could have the impact of deferring operating expenses. Scott-Rice plans to adopt this new standard as of July 1, 2018 and, based on its initial assessment, expects to apply the modified retrospective method, which may result in a cumulative effect adjustment as of the date of adoption. Until Scott-Rice is further along in its assessment, it does not anticipate being able to provide reasonably accurate estimates of the impact of ASU 2014-09.

13

SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS

(3) ACQUISITIONS

Electric Lightwave Parent, Inc.

On March 1, 2017, Zayo acquired ELI, an infrastructure and telecom services provider serving 35 markets in the western U.S., for net purchase consideration of $1,426.6 million, net of cash acquired, subject to certain post-closing adjustments. The operations of ELI were allocated to multiple Zayo segments, with $75.1 million being allocated to Scott-Rice. The acquisition was funded through Zayo’s debt and Zayo’s cash on hand. The acquisition was considered a stock purchase for tax purposes.

Although Scott-Rice continued as the same legal entity after the acquisition of ELI, push-down accounting was not applied. Scott-Rice’s net assets were not adjusted for the fair value of goodwill, customer lists, and other intangible assets.

The table below reflects the acquisition date fair values of the assets and liabilities assumed allocated to Scott-Rice from Zayo’s Fiscal 2017 acquisition of ELI:

(4) PROPERTY AND EQUIPMENT

Property and equipment was comprised of the following as of December 31, 2017:

Depreciation is computed using the straight-line method based on the estimated service or remaining useful lives of the various classes of depreciable assets. Total depreciation expense during the period March 1, 2017 to December 31, 2017 was $4,484,491.

14

SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS

During the period March 1, 2017 to December 31, 2017, the Company capitalized $1,364,125 of direct labor costs to property and equipment accounts.

(5) LONG-TERM DEBT

Guarantees

As of December 31, 2017, Zayo had $5.6 billion of long-term debt, including Notes Payable, Term Loan Facility, and Revolver. The long-term debt was payable through January 2027. As of December 31, 2017, no amounts were outstanding under the $500 million Revolver.

Zayo’s Notes Payable, Term Loan Facility, and Revolver are fully and unconditionally guaranteed, jointly and severally, by all of Zayo’s current and future domestic restricted subsidiaries.

Upon the closing of the sale of Scott-Rice to New Ulm Telecom, Inc., Scott-Rice will no longer be a guarantor of Zayo’s Notes Payable, Term Loan Facility, or Revolver.

Debt covenants

Zayo’s Notes Payable contain covenants that, among other things, restrict the ability of Zayo 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 Zayo’s restricted subsidiaries to pay dividends or make other payments to Zayo, consolidate, or merge with or into other companies, or transfer all or substantially all of their assets, engage in transactions with affiliates, and enter into sale and leaseback transactions. The terms of the Notes Payable include customary events of default.

Zayo’s 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 Zayo 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 that Zayo and its subsidiaries comply with customary affirmative and negative covenants.

15

SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS

The Notes Payable indentures limit any increase in Zayo’s secured indebtedness  to a pro forma secured debt ratio of 4.50 times Zayo’s previous quarter’s annualized modified EBITDA (as defined in the Notes Payable indentures), and limit Zayo’s incurrence of additional indebtedness to a total indebtedness ratio of 6.00 times the previous quarter’s annualized modified EBITDA.

Zayo was in compliance with all covenants associated with its debt agreements as of December 31, 2017.

(6) INCOME TAXES

The Company’s provision for income taxes from operations during the period March 1, 2017 to December 31, 2017 is summarized as follows:

         On December 22, 2017, the U.S. federal government enacted a tax bill, H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018, previously known as Tax Cuts and Jobs Act of 2017 (“U.S. Tax Reform”). U.S. Tax Reform reduced the U.S. corporate tax rate from 35% to 21%, created a territorial tax system with a one-time mandatory repatriation tax on previously deferred foreign earnings, and changed business-related deductions and credits.

         ASC 740, Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment. The SEC staff issued SAB 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which will allow registrants to record provisional amounts during a ‘measurement period’. The measurement period is similar to the measurement period used when accounting for business combinations under ASC 805, Business Combinations. SAB 118 allows a registrant to recognize provisional amounts when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. The measurement period ends when a registrant has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year.

16

SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS

In accordance with SAB 118, Scott-Rice has recorded a provisional tax expense for the period March 1, 2017 to December 31, 2017 of $852,736 to record the impact of U.S. Tax Reform. The provisional amounts will be known when the actual US and state tax returns are filed.

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.

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 period March 1, 2017 to December 31, 2017 is as follows:

Scott-Rice files income tax returns in United States and the state of Minnesota. In the normal course of business, Scott-Rice is subject to examination by taxing authorities.

Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 2017 are as follows:

As of December 31, 2017, the Company had no U.S. federal net operating loss ("NOL") carry forwards. As of December 31, 2017, the Company had tax-effected state net operating loss carry forwards of $526,887, which are not subject to limitations on their utilization and have various expiration dates 2021 through 2030.

17

SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS

Management believes it is more likely than not that it will utilize its net deferred tax assets to reduce or eliminate tax payments in future periods and has not recorded a valuation allowance.

(7) ACCRUED LIABILITIES

Accrued liabilities included in current liabilities as of December 31, 2017 consisted of the following:

(8) INVESTMENT EQUITY

Overview

All of Scott-Rice’s related party transactions with subsidiaries, divisions, and entities of Zayo (herein individually and collectively referred to as Zayo) were agreed to by Scott-Rice and Zayo. The costs for such services transferred to Scott-Rice are reflected in appropriate categories in the accompanying statement of operations during the period March 1, 2017 to December 31, 2017.

Net Contributions from Zayo

The significant components of net contributions from Zayo during the period March 1, 2017 to December 31, 2017, were as follows:

18

SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS

The net contributions from Zayo are generally recorded based on actual costs incurred, without a markup. The basis of allocation for items described above is as follows:

·         Investment in Scott-Rice: Amount represents Zayo’s initial investment in Scott-Rice.

·         Allocation of expenses: Zayo provides certain management and administrative services to each of its business units. See Note 11 for further discussion.

·         Income taxes – Zayo holds the income tax liabilities and deferred income taxes

·         Dividend from parent: Scott-Rice transferred the amount due from Zayo via a dividend.

(9) EMPLOYEE SAVINGS PLAN

(10) COMMITMENTS AND CONTINGENCIES

In the normal course of business, Scott-Rice 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 Scott-Rice’s financial condition, results of operations, or cash flows.

(11) RELATED PARTY TRANSACTIONS

Zayo provides certain management and administrative services to Scott-Rice. The costs for such services transferred to Scott-Rice are reflected in appropriate categories in the accompanying statements of operations during the period March 1, 2017 to December 31, 2017. Additionally, Zayo performs cash management functions on behalf of Scott-Rice. Scott-Rice’s cash needs are managed by Zayo on a daily basis. As a result, all of the charges and cost allocations to Scott-Rice covered by the centralized cash management functions were treated as a payable to Zayo. In addition, all of the cash receipts on behalf of Scott-Rice were deemed to be receivable from Zayo, as they were received.

The transactions to/from Zayo are generally recorded based on actual costs incurred, without a markup. The basis of allocation for items described above is as follows:

·         Customer payments and other cash receipts: As indicated above, to the extent payments for other units are received by Scott-Rice, such amounts are applied to the corresponding customer accounts receivable and are reflected as cash contribution from Zayo.

·         Allocation of expenses: Zayo provides certain management and administrative services to each of its business units. These costs include, but are not limited to, items such as general management and executive oversight, costs to support Scott-Rice’s information technology infrastructure, facilities, compliance, human resources, marketing, legal and finance functions, benefit plan administration, and risk management. These corporate allocations are based on one of two utilization measures: 1) full time equivalents  and 2) revenue.

·         Accounts payable and other payments: A portion of Scott-Rice’s cash disbursements for trade and other accounts payable and accrued expenses, are funded centrally by Zayo. Such transactions processed for trade and other accounts payable and accrued expenses associated with Scott-Rice are reflected as cash contribution from Zayo.

19

SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS

The significant components of the transactions with Zayo’s subsidiaries during the period March 1, 2017 to December 31, 2017 were as follows:

(12) SUBSEQUENT EVENTS

On February 23, 2018, Zayo entered into an agreement to sell Scott-Rice Telephone Co., a Minnesota Incumbent local exchange carrier, to New Ulm Telecom, Inc. (now known as “Nuvera Communications, Inc.” as a result of their name change on June 4, 2018) for $42 million.

Subsequent events were evaluated through June 11, 2018, the date that the financial statements were issued.

20