Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 2011
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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)
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DELAWARE
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26-2012549 |
(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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400 Centennial Parkway, Suite 200,
Louisville, CO 80027
(Address of Principal Executive Offices)
(303) 381-4683
(Registrants Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Act. Yes þ No o
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 o No þ The registrant is
no longer subject to the filing requirements of the Exchange Act, but filed all Exchange Act
reports when it was required to do so.
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
o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. þ
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.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
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Smaller reporting company o |
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(Do not check if a small reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
On August 31, 2011, 1,000 membership interest units were outstanding, none of which are held
by non-affiliates of the registrant.
GLOSSARY OF TERMS
Our industry uses many terms and acronyms that may not be familiar to you. To assist you in
reading this prospectus, we have provided definitions of some of these terms below.
4G: Fourth generation of cellular wireless standards. It is a successor to 3G and 2G
standards, with the aim to provide a wide range of data services, with rates up to gigabit-speed
Internet access for mobile, as well as stationary users.
ADM: Add drop multiplexer; optronics that allow for lower speed SONET services to be
aggregated or multiplexed to higher speed SONET services. These optronics are used to provide
SONET-based Bandwidth Infrastructure services over fiber.
Backbone: A major fiber optic network that interconnects smaller networks including regional
and metropolitan networks. It is the through-portion of a transmission network, as opposed to spurs
which branch off the through-portions.
Bandwidth Infrastructure: Lit and dark bandwidth provided over fiber networks. These services
are commonly used to transport telecom services, such as wireless, data, voice, Internet and video
traffic between locations. These locations frequently include cellular towers, network-neutral and
network specific data centers, carrier hotels, mobile switching centers, CATV head ends and
satellite uplink sites, ILEC central offices, and other key buildings that house telecommunications
and computer equipment. Bandwidth Infrastructure services that are lit (i.e., provided by using
optronics that light the fiber) include private line, Ethernet and Wavelength services. Bandwidth
Infrastructure services that are not lit are sold as dark-fiber capacity.
Capacity: The information carrying ability of a telecommunications service. Below is a list
of some common units of capacity for bandwidth and colocation services:
DS-0: A data communication circuit capable of transmitting at 64 Kbps.
DS-1: A data communication circuit capable of transmitting at 1.544 Mbps.
DS-3: A data communication circuit capable of transmitting at 45 Mbps.
OC-3: A data communication circuit capable of transmitting at 155 Mbps.
OC-12: A data communication circuit capable of transmitting at 622 Mbps.
OC-48: A data communication circuit capable of transmitting at 2.5 Gbps.
OC-192: A data communication circuit capable of transmitting at 10 Gbps.
Carrier: A provider of communications services that commonly include voice, data and Internet
services.
Carrier Hotel: A building containing many carriers, IXCs, and other telecommunications
service providers that are widely interconnected. These facilities generally have high-capacity
power service, backup batteries and generators, fuel storage, riser cable systems, large cooling
capability and advanced fire suppression systems.
CATV: Community antennae television; cable television.
CDN: Content distribution network; a system of computers networked together across the
Internet that cooperate to deliver various types of content to end users. The delivery process is
designed generally for either performance or cost.
Central Office: A facility used to house telecommunications equipment (e.g., switching
equipment), usually operated by the ILECs and CLECs.
CLEC: Competitive local exchange carrier; provides local telecommunications services in
competition with the ILEC.
Cloud Computing: An Internet-based or intranet-based computing environment wherein computing
resources are distributed across the network (i.e., the cloud) and are dynamically allocated on
an individual or pooled basis, and are increased or reduced as circumstances warrant, to handle the
computing task at hand.
Colocation: The housing of transport equipment, other communications equipment, servers and
storage devices within the same location. Some colocation providers are network-neutral, meaning
that they allow the customers who colocate in their facilities to purchase Bandwidth Infrastructure
and other telecommunications services from third parties. Operators of these colocation facilities
sell interconnection services to their customers, enabling them to cross connect with other
customers located within the same facility and/or with Bandwidth Infrastructure providers. Other
colocation facilities are operated by service providers and are network-specific in that they
require their customers to purchase Bandwidth Infrastructure and other telecommunications services
from them.
Conduit: A pipe, usually made of metal, ceramic or plastic, that protects buried fiber optic
cables.
Data center: A facility used to house computer systems, backup storage devices, routers,
services and other Internet and other telecommunications equipment. Data centers generally have
environmental controls (air conditioning, fire suppression, etc.), redundant/backup power supplies,
redundant data communications connections and high security.
Dark-Fiber: Fiber that has not yet been connected to telecommunications transmission
equipment or optronics and, therefore, has not yet been activated or lit.
DS: Digital signal level; a measure of the transmission rate of optical telecommunications
traffic. For example: DS-1 corresponds to 1.544 Mbps and DS-3 corresponds to 45 Mbps. See the
definition of Capacity, above.
DWDM: Dense wavelength-division multiplexing. The term dense refers to the number of
channels being multiplexed. A DWDM system typically has the capability to multiplex greater than 16
wavelengths.
Ethernet: The standard local area network (LAN) protocol. Ethernet was originally specified
to connect devices on a company or home network as well as to a cable modem or DSL modem for
Internet access. Due to its ubiquity in the LAN, Ethernet has become a popular transmission
protocol in metropolitan, regional and long haul networks as well.
Fiber Optics: Fiber, or fiber optic cables, are thin filaments of glass through which light
beams are transmitted over long distances.
Gbps: Gigabits per second, a measure of telecommunications transmission speed. One gigabit
equals 1 billion bits of information.
HDTV: High-definition television.
ILEC: Incumbent local exchange carrier; a traditional telecommunications provider that, prior
to the Telecommunications Act of 1996, had the exclusive right and responsibility for providing
local telecommunications services in its local service area.
Interconnection Service: A service that is used to connect two customers who are located
within a single building or within a single colocation space using either fiber or other means.
IP: Internet protocol; the transmission protocol used in the transmission of data over the
Internet.
ISP: Internet service provider; provides access to the Internet for consumers and businesses.
IXC: Inter-exchange carrier; a telecommunications company that traditionally provided telecom
service between local voice exchanges and intrastate or interstate (i.e., long distance) voice
exchanges. Today, IXCs frequently provide additional services to their customers beyond voice
including data and wireless Internet services.
Lateral/Spur: An extension from the main or core portion of a network to a customers
premises or other connection point.
Local Loop: A circuit that connects an end customer premise to a metropolitan network,
regional network or backbone network.
LTE Network: Long-term evolution network; can be used to provide 4G cellular networks that
are capable of providing high speed (greater than 100 Mbps) cellular data services.
Mbps: Megabits per second; a measure of telecommunications transmission speed. One megabit
equals one million bits of information.
Meet-Me Room: A physical location in a building, usually a data center or carrier hotel,
where voice carriers, Internet service providers, data service providers and others physically
interconnect so that traffic can be passed between their respective networks. At any given
colocation facility or data center, network owners may also be able to interconnect outside the
Meet-Me Room.
Mobile Switching Centers: Buildings where wireless service providers house their Internet
routers and voice switching equipment.
MPLS: Multi-protocol label switching; a standards-based technology for speeding up data
services provided over a network and making those data services easier to manage.
Multiplexing: An electronic or optical process that combines a large number of lower speed
transmissions into one higher speed transmission.
NOC: Network operations center; a location that is used to monitor networks, troubleshoot
network degradations and outages, and ensure customer network outages and other network
degradations are restored.
OC: Optical carrier level; a measure of the transmission rate of optical telecommunications
traffic. For example: OC-3 corresponds to 155 Mbps. See the definition of Capacity, above.
Optronics: Various types of equipment that are commonly used to light fiber. Optronics
include systems that are capable of providing SONET, Ethernet, Wavelength and other service over
fiber optic cable.
POP: Point-of-presence; a location in a building separate from colocation facilities and data
centers that houses equipment used to provide telecom or Bandwidth Infrastructure services.
PRI: Primary rate interface; a standardized telecommunications service level for carrying
multiple DS-0 voice and data transmissions between a network and a user.
Private Line: Dedicated private bandwidth that generally utilizes SONET technology and is
used to connect various locations.
RLEC: Rural local exchange carrier; an ILEC that serves rural areas.
Route Miles: The length, measured in non-overlapping miles, of a fiber network. Route miles
are distinct from fiber miles, which is the number of route miles in a network multiplied by the
number of fiber strands within each cable on the network. For example, if a ten mile network
segment has a 24-count fiber installed, it would represent 10x24 or 240 fiber miles.
SONET: Synchronous optical network; a network protocol traditionally used to support private
line services. This protocol enables transmission of voice, data and video at high speeds.
Protected SONET networks provide for virtually instantaneous restoration of service in the event of
a fiber cut or equipment failure.
Streaming: The delivery of media, such as movies and live video feeds, over a network in real
time.
Switch: An electronic device that selects the path that voice, data and Internet traffic take
or use on a network.
Transport: A telecommunication service to move data, Internet, voice, video or wireless
traffic from one location to another.
VPN: Virtual private network; a computer network that is implemented as an overlay on top of
an existing larger network.
Wavelength: A channel of light that carries telecommunications traffic through the process of
wavelength-division multiplexing.
WiMax: Worldwide interoperability for microwave access. WiMax services can be used by 4G cellular
networks that are capable of providing high speed (greater than 100 Mbps) cellular data services.
PART I
Overview
Zayo Group, LLC (we or us) is a provider of bandwidth infrastructure and network-neutral
colocation and interconnection services, which are key components of telecommunications and
Internet infrastructure services. These services enable our customers to manage, operate, and scale
their telecommunications and data networks and data center related operations. We provide our
bandwidth infrastructure services over our dense regional and metropolitan fiber networks, enabling
our customers to transport data, voice, video, and Internet traffic, as well as to interconnect
their networks. Our bandwidth infrastructure services are primarily used by wireless service
providers, carriers and other communications service providers, media and content companies, and
other bandwidth-intensive enterprises. We typically provide our lit bandwidth infrastructure
services for a fixed-rate monthly recurring fee under long-term contracts, which are usually three
to five years in length (and typically seven to ten years for fiber-to-the-tower services). Our
dark-fiber contracts are generally longer term in nature, up to 20 years and in a few cases longer.
Our network-neutral colocation and interconnection services facilitate the exchange of voice,
video, data, and Internet traffic between multiple third-party networks.
Our fiber networks span over 24,000 route miles, serve 153 geographic markets in the United
States, and connect to over 4,300 buildings, including approximately 1,978 cellular towers,
allowing us to provide our bandwidth infrastructure services to our customers over redundant fiber
facilities between key customer locations. The majority of the markets that we serve and buildings
to which we connect have few other networks capable of providing similar bandwidth infrastructure
services, which we believe provides us with a sustainable competitive advantage in these markets.
As a result, we believe that the services we provide our customers would be difficult to replicate
in a cost- and time-efficient manner. We provide our network-neutral colocation and interconnection
services utilizing our own data centers located within three major carrier hotels in the important
gateway markets of New York and New Jersey and in facilities located in Los Angeles, California;
Nashville, Tennessee; Plymouth, Minnesota; Cincinnati, Ohio; Cleveland, Ohio; Columbus, Ohio;
Pittsburg, Pennsylvania; and Memphis, Tennessee.
We were founded in 2007 in order to take advantage of the favorable Internet, data, and
wireless growth trends driving the demand for bandwidth infrastructure services. 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 our network
and services through 16 acquisitions and asset purchases for an aggregate purchase price of $546.5
million (after deducting our acquisition cost for Onvoy Voice Services (OVS) and Zayo Enterprise
Networks (ZEN), two business units which we spun-off to our parent in March of 2010 and April of
2011, respectively; see Our Business Units ). We have invested $235.4 million (after deducting
that portion of our equity capital that we used to fund our acquisition of OVS and ZEN) of equity
capital to fund these acquisitions. Some of our most significant acquisitions to date have been:
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PPL Telecom, LLC. We acquired PPL Telecom on August 24, 2007 for $56.7 million. PPL
Telecoms businesses and assets are primarily deployed in our Zayo Bandwidth business unit. |
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Onvoy, Inc (Onvoy). We acquired Onvoy on November 7, 2007, for $77.2 million. The
business and the assets that we acquired when we purchased Onvoy were divided into the Zayo
Bandwidth (ZB), ZEN and OVS business units. On March 12, 2010, we distributed all of the
shares of common stock of Onvoy, which holds the OVS business unit, to Zayo Group Holdings,
Inc. (Holdings), our current direct shareholder. On April 1, 2011, we distributed all of
the assets and liabilities of the ZEN unit to Holdings. See Item 7: Managements
Discussion and Analysis of Results of Operations and Financial Condition Factors
Affecting Our Results of Operations Spin-Off of Business Units. |
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Citynet Fiber Networks, LLC. We acquired Citynet Fiber Networks on February 15, 2008,
for $102.2 million. Citynet Fiber Networks assets are deployed in the ZB business unit. |
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FiberNet Telecom Group, Inc (FiberNet). We acquired FiberNet on September 9, 2009,
for $104.1 million. We formed our zColo business unit from a portion of the legacy FiberNet
assets. The remaining FiberNet assets were contributed to our ZB business unit. |
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AGL Networks, LLC (AGL Networks). We acquired AGL Networks on July 1, 2010, for
approximately $73.7 million. The business and the assets that we acquired with AGL were
used to establish the new Zayo Fiber Solutions (ZFS) business unit. |
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American Fiber Systems Holdings Corporation (AFS). We acquired AFS on October 1, 2010
for $114.1 million. The business and the assets were contributed to the ZB and ZFS business
units. |
See Item 7: Managements Discussion and Analysis of Financial Condition and Results of
Operations Factors Affecting Our Results of Operations Business Acquisitions for
additional information regarding our acquisitions and asset purchases since inception.
We are a wholly-owned subsidiary of Holdings a Delaware corporation, which is in turn
wholly owned by Communications Infrastructure Investments, LLC, a Delaware limited liability
company (CII).
Our fiscal year ends June 30 each year and we refer to the fiscal year ended June 30, 2011 as
Fiscal 2011 and the year ended June 30, 2010 as Fiscal 2010.
Our Business Strategy
Our primary business objective is to be the preferred provider of bandwidth infrastructure and
network-neutral colocation and interconnection services within our target markets. The following
are the key elements to our strategy for achieving this objective:
Selectively Expand Through Acquisitions. We have made numerous acquisitions since our
founding and we will continue to evaluate potential acquisition opportunities. 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 have consistently
demonstrated that we are able to acquire and effectively integrate companies and organically grow
revenue and EBITDA post-acquisition. Acquisitions have the ability to increase the scale at which
we operate, which in turn affords us the ability to increase our operating leverage, extend our
network reach, and broaden our customer base. We will continue to evaluate potential acquisitions,
both small and large, on a number of criteria, including the quality of the infrastructure assets,
the fit within our existing businesses, the opportunity to expand our network, and the opportunity
for us to create value as a result of the acquisition. See Item 1A: Risk Factors Future
Acquisitions are a Component of Our Strategic Plan, and will Include Integration and Other Risks
That could Harm Our Business.
Specifically Focus on Bandwidth Infrastructure and Colocation Services. Bandwidth
infrastructure and network-neutral colocation and interconnection services are critical network
components in the delivery of services (including Internet connectivity, wireless voice and data,
content delivery and voice and data networks) by communications service providers to their end
users. We believe our disciplined approach and specific focus on providing these critical services
to our targeted customers enable us to provide a high level of customer service while at the same
time being responsive to their needs and to changes in the marketplace.
Leverage Our Extensive Infrastructure Asset Base by Targeting Customers Within Our Network
Footprint. Targeting our sales efforts on markets that are served by our network enables us to
reduce our reliance on, and the associated costs of, third-party service providers. This also
enables us to provide our customers with a high level of customer service while producing high
incremental margins and attractive returns on the capital we invest.
Continue to Expand and Leverage Our Fiber-to-the-Tower Footprint. We believe the bandwidth
needs for wireless backhaul will continue to grow with the continued adoption of smart phones,
tablet PCs, netbooks, and other bandwidth-intensive mobile devices, as
well as the escalating deployment of 4G networks. The legacy copper infrastructure that
currently serves most cellular towers is not able to provide the same bandwidth capacity as our
fiber-based networks. Our existing fiber-to-the-tower networks enable us to sell additional
bandwidth to our existing customers as their capacity needs grow, as well as sell our bandwidth
infrastructure services to other wireless carriers located on these towers. In addition, we will
continue to seek opportunities to expand our fiber-to-the-tower footprint where the terms of the
contract provide an attractive return on our investment. The expansion of our fiber-to-the-tower
network footprint provides the ancillary benefit of bringing other potential customer locations
within reach of our network.
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Maintain a Disciplined Approach to Capital Investments. A significant portion of our capital
expenditures are success-based, meaning that the capital is invested only after we have entered
into a customer contract with terms that we believe provide an attractive return on our investment.
When building our networks, we design them so that adding incremental customers to the network or
increasing the bandwidth for an existing customer can be done economically and efficiently. As
customer demand increases for our network-neutral colocation and interconnection services, we will
seek opportunities to invest in additional data center space.
Our Business Units
As of June 30, 2011, we were organized into three autonomous business units: ZB, zColo and
ZFS. Each business unit is structured to provide sales, delivery and customer support for its
specific telecom and Internet infrastructure services. A fourth business unit, ZEN, was spun-off
during Fiscal 2011 and a fifth business unit, OVS, was spun-off during Fiscal 2010 to Holdings,
our direct shareholder. These business units were spun-off as it was determined that the services
they provided did not fit within our current business model of providing bandwidth infrastructure,
colocation and interconnection services.
Our business units have historically been identified by both the products they offer and the
customers they serve. Effective January 1, 2011, prior to the spin-off of the ZEN unit, the ZEN
unit was restructured in order for our business units to more closely align with their product
offerings rather than a combination of product offerings and customer demographics. The
restructuring resulted in the ZEN unit transferring its bandwidth infrastructure products to the ZB
unit, its dark fiber products to the ZFS unit and its colocation products to the zColo unit. The
remaining ZEN unit that was spun-off to Holdings on April 1, 2011, comprised our legacy managed
services product offerings.
Zayo Bandwidth. Through our ZB unit, we provide bandwidth infrastructure services over our
metropolitan and regional fiber networks. These services are typically lit bandwidth, meaning that
we use optronics to light the fiber, and consist of private line, wavelength, and Ethernet
services. Our target customers within this unit are primarily wireless service providers, carriers
and other communications service providers (including Incumbent Local Exchange Carriers (ILECs),
Inter Exchange Carrier (IXCs), Rural Local Exchange Carrier (RLECs), Competitive Local Exchange
Carriers (CLECs), and foreign carriers), media and content companies (including cable and
satellite video providers), and other Internet-centric businesses that require an aggregate minimum
of 10 Gbps of bandwidth across their networks.
zColo. Through our zColo unit, we provide network-neutral colocation and interconnection
services in three major carrier hotels in the New York metropolitan area (60 Hudson Street and 111
8th Avenue in New York, New York, and 165 Halsey Street in Newark, New Jersey) and in facilities
located in Los Angeles, California and Nashville, Tennessee. As a result of the restructuring of
our business units, in January 2011, zColo was transferred five facilities from ZEN and ZB located
in Plymouth, Minnesota; Cincinnati, Ohio; Cleveland, Ohio; Columbus, Ohio; Pittsburg, Pennsylvania;
and Memphis, Tennessee. In addition, we are the exclusive operator of the Meet-Me Room at 60
Hudson Street, which is one of the most important carrier hotels in the United States with
approximately 200 global networks interconnecting within this facility. Our zColo data centers
house and power Internet and private-network equipment in secure, environmentally-controlled
locations that our customers use to aggregate and distribute data, voice, Internet, and video
traffic. Throughout two of the three facilities in the New York City metropolitan area, we operate
intra-building interconnect networks that, along with the Meet-Me Room at 60 Hudson Street, are
utilized by our customers to efficiently and cost-effectively interconnect with other Internet,
data, video, voice, and wireless networks. As of June 30, 2011 and June 30, 2010 the zColo unit
managed 72,927 and 41,091 square feet of billable colocation space, respectively.
Zayo Fiber Solutions. The ZFS unit was formally launched on July 1, 2010, after our
acquisition of AGL Networks, a company whose business was comprised solely of dark-fiber-related
services. See Item 7. Management Discussion and Analysis: Overview Recent Developments.
The assets of AGL Networks complement our existing dark-fiber services, which had previously been
provided by ZEN and ZB. Subsequent to the acquisition, we transferred those existing dark-fiber
customer contracts to our ZFS unit and began leveraging a portion our pre-existing fiber network to
provide dark-fiber solution offerings.
Through our ZFS unit, we provide dark-fiber and related services primarily on our existing
fiber footprint. We lease dark-fiber pairs to our customers and, as part of our service offering,
we manage and maintain the underlying fiber network for the customer. Our customers light the fiber
using their own optronics, and as such, we do not manage the bandwidth that the customer receives.
This allows the customer to manage bandwidth on their own metro and long haul networks according to
their specific business needs. ZFSs 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. We market and sell dark-fiber-related services under long-term contracts (up to 20
years and in a few cases longer); our customers generally pay us on a monthly basis for these
services.
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Below is a summary of the key services provided by our three business units, the types of
customers we target and our representative peer groups that offer comparable services:
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Business Unit |
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Key Services |
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Target Customers |
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Peer Group |
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Zayo Bandwidth
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bandwidth
infrastructure, including lit services
such as private lines, wavelengths, and
Ethernet
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Top 200
bandwidth users in the
United States (wireless,
carriers/local exchange
carriers, media and
content companies)
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AboveNet,
Inc.
Sidera
Networks (formerly RCN
Metro) |
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ZColo
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Network-neutral
colocation
Interconnection
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Carriers,
service providers,
colocation-intensive
enterprises
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The Telx
Group, Inc.
Equinix,
Inc |
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Zayo Fiber
Solutions
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Bandwidth
infrastructure, primarily dark-fiber
leases
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Carriers,
media and content
companies, large
enterprises and public
sector
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AboveNet,
Inc.
Fibertech
Networks, LLC |
Financial information for each of our business units is contained in Note 17 Segment
Reporting to our consolidated financial statements.
Industry
We classify the communications services industry into four distinct categories: enablers of
infrastructure, telecom and Internet infrastructure service providers, communications service
providers, and end users. Bandwidth infrastructure services and colocation and interconnection
services are components of telecom and Internet infrastructure services.
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Enablers of Infrastructure. Entities that approve, sell, or provide the licenses,
rights-of-way, and other necessary permits and land that are required in order to provide
telecom and Internet infrastructure services. |
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Telecom and Internet Infrastructure Service Providers. Companies that own and operate
assets that are used to provide (i) raw bandwidth services, including bandwidth
infrastructure, that are used to transport wireless, data, voice, Internet and video
traffic using fiber, legacy copper, or microwave networks, (ii) colocation services used to
house and interconnect networks, and (iii) cellular tower services to Communication Service
Providers. Telecom and Internet infrastructure service providers rely on enablers of
infrastructure to provide their services. |
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Communications Service Providers. Companies that market and sell communications
services such as voice, Internet, data, video, wireless, CDN services, and hosting
solutions. Telecom and Internet infrastructure services are used by nearly all
communications service providers in the provision of services such as Internet
connectivity, wireless voice and data services, content delivery, and voice and data
networks to end users. |
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End Users: Public sector entities, businesses, and private consumers that purchase
communications services. |
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We are a provider of bandwidth infrastructure and colocation services, a subset of telecom and
Internet infrastructure services. We provide the following services:
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Bandwidth Infrastructure. Bandwidth infrastructure providers transport communications
services, such as wireless, data, voice, Internet and video traffic over fiber networks.
Bandwidth infrastructure providers supply lit bandwidth and/or dark fiber between
locations, such as cellular towers, neutral and network-specific data centers, carrier
hotels, mobile switching centers, CATV head ends and satellite uplink sites, ILEC central
offices, and other key buildings that house telecommunications and computer equipment.
Bandwidth infrastructure services (including fiber-to-the-tower) primarily consist of
private line, Ethernet and Wavelength services commonly referred to as lit services,
bandwidth infrastructure services that are not lit are sold as dark-fiber capacity. |
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Colocation. Colocation providers offer a highly controlled environment for housing
telecommunications, Internet and other networking and computer equipment such as switches,
routers, transport equipment, servers and storage devices within their own colocation
facilities. Network-neutral data center providers allow customers who colocate in their
facilities to purchase bandwidth infrastructure and other telecommunications services from
third parties. This enables customers to interconnect with other customers colocated at the
same facility and/or with bandwidth infrastructure providers of their choice.
Network-specific data center providers require their customers to purchase bandwidth
infrastructure and other telecommunications services from them. |
Nearly all communications service providers utilize one or more forms of telecom and Internet
infrastructure services in order to provide services such as Internet connectivity, wireless voice
and data services, CDN services, hosting services, local and long distance voice networks, HDTV
networks and data networks. These services are typically offered by ILECs, RLECs, hosting
companies, wireless service providers, IXCs, CLECs, CATV, satellite TV, and CDN service providers.
In recent years, the industry has experienced significant increases in global IP traffic. The
growth in Internet traffic overall is being driven by a mix of consumer and business trends
including the proliferation of wireless smart phones, rich media such as video on demand, real time
online streaming video, social networks, online gaming, cloud computing, 3G and 4G mobile broadband
cards, and the trend towards enterprise outsourcing of IT and storage needs.
Growth in demand of telecom and Internet infrastructure services is also likely to continue to
come from private data networks or those networks that do not utilize the Internet. Such networks
have many uses including executing trades and backing up data for the major financial exchanges,
securely transferring corporate and government information, conducting high definition video calls,
supporting federal medical privacy regulations (HIPPA) compliance when sending patient medical
x-rays electronically, and backing up or storing other critical data. Services sold by bandwidth
infrastructure providers are commonly used to support these data networks.
In recent years, there have been numerous acquisitions of companies that provide bandwidth
infrastructure services in the United States. We believe our industry will continue to consolidate,
resulting in a decrease in the number of bandwidth infrastructure providers. At the same time, we
anticipate that demand for bandwidth will continue to increase, positively impacting businesses
that provide bandwidth infrastructure services.
Our Telecom and Internet Infrastructure Assets
Our telecom and Internet infrastructure assets consist of our fiber networks (including our
fiber-to-the-tower networks), the optronics that we use to provide our bandwidth infrastructure
services over our fiber networks, and our data centers where we provide network-neutral colocation
and interconnection services.
5
Networks
The vast majority of our fiber networks are owned or operated under long-term indefeasible
right of use (IRU) contracts, span over 24,000 route miles, and connect to 153 geographic markets
in the United States. Within the markets that we serve, our network connects to over 4,300
buildings, including major data centers, carrier hotels and central offices, single-tenant
high-bandwidth locations, cellular towers and enterprise buildings. Our networks are designed in
such a way that ample opportunity exists to organically add additional markets and buildings to our
networks; we are focused on adding markets and buildings that have limited or no existing bandwidth
infrastructure providers. Our fiber networks also have the following key attributes:
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Modern Fiber and Optronics. Our modern fiber networks support current generation
optronics as well as Dense Wave Division Multiplex (DWDM) systems, Add Drop Multiplexing
(ADM) systems, and Ethernet switches. This equipment is used to provide our lit bandwidth
infrastructure services. The vast majority of our networks are capable of supporting next
generation technologies with minimal capital investment. |
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Scalable Network Architecture. Our networks are scalable, meaning we have spare fiber
that will allow us to continue to add additional capacity to our network as demand for our
services increases. In addition, many of our core network technologies utilize DWDM
systems, nearly all of which have spare capacity whereby we can continue to add wavelengths
to our network without consuming additional fiber. |
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Extensive Coverage in Locations with Few Fiber Alternatives. We focus our sales and
marketing efforts within our network footprint, specifically those areas within our
networks (including our fiber-to-the-tower networks) that we believe are less competitive.
A significant portion of our revenue is derived from small and midsized markets and from
our fiber-to-the-tower network that, in general, have a limited number of fiber
alternatives. We frequently connect customer locations in our target small to midsized
markets back to major data centers, carrier hotels and central offices, single-tenant
high-bandwidth locations, enterprise buildings and other major telecommunications buildings
that are usually located in larger markets. We also target locations in larger markets with
few fiber alternatives such as cellular towers and enterprise buildings. |
Regional Fiber Networks. We use our regional fiber networks to provide bandwidth
infrastructure services between markets that we serve. Our regional networks are commonly used in
the following scenarios: First, to provide service between on-net buildings (or buildings that are
directly connected to our fiber network), that are located in different large markets, for example,
Chicago and New York. Second, to connect our on-net buildings in small and midsized markets back to
major data centers, wireless switching centers, carrier hotels and ILEC central offices in larger
markets, for example, between Lima, Ohio and Cleveland, Ohio. Occasionally our networks provide
service between on-net buildings in two different small or midsized markets located on various
parts of our regional networks, for example, between Sioux Falls, South Dakota and Alexandria,
Minnesota. We seek to continue to add new markets to our regional networks on a success basis,
meaning that we attempt primarily to invest capital only when the terms of a customer contract
provide an attractive return on our investment. We have deployed current generation DWDM
technologies across most of our regional networks which are capable of scaling to 400 Gbps of
bandwidth, which allow us to continue to add capacity as demand for bandwidth increases. We expect
technology to continue to advance and that we will augment our regional networks accordingly.
Fiber-to-the-Tower Networks. We operate fiber-to-the-tower (FTT) networks in 45 distinct
geographic areas across our footprint and have FTT projects under construction in four additional
markets. We connect to 1,978 cellular towers and have contracts with multiple national wireless
carriers to build out to 500 additional towers. These fiber-to-the-tower networks provide our
customers with bandwidth infrastructure services that offer significantly improved performance over
legacy copper networks. Our fiber-to-the-tower networks are scalable, which means that we can
increase the amount of bandwidth that we provide to each of the towers as our customers wireless
data networks grow. Our fiber-to-the-tower markets are generally in areas where we already have
dense networks, which afford us the ability to offer ring-protected fiber-to-the-tower services. As
such, we are able to offer a higher service level agreement than those traditionally offered over
legacy unprotected microwave and copper networks.
Our fiber-to-the-tower networks have the ability to provide significantly more bandwidth to a
given tower than copper and microwave networks. We believe that bandwidth used on our
fiber-to-the-tower networks will grow over time as smart phone penetration increases, tablet
computers and readers are adopted, wireless 3G and 4G laptop cards are more broadly used, video
consumption increases on mobile devices, and 3G networks are upgraded to 4G networks, including LTE
and WiMax networks.
6
Diverse Portfolio of On-Net Buildings. We provide service to over 4,300 on-net buildings and
are continually making capital investments to increase our on-net building footprint. On-net
buildings are buildings that directly connect via fiber to our metropolitan or regional fiber
networks. Our customers generally purchase our bandwidth infrastructure services to transport their
data, Internet, wireless and voice traffic between buildings directly connected to our network. The
types of buildings connected to our network are primarily composed of the following:
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Data Centers, Carrier Hotels and Central Offices. These buildings house multiple
consumers of bandwidth infrastructure services. Our networks generally connect the most
important of these buildings in the markets where we operate. We have 340 of these types of
facilities connected to our network. |
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Single-Tenant, High-Bandwidth Locations. These buildings house a single large consumer
of bandwidth infrastructure services. Examples of these buildings include video aggregation
sites, mobile switching centers and hosting centers. Our network is connected to these
buildings only when the tenant purchases services from us. We currently have 345
single-tenant, high-bandwidth locations on-net. |
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Cellular Towers. We connect to cellular towers and other locations that house wireless
antennas. We have 1,978 cellular towers on-net, and we are actively constructing an
additional 500. We have signed contracts to provide service to at least one tenant at each
tower that we connect or will connect to. Typically, towers have multiple tenants, which
provide us with the opportunity to sell services to those additional tenants. |
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Enterprise Buildings. Our network extends to 1,653 enterprise buildings. These
buildings contain a mix of single tenant and multi-tenant enterprise buildings and include
hospitals, corporate data centers, schools, government buildings, research centers and
other key corporate locations that require bandwidth infrastructure services. |
Key Colocation Facilities Exclusively in Major Telecom/Internet Buildings
Our key colocation facilities are located in some of the most important carrier hotels in the
United States, including 60 Hudson Street and 111 8th Avenue in New York, New York and 165 Halsey
Street in Newark, New Jersey. zColo also has the exclusive right to operate and provide colocation
and interconnection services in the Meet-Me Room at 60 Hudson Street, although carriers may
inter-connect there in less cost-effective manners including without using the Meet-Me-Room. We
also have colocation facilities located in Los Angeles, California; Nashville, Tennessee; Plymouth,
Minnesota; Cincinnati, Ohio; Cleveland, Ohio;
Columbus, Ohio; Pittsburg, Pennsylvania; and Memphis, Tennessee. All of our colocation
facilities are network-neutral and have backup power in the form of batteries and generators, air
conditioning, modern fire suppression equipment and ample power to meet customer needs. We have
long-term leases with the owners of each of the buildings where we provide colocation services. Our
colocation facilities total approximately 73,000 net square feet of usable data center space.
Network Management and Operations
Our primary network operations center (NOC) is located in Tulsa, Oklahoma and provides
24-hour, 365-day monitoring and network surveillance. We continually monitor for and proactively
respond to any events that negatively impact or interrupt the services that we provide to our
customers. Our NOC also responds to customer network inquiries via standard customer trouble ticket
procedures. Our NOC coordinates and notifies our customers of maintenance activities and is the
organization responsible for ensuring that we meet our service level agreements.
Rights-of-Way
We have the necessary right-of-way agreements and other required rights, including state and
federal government authorization, that allow us to maintain and expand our fiber networks which are
located on private property and public rights-of-way, including utility poles. When we expand our
network we obtain the necessary construction permits, license agreements, permits and franchise
agreements. Certain of these permits, licenses and franchises are for a limited duration. When we
need to use private property our strategy is to obtain right-of-way agreements under long-term
contracts.
7
Other
We do not own any significant intellectual property, nor do we spend a material amount on
research and development. Our working capital requirements and expansion needs have been satisfied
to date through the members equity contributions, borrowings under our credit agreement, and cash
provided by operating activities.
Our Services
Zayo Bandwidth. Through our ZB unit, we offer bandwidth infrastructure services over our
fiber network. These service offerings are targeted to meet the needs of the largest consumers of
bandwidth infrastructure in the United States. Services are primarily provided under contracts with
terms ranging from three to ten years and typically include a monthly recurring charge and in many
cases an installation fee. The monthly recurring fee is fixed in most cases and is based on the
amount of bandwidth provided and the type of locations to which the bandwidth connects.
Bandwidth infrastructure services typically include (i) private line services that range in
speed, or bandwidth provided, from 45 Mbps to 10 Gbps and include DS-1, DS-3, OC-3, OC-12, OC-48
and OC-192 service; (ii) Ethernet services that range in speed from 100 Mbps to 10 Gbps; (iii)
wavelength services that are provided at 2.5 Gbps and 10 Gbps speeds; and (iv) fiber-to-the-tower
services. ZB offers several configurations of these services. These configurations include simple
point-to-point (or building-to-building) services and more complex point-to-multi-point or
multi-point-to-multi-point services. We also custom-tailor complex network solutions for our
largest customers, including customized low latency routing, multi-hundred location
fiber-to-the-tower networks and other similarly customized deployments.
All services are provided over modern fiber optic cable and are monitored by our 24-hour,
365-day NOC. A majority of our services are provided end-to-end exclusively over our fiber network,
which provides many benefits including:
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avoidance of the cost of third-party service providers, including ILECs; |
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the ability to rapidly and cost effectively scale, or increase bandwidth, to meet the
growing network requirements of our customers; and |
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ease in identifying and responding to customer service inquiries over one contiguous
fiber network. |
ZB is an active participant in federal broadband stimulus projects- available through the
Broadband Technology Opportunity Program and the American Recovery and Reinvestment Act. For more
information, see Item 7: Managements Discussion and Analysis of Financial Condition and Results
of Operations Overview Recent Developments Broadband Stimulus Awards.
zColo. Through our zColo business unit, we provide network-neutral colocation,
interconnection and other services.
Colocation Services. Our facilities provide our customers with secure, reliable, and
environmentally-controlled data center space. Our colocation services include redundant power and
cooling, physical security, fire suppression and remote hands services. Each of our colocation
facilities is managed by experienced and well-trained technicians and monitored from our network
control center based in New York, New York. We typically provide our services for an installation
fee and a recurring monthly fee and generally provide them on one to five year contracts.
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Space. We sell cabinets, racks, half-racks and cages. We also provide and charge for
remote hands/remote technician services. |
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Power. We provide alternating current (AC) and direct current (DC) power at
various levels. Our power product is backed up by batteries and generators. |
8
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Interconnection Services. As a network-neutral provider of colocation services, we
provide our customers with interconnection services including fiber, OCn, DS3 and DS1
service levels. These services are provided for terms between one and five years for a
recurring fee and in many cases a non-recurring fee. Interconnection services allow
customers to connect and deliver capacity services between separate networks. |
Zayo Fiber Solutions. Through our ZFS unit, we provide dark-fiber-related services to
customers who desire to operate their telecommunications and data networks at the fiber level, in
those markets where we have fiber inventory in excess of our needs. These include customers from
Zayo Bandwidth, as well as from the legacy AFS and AGL Networks businesses, and range from large
wireless carriers to local municipalities. Dark-fiber related services generally consist of the
following:
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Dark-Fiber Leases. We provide our customers the opportunity to lease dark-fiber,
usually in pairs, for a monthly recurring fee or upfront payment. Contracts are
generally long-term (up to 20 years and in a few cases longer) and sometimes include
automatic annual price escalators. |
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Maintenance & Other Services. Dark-fiber leases also include maintenance
services for which Zayo charges customers on a recurring basis. Other related
services may include building entrance fiber or riser fiber for distribution within
a building. |
Demand for all of our services does not materially fluctuate based on seasonality.
Sales and Marketing
Each of our business units has its own sales team. Our business units primarily engage in
direct sales without the use of agents or resellers. In the aggregate, our three business units
employ 36 sales representatives. Each of these sales representatives is
responsible for meeting a monthly quota. The sales representatives are directly supported by
sales management, engineering, solutions engineering and marketing staff.
Our ZB sales force is distributed across the country and focuses on a select group of 100
accounts. These accounts consist of the largest consumers of both lit and dark bandwidth in the
United States, including national carriers, wireless carriers, PTTs media and content businesses,
RLECs, CLECs and other bandwidth-intensive businesses. The Zayo Bandwidth sales team is focused on
delivering the Companys lit bandwidth infrastructure product offerings to these select 100
accounts.
The ZFS sales force collaborates with the ZB sales force in order to market and deliver the
Companys dark bandwidth infrastructure and lit bandwidth infrastructure product offerings to the
65 accounts identified by management as the largest bandwidth consumers in the United States.
Our zColo sales force is located in various markets and is focused on existing customers who
are located within our colocation facilities that require additional interconnection or colocation
services, and on new customers such as content and media companies, domestic and international
carriers, and other bandwidth-intensive businesses that require colocation services in the major
carrier hotels and data centers in the United States.
In January of 2011, the Company established the Zayo Networks sales and solutions
organization. Zayo Networks includes approximately 20 sales representatives organized into
geographic teams. The Zayo Networks sales team has a mission of selling all of the Companys
product offerings to companies outside of the top wholesale accounts that have fiber-based
bandwidth and colocation needs, including healthcare, education, financial companies, regional
carriers, Internet service providers and other bandwidth-intensive businesses located near our
existing network assets. Each regional team has dedicated project managers, sales engineers, and
Outside Plan Solutions Engineers to develop cost effective and reliable customer network solutions.
In addition to its mission of selling Zayos product portfolio to approximately 1000
customers, Zayo Networks is responsible for the Companys marketing efforts. The marketing staff
manages Zayos web presence, customer facing mapping tools, marketing campaigns and public
relations.
9
Our Customers
Our customers generally have a significant and growing need for the telecom and Internet
infrastructure services that we provide. Our customer base consists of wireless service providers,
carriers and other communication service providers, media and content companies (including cable
and satellite video providers), and other bandwidth-intensive businesses such as companies in the
education, healthcare, financial services, and technology industries. Our largest single customer
accounted for approximately 13% of our monthly recurring revenue as of June 30, 2011, and total
revenues from our top ten customers accounted for approximately 47% of our monthly recurring
revenue during the same period. We currently depend, and expect to continue to depend, upon a
relatively small number of customers for a significant percentage of our revenue. If any of our key
customers experience a general decline in demand due to economic or other forces, or if any such
customer is not satisfied with our services, such key customer may reduce the number of service
orders it has with us, terminate its relationship with us (subject to certain early termination
fees), or fail to renew its contractual relationship with us upon expiration.
The majority of our customers sign Master Service Agreements (MSAs) that contain standard
terms and conditions including service level agreements, required response intervals,
indemnification, default, force majeure, assignment and notification, limitation of liability,
confidentiality and other key terms and conditions. Most MSAs also contain appendices that contain
information that is specific to each of the services that we provide. The MSAs either have exhibits
that contain service orders or, alternatively, terms for services ordered are set forth in a
separate service order. Each service order sets forth the minimum contract duration, the monthly
recurring charge, and the non-recurring charges.
We have numerous customer orders for connections, including contracts with multiple national
wireless carriers, to build out to more than 500 additional towers. If we are unable to satisfy new
orders or build our network according to contractually specified deadlines, we may incur penalties
or suffer the loss of revenue.
Competition
Bandwidth Infrastructure. We believe that among the key factors that influence our customers
choice of bandwidth infrastructure providers are the ability to provide our customers with a
service that exclusively utilizes our fiber network from end-to-end, the quality of the service the
customer receives, the ability to implement a complex custom solution to meet the customers needs,
the price of the service provided, and the ongoing customer service provided.
Generally, price competition in non-commoditized geographies is less intense than that for
commoditized routes. We face direct price competition when there are other fiber-based carriers who
have networks that serve the same customers and geographies that we do. The specific competitors
vary significantly based on geography, and often a particular solution can be provided by only one
to three carriers that have comparable fiber. Typically, these competitors are large,
well-capitalized ILECs such as AT&T Inc., CenturyLink, Inc. and Verizon Communications Inc., or are
publicly traded bandwidth infrastructure providers such as AboveNet, Inc., and Level 3
Communications, Inc. In certain geographies, privately held companies can also offer comparable
fiber-based solutions. On occasion, the price for bandwidth infrastructure services is too high
compared with the cost of lower-speed, copper-based telecom services. We believe that price
competition will continue in situations where our competitors have comparable pre-existing fiber
networks. Some of our competitors have long standing customer relationships, very large enterprise
values and significant access to capital. In addition, several of our competitors have large,
pre-existing expansive fiber networks.
Colocation. The market for our colocation and interconnection services is very competitive.
We compete based on price, quality of service, network-neutrality, the type and quantity of
customers in our data centers and location. We compete against large, well-established colocation
providers who have significant enterprise values, and against privately-held, well-funded
companies. Given that certain companies are privately-held, we are unable to effectively calculate
our market share.
Some of our competitors have longer standing customer relationships and significantly greater
access to capital, which may enable them to materially increase data center space, and therefore
lower overall market pricing for such services. Several of our competitors have much larger
colocation facilities in the markets where we operate. Others operate nationally and are able to
attract a customer base that values and requires national reach and scale.
10
We compete with other interconnection and colocation service providers including Equinix,
Inc., The Telx Group, Inc., Terremark Worldwide, Inc. (aVerizon Communications, Inc. subsidiary),
Level 3 Communications, Inc., and Savvis, Inc. (a CenturyLink Inc. subsidiary) among others. These
companies offer similar services and operate in the markets where we provide service.
Regulatory Matters
Our operations require that certain of our subsidiaries hold licenses, certificates, and/or
other regulatory authorizations from the Federal Communications Commission (FCC) and various
state Public Utilities Commissions (PUCs), all of which we have obtained and maintain in the
normal course of our business. The FCC and State PUCs generally have the power to modify or
terminate a carriers authority to provide regulated wireline services for failure to comply with
certain federal and state laws and regulations, and may impose fines or other penalties for
violations of the same, and the State PUCs typically have similar powers with respect to the
intrastate services we provide under their jurisdiction. In addition, we are required to submit
periodic reports to the FCC and the State PUCs documenting interstate and intrastate revenue, among
other data, for fee assessments and general regulatory governance, and in some states are required
to file tariffs of our rates, terms, and conditions of service. In order to engage in certain
transactions in certain of these jurisdictions, including changes of control, the encumbrance of
certain assets, the issuance of securities, the incurrence of indebtedness, the guarantee of
indebtedness of other entities, including subsidiaries of ours, and the transfer of our assets, we
are required to provide notice and/or obtain prior approval from certain of these governmental
agencies. The construction of additions to our current fiber network is also subject to certain
governmental permitting and licensing requirements.
In addition, our business is subject to various other regulations at the federal, state and
local levels. These regulations affect the way we can conduct our business and our costs of doing
so. However, we believe, based on our examination of such existing and
potential new regulations being considered in ongoing FCC and State PUC proceedings, that such
regulations will not have a material adverse effect on us.
Website Access and Important Investor Information
Our website address is www.zayo.com, and we routinely post important investor information in
the Investor Relations section of our website at www.zayo.com/investor-center. The information
contained on, or that may be accessed through, our website is not part of this annual report. You
may obtain free electronic copies of our annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and all amendments to those reports in the Investor Relations
section of our website under the heading Financial Reporting. These reports are available on our
website as soon as reasonably practicable after we electronically file them with the Securities and
Exchange Commission (the SEC).
We have adopted a written code of conduct that serve as the code of ethics applicable to our
directors, officers and employees, including our principal executive officer and senior financial
officers, in accordance with Section 406 of the Sarbanes-Oxley Act of 2002 and the rules of the
SEC. In the event that we make any changes to, or provide any waivers from, the provisions of our
code of conduct applicable to our principal executive officer and senior financial officers, we
intend to disclose these events on our website or in a report on Form 8-K within four business days
of such event. This code of conduct is available in the Corporate Governance section of our
website at http://investor.zayo.com/corporate-governance.
Special Note Regarding Forward-Looking Statements
Information contained in this Annual Report that is not historical by nature constitutes
forward-looking statements which 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
managements 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 the Companys financial and operating prospects, current economic trends, future
opportunities, ability to retain existing customers and attract new ones, the Companys 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 Item 1A: Risk Factors, contained within this Annual Report on Form 10-K. 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 Annual Report or to reflect the occurrence of unanticipated
events, except as required by law.
11
You should carefully consider the risks described below as well as the other information
contained in this Annual Report on Form 10-K. The risks described in this Annual Report are not the
only ones we may face. There may be additional risks and uncertainties not currently known to us or
that we may currently deem immaterial in addition to those outlined below, which could impair our
financial position and results of operations. If any of the following risks occur, our business,
financial condition and results of operations could be materially adversely affected.
We have a Limited Operating History as a Consolidated Entity.
We were formed in 2007 and have primarily built our operations through the consolidation of 16
acquisitions and asset purchases, the first of which closed in July 2007 and the most recent of
which, AFS, closed on October 1, 2010.
Prior to our first acquisition, our activities were exclusively related to start-up and
corporate development. Our history as a consolidated entity is brief and has been subject to
ongoing and substantial change since our inception, consequently there is a limited amount of
information upon which you can make an investment decision. Other issuers could have longer
histories, which may have greater predictive value.
Future Acquisitions are a Component of Our Strategic Plan, and will Include Integration and Other
Risks That could Harm Our Business.
We intend to continue to acquire complementary businesses and assets, and some of these
acquisitions may be large. This exposes us to the risk that when we evaluate a potential
acquisition target we over-estimate the targets value and, as a result, pay too much for it. We
also cannot be certain that we will be able to successfully integrate acquired assets or the
operations of the acquired entity with our existing operations. We paid $114.1 million for the
largest transaction we have integrated to date. We may engage in significantly larger acquisitions,
which could be much more difficult to integrate. Difficulties with integration could cause material
customer disruption and dissatisfaction, which could in turn increase disconnects and reduce new
sales.
We may incur additional debt and issue additional units to assist in the funding of these
potential transactions, which may increase our leverage and/or dilute our existing equity holders
at CII, our ultimate parent. Further, additional transactions (including acquisitions by our parent
or affiliates) could cause disruption of our ongoing business and divert managements attention
from the management of daily operations to the closing and integration of the acquired operations.
Additional acquisitions also involve other operational and financial risks such as:
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increased demand on our existing employees and management related to the increase in the
size of the business and the possible distraction from our existing business due to the
acquisition, particularly with respect to businesses acquired by our sister companies or
parent; |
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loss of key employees and sales people of the acquired business; |
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liabilities of the acquired business, both unknown and known at the time of the
consummation of the acquisition; |
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agreeing to buy a business before we have obtained its audited financial statements and
subsequently discovering that the unaudited financial statements we relied on were
incorrect; |
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expenses associated with the integration of the operations of the acquired business; |
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the possibility of future impairment, write-downs of goodwill and other intangibles
associated with the acquired business; |
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that the services and operations of the acquired business do not meet the level of
quality of those of our existing services and operations; and |
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that the internal controls of the acquired business are inadequate. |
12
Our Debt Level could Negatively Impact Our Financial Condition, Results of Operations and
Business Prospects and Prevent us From Fulfilling Our Debt Obligations. In the Future, We may
Incur Substantially More Indebtedness, Which could Further Increase the Risks Associated With Our
Leverage.
As of June 30, 2011, (i) our total debt and capital leases were $365.6 million and (ii) we had
$93.6 million available for borrowing under our credit agreement, subject to certain conditions.
Subject to the limitations set forth in the indenture and our credit agreement, we may incur
additional indebtedness (including additional first lien obligations) in the future. If new
indebtedness is added to our current levels of indebtedness, the related risks that we now face in
light of our current debt level, including our possible inability to service our debt could
intensify.
Specifically, our level of debt could have important consequences to the holders of our notes,
including the following:
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making it more difficult for us to satisfy our obligations under our debt agreements; |
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requiring us to dedicate a substantial portion of our cash flow from operations to
required payments on debt, thereby reducing the availability of cash flow for working
capital, capital expenditures and other general business activities; |
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limiting our ability to obtain additional financing in the future for working capital,
capital expenditures, acquisitions and general corporate and other activities; |
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limiting our flexibility in planning for, or reacting to, changes in our business and the
industry in which we operate; |
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increasing our vulnerability to both general and industry-specific adverse economic
conditions; |
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placing us at a competitive disadvantage relative to less leveraged competitors; and |
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preventing us from raising the funds necessary to repurchase the notes tendered to us
upon the occurrence of certain changes of control, which would constitute a default under
the indenture governing our notes. |
We may not be Able to Generate Enough Cash Flow to Meet Our Debt Obligations.
Our future cash flow may be insufficient to meet our debt obligations and commitments. Any
insufficiency could negatively impact our business. A range of economic, competitive, business,
regulatory and industry factors will affect our future financial performance, and, as a result, our
ability to generate cash flow from operations and to pay our debt. Many of these factors, such as
economic and financial conditions in our industry and the global economy or competitive initiatives
of our competitors, are beyond our control.
Our Adjusted EBITDA and capital expenditures were $126.6 million and $112.5 million (net of
stimulus grant reimbursements), respectively, during the year ended June 30, 2011. Our internal
projections indicate that, even if we do not consummate any acquisitions, our interest expense plus
capital expenditures will exceed our cash flow from operations in our fiscal year ending June 30,
2012 (Fiscal 2012). In the several quarters thereafter, we do not expect our existing business to
generate cash flow from operations that exceeds interest expense and capital expenditures by a
significant ratio. Our credit agreement allows for this cash flow deficit by permitting a minimum
consolidated fixed charge ratio of 1.1:1 during Fiscal 2011. The fixed charge ratio will increase
to 1.15 during Fiscal 2012 and 1.25 during Fiscal 2013. Under our credit agreement, fixed charges
exclude, in all periods, capital expenditures on fiber-to-the-tower builds, which has historically
been a material portion of our capital expenditures.
13
If we do not generate enough cash flow from operations to satisfy our debt obligations, we may
have to undertake alternative financing plans, such as:
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reducing or delaying capital investments; |
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raising additional capital; |
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refinancing or restructuring our debt; and |
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selling assets. |
We cannot assure you that we would be able to implement alternative financing plans, if
necessary, on commercially reasonable terms, or at all, or that implementing any such alternative
financing plans would allow us to meet our debt obligations. Our inability to generate sufficient
cash flow to satisfy our debt obligations or to obtain alternative financings, could materially and
adversely affect our business, financial condition, results of operations and prospects.
If for any reason we are unable to meet our debt service obligations, we would be in default
under the terms of the agreements governing our outstanding debt. If such a default were to occur,
the lenders under our credit agreement could elect to declare all amounts outstanding under our
credit agreement immediately due and payable, and the lenders would not be obligated to continue to
advance funds under our credit agreement. If the amounts outstanding are accelerated, we cannot
assure you that our assets will be sufficient to repay in full the money owed to the lenders or to
our debt holders, including holders of notes.
Since Our Inception We have Used More Cash Than We have Generated From Operations and We Expect
to Continue to do so in the Next Several Quarters.
Since our inception, we have consistently consumed our entire positive cash flow generated
from operating activities with our investing activities. To date, our investing activities have
consisted principally of the acquisition of businesses as well as material additions of property
and equipment. We have funded the excess of cash used in investing activities over cash provided by
operating activities with proceeds from equity contributions, bank debt, the issuance of notes and
capital leases.
Our near-term expectation is to continue to invest success-based capital in incremental
property and equipment at an amount equal to or probably greater than the amount of capital
available from operations after debt service requirements. We also intend to continue to
opportunistically pursue acquisitions, some of which may be quite large. In addition to our cash
flow from operations, we plan to rely on proceeds from our note offerings, cash on hand, and
availability under our credit agreement. We cannot assure you, however, that we will have access to
sufficient cash to successfully operate or grow our business.
We Incurred Net Losses in the Current and Prior Periods and We Cannot Guarantee That We will
Generate Net Income in the Future.
We incurred net losses from continuing operations in two of the last three fiscal years. Our
business plan is to continue to expand our network on a success basis, meaning that we attempt
primarily to invest capital only when the terms of a customer contract provide an attractive return
on our investment. If we continue to expand our network we might continue to incur losses in future
periods. However, we cannot assure you that we will be successful in implementing our business plan
or that we will not change our business plan. Furthermore, if a material number of circuits are
disconnected or customers disconnect or terminate their service with us, we may not be able to
generate positive net income in future periods.
Further, we grant stock-based compensation to employees with terms that require the awards to
be classified as liabilities. As such, the Company accounts for these awards as a liability and
re-measures the liability at each reporting date. To the extent that the Companys valuation
increases, additional expense will be recognized at the reporting date. In prior periods, the
expense has been a material contributor to the Companys net loss from continuing operations.
14
We are Experiencing Rapid Growth of Our Business and Operations and We may not be Able to
Efficiently Manage Our Growth.
We have rapidly grown our company through acquisitions of companies and assets as well as
expansion of our own network and the acquisition of new customers through our own sales efforts. We
intend to continue to rapidly grow our company, including through acquisitions, some of which may
be large. Our expansion places strains on our management and our operational and financial
infrastructure. Our ability to manage our growth will be particularly dependent upon our ability
to:
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expand, develop and retain an effective sales force and other qualified personnel; |
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maintain the quality of our operations and our service offerings; |
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maintain and enhance our system of internal controls to ensure timely and accurate
reporting; and |
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expand our operational information systems in order to support our growth. |
If we fail to implement these or other necessary measures, our ability to manage our growth
and our results of operations will be impaired.
Our Back Office Infrastructure, Including the Operational Support Systems, Processes and People,
is a Key Component to Providing a Good Experience to Our Customers, the Failure of Which could
Impair Our Ability to Retain Customers or Attract New Customers.
Our ability to provide ongoing high-quality service to customers is fundamental to our
success. The material failure of one or more of our operational support systems, including the
systems for sales tracking, billing, order entry, provisioning and trouble ticketing, may inhibit
us from performing critical aspects of our services for an extended period. We may incur additional
expenses, delays and a degradation of customer experience associated with system failures, and may
not be able to efficiently and accurately install new orders for services on a timely basis.
Further, the impact of a prolonged failure of these systems could negatively impact our reputation
and ability to retain existing customers and to win new business.
Our Ability to Provide Services would be Hindered if Any of Our Franchises, Licenses, Permits,
Rights-of-Way, Conduit Leases, Fiber Agreements, or Property Leases are Canceled or Not Renewed.
We must maintain rights-of-way, franchises and other permits from railroads, utilities, state
highway authorities, local governments, transit authorities and others to operate our owned fiber
network. We cannot be certain that we will be successful in maintaining these rights-of-way
agreements or obtaining future agreements on acceptable terms. Some of these agreements are
short-term or revocable at-will, and we cannot assure you that we will continue to have access to
existing rights-of-way after they have expired or terminated. If a material portion of these
agreements are terminated or are not renewed we might be forced to abandon our networks, which
could have a material adverse effect on our business, financial condition and results of
operations. In order to operate our networks, we must also maintain fiber leases and IRU agreements
that we have with public and private entities. A small percentage of these agreements expire prior
to 2020. There is no assurance that we will be able to renew those fiber routes on favorable terms.
If we are unable to renew those fiber routes on favorable terms, we might experience the following:
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increased costs as a result of renewing the IRU under less favorable terms; |
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significant capital expenditures in order to build replacement fiber; |
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increased costs as a result of entering into short-term leases for lit services; and |
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lost revenue resulting from our inability to provide certain services. |
In order to expand our network to new locations, we often need to obtain additional
rights-of-way, franchises and other permits. Our failure to obtain these rights in a prompt and
cost-effective manner may prevent us from expanding our network, which may be necessary to meet our
contractual obligations to our customers and could expose us to liabilities and have an adverse
effect on our business, financial condition and results of operations.
15
If we lose or are unable to renew key real property leases where we have located our
point-of-presence (POPs), it could adversely affect our services and increase our costs as we
would be required to restructure our network and move our POPs.
If Our Contracts With Our Customers are Not Renewed or are Terminated, Our Business could be
Substantially Harmed.
Our customer contracts typically have terms of one to twenty years. Our customers may elect to
not renew these contracts. Furthermore, our customer contracts are terminable for cause if we
breach a material provision of the contract. We may face increased competition and pricing pressure
as our customer contracts become subject to renewal. Our customers may negotiate renewal of their
contracts at lower rates, for fewer services or for shorter terms. If we are unable to successfully
renew our customer contracts on commercially acceptable terms, or if our customer contracts are
terminated, our business could suffer.
We have numerous customer orders for connections, including contracts with multiple national
wireless carriers to build out additional towers. If we are unable to satisfy new orders or build
our network according to contractually specified deadlines, we may incur penalties or suffer the
loss of revenue.
Our Revenue is Relatively Concentrated Among a Small Number of Customers and the Loss of any of
These Customers could Significantly Harm Our Business, Financial Condition and Results of
Operations.
Our largest single customer, Verizon Communications, Inc. accounted for approximately 13% of
our monthly recurring revenue as of the last day of the year ended June 30, 2011, and total
revenues from our top ten customers accounted for approximately 47% of our monthly recurring as of
the last day of the same period. We currently depend, and expect to continue to depend, upon a
relatively small number of customers for a significant percentage of our revenue. If any of our key
customers experience a general decline in demand due to economic or other forces, if the demand for
bandwidth does not continue to grow, or if any such customer is not satisfied with our services,
such key customer may reduce the number of service orders it has with us, terminate its
relationship with us (subject to certain early termination fees), or fail to renew its contractual
relationship with us upon expiration.
Service Level Agreements in Our Customer Agreements could Subject us to Liability or the Loss of
Revenue.
Our contracts with customers typically contain service guarantees (including network
availability) and service delivery date targets, which if not met by us, enable customers to claim
credits against their payments to us and, under certain conditions, terminate their agreements. Our
inability to meet our service level guarantees could adversely affect our revenue and cash flow.
While we typically have carve-outs for force majeure events, many events, such as fiber cuts,
equipment failure and third-party vendors being unable to meet their underlying commitments or
service level agreements with us, could impact our ability to meet our service level agreements and
are potentially out of our control.
We are Required to Maintain, Repair, Upgrade and Replace Our Network and Our Facilities, and Our
Failure to do so could Harm Our Business.
Our business requires that we maintain, repair, upgrade and periodically replace our
facilities and networks. This requires and will continue to require management time and the
periodic expenditure of capital. In the event that we fail to maintain, repair, upgrade or replace
essential portions of our network or facilities, it could lead to a material degradation in the
level of service that we provide to our customers, which would adversely affect our business. Our
networks can be damaged in a number of ways, including by other parties engaged in construction
close to our network facilities. In the event of such damage, we will be required to incur expenses
to repair the network in order to maintain services to customers. We could be subject to
significant network repair and replacement expenses in the event of a terrorist attack or if
natural disaster damages our network. Further, the operation of our network requires the
coordination and integration of sophisticated and highly specialized hardware and software
technologies. Our failure to maintain or properly operate this hardware and software can lead to
degradations or interruptions in customer service. Our failure to provide proper customer service
can result in claims from our customers for credits or damages, can lead to early termination of
contracts, and can damage our reputation for service, thereby limiting future sales opportunities.
16
Any Failure of Our Physical Infrastructure, Services or Other Physical Assets could Lead to
Significant Costs and Disruptions That could Reduce Our Revenues, Harm Our Business Reputation,
and have a Material Adverse Effect on Our Financial Results.
Our business depends on providing customers with highly reliable service. The services we
provide are subject to failure resulting from numerous factors, including:
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human error; |
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power loss; |
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improper building maintenance by the landlords of the buildings in which our data centers
are located; |
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physical or electronic security breaches; |
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fire, earthquake, hurricane, flood, and other natural disasters; |
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water damage; |
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the effect of war, terrorism, and any related conflicts or similar events worldwide; and |
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sabotage and vandalism. |
Problems within our network or at one or more of our data centers, whether or not within our
control, could result in service interruptions or equipment damage. In the past we have at times
experienced instability in our network attributed to equipment failure and power outages. Although
such disruptions have been remedied and the network has been stabilized, there can be no assurance
that similar disruptions will not occur in the future. We have service level commitment obligations
with substantially all of our customers. As a result, service interruptions or equipment damage in
our network or at our data centers could result in credits for service interruptions to these
customers. We have at times in the past given credits to our customers as a result of service
interruptions due to equipment failures. We cannot assume that our customers will accept these
credits as compensation in the future. Also, service interruptions and equipment failures may
expose us to additional legal liability. We depend on our landlords and other third-party providers
to properly maintain the buildings in which our data centers are located. Improper maintenance by
such landlords and third parties increase the risk of service interruptions and equipment damage.
We do not Own the Buildings in Which Our Data Centers are Located. Instead, We Lease Our Data
Center Space, and the non-Renewal of Leases could be a Significant Risk to Our Ongoing
Operations.
We would incur significant costs if we were forced to vacate one of our data centers due to
the high costs of relocating the equipment in our data centers and installing the necessary
infrastructure in a new data center. In addition, if we were forced to vacate a data center, we
could lose customers that chose our services based on our location. Our landlords could attempt to
evict us for reasons beyond our control. Further, we may be unable to maintain good working
relationships with our landlords, which would adversely affect our customer service and could
result in the loss of customers.
We may be Unable to Expand Our Existing Data Centers or Locate and Secure Suitable Sites for
Additional Data Centers.
Our data centers may reach high rates of utilization in our key locations. Our ability to meet
the growing needs of our existing customers and to attract new customers in these key markets
depends on our ability to add additional capacity by incrementally expanding our existing data
centers or by locating and securing additional data centers in these markets. Such additional data
centers must meet specific infrastructure requirements, such as access to multiple
telecommunications carriers, a significant supply of electrical power, and the ability to sustain
heavy floor loading. In many markets, the supply of space with these characteristics is limited and
subject to high demand.
17
We may not be Able to Obtain or Construct Additional Laterals to Connect New Buildings to Our
Network.
In order to connect a new building to our network, we need to obtain or construct a lateral
from our existing network to the building. We may not be able to obtain fiber in an existing
lateral at an attractive price or may not be able to construct our own lateral due to the cost of
construction or municipal regulatory restrictions. Failure to obtain fiber in an existing lateral
or to construct a new lateral could keep us from adding new buildings to our network.
Our Services have a Long Sales Cycle, Which May Have a Material Adverse Effect on Our Business,
Financial Condition, and Results of Operations.
A customers decision to purchase bandwidth infrastructure services typically involves a
commitment of our time and resources. As a result, we experience a long sales cycle for some of our
services. Furthermore, we may expend significant time and resources in pursuing a particular sale
or customer that does not generate revenue. Delays due to the length of our sales cycle or costs
incurred that do not result in sales may have a material adverse effect on our business, financial
condition, and results of operations.
We are Highly Dependent on Our Management Team and Other Key Employees.
We expect that our continued success will largely depend upon the efforts and abilities of
members of our management team and other key employees. Our success also depends upon our ability
to identify, attract, develop, and retain qualified employees. None of Daniel Caruso, Kenneth
desGarennes, Glenn S. Russo, David Howson, Chris Morley, or Matthew Erickson is bound by an
employment agreement with us. A portion of Daniel Carusos professional time is spent on his
service as Executive Chairman of Envysion, Inc., of which he is a significant investor. John
Scarano, former President and COO of Zayo Bandwidth, terminated his employment with the Company
effective December 1, 2010. The loss of additional members of our management team or other key
employees is likely to have a material adverse effect on our business. See Item 10Directors,
Executive Officers and Corporate Governance. In addition, our management teams equity interests
are at CII, our ultimate parent. Accordingly, if CIIs other subsidiaries acquire assets, our
management could have, indirectly, a significant portion of their equity in another enterprise and
could devote substantial attention to it.
Our Future Tax Liabilities are not Predictable or Controllable. If We Become Subject to Increased
Levels of Taxation, Our Financial Condition and Operations could be Negatively Impacted.
We provide telecommunication and other services in multiple jurisdictions across the United
States and are therefore subject to multiple sets of complex and varying tax laws and rules. We
cannot predict the amount of future tax liabilities to which we may become subject. Any increase in
the amount of taxation incurred as a result of our operations or due to legislative or regulatory
changes could result in a material adverse effect on our sales, financial condition and results of
operations. While we believe that our current provisions for taxes are reasonable and appropriate,
we cannot assure you that these items will be settled for the amounts accrued or that we will not
identify additional exposures in the future.
Risks Relating to Our Industry
The Telecommunications Industry is Highly Competitive, and Contains Competitors That have
Significantly Greater Resources and a More Diversified Base of Existing Customers Than We do.
In the telecommunications industry, we compete against ILECs, which have historically provided
local telephone services and currently occupy significant market positions in their local
telecommunications markets. In addition to these carriers, several other competitors, such as
facilities-based communications service providers, including CLECs, cable television companies,
electric utilities and large end-users with private networks, offer services similar to those
offered by us. Many of our competitors have greater financial, managerial, sales and marketing and
research and development resources than we do and are able to promote their brands with
significantly larger budgets. Additionally, some of our brands are relatively new and as such have
limited tenure in the market. Many of these competitors have the added advantage of a larger, more
diversified customer base. If we fail to develop and maintain brand recognition through sales and
marketing efforts and a reputation for high-quality service, we may be unable to attract new
customers and risk losing existing customers to competitors with better known brands.
18
In addition, significant new competition could arise as a result of:
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consolidation in the industry, leading to larger competitors with more expansive
networks; |
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a competitor building new fiber networks; |
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the creation of new competitive technology for transport services; |
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further technological advances; and |
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further deregulation and other regulatory initiatives. |
If we are unable to compete successfully, our business will be significantly affected.
If We do not Adapt to Swift Changes in the Telecommunications Industry, We could Lose Customers
or Market Share.
The telecommunications industry is characterized by rapidly changing technology, evolving
industry standards, frequent new service introductions, shifting distribution channels, and
changing customer demands. We may not be able to adequately adapt our services or acquire new
services that can compete successfully. Our failure to obtain and integrate new technologies and
applications could impact the breadth of our service portfolio resulting in service gaps, a less
differentiated service suite and a less compelling offering to customers. We risk losing customers
to our competitors if we are unable to adapt to this rapidly evolving marketplace.
In addition, the introduction of new services or technologies, as well as the further
development of existing services and technologies, may reduce the cost or increase the supply of
certain services similar to those that we provide. As a result, our most significant competitors in
the future may be new entrants to the telecommunications industry. These new entrants may not be
burdened by an installed base of outdated equipment or obsolete technology. Our future success
depends, in part, on our ability to anticipate and adapt in a timely manner to technological
changes. Failure to do so could have a material adverse effect on our business.
We are Subject to Significant Regulation that could Change or Otherwise Impact us in an Adverse
Manner.
Telecommunications services are subject to significant regulation at the federal, state, and
local levels. These regulations affect our business and our existing and potential competitors. In
addition, both the FCC and the state public utility commissions or similar regulatory authorities
typically require us to file periodic reports, pay various regulatory fees and assessments, and to
comply with their regulations, and 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 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. The FCC regularly considers changes to its 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.
Unfavorable General Economic Conditions in the United States could Negatively Impact Our
Operating Results and Financial Condition.
Unfavorable general economic conditions could negatively affect our business. Although it is
difficult to predict the impact of general economic conditions on our business, these conditions
could adversely affect the affordability of, and customer demand for our services, and could cause
customers to delay or forgo purchases of our services. One or more of these circumstances could
cause our revenue to decline. Also, our customers may not be able to obtain adequate access to
credit, which could affect their ability to purchase our services or make timely payments to us.
The current economic conditions, the federal stimulus package, and other proposed spending measures
may lead to inflationary conditions in our cost base, particularly in our lease and personnel
related
expenses. This could harm our margins and profitability if we are unable to increase prices or
reduce costs sufficiently to offset the effects of inflation in our cost base. For these reasons,
among others, if challenging economic conditions persist or worsen, our operating results and
financial condition could be adversely affected.
19
Disruptions in the Financial Markets could Affect Our Ability to Obtain Debt or Equity Financing
or to Refinance Our Existing Indebtedness on Reasonable Terms (or at All).
Disruptions in the financial markets could impact our ability to obtain debt or equity
financing or lines of credit in the future or be able to refinance our existing indebtedness on
reasonable terms (or at all), which could affect our strategic operations and our financial
performance and force modifications to our operations.
Terrorism and Natural Disasters could Adversely Impact Our Business.
The ongoing threat of terrorist activity and other acts of war or hostility have had, and may
continue to have, an adverse effect on business, financial and general economic conditions. Effects
from these events and any future terrorist activity, including cyber terrorism, may, in turn,
increase our costs due to the need to provide enhanced security, which would adversely affect our
business and results of operations. Terrorist activity could damage or destroy our Internet
infrastructure and may adversely affect our ability to attract and retain customers, raise capital,
and operate and maintain our network access points. We are particularly vulnerable to acts of
terrorism because of our large data center presence in New York. We are also susceptible to other
catastrophic events such as major natural disasters, extreme weather, fires or similar events that
could affect our headquarters, other offices, our network, infrastructure or equipment, all of
which could adversely affect our business.
Changes in Regulations Affecting Commercial Power Providers may Increase Our Costs.
In the normal course of business, we need to enter into agreements with many providers of
commercial power for our office, network and data centers. Costs of obtaining commercial power can
comprise a significant component of our operating expenses. Changes in regulations that affect
commercial power providers, particularly regulations related to the control of greenhouse gas
emissions or other climate change related matters, could adversely affect the costs of commercial
power, which may increase the costs of providing our services and may adversely affect our
operating results and financial condition.
Consolidation Among Companies in the Telecommunications Industry could Adversely Impact our
Business
The telecommunications industry is intensely competitive and has undergone significant
consolidation over the past few years. There are many reasons for consolidation in the industry,
including the desire for telecommunication companies to acquire network assets in regions where
they currently have no or insufficient amounts of owned network infrastructure. The consolidation
within the industry may decrease the demand for leased fiber infrastructure assets.
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ITEM 1B. |
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UNRESOLVED STAFF COMMENTS |
Not applicable.
20
Our principal properties are fiber optic networks and their component assets. We own a
majority of the communications equipment required for operating the network and our business. As
of June 30, 2011, we own or lease approximately 24,251 fiber route miles or 1,008,205 fiber miles.
We provide colocation and interconnection services in three major carrier hotels in the New York
metropolitan area (60 Hudson Street and 111 8th Avenue in New York, New York, and 165 Halsey Street
in Newark, New Jersey) and in facilities located in Los Angeles, California; Nashville, Tennessee;
Plymouth, Minnesota; Cincinnati, Ohio; Cleveland, Ohio; Columbus, Ohio; Pittsburg, Pennsylvania;
and Memphis, Tennessee. We do not own the buildings where we provide our colocation and
interconnection services, however, as of June 30, 2011 and June 30, 2010 the zColo unit managed
72,927 square feet of billable colocation space. See Item 1. Business Our Telecom and
Infrastructure Assets, for additional discussion related to our network and colocation properties.
We lease our corporate headquarters in Louisville, Colorado as well as sales, administrative
and other support offices. Our corporate headquarters located at 400 Centennial Parkway, Suite
200, Louisville, CO is approximately 15,614 square feet. We lease properties to locate the POPs
necessary to operate our networks. Office and POP space is leased in the markets where we
maintain our network and generally ranges from 100 to 5,000 square feet.
The majority of our leases have renewal provisions at either fair market value or a stated
escalation above the last year of the current term.
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ITEM 3. |
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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 or our consolidated financial condition.
21
PART II
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ITEM 5. |
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MARKET FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES |
Holders of Our Common Stock
We are a privately held company and there is no public or private trading market for our
common units. We are a wholly-owned subsidiary of Zayo Group Holdings, Inc. See Item 12: Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters for
information regarding the beneficial ownership of our indirect parent company.
Dividend Policy
We have never declared or paid any cash dividends on our common units and no cash dividends
are contemplated on our common units in the foreseeable future. In addition, our credit agreement
and the indenture governing our notes contain restrictions on our ability to pay dividends or make
other distributions with respect to any equity interests.
Issuer Purchases of Equity Securities
None.
22
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ITEM 6. |
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SELECTED FINANCIAL DATA |
The following summary historical consolidated financial information is based on our audited
consolidated financial statements for the years ended June 30, 2011, 2010, 2009, and 2008. The
historical financial statement data as of June 30, 2011 and 2010 and for the years ended June 30,
2011, 2010 and 2009, have been derived from the audited consolidated financial statements and
should be read in conjunction with such audited consolidated financial statements and related notes
and Managements Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere in this Annual Report.
We were organized in May 2007, and our first substantive activity was the acquisition of
Memphis Networks, LLC on July 31, 2007 and of PPL Telecom, LLC on August 24, 2007. PPL Telecom, LLC
is our predecessor company; however, we do not believe that reliable financial statements for PPL
Telecom, LLC for prior periods can be produced. As a result, no selected financial information for
periods prior to our fiscal year ended June 30, 2008 have been set forth in this table.
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Year Ended June 30, |
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2011 |
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2010 |
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2009 |
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2008 |
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(in thousands) |
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Consolidated Statements of Operations Data: |
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Revenue |
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$ |
287,235 |
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$ |
199,330 |
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$ |
125,339 |
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$ |
64,623 |
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Operating costs and expenses: |
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Operating costs, excluding depreciation and amortization |
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71,528 |
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62,688 |
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37,792 |
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18,693 |
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Selling, general and administrative expenses |
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89,846 |
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65,911 |
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51,493 |
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30,342 |
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Stock-based compensation |
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24,310 |
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18,168 |
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6,412 |
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3,381 |
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Depreciation and amortization |
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60,463 |
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38,738 |
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26,554 |
|
|
|
10,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
246,147 |
|
|
|
185,505 |
|
|
|
122,251 |
|
|
|
62,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
41,088 |
|
|
|
13,825 |
|
|
|
3,088 |
|
|
|
1,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(33,414 |
) |
|
|
(18,692 |
) |
|
|
(15,245 |
) |
|
|
(6,287 |
) |
Other (expense)/ income |
|
|
(126 |
) |
|
|
1,526 |
|
|
|
234 |
|
|
|
351 |
|
Gain on bargain purchase |
|
|
|
|
|
|
9,081 |
|
|
|
|
|
|
|
|
|
Loss on extinguishment of debt |
|
|
|
|
|
|
(5,881 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses, net |
|
|
(33,540 |
) |
|
|
(13,966 |
) |
|
|
(15,011 |
) |
|
|
(5,936 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings/(loss) from continuing operations before income taxes |
|
|
7,548 |
|
|
|
(141 |
) |
|
|
(11,923 |
) |
|
|
(4,103 |
) |
Provision/(benefit) for income taxes |
|
|
12,542 |
|
|
|
4,823 |
|
|
|
(2,321 |
) |
|
|
(469 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(4,994 |
) |
|
|
(4,964 |
) |
|
|
(9,602 |
) |
|
|
(3,634 |
) |
Earnings from discontinued operations, net of income taxes |
|
|
899 |
|
|
|
5,425 |
|
|
|
7,355 |
|
|
|
1,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/earnings |
|
$ |
(4,095 |
) |
|
$ |
461 |
|
|
$ |
(2,247 |
) |
|
$ |
(1,953 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zayo Group, LLC (Historical) |
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Consolidated Balance Sheet Data (at period end): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
25,394 |
|
|
$ |
87,864 |
|
|
$ |
38,019 |
|
|
$ |
4,390 |
|
Property and equipment, net |
|
|
518,513 |
|
|
|
297,889 |
|
|
|
211,864 |
|
|
|
161,134 |
|
Total assets |
|
|
789,261 |
|
|
|
565,840 |
|
|
|
422,162 |
|
|
|
339,439 |
|
Long-term debt and capital lease obligations, including current portion |
|
|
365,588 |
|
|
|
259,786 |
|
|
|
151,488 |
|
|
|
115,720 |
|
Total members equity |
|
|
237,345 |
|
|
|
213,136 |
|
|
|
212,963 |
|
|
|
177,671 |
|
Other Financial Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(1), from continuing operations |
|
|
101,425 |
|
|
|
57,289 |
|
|
|
29,876 |
|
|
|
12,558 |
|
Adjusted EBITDA(1), from continuing operations |
|
|
126,600 |
|
|
|
73,556 |
|
|
|
37,007 |
|
|
|
15,939 |
|
Total capital expenditures, net of stimulus grants continuing operations |
|
|
112,524 |
|
|
|
58,751 |
|
|
|
61,614 |
|
|
|
22,729 |
|
Reconciliation of EBITDA and Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(4,994 |
) |
|
$ |
(4,964 |
) |
|
$ |
(9,602 |
) |
|
$ |
(3,634 |
) |
Add back non-EBITDA items included in loss from continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
60,463 |
|
|
|
38,738 |
|
|
|
26,554 |
|
|
|
10,374 |
|
Interest expense (excluding loss on extinguishment of debt) |
|
|
33,414 |
|
|
|
18,692 |
|
|
|
15,245 |
|
|
|
6,287 |
|
Provision/(benefit) for income taxes |
|
|
12,542 |
|
|
|
4,823 |
|
|
|
(2,321 |
) |
|
|
(469 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA, from continuing operations |
|
|
101,425 |
|
|
|
57,289 |
|
|
|
29,876 |
|
|
|
12,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
24,310 |
|
|
|
18,168 |
|
|
|
6,412 |
|
|
|
3,381 |
|
Gain on bargain purchase |
|
|
|
|
|
|
(9,081 |
) |
|
|
|
|
|
|
|
|
Loss on extinguishment of debt |
|
|
|
|
|
|
5,881 |
|
|
|
|
|
|
|
|
|
Transaction costs related to acquisitions |
|
|
865 |
|
|
|
1,299 |
|
|
|
719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA, from continuing operations |
|
$ |
126,600 |
|
|
$ |
73,556 |
|
|
$ |
37,007 |
|
|
$ |
15,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
EBITDA and Adjusted EBITDA are not financial measurements prepared in accordance with generally
accepted accounting principles in the United States (GAAP). The above table sets forth, for the periods indicated,
a reconciliation of EBITDA and Adjusted EBITDA to loss from continuing operations, as loss from continuing operations
is calculated in accordance with GAAP. We define Adjusted EBITDA as earnings before interest, income taxes,
depreciation and amortization (EBITDA) adjusted to exclude transaction costs, stock-based compensation, and certain
non-cash items. |
24
|
|
|
ITEM 7. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Information contained in this Annual Report on Form 10-K (this Report), in other filings by
Zayo Group, LLC (we or us), with the Securities and Exchange Commission (the SEC) in press
releases and in presentations by us or our management that are not historical by nature constitute
forward-looking statements, which 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 Item 1A: Risk Factors and in this Managements 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 audited consolidated
financial statements and the related notes appearing elsewhere in this Report.
Amounts presented in this Item 7 are rounded. As such, rounding differences could occur in
period-over-period changes and percentages reported throughout this Item 7.
Overview
Introduction
We are a provider of bandwidth infrastructure and network-neutral colocation and
interconnection services, which are key components of telecommunications and Internet
infrastructure services. We were founded in 2007 in order to take advantage of the favorable
Internet, data and wireless growth trends driving the demand for bandwidth infrastructure services.
Since our inception we have experienced significant growth as a result of our 16 acquisitions and
asset purchases and organic expansions.
The components of our operating income are revenue, operating costs, selling, general and
administrative expenses, stock-based compensation and depreciation and amortization. These
components of our operating income are described below. Our discussion and analysis, below, covers
the periods shown in our consolidated statements of operations included elsewhere in this Report.
Our fiscal year ends June 30 each year and we refer to the fiscal year ended June 30, 2010 as
Fiscal 2010 and the year ended June 30, 2011 as Fiscal 2011.
Our Business Units
When assessing the results of our operations, we review such results at our business unit
level. As of June 30, 2011, the Company consisted of three business units: Zayo Bandwidth (ZB),
Zayo Fiber Solutions (ZFS) and zColo. Our ZB unit focuses on lit bandwidth infrastructure
product offerings. ZFS focuses on dark fiber infrastructure products and the zColo unit focuses on
network-neutral colocation and interconnection services. See Item 1: Business Our Business
Units for further discussion of our business units.
25
Recent Developments
Acquisition of AGL Networks
On July 1, 2010, we acquired 100% of the equity of AGL Networks from its parent, AGL Resources
Inc., and changed AGL Networks name to Zayo Fiber Solutions, LLC. We paid the purchase price of
approximately $73.7 million with cash on hand. AGL Networks assets were comprised of dense,
high-fiber-count networks totaling 786 (761 of which are incremental to our existing footprint)
route miles and over 190,000 fiber miles, and included 289 (281 incremental) on-net buildings
across the metropolitan markets of Atlanta, Georgia, Charlotte, North Carolina, and Phoenix,
Arizona. AGL Networks generated all of its revenue from providing dark-fiber related services to
both wholesale and enterprise customers.
In connection with the AGL Networks acquisition, we established the ZFS unit on July 1, 2010.
The assets of AGL Networks complement our existing dark-fiber services, which had previously been
provided by ZEN and ZB. After the acquisition, we transferred those existing dark-fiber customer
contracts to our ZFS unit.
Merger with American Fiber Systems Holding Corporation
On October 1, 2010, we completed a merger with AFS, the parent company of American Fiber
Systems, Inc. (AFS Inc.). The AFS merger was consummated with the exchange of $110.0 million in
cash and a $4.5 million non-interest bearing promissory note due in 2012 for all of the interest in
AFS. The Company calculated the fair market value of the promissory note to be $4.1 million
resulting in an aggregate purchase price of $114.1 million. The AFS merger was effected through a
merger between AFS and a special purpose vehicle created for the AFS merger. The purchase price was
based upon the valuation of both the business and assets directly owned by AFS and the ownership
interest in US Carrier Telecom Holdings, LLC (US Carrier), held by AFS Inc. for which we
estimated the fair value to be $15.1 million. AFS is a provider of bandwidth infrastructure
services in nine metropolitan markets: Atlanta, Georgia; Boise, Idaho; Cleveland, Ohio; Kansas
City, Missouri; Las Vegas, Nevada; Minneapolis, Minnesota; Nashville, Tennessee; Reno, Nevada; and
Salt Lake City, Utah. AFS owns and operates approximately 1,251 route miles (about 1,000 of which
are incremental to our existing footprint) and approximately 172,415 fiber miles of fiber networks
and has over 600 incremental on-net buildings in these markets.
Acquisition of Dolphini Assets
On September 20, 2010, our zColo business unit acquired certain colocation assets in
Nashville, Tennessee from Dolphini Corporation for a cash purchase price of $0.2 million.
Broadband Stimulus Awards
During Fiscal 2011, we were an active participant in federal broadband stimulus projects
created through the American Recovery and Reinvestment Act. To date, we have been awarded, as a
direct recipient, federal stimulus funds for two projects by the National Telecommunication and
Information Administration. The projects involve the construction, ownership, and operation of
fiber networks for the purpose of providing broadband services to governmental and educational
institutions, as well as underserved, and usually rural, communities. As part of the award, the
federal government funds a large portion of the construction and development costs. On the two
projects awarded to us to date, the stimulus funding will cover, on average, approximately 77% of
the total expected cost of the projects. Commitments by other third parties will provide additional
funding representing approximately 10% of the total cost of the projects. Both of these projects
allow for our ownership or use of the network for other commercial purposes, including the sale of
our bandwidth infrastructure services to new and existing customers. The details of the two awards
are as follows:
|
|
|
In February 2010, ZB, as the direct recipient, was awarded $25.1 million in funding to
construct 626 miles of fiber network connecting 21 community colleges in Indiana. The
total project involves approximately $31.4 million of capital expenditures of which $6.3
million is anticipated to be funded by the Company. |
26
|
|
|
In July 2010, ZB, as the direct recipient, was awarded a $13.4 million grant to
construct 286 miles of fiber network in Anoka County, Minnesota, outside of Minneapolis.
The total project involves approximately $19.2 million of capital expenditures of which
$5.7 million is anticipated to be funded by the Company. |
In addition, there is one additional stimulus application, pending review and finalization, in
which we may participate as a sub-recipient.
Factors Affecting Our Results of Operations
Business Acquisitions
We were founded in 2007 in order to take advantage of the favorable Internet, data and
wireless growth trends driving the demand for bandwidth infrastructure services. 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 our network
and services through 16 acquisitions and asset purchases for an aggregate purchase consideration
(including assumed debt) of $546.5 million (after deducting our acquisition cost for OVS and ZEN,
two business units operated by our subsidiary Onvoy, which we spun-off during Fiscal 2010 and 2011,
respectively).
During Fiscal 2009, we purchased all of the outstanding equity interests of Columbia Fiber
Solutions LLC (Columbia Fiber Solutions), and all of the outstanding shares of common stock of
Northwest Telephone, Inc. CA LLC (Northwest Telephone California). In addition, during this
period we acquired certain telecom assets from CenturyTel (CTel Tri-State Markets), Citynet
Holdings LLC (Citynet Holdings Assets) and from the Adesta Secured Creditors Trust (Adesta
Assets).
On September 9, 2009, we completed our acquisition of all of the outstanding shares of common
stock of FiberNet Telecom Group, Inc. In conformity with applicable accounting standards, a gain on
bargain purchase was recognized in earnings for the year ended June 30, 2010 as it was determined
that the fair market value of the assets acquired exceeded the purchase price.
We formed our zColo business unit from a portion of the legacy FiberNet business, and thus
that business unit is only included in our Fiscal 2010 operating results for the period September
10, 2009 through March 31, 2010. The remaining portion of the legacy FiberNet business was added to
our existing ZB business unit.
As discussed in the Recent Developments section, above, on July 1, 2010 we completed our
acquisition of all of the equity interest in AGL Networks and thus the results of the legacy AGL
Networks business are included in the operating results of the ZFS unit for the year ended June 30,
2011. Additionally, on October 1, 2010 we completed a merger with AFS, and thus the results of the
legacy AFS business are included in the operating results of the ZB and ZFS business units for the
last nine months of the year ended June 30, 2011.
27
The table below summarizes the dates and purchase prices (which includes assumption of debt
and capital leases) of all acquisitions and asset purchases since our inception.
|
|
|
|
|
|
|
|
|
Acquisition |
|
Date |
|
Acquisition Cost |
|
|
|
|
|
|
(In thousands) |
|
Memphis Networx |
|
July 31, 2007 |
|
$ |
9,789 |
|
PPL Telecom |
|
August 24, 2007 |
|
|
56,734 |
|
Indiana Fiber Works |
|
September 28, 2007 |
|
|
23,134 |
|
Onvoy |
|
November 7, 2007 |
|
|
77,167 |
|
Voicepipe |
|
November 7, 2007 |
|
|
3,250 |
|
Citynet Fiber Networks |
|
February 15, 2008 |
|
|
102,183 |
|
Northwest Telephone |
|
May 30, 2008 |
|
|
6,897 |
|
CenturyTel Tri-State Markets |
|
July 22, 2008 |
|
|
2,700 |
|
Columbia Fiber Solutions |
|
September 30, 2008 |
|
|
12,161 |
|
CityNet Holdings Assets |
|
September 30, 2008 |
|
|
3,350 |
|
Adesta Assets |
|
September 30, 2008 |
|
|
6,430 |
|
Northwest Telephone California |
|
May 26, 2009 |
|
|
15 |
|
FiberNet |
|
September 9, 2009 |
|
|
104,083 |
|
AGL Networks |
|
July 1, 2010 |
|
|
73,666 |
|
Dolphini Assets |
|
September 20, 2010 |
|
|
235 |
|
American Fiber Systems |
|
October 1, 2010 |
|
|
114,500 |
|
Less portion of Onvoy costs related to OVS and ZEN |
|
|
|
|
|
|
(49,791 |
) |
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
546,503 |
|
|
|
|
|
|
|
|
|
We completed each of the acquisitions described above, with the exception of Voicepipe, with
cash raised through combinations of equity and debt capital. We acquired Voicepipe from certain
existing CII equity holders in exchange for CII preferred units.
Spin-Off of Business Units
During Fiscal 2010, we determined that the services provided by one of our business units
OVS, did not fit within our current business model of providing bandwidth infrastructure,
colocation and interconnection services, and the Company therefore spun-off Onvoy to Holdings, the
parent of the Company.
Effective January 1, 2011, we finalized a restructuring of our units which resulted in the
units more closely aligning with their product offerings rather than a combination of product
offerings and customer demographics. Prior to the restructuring, the ZEN unit held a mix of
bandwidth infrastructure, colocation, interconnection, competitive local exchange carrier (CLEC)
and enterprise product offerings. Subsequent to the restructuring, the remaining ZEN unit
consisted of only CLEC and enterprise product offerings. As the product offerings provided by the
restructured ZEN unit fell outside of our business model, the business unit, was spun-off to
Holdings on April 1, 2011.
During Fiscal 2011, 2010 and 2009, the results of the operations of Onvoy and ZEN have been
aggregated and are presented in a single caption entitled, Earnings from discontinued operations,
net of income taxes on our consolidated statements of operations. All discussions contained in
this Managements Discussion and Analysis of Financial Condition and Results of Operations relate
only to our results of operations from our continuing operations.
28
Formation of the Zayo Fiber Solutions Business Unit
We created the ZFS business unit on July 1, 2010 to separately monitor the performance of our
dark fiber business. Effective July 1, 2010, we transferred our existing dark-fiber assets which
had previously been accounted for by our ZEN and ZB units to the ZFS unit. The historical business
unit information throughout this Report has not been restated to reflect the dark fiber assets
transferred from ZEN and ZB to ZFS on July 1, 2010 as management has concluded it is impractical to
do so. As such, the current period results of our business units throughout this Report are not
comparable to prior period financial results.
Substantial Capital Expenditures
During Fiscal 2011, 2010 and 2009, we invested $112.5 million (net of stimulus grant
reimbursements), $58.8 million (net of stimulus grant reimbursements) and $61.6 million,
respectively, in capital expenditures related to property and equipment primarily to expand our
fiber network and largely in connection with new customer contracts. We expect to continue to make
significant capital expenditures in future periods.
As a result of the growth of our business from the acquisitions described above, as well as
from such capital expenditures, our results of operations for the respective periods presented and
discussed herein are not comparable.
Substantial Indebtedness
We had total indebtedness (excluding capital leases) of $354.4 million and $247.1 million as
of June 30, 2011 and 2010, respectively, which principally includes our $350 million of Senior
Secured Notes (Notes), the net proceeds from which were used to fund our acquisitions and for
other working capital purposes. The nominal interest rate on our Notes as of June 30, 2011 and June
30, 2010 was 10.25 percent.
Critical Accounting Policies and Estimates
This discussion and analysis of our financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue, expenses and related disclosures. We base our estimates on historical results
which form the basis for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. We evaluate these estimates on an ongoing basis.
Actual results may differ from these estimates under different assumptions or conditions.
We have accounting policies that involve estimates such as the allowance for doubtful
accounts, revenue reserves, useful lives of long-lived assets, fair value of our common and
preferred units issued as compensation, accruals for estimated tax and legal liabilities, accruals
for customer disputes and valuation allowance for deferred tax assets. We have identified the
policies below, which require the most significant judgments and estimates to be made in the
preparation of our consolidated financial statements, as critical to our business operations and an
understanding of our results of operations.
Revenue and trade receivables
We recognize revenue derived from leasing fiber optic telecommunications infrastructure and
the provision of telecommunications and colocation services when the service has been provided and
when there is persuasive evidence of an arrangement, the fee is fixed or determinable and
collection of the receivable is reasonably assured. Taxes collected from customers and remitted to
government authorities are excluded from revenue.
Most revenue is billed in advance on a fixed-rate basis. The remainder of revenue is billed in
arrears on a transaction basis determined by customer usage. Fees billed in connection with
customer installations and other up-front charges are deferred and recognized as revenue ratably
over the contract life.
Revenue attributable to leases of dark fiber pursuant to indefeasible rights-of-use agreements
(IRUs) are accounted for in the same manner as the accounting treatment for sales of real estate
with property improvements or integral equipment. This accounting treatment typically results in
the deferral of revenue for the cash that has been received and the recognition of revenue ratably
over the term of the agreement (generally up to 20 years). However, ASC 360-20 Property Plant and
Equipment: Real Estate Sales, allows for full profit recognition on IRU contracts when the
following conditions have been met: 1) the sale has been consummated, 2) the buyers initial and
continuing investments are adequate to demonstrate a commitment to pay for the property, 3) the
sellers receivable is not subject to future subordination, and 4) the seller has transferred to the
buyer the usual risks and rewards of ownership in a
transaction that is in substance a sale and does not have a substantial continuing involvement
with the property. During Fiscal 2011, the Company recognized revenue in the amount of $1.1
million related to a fiber sale. The Company did not enter into any contracts during the years
ended June 30, 2010 or 2009 that would have required sales-type accounting treatment.
29
Revenue is recognized at the amount expected to be realized, which includes billing and
service adjustments. During each reporting period, we make estimates for potential future sales
credits to be issued in respect of current revenue, related to service interruptions and customer
disputes, which are recorded as a reduction in revenue. We analyze historical credit activity when
evaluating our credit reserve requirements. We reserve for known service interruptions as
incurred. We review customer disputes and reserve against those we believe to be valid claims.
The determination of the customer dispute credit reserve involves significant estimations and
assumptions.
We defer recognition of revenue until cash is collected on certain components of revenue,
principally contract termination charges and late fees.
We estimate the ability to collect our receivables by performing ongoing credit evaluations of
our customers financial condition, and provide an allowance for doubtful accounts based on
expected collection of our receivables. Our estimates are based on assumptions and other
considerations, including payment history, credit ratings, customer financial performance, industry
financial performance and aging analysis.
Network Expenses and Accrued Liabilities
We lease certain network facilities, primarily infrastructure assets such as lit fiber
circuits, dark fiber, and colocation assets, to augment our owned infrastructure for which we are
generally billed a fixed monthly fee. We also use the facilities of other carriers for which we are
billed on a usage basis.
We recognize the cost of these facilities or services when it is incurred in accordance with
contractual requirements. We dispute incorrect billings. The most prevalent types of disputes
include disputes for circuits that are not disconnected on a timely basis and usage bills with
incorrect or inadequate call detail records. Depending on the type and complexity of the issues
involved, it may take several quarters to resolve disputes.
In determining the amount of such operating expenses and related accrued liabilities to
reflect in our financial statements, we consider the adequacy of documentation of disconnect
notices, compliance with prevailing contractual requirements for submitting such disconnect notices
and disputes to the provider of the facilities, and compliance with our interconnection agreements
with these carriers. Significant judgment is required in estimating the ultimate outcome of the
dispute resolution process, as well as any other amounts that may be incurred to conclude the
negotiations or settle any litigation.
Stock-Based Compensation
We account for our stock-based compensation in accordance with the provisions of ASC 718
Compensation: Stock Compensation, which requires stock compensation to be recorded as either
liability or equity awards based on the terms of the grant agreement. The common units granted to
employees are considered to be stock-based compensation with terms that require the awards to be
classified as liabilities. As such, we account for these awards as a liability and re-measure the
liability at each reporting date until the date of settlement. Each reporting period we adjust the
value of the vested portion of our liability awards to their fair value. The preferred units
granted to certain employees and directors are considered to be stock-based compensation with terms
that require the awards to be classified as equity. As such, we account for these awards as
equity, which requires us to determine the fair market value of the award on the grant date and
amortize the related expense over the vesting period of the award.
We use a third party valuation firm to assist in the valuation of our common units each
reporting period and preferred units when granted. In developing a value for these units, we
utilize a two-step valuation approach. In the first step we estimate the value of our equity
instruments through an analysis of valuations associated with various future potential liquidity
scenarios for our shareholders. The second step involves allocating this value across our capital
structure. The valuation is conducted in consideration of the guidance provided in the American
Institute of Certified Public Accountant (AICPA) Practice Aid Valuation of Privately-Held
Company Equity Securities Issued as Compensation and with adherence to the Uniform Standards of
Professional Appraisal Practice (USPAP) set forth by the Appraisal Foundation.
In estimating our fair value we have historically evaluated both market and income based
valuation techniques. The income approach was based on our projected free cash flows. In our
market based approach, the valuation was estimated based on the prices paid by investors and
acquirers of interest of comparable companies in the public and private markets. The valuation
was based on a
weighted average of the market and income valuation techniques. As a result of our expansion
since inception and due to the fact that the committed capital from our ultimate investors has been
fully funded, the potential of a liquidation event for our shareholders in the future has
increased. As such, we have revised the market based approach utilized in our valuation to account
for potential liquidation events.
30
During Fiscal 2011, we employed a probability-weighted estimated return method to value our
common units. The method estimates the value of the units based on an analysis of values of the
enterprise assuming various future outcomes. The unit value was based on a probability-weighted
present value of expected future proceeds to our shareholders, considering each potential liquidity
scenario available to us as well as preferential rights of each security. This approach utilizes a
variety of assumptions regarding the likelihood of a certain scenario occurring, if the event
involves a transaction, the potential timing of such an event, and the potential valuation that
each scenario might yield. The potential future outcomes that we considered were remaining a
private company with the same ownership, a sale or merger, an initial public offering (IPO), and
a partial recapitalization.
We most heavily weighted the valuation estimate associated with remaining a private entity
with the same ownership. In this assumption, we assessed our value using a discounted cash flow
approach, which involves developing a projected free cash flow, estimating an appropriate risk
adjusted present value discount rate, calculating the present value of our projected free cash
flows, and calculating a terminal value. In estimating our fair value, we utilized the following
discounted cash flow valuation techniques: Total Enterprise Value to Terminal Revenue and Total
Enterprise to Terminal EBITDA. There are several inputs that are required to develop an estimate
of the enterprise value when utilizing these income approaches including, forecasted earnings,
discount rate, and the terminal multiple. We have developed a forecast of our revenues and EBITDA
through December 31, 2015. Our forecasted revenues and EBITDA are based on our composition as of
the balance sheet date, not adjusted for potential acquisitions. The next step in the income
approach is to estimate a discount rate which most appropriately reflects our cost of capital which
we estimated to be 13 percent. In determining this discount rate, , we utilized a weighted average
cost of capital (WACC) utilizing the Capital Asset Pricing Model (CAPM) buildup method. This
method derives the cost of equity in part from the volatility (risk) statistics suggested by the
Guideline Public Companies in the form of their five year historical betas. We included certain
incremental risk premiums specific to us to account for the fact that we have historically depended
on outside investment to operate, are significantly smaller than the Guideline Public Companies and
have a history of substantial volatility in earnings and cash flows. Based on our projections and
discount rate we estimate the present value of our future cash flows. In order to estimate the
enterprise value we add to the estimated discounted cash flows an estimated terminal value. The
terminal value is estimated utilizing the Observed Market Multiple method. This method requires
us to observe prevailing valuations associated with the Guideline Public Companies and the
acquisitions of guideline Companies. This terminal value is converted to a present value through
the use of an appropriate present value factor.
For purposes of the probability-weighted expected return method valuation, management also
considered various liquidation possibilities including an IPO, a sale or merger, and a partial
recapitalization. In each of these scenarios a distribution is established around the estimated
dates and valuations of each scenario. Future valuation figures are based upon corresponding
market data for comparable companies in comparable scenarios. These include publicly traded
valuation statistics and acquisition valuation statistics for comparable companies in the IPO
scenario and sale/merger scenario, respectively. Valuation statistics are combined with
expectations regarding our future economic performance to produce future valuation estimates.
Estimates are then translated to present value figures through the use of appropriate discount
rates.
We also considered the likelihood of a near term recapitalization. In this scenario, we would
complete a partial recapitalization of our equity and to facilitate the ultimate liquidity for all
investors, we would pursue a future sale via an IPO or a sale to a financial or strategic buyer.
The third scenario that we reviewed in determining our enterprise value was a dual track exit
in which we engage in a formal process with an investment banker to achieve liquidity for existing
shareholders. In this scenario, we would simultaneously evaluate both an IPO and a sale of the
Company. As part of the sale process, we would engage in discussions with both financial and
strategic buyers.
Based on these scenarios, management calculated the probability-weighted expected return to
all of the equity holders. The resulting enterprise valuation is then allocated across our capital
structure. Upon a liquidation of CII, or upon a non-liquidating distribution, the holders of
common units would share in the proceeds after the CII preferred unit holders received their
unreturned capital contributions and their priority return (6% per annum). After the preferred
unreturned capital contributions and the priority return are satisfied, the remaining proceeds are
allocated on a scale ranging from 85% to the Class A preferred unit holders and 15% to the common
unit holders to 80% to the Class A preferred unit holders and 20% to the common unit holders
depending upon the return
multiple to the Class A preferred unit holders up to the amount of the Class A gain percentage.
Once the amount of proceeds related to the Class A percentage gain has been distributed, then
proceeds attributable to the Class B gain percentages are distributed in a similar method as the
Class A gains.
31
The value attributable to each class of shares is then discounted in order to account for the
lack of marketability of the units. In determining the appropriate lack of marketability discount,
we evaluated both empirical and theoretical approaches to arrive at a composite range which we
believe indicates a reasonable spectrum of discounts for each of the valuation techniques utilized.
The empirical methods we utilized rely on datasets procured from observed transactions in
interests in the public domain that are perceived to incorporate pricing information related to the
marketability (or lack thereof) of interest itself. These empirical methods include IPO Studies
and Restricted Stock Studies. The primary theoretical models utilized in our analysis were the
option pricing approach, discounted cash flow and Quantitative Marketability Discount Model. Based
on a review of these approaches, we estimated the appropriate marketability discount to be in the
range of 11.7 percent and 23.02 percent.
The following table reflects the estimated value of the Class A, B, C D and E common units as
of June 30, 2011, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Units |
|
2011 |
|
|
2010 |
|
|
2009 |
|
Class A |
|
$ |
0.81 |
|
|
$ |
0.49 |
|
|
$ |
0.16 |
|
Class B |
|
$ |
0.58 |
|
|
$ |
0.28 |
|
|
|
n/a |
|
Class C |
|
$ |
0.33 |
|
|
$ |
0.03 |
|
|
|
n/a |
|
Class D |
|
$ |
0.31 |
|
|
|
n/a |
|
|
|
n/a |
|
Class E |
|
$ |
0.23 |
|
|
|
n/a |
|
|
|
n/a |
|
Determining the fair value of share-based awards at the grant date and subsequent reporting
dates requires judgment. If actual results differ significantly from these estimates, stock-based
compensation expense and the Companys results of operations could be materially impacted.
Property and Equipment
We record property and equipment acquired in connection with a business combination at their
estimated fair values on the acquisition date See Critical Account Policies and Estimates:
Acquisitions Purchase Price Allocation. Purchases of property and equipment are stated at
cost, net of depreciation. Major improvements are capitalized, while expenditures for repairs and
maintenance are expensed when incurred. Costs incurred prior to a capital projects completion are
reflected as construction-in-progress and are part of network infrastructure assets. Depreciation
begins once the property and equipment is available and ready for use. Certain internal direct
labor costs of constructing or installing property and equipment are capitalized. Capitalized
direct labor reflects a portion of the salary and benefits of certain field engineers and other
employees that is directly related to the construction and installation of network infrastructure
assets. Depreciation and amortization is provided on a straight-line basis over the estimated
useful lives of the assets, with the exception of leasehold improvements, which are amortized over
the lesser of the estimated useful lives or the term of the lease.
Estimated useful lives of our property and equipment are as follows:
|
|
|
|
|
Land |
|
|
N/A |
|
Buildings improvements and site improvements |
|
8 to15 |
|
Furniture, fixtures and office equipment |
|
|
3 to 7 |
|
Computer hardware |
|
|
2 to 5 |
|
Software |
|
|
2 to 3 |
|
Machinery and equipment |
|
|
3 to 7 |
|
Fiber optic equipment |
|
|
4 to 8 |
|
Circuit switch equipment |
|
|
10 |
|
Packet switch equipment |
|
|
3 to 5 |
|
Fiber optic network |
|
|
8 to 20 |
|
Construction in progress |
|
|
N/A |
|
32
We perform periodic internal reviews to estimate useful lives of our property and equipment.
Due to rapid changes in technology and the competitive environment, selecting the estimated
economic life of telecommunications property, and equipment requires a significant amount of
judgment. Our internal reviews take into account input from our network services personnel
regarding actual usage, physical wear and tear, replacement history, and assumptions regarding the
benefits and costs of implementing new technology that factor in the need to meet our financial
objectives.
When property and equipment is retired or otherwise disposed of, the cost and accumulated
depreciation is removed from the accounts, and resulting gains or losses are reflected in operating
income.
From time to time, we are required to replace or re-route existing fiber due to structural
changes such as construction and highway expansions, which is defined as a relocation. In such
instances, we fully depreciate the remaining carrying value of network infrastructure removed or
rendered unusable and capitalize the new fiber and associated construction costs of the relocation
placed into service, which is reduced by any reimbursements received for such costs. To the extent
that the relocation does not require the replacement of components of our network and only involves
the act of moving our existing network infrastructure, as-is, to another location, the related
costs are expensed as incurred.
Interest costs are capitalized for all assets that require a period of time to get them ready
for their intended use. This policy is based on the premise that the historical cost of acquiring
an asset should include all costs necessarily incurred to bring it to the condition and location
necessary for its intended use, in principle, the cost incurred in financing expenditures for an
asset during a required construction or development period is itself a part of the assets
historical acquisition cost. The amount of interest costs capitalized for qualifying assets is
determined based on the portion of the interest cost incurred during the assets acquisition
periods that theoretically could have been avoided if expenditures for the assets had not been
made. The amount of interest capitalized in an accounting period is calculated by applying the
capitalization rate to the average amount of accumulated expenditures for the asset during the
period. The capitalization rates used to determine the value of interest capitalized in an
accounting period is based on our weighted average effective interest rate for outstanding debt
obligations during the respective accounting period. During Fiscal 2011, the Company capitalized
interest in the amount of $3,691. No interest was capitalized during Fiscal 2010 or Fiscal 2009.
We periodically evaluate the recoverability of our long-lived assets and evaluate such assets
for impairment whenever events or circumstances indicate that the carrying amount of such assets
may not be recoverable. Impairment is determined to exist if the estimated future undiscounted
cash flows are less than the carrying value of such assets. We consider various factors to
determine if an impairment test is necessary. The factors include: consideration of the overall
economic climate, technological advances with respect to equipment, our strategy, and capital
planning. Since our inception, no event has occurred nor has there been a change in the business
environment that would trigger an impairment test for our property and equipment assets.
Deferred Tax Accounting
Deferred tax assets arise from a variety of sources, the most significant being: a) tax losses
that can be carried forward to be utilized against taxable income in future years; and b) expenses
recognized in our income statement but disallowed in our tax return until the associated cash flow
occurs.
We record a valuation allowance to reduce our deferred tax assets to the amount that is
expected to be recognized. The level of deferred tax asset recognition is influenced by
managements assessment of our future profitability with regard to relevant business plan
forecasts. At each balance sheet date, existing assessments are reviewed and, if necessary, revised
to reflect changed circumstances. In a situation where recent losses have been incurred, the
relevant accounting standards require convincing evidence that there will be sufficient future
profitability.
In connection with several of our acquisitions, we have acquired significant net operating
loss carryforwards (NOLs). The Tax Reform Act of 1986 contains provisions that limit the
utilization of NOLs if there has been an ownership change as described in Section 382 of the
Internal Revenue Code.
Upon acquiring a company that has NOLs, we prepare an assessment to determine if we have a
legal right to use the acquired NOLs. In performing this assessment we follow the regulations
within the Internal Revenue Code Section 382: Net Operating Loss Carryovers Following Changes in
Ownership. Any disallowed NOLs acquired are written-off in purchase accounting.
33
A valuation allowance is required for deferred tax assets if, based on available evidence, it
is more-likely-than-not that all or
some portion of the asset will not be realized due to the inability to generate sufficient
taxable income in the period and/or of the character necessary to utilize the benefit of the
deferred tax asset. When evaluating whether it is more-likely-than-not that all or some portion of
the deferred tax asset will not be realized, all available evidence, both positive and negative,
that may affect the realizability of deferred tax assets is identified and considered in
determining the appropriate amount of the valuation allowance. We continue to monitor our
financial performance and other evidence each quarter to determine the appropriateness of our
valuation allowance. If we are unable to meet our taxable income forecasts in future periods we may
change our conclusion about the appropriateness of the valuation allowance which could create a
substantial income tax expense in our consolidated statement of operations in the period such
change occurred.
As of June 30, 2011, we have a cumulative NOL carryforward balance of $127.4 million of which
we expect to utilize all but $1.0 million. During the year ended June 30, 2011, we added $41.2
million to our NOL carryforward balance as a result of NOLs acquired from the AFS merger. These
NOLs, if not utilized to reduce taxable income in future periods, will expire in various amounts
beginning in 2015 and ending in 2029. We utilized NOLs to offset income tax obligations in each of
the years ended June 30, 2011, 2010 and 2009. As a result of Internal Revenue Service regulations,
we are currently limited to utilizing a maximum of $12.5 million NOLs during Fiscal 2012; however
to the extent that we do not utilize $12.5 million of NOLs during a fiscal year, the difference
between the $12.5 maximum usage and the actual NOLs usage is carried over to the next calendar
year. During the year ended June 30, 2011 we offset our taxable income with $11.0 million in NOLs.
The deferred tax assets recognized at June 30, 2011 have been based on future profitability
assumptions over a five-year horizon.
As a result of the annual limitations placed on us and the expiration dates of our NOLs, we
have estimated that $1 million of the NOL balance will expire unused and as such, we have recorded
a valuation allowance of $0.4 million against the gross deferred tax asset as of June 30, 2011.
However, if our estimate of future taxable income changes, we may increase the valuation allowance.
The analysis of our ability to utilize our NOL balance is based on our forecasted taxable
income. The forecasted assumptions approximate our best estimates, including market growth rates,
future pricing, market acceptance of our products and services, future expected capital
investments, and discount rates. Although our forecasted income includes increased taxable
earnings in future periods, flat earnings over the period in which our NOLs are available would
result in full utilization of our current unreserved NOLs.
Goodwill and Purchased Intangibles
We perform an assessment of goodwill for impairment annually in April each year or more
frequently if we determine that indicators of impairment exist. Our impairment review process
compares the fair value of each reporting unit to its carrying value. Our reporting units are
consistent with the reportable business units identified in Note 17 Segment Reporting, to our
consolidated financial statements.
In performing the annual goodwill impairment test, if the fair value of the reporting unit
exceeds its carrying value, goodwill is not impaired and no further testing is performed. If the
carrying value of the reporting unit exceeds its estimated fair value, then a second step must be
performed, and the implied fair value of the reporting units goodwill must be determined and
compared to the carrying value of the reporting units goodwill. If the carrying value of a
reporting units goodwill exceeds its implied fair value, then an impairment loss equal to the
difference will be recorded.
We consider the use of multiple valuation techniques in accordance with fair value
measurements and disclosures guidance to estimate the fair value of its reporting business units
and have consistently applied an income and market based approach to measure fair value.
Under the income approach, we estimate the reportable segments fair market value using the
discounted cash flow method. The discounted cash flow method involves the following key steps:
|
|
|
the development of projected free cash flows; |
|
|
|
|
the estimation of an appropriate risk adjusted present value discount rate; |
|
|
|
|
the calculation of the present value of projected free cash flow; and |
|
|
|
|
the calculation of a terminal value. |
34
In developing the projected free cash flows, we utilize expected growth rates implied by the
financial projections that have been developed by management. The cash flow forecasts are based
upon upside, midpoint, and downside scenarios. In developing the discount rate, we use a rate that
reflects the cost of capital for the Company. This cost of capital reflects the relative risk of
an investment in the Company, and the time value of money. We calculate this discount rate using
the weighted-average cost of capital formula. Management estimated the weighted-average cost of
capital for the ZB business unit to be 12.1 percent and 13.2 percent for the ZFS business unit.
Using the projected cash flow and discount rate inputs, we calculate the present value of our
projected cash flows. In calculating the terminal value, we estimate a long-term growth rate that
we believe appropriately reflects the expected long-term growth in nominal U.S. gross domestic
product. The terminal value is converted to a present value through the use of the appropriate
present value factor. This figure is then summed with the present value of projected free cash flow
for the projection period to render a valuation estimate for each reporting segment.
Under the market approach, we estimate the reportable segments fair market value using the
Analysis of Guideline Public Companies method. The use of this method involves the following:
|
|
|
identification and selection of a group of acceptable and relevant guideline
companies; |
|
|
|
|
selection of financial ratios and time period most appropriate for the
analysis; |
|
|
|
|
financial adjustments made to both or either of the guideline and/or subject
companies to make the underlying financial figures comparable. |
|
|
|
|
subjective discounts or premiums to implied ratios to account for
observations relating to substantial differences that would be perceived as having an
impact on value between the collective guideline companies and us; and |
|
|
|
|
selection of a statistical midpoint or range within the dataset most
appropriate for the analysis. |
In identifying and selecting the guideline companies that could be deemed appropriate for our
reporting units, we screened potential companies using a research tool with parameters including
constraints regarding geographic location, primary industry classification, and market
capitalization. We selected the Enterprise Value to Revenue and EBITDA ratios as the most
appropriate market based valuation technique for us. With the assistance of a third-party valuation
firm, we estimated the 2011 revenue trading multiples based on Guideline Public Companies.
Utilizing third-party market studies, we estimated a control premium as part of the market based
calculations, which is in-line with historical control premiums offered for comparable transactions
in the communications industry, the availability of financing, and number of potential buyers.
In estimating the fair market value of each of our reportable segments, we averaged the
valuations from each of the approaches above. The resulting valuations are significantly higher
than the current carrying value of these segments. Although we estimate the fair value of our
segments utilizing the average of various valuation techniques, none of the valuation techniques on
a stand-alone basis indicated an impairment of any of our segments.
Acquisitions Purchase Price Allocation
We apply the acquisition method of accounting to account for business combinations. The cost
of an acquisition is measured as the aggregate of the fair values at the date of exchange of the
assets given, liabilities incurred, and equity instruments issued. Identifiable assets,
liabilities, and contingent liabilities acquired or assumed are measured separately at their fair
value as of the acquisition date. The excess of the cost of the acquisition over our interest in
the fair value of the identifiable net assets acquired is recorded as goodwill. If our interest in
the fair value of the identifiable net assets acquired in a business combination exceeds the cost
of the acquisition, a gain is recognized in earnings on the acquisition date only after we have
reassessed whether we have correctly identified all of the assets acquired and all of the
liabilities assumed.
For most acquisitions, we engage outside appraisal firms to assist in the fair value
determination of identifiable intangible assets such as customer relationships, tradenames,
property and equipment and any other significant assets or liabilities. We adjust the preliminary
purchase price allocation, as necessary, after the acquisition closing date through the end of the
measurement period of one year or less as we finalize valuations for the assets acquired and
liabilities assumed.
The determination and allocation of fair values to the identifiable assets acquired and
liabilities assumed is based on various assumptions and valuation methodologies requiring
considerable management judgment. The most significant variables in these valuations are discount
rates, terminal values, the number of years on which to base the cash flow projections, as well as
the assumptions and estimates used to determine the cash inflows and outflows. We determine which
discount rates to use based on the risk inherent in the related activitys current business model
and industry comparisons. Terminal values are based on the expected life of products and forecasted
life cycle and forecasted cash flows over that period. Although we believe that the assumptions
applied in the determination are reasonable based on information available at the date of
acquisition, actual results may differ from the forecasted
amounts and the difference could be material.
35
Background for Review of Our Results of Operations
Operating Costs
Our operating costs consist primarily of third-party network service costs, colocation
facility costs and colocation facility utilities costs. Third-party network service costs result
from our leasing of certain network facilities, primarily leases of circuits and dark fiber, from
other local exchange carriers to augment our owned infrastructure for which we are generally billed
a fixed monthly fee. Our colocation facility costs comprise rent and license fees paid to the
landlords of the buildings in which our zColo business operates. The colocation facility utilities
cost is the cost of power used in those facilities.
Recurring transport costs are the largest component of our operating costs and primarily
include monthly service charges from telecommunication carriers related to the circuits and dark
fiber utilized by us to interconnect our customers. While increases in demand will drive additional
operating costs in our business, we expect to primarily utilize our existing network infrastructure
and augment, when necessary, with additional circuits or services from third-party providers.
Non-recurring transport costs primarily include the cost of the initial installation of such
circuits.
Selling, General and Administrative Expenses
Our selling, general and administrative (SG&A) expenses include personnel costs, costs
associated with the operation of our network (network operations), and other related expenses,
including sales commissions, marketing programs, office rent, professional fees, travel, software
maintenance costs and other expenses.
After compensation and benefits, network operations expenses are the largest component of our
SG&A expenses. Network operations expenses include all of the non-personnel related expenses of
maintaining our network infrastructure, including contracted maintenance fees, right-of-way costs,
rent for locations where fiber is located (including cellular towers), pole attachment fees, and
relocation expenses.
Year Ended June 30, 2011 Compared to the Year Ended June 30, 2010
Revenue
Our revenue was generated from the following business units during the years ended June 30,
2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zayo Bandwidth |
|
$ |
214,110 |
|
|
|
75 |
% |
|
$ |
183,085 |
|
|
|
92 |
% |
Zayo Fiber Solutions |
|
|
44,549 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
zColo |
|
|
33,899 |
|
|
|
12 |
|
|
|
23,993 |
|
|
|
12 |
|
Intercompany |
|
|
(5,323 |
) |
|
|
(2 |
) |
|
|
(7,748 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
287,235 |
|
|
|
100 |
% |
|
|
199,330 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Our
total revenue increased by $87.9 million, or 44%, from $199.3 million to $287.3 million
for the year ended June 30, 2010 and 2011, respectively. The increase is principally a result of
the AGL Networks acquisition and the AFS merger, which occurred on the first day of the first and
second quarter of Fiscal 2011, respectively. Also contributing to the increase is growth in
revenues resulting from the addition of new customer services. As a result of internal sales
efforts since June 30, 2010 we have entered into $425.0 million of gross new sales contracts, which
will represent an additional $6.7 million in monthly recurring revenue once installation on those
contracts is accepted. Since June 30, 2010, we have received acceptance on gross installations that
have resulted in additional monthly recurring revenue of $6.0 million as of June 30, 2011, as
compared to June 30, 2010. This increase in revenue related to our organic growth is offset by
total customer churn of $3.9 million in monthly revenue since June 30, 2010.
36
The stratification of our revenue during the years ended June 30, 2011 and 2010 was consistent
with a majority of the revenue recognized during the periods presented resulting from monthly
recurring revenue streams. The following table reflects the stratification of our revenues during
these periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Monthly recurring revenue |
|
$ |
274,262 |
|
|
|
96 |
% |
|
$ |
194,383 |
|
|
|
97 |
% |
Amortization of deferred revenue |
|
|
8,976 |
|
|
|
3 |
|
|
|
3,500 |
|
|
|
2 |
|
Other revenue |
|
|
3,997 |
|
|
|
1 |
|
|
|
1,447 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
287,235 |
|
|
|
100 |
% |
|
$ |
199,330 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Zayo Bandwidth. Our revenues from our Zayo Bandwidth business unit increased by $31.1 million,
or 17%, from $183.1 million to $214.1 million during the years ended June 30, 2010 and 2011,
respectively. This increase is primarily a result of additional revenue associated with the AGL
Networks acquisition and AFS merger during Fiscal 2011 and organic growth related to our sales
efforts and expansion of our network. Partially offsetting this increase is the impact of Zayo
Bandwidth transferring to Zayo Fiber Solutions its dark fiber assets and customer contracts as of
July 1, 2010. Additionally, as of January 1, 2011 Zayo Bandwidth transferred certain intra-building
and colocation assets and the related customer contracts to the zColo unit. The transfer of these
customer contracts from Zayo Bandwidth to zColo resulted in a decrease to revenue of $1.1 million
at ZB during the year ended June 30, 2011.
zColo. Our revenues from our zColo business unit increased by $9.9 million or 41% from $24.0
million to $33.9 million during the years ended June 30, 2010 and 2011, respectively. Our
colocation revenues are primarily derived from the assets acquired from the acquisition of Fibernet
in September of 2009. The year-over-year increase in revenues is primarily a result of a full year
of operating results generated by the legacy Fibernet colocation assets during Fiscal 2011. Also
contributing to the increase are revenues from intra-building and colocation services which were
migrated from the ZB to the zColo unit effective January 1, 2011. The transfer of these customer
contracts from Zayo Bandwidth to zColo resulted in an additional $1.1 million in revenue being
recognized at the zColo unit during the year ended June 30, 2011.
Zayo Fiber Solutions. The Zayo Fiber Solutions business unit was established on July 1, 2010.
The revenue recognized by Zayo Fiber Solutions during the year ended June 30, 2011 includes dark
fiber contracts acquired in our AGL Networks acquisition and our merger with AFS. The revenue in
Fiscal 2011 also includes revenue from dark fiber revenue from customers that were transferred from
the Zayo Bandwidth and Zayo Enterprise Networks business units upon the formation of the Zayo Fiber
Solutions business unit on July 1, 2010. We have not restated the corresponding items of the
segment information included within this Report related to the re-allocation of dark fiber
contracts from ZB to the ZFS on July 1, 2010, as we have determined that it is impractical to do
so.
Operating Costs, Excluding Depreciation and Amortization
Our operating costs, excluding depreciation and amortization, increased by $8.8 million, or
14%, from $62.7 million to $71.5 million during the years ended June 30, 2010 and 2011,
respectively. The increase in operating costs, excluding depreciation and amortization, primarily
relates to the increased costs associated with our acquisition of AGL Networks and merger with AFS
during Fiscal 2011 and our organic network expansion efforts. The 14% increase in operating costs,
excluding depreciation and amortization, occurred during the same period in which our revenues
increased by 44%. The lower ratio of operating costs as compared to revenues is primarily a result
of gross installed revenues having a lower component of associated operating costs than the prior
periods revenue base and churned revenue. The ratio also benefited from synergies realized related
to our previous acquisitions.
37
Selling, General and Administrative Expenses:
The table below sets forth the components of our SG&A expenses during the years ended June 30,
2011 and 2010, respectively.
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
|
Compensation and benefits expenses |
|
$ |
39,657 |
|
|
$ |
31,047 |
|
Network operations expenses |
|
|
27,569 |
|
|
|
19,892 |
|
Other SG&A expenses |
|
|
21,755 |
|
|
|
13,673 |
|
Transaction costs |
|
|
865 |
|
|
|
1,299 |
|
|
|
|
|
|
|
|
Total SG&A expenses |
|
$ |
89,846 |
|
|
$ |
65,911 |
|
|
|
|
|
|
|
|
Compensation and Benefits Expenses. Compensation and benefits expenses increased by $8.6
million, or 28%, from $31.0 million to $39.7 million during the years ended June 30, 2010 and 2011,
respectively. The increase reflects the increased number of employees as our business grew during
this period, principally as a result of our acquisition of AGL Networks and merger with AFS in
Fiscal 2011. At June 30, 2011 we had 396 full time employees compared to 300 at June 30, 2010.
Network Operations Expenses. Network operations expenses increased by $7.7 million, or 39%,
from $19.9 million to $27.6 million during the years ended June 30, 2010 and 2011, respectively.
The increase in such expenses principally reflects the growth of our network assets and the related
expenses of operating that expanded network following our acquisition of AGL Networks and the AFS
merger during Fiscal 2011. The ratio of network operations expenses as a percentage of revenues
was consistent during the years ended June 30, 2011 and 2010 at 10%.
Other SG&A. Other SG&A expenses, which includes expenses such as property tax, travel, office
expense, and maintenance expense on colocation facilities, increased by $8.1 million, or 59%, from
$13.7 million to $21.7 million during the years ended June 30, 2010 and 2011, respectively. The
increase is principally from our acquisition of AGL Networks and merger with AFS in Fiscal 2011 and
our organic network expansion efforts.
Stock-Based Compensation
Stock-based compensation expenses increased by $6.1 million, or 34%, from $18.2 million to
$24.3 million during the years ended June 30, 2010 and 2011, respectively. The increase is
primarily a result of an adjustment in the estimated value of the common units issued to the
Companys employees and directors. As of June 30, 2011, management estimates the value of the
Companys Class A, B, C, D and E common units to be $0.81, $0.58, $0.33, $0.31 and $0.23,
respectively compared to a valuation of $0.49, $0.28, $0.03, $0.0 and $0.0, respectively, as of
June 30, 2010.
Depreciation and Amortization
Depreciation and amortization expense increased by $21.8 million, or 56%, from $38.7 million
to $60.5 million during the years ended June 30, 2010 and 2011, respectively. The increase is a
result of the substantial increase in our capital assets and intangible assets, principally from
the AGL Networks acquisition and merger with AFS in Fiscal 2011, and the resulting depreciation and
amortization of such capitalized amounts.
Interest Expense
Interest expense increased by $14.7 million, or 79%, from $18.7 million to $33.4 million
during the years ended June 30, 2010 and 2011, respectively. The increase is primarily a result of
our increased indebtedness associated with our Notes. As of June 30, 2011 we had Notes with a
principal amount of $350.0 million, which accrue interest at a notional rate of 10.25%. During the
period January 1, 2010 through March 12, 2010, our average debt balance, which consisted of term
loans and a revolving line of credit was $177.5 million. These term loans accrued interest at lower
rates ranging from 5.9% to 6.4%. On March 12, 2010, we issued $250 million in Notes which accrued
interest at 10.25%. With a portion of the proceeds of the Notes, we repaid our term loans and
revolver. Additionally, in September of 2010, we issued an additional $100 million in Notes. The
increased average outstanding debt balance during the year ended June 30, 2011 as compared to the
year ended June 30, 2010 was the primary cause of the increased
interest expense during the period. Partially offsetting the increase in interest expense was
$3.7 million of interest which was capitalized during the year ended June 30, 2011 related to our
construction projects.
38
Provision for Income Taxes
Income tax expense increased over the prior year by $7.7 million from $4.8 million to $12.5
million during the year ended June 30, 2010 and 2011, respectively. Our provision for income taxes
includes both the current provision and a provision for deferred income tax expense resulting from
timing differences between tax and financial reporting accounting bases. We are unable to combine
our NOLs for application to the income of our subsidiaries in some states and thus our state income
tax expense is higher than the expected combined rate. In addition, as noted above, we are subject
to limits on the amount of carry forward NOLs that we may use each year for federal and state
purposes. See Factors Affecting Our Results of Operations. The following table reconciles an
expected tax provision based on a statutory federal tax rate of 34 percent applied to our book net
income.
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
|
Expected provision at statutory rate of 34 percent |
|
$ |
2,566 |
|
|
$ |
(48 |
) |
Increase/(decrease) due to: |
|
|
|
|
|
|
|
|
Non-deductible stock-based compensation |
|
|
7,824 |
|
|
|
6,177 |
|
State income taxes, net of federal benefit |
|
|
1,564 |
|
|
|
786 |
|
Transaction costs not deductible |
|
|
294 |
|
|
|
385 |
|
Gain on bargain purchase |
|
|
|
|
|
|
(3,078 |
) |
Other, net |
|
|
294 |
|
|
|
601 |
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
12,542 |
|
|
$ |
4,823 |
|
|
|
|
|
|
|
|
Year Ended June 30, 2010 Compared to the Year Ended June 30, 2009
Revenue
Our revenue was generated from the following business units during the years ended June 30,
2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zayo Bandwidth |
|
$ |
183,085 |
|
|
|
92 |
% |
|
$ |
129,282 |
|
|
|
103 |
% |
Zayo Fiber Solutions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
zColo |
|
|
23,993 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
Intercompany |
|
|
(7,748 |
) |
|
|
(4 |
) |
|
|
(3,943 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
199,330 |
|
|
|
100 |
% |
|
|
125,339 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Our total revenue increased by $74.0 million, or 59%, from $125.3 million to $199.3 million
during the years ended June 30, 2009 and 2010, respectively. The increase is a result of a full
year of revenue from our Fiscal 2009 acquisitions being reflected in the Fiscal 2010 results and
organic growth.
39
The stratification of our revenue during the years ended June 30, 2010 and 2009 was consistent
with a majority of the revenue recognized during the periods presented resulting from monthly
recurring revenue streams. The following table reflects the stratification of our revenues during
these periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Monthly recurring revenue |
|
$ |
194,383 |
|
|
|
97 |
% |
|
$ |
120,412 |
|
|
|
96 |
% |
Amortization of deferred revenue |
|
|
3,500 |
|
|
|
2 |
|
|
|
2,011 |
|
|
|
2 |
|
Other revenue |
|
|
1,447 |
|
|
|
1 |
|
|
|
2,916 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
199,330 |
|
|
|
100 |
% |
|
$ |
125,339 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Zayo Bandwidth. Our revenues from our Zayo Bandwidth business unit increased by $53.8 million,
or 42%, from $129.3 million during the year ended June 30, 2009 to $183.1 million during the year
ended June 30, 2010, principally as a result of increased revenues attributable to our acquisition
of FiberNet and the allocation of a portion of the FiberNet assets and legacy business to the Zayo
Bandwidth business unit.
zColo. Our zColo business unit, which only began operations in September 2009 following our
acquisition of FiberNet, recognized $24.0 million of revenues during the year ended June 30, 2010.
Operating Costs, Excluding Depreciation and Amortization
Operating Costs, Excluding Depreciation and Amortization. Our operating costs, excluding
depreciation and amortization, increased by $24.9 million, or 66%, from $37.8 million to $62.7
million during the years ended June 30, 2009 and 2010, respectively. The increase in operating
costs, excluding depreciation and amortization, reflects the increased operating costs of our
growing network.
Selling, General and Administrative Expenses
The table below sets forth the components of our SG&A expenses during the years ended June 30,
2010 and 2009, respectively.
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Compensation and benefits expenses |
|
$ |
31,047 |
|
|
$ |
21,527 |
|
Network operation expenses |
|
|
19,892 |
|
|
|
17,277 |
|
Other SG&A expenses |
|
|
13,673 |
|
|
|
11,970 |
|
Transaction costs |
|
|
1,299 |
|
|
|
719 |
|
|
|
|
|
|
|
|
Total SG&A expenses |
|
$ |
65,911 |
|
|
$ |
51,493 |
|
|
|
|
|
|
|
|
Compensation and Benefits Expenses. Compensation and benefits expenses increased by $9.5
million, or 44%, from $21.5 million to $31.0 million during the years ended June 30, 2009 and 2010,
respectively. The increase reflects the increased number of employees as our business grew during
this period, principally as a result of our acquisition of FiberNet in September of 2009. At June
30, 2010, we had 300 full time employees compared to 218 at June 30, 2009.
Network Operations Expenses. Network operations expenses increased by $2.6 million, or 15%,
from $17.3 million to $19.9 million during the years ended June 30, 2009 and 2010, respectively.
The increase in such expenses principally reflected the growth of our network assets and the
related expenses of operating that expanded network following our acquisition of FiberNet in
September of 2009.
Other SG&A. Other SG&A expenses, which includes expenses such as property tax, travel, office
expense, and maintenance
expense on colocation facilities, increased by $1.7 million, or 14%, from $12.0 million to
$13.7 million during the years ended June 30, 2009 and 2010, respectively. The increase is a
result of our acquisition of FiberNet in September of 2009 as well as our organic network expansion
efforts.
40
Transaction Costs. We incurred transaction costs, which principally include expenses incurred
in connection with potential and closed acquisitions, of $0.7 million and $1.3 million during the
years ended June 30, 2009 and 2010, respectively.
Stock-Based Compensation
Stock-based compensation expenses increased by $11.8 million, or 183%, from $6.4 million to
$18.2 million during the years ended June 30, 2009 and 2010, respectively. The increase is
primarily a result of an additional 5.4 million common units vesting during the year ended June 30,
2010 as compared to the year ended June 30, 2009 and an increase in the fair market value of the
Class A, B and C common units from $0.16, $0 and $0 per unit, respectively as of June 30, 2009 to
$0.49, $0.28 and $0.03 per unit, respectively as of June 30, 2010.
Depreciation and Amortization
Depreciation and amortization expense increased by $12.2 million, or 46%, from $26.6 million
to $38.7 million during the years ended June 30, 2009 and 2010, respectively. The increase is a
result of the substantial increase in our capital assets and intangible assets, principally from
the FiberNet acquisition in September 2009, and the resulting depreciation and amortization of such
capitalized amounts.
Total Other Expense, Net
The table below sets forth the components of our total other expense, net for the years ended
June 30, 2010 and 2009, respectively.
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30 |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Interest expense |
|
$ |
(18,692 |
) |
|
$ |
(15,245 |
) |
Interest income |
|
|
10 |
|
|
|
186 |
|
Other income, net |
|
|
1,516 |
|
|
|
48 |
|
Non-taxable gain on bargain purchase |
|
|
9,081 |
|
|
|
|
|
Loss on extinguishment of debt |
|
|
(5,881 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total other expenses, net |
|
$ |
(13,966 |
) |
|
$ |
(15,011 |
) |
|
|
|
|
|
|
|
Interest Expense. Interest expense increased by $3.5 million, or 23%, from $15.2 million
during the year ended June 30, 2009 to $18.7 million during the year ended June 30, 2010. The
increase is a result of the increase in our debt balance beginning in March 2010 as a result of the
offering of $250.0 million of existing notes and the higher interest rate (10.25%) associated with
the notes. This increase was partially offset by the decline in the LIBOR rates during the nine
months ended March 31, 2010 as compared to Fiscal 2009 as the interest rate on our term loans,
which were paid off with proceeds from the offering of the notes in March 2010, was adjustable
based on the LIBOR rate. Interest expense associated with our interest rate swaps was $0.7 million
in Fiscal 2010 compared to $3.1 million in Fiscal 2009.
Other Income. During the year ended June 30, 2010 the Company recognized a gain on bargain
purchase associated with the FiberNet acquisition. The bargain purchase is primarily the result of
recording of deferred income tax assets for the NOL carry forwards of FiberNet. Also contributing
to the increase in other income during the year ended June 30, 2010 was our realization in Fiscal
2010 of a reduction in the price we originally paid for the Onvoy acquisition. We received $0.8
million from the Onvoy purchase escrow account during the period when such amount was released from
escrow. In accordance with ASC 805-10, the Company recognized the release from escrow as other
income as the release was outside of the one year acquisition accounting true-up period.
Loss on Extinguishment of Debt: A portion of the proceeds from our issuance in March 2010 of
$250.0 million in principal amount of notes was used to pay off all of our then-outstanding term
loans. Upon the termination of the term loans, the Company wrote off the unamortized portion of the
debt issuance costs associated with those loans resulting in a loss on extinguishment of debt of
$5.9 million.
41
Provision for Income Taxes
Income tax expense increased over the prior year by $7.1 million from a benefit of $2.3
million to a provision of $4.8 million during the years ended June 30, 2009 and 2010, respectively.
Our provision for income taxes includes both the current provision and a provision for deferred
income tax expense resulting from timing differences between tax and financial reporting accounting
bases. We are unable to combine our NOLs for application to the income of our subsidiaries in some
states and thus our state income tax expense is higher than the expected combined rate. In
addition, as noted above, we are subject to limits on the amount of carry forward NOLs that we may
use each year for federal and state purposes. See Factors Affecting Our Results of Operations.
The following table reconciles an expected tax provision based on a statutory federal tax rate of
34 percent applied to our book net income.
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Expected provision at statutory rate of 34 percent |
|
$ |
(48 |
) |
|
$ |
(4,053 |
) |
Increase/(decrease) due to: |
|
|
|
|
|
|
|
|
Non-deductible stock-based compensation |
|
|
6,177 |
|
|
|
2,158 |
|
State income taxes, net of federal benefit |
|
|
786 |
|
|
|
(248 |
) |
Transaction costs not deductible |
|
|
385 |
|
|
|
|
|
Gain on bargain purchase |
|
|
(3,078 |
) |
|
|
|
|
Other, net |
|
|
601 |
|
|
|
(178 |
) |
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
4,823 |
|
|
$ |
(2,321 |
) |
|
|
|
|
|
|
|
Adjusted EBITDA
We define Adjusted EBITDA as earnings before interest, income taxes, depreciation and
amortization (EBITDA) adjusted to exclude transaction costs, stock-based compensation, and
certain non-cash items. We use EBITDA and Adjusted EBITDA to evaluate operating performance and
liquidity, and these financial measures are among the primary measures used by management for
planning and forecasting of future periods. We believe Adjusted EBITDA is especially important in a
capital-intensive industry such as telecommunications. We further believe that the presentation of
EBITDA and 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 makes it easier to compare our
results with the results of other companies that have different financing and capital structures.
We also monitor EBITDA as we have debt covenants that restrict our borrowing capacity that are
based on a leverage ratio which utilizes EBITDA. We must not exceed a consolidated leverage ratio
(funded debt to annualized EBITDA), as determined under the credit agreement, of 4.25x the last
quarters annualized EBITDA. 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.
EBITDA and Adjusted EBITDA have limitations as analytical tools, and should not be considered
in isolation from, or as substitutes 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. |
42
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. A reconciliation from net earnings from continuing operations to Adjusted EBITDA is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2011 |
|
|
|
Zayo |
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
Bandwidth |
|
|
zColo |
|
|
ZFS |
|
|
Corporate |
|
|
Zayo Group |
|
Earnings/(loss) from continuing operations |
|
$ |
37.2 |
|
|
$ |
5.9 |
|
|
$ |
10.8 |
|
|
$ |
(58.9 |
) |
|
$ |
(5.0 |
) |
Interest expense |
|
|
1.0 |
|
|
|
0.2 |
|
|
|
|
|
|
|
32.2 |
|
|
|
33.4 |
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.5 |
|
|
|
12.5 |
|
Depreciation and amortization expense |
|
|
41.5 |
|
|
|
5.4 |
|
|
|
13.6 |
|
|
|
|
|
|
|
60.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
|
79.7 |
|
|
|
11.5 |
|
|
|
24.4 |
|
|
|
(14.2 |
) |
|
|
101.4 |
|
Transaction costs |
|
|
0.6 |
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
|
|
|
|
0.9 |
|
Stock-based compensation |
|
|
9.2 |
|
|
|
0.6 |
|
|
|
1.9 |
|
|
|
12.6 |
|
|
|
24.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
89.5 |
|
|
$ |
12.2 |
|
|
$ |
26.5 |
|
|
$ |
(1.6 |
) |
|
$ |
126.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2010 |
|
|
|
Zayo |
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
Bandwidth |
|
|
zColo |
|
|
ZFS |
|
|
Corporate |
|
|
Zayo Group |
|
Earnings/(loss) from continuing operations |
|
$ |
26.6 |
|
|
$ |
4.2 |
|
|
$ |
|
|
|
$ |
(35.8 |
) |
|
$ |
(5.0 |
) |
Interest expense |
|
|
1.1 |
|
|
|
0.2 |
|
|
|
|
|
|
|
17.4 |
|
|
|
18.7 |
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.8 |
|
|
|
4.8 |
|
Depreciation and amortization expense |
|
|
34.2 |
|
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
|
38.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
|
61.9 |
|
|
|
8.9 |
|
|
|
|
|
|
|
(13.6 |
) |
|
|
57.2 |
|
Transaction costs |
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
1.3 |
|
Stock-based compensation |
|
|
6.6 |
|
|
|
0.1 |
|
|
|
|
|
|
|
11.5 |
|
|
|
18.2 |
|
Loss on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.9 |
|
|
|
5.9 |
|
Gain on bargain purchase |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9.1 |
) |
|
|
(9.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
69.6 |
|
|
$ |
9.0 |
|
|
$ |
|
|
|
$ |
(5.1 |
) |
|
$ |
73.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2009 |
|
|
|
Zayo |
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
Bandwidth |
|
|
zColo |
|
|
ZFS |
|
|
Corporate |
|
|
Zayo Group |
|
Earnings/(loss) from continuing operations |
|
$ |
15.3 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(24.9 |
) |
|
$ |
(9.6 |
) |
Interest expense |
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
14.0 |
|
|
|
15.2 |
|
Income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.3 |
) |
|
|
(2.3 |
) |
Depreciation and amortization expense |
|
|
26.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
|
43.1 |
|
|
|
|
|
|
|
|
|
|
|
(13.2 |
) |
|
|
29.9 |
|
Transaction costs |
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.7 |
|
Stock-based compensation |
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
4.2 |
|
|
|
6.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
46.0 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(9.0 |
) |
|
$ |
37.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
Our primary sources of liquidity have been cash provided by operations, equity contributions,
and borrowings. Our principal uses of cash have been for acquisitions, capital expenditures, and
debt-service requirements. See Cash flows. We anticipate that our principal uses of cash in
the future will be for acquisitions, capital expenditures, working capital and debt service.
We have debt covenants under both the indenture governing our Notes and our credit facility
that, under certain circumstances, restrict our ability to incur additional indebtedness. The
credit facility covenants prohibit us from increasing our total indebtedness above 4.25 of our
previous quarters annualized EBITDA. Under the indenture governing our Notes, any increase in
secured indebtedness would be subject to a pro-forma permitted liens test not to exceed 3.5 times
our previous quarters annualized EBITDA, and the incurrence of total indebtedness is restricted
not to exceed 4.25 times our previous quarters annualized EBITDA.
43
As of June 30, 2011, we had $25.4 million in cash and cash equivalents and $0.6 million in
non-current restricted cash
(included within other long-term assets on the June 30, 2011 consolidated balance sheet). Cash
and cash equivalents consist of amounts held in bank accounts and highly-liquid U.S. treasury money
market funds. The restricted cash balance is pledged as collateral for certain commercial letters
of credit. Working capital (current assets less current liabilities) at June 30, 2011 was a deficit
of $17.3 million. Although we have a working capital deficit as of June 30, 2011, a majority of
the deficit is a result of a current deferred revenue balance of $15.7 million that we will be
recognizing as revenue over the next twelve months. The actual cash outflows associated with
fulfilling this deferred revenue obligation during the next twelve months will be significantly
less than the June 30, 2011 current deferred revenue balance. Additionally, as of June 30, 2011,
we had $93.6 million available on our line of credit, which can be used to satisfy any short term
obligations.
Our net capital expenditures increased by $53.7 million, or 91%, during the year ended June
30, 2011 as compared to the year ended June 30, 2010, from $58.8 million to $112.5 million, net of
stimulus grants, respectively. Our capital expenditures primarily relate to success-based
contracts. The increase is a result of meeting the needs of our increased customer base resulting
from our Fiscal 2011 acquisitions and organic growth. We expect to continue to invest in our
network (in part driven by fiber-to-the-tower activities) for the foreseeable future. Over the next
two fiscal years, we expect that the level of our investment will be closely correlated to the
amount of Adjusted EBITDA we generate. Adjusted EBITDA is a performance, rather than cash flow
measure. Correlating our capital expenditures to our Adjusted EBITDA does not imply that we will be
able to fund such capital expenditures solely with cash from operations. We expect to fund such
capital expenditures with cash from operations, available borrowings under our credit agreement,
and available cash on hand. These capital expenditures will, however, 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 a result, the amount we invest in such capital
expenditures will be based on contracts that are executed and may at times be above or below our
actual adjusted EBITDA generation.
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 (including available borrowings
under our revolving credit facility), equity contributions, and available cash on hand.
Cash Flows
We believe that our cash flow from operating activities, in addition to cash and cash
equivalents currently on-hand, will be sufficient to fund our operating activities 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 review 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 years ended, 2011, 2010 and
2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Net cash provided by operating activities |
|
$ |
97,054 |
|
|
$ |
58,200 |
|
|
$ |
24,667 |
|
Net cash used in investing activities |
|
|
(296,162 |
) |
|
|
(155,322 |
) |
|
|
(73,122 |
) |
Net cash provided by financing activities |
|
|
134,190 |
|
|
|
135,446 |
|
|
|
67,921 |
|
Net Cash Flows from Operating Activities
Net cash flows from operating activities increased by $38.9 million, or 67%, from $58.2
million to $97.1 million during the years ended June 30, 2010 and 2011, respectively. Net cash
flows from operating activities during the year ended June 30, 2011 represents our loss from
continuing operations of $5.0 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 $60.5 million, the
deferred tax provision of $11.1 million and non-cash stock-based compensation expense of $24.3
million, plus the change in working capital components.
Net cash flows from operating activities during the year ended June 30, 2010 represents our
loss from continuing operations of $5.0 million, plus the add back to our net earnings of non-cash
items deducted in the determination of net income, principally depreciation and amortization of
$38.7 million, the deferred tax provision of $5.4 million, non-cash stock-based compensation
expense of $18.2 million and our loss on extinguishment of debt of $5.9 million less the $9.1 gain
on bargain purchase of FiberNet,
plus the change in working capital components.
44
The increase in net cash flows from operating activities during Fiscal 2011 is a result of the
increase in earnings recognized associated with our acquisitions during Fiscal 2011 and organic
growth.
Cash Flows Used for Investing Activities
We used cash in investing activities of $296.2 million and $155.3 million during the years
ended June 30, 2011 and 2010, respectively. During the year ended June 30, 2011, our principal uses
of cash in investing activities were our $73.7 million purchase of AGL Networks, our $110.0 merger
with AFS and $112.5 million in additions to property and equipment, net of stimulus grant
reimbursements.
During the year ended June 30, 2010, our principal uses of cash in investing activities were
our $96.6 million purchase of FiberNet and $58.8 million in additions to network-related equipment.
Cash Flows from Financing Activities
Our net cash provided by financing activities was $134.2 million and $135.4 million during the
years ended June 30, 2011 and 2010, respectively. Our cash flows from financing activities during
the year ended June 30, 2011 primarily comprise $103.0 million in cash proceeds from our September
2010 Notes offering and $36.5 million in equity contributions from CII. These cash inflows were
offset by $4.1 million in deferred financing costs and $1.7 million in principal payments on
capital leases during the period.
Our cash flows from financing activities during the year ended June 30, 2010 primarily
consisted of $39.8 million from equity contributions, $246.9 million in net proceeds from our March
2010 Note offering and $30 million in net proceeds on a term loan entered into in order to finance
the FiberNet acquisition. These financing inflows were offset by the repayment of our outstanding
term loans totaling $166.2 million, debt issuance costs incurred during the period of $12.4
million, $2.2 million in capital lease principal payments, and $0.6 million in transfers of cash to
restricted cash accounts.
Contractual Cash Obligations
The following table represents a summary of our estimated future payments under contractual
cash obligations as of June 30, 2011. Changes in our business needs, cancellation provisions,
changing interest rates and other factors may result in actual payments differing from these
estimates. We cannot provide certainty regarding the timing and amounts of payments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less |
|
|
|
|
|
|
|
|
|
|
More |
|
|
|
|
|
|
|
Than |
|
|
|
|
|
|
|
|
|
|
Than |
|
|
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
|
|
(in thousands) |
|
Long-term debt (principal and interest) |
|
$ |
559,286 |
|
|
$ |
35,875 |
|
|
$ |
76,250 |
|
|
$ |
71,750 |
|
|
$ |
375,411 |
|
Operating leases |
|
|
178,799 |
|
|
|
23,353 |
|
|
|
40,511 |
|
|
|
33,876 |
|
|
|
81,059 |
|
Purchase obligations |
|
|
22,822 |
|
|
|
22,202 |
|
|
|
620 |
|
|
|
|
|
|
|
|
|
Capital leases (principal and interest) |
|
|
15,717 |
|
|
|
1,769 |
|
|
|
3,475 |
|
|
|
3,175 |
|
|
|
7,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
776,624 |
|
|
$ |
83,199 |
|
|
$ |
120,856 |
|
|
$ |
108,801 |
|
|
$ |
463,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys purchase commitments are primarily success-based; that is, the Company has
executed customer contracts that support the future capital expenditures.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
New Accounting Pronouncements
We have reviewed all new accounting pronouncements and have concluded that none of the
recently issued pronouncements will have a material impact on our consolidated results of
operations, financial condition, or financial disclosure.
45
|
|
|
ITEM 7A |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our exposure to market risk consists of changes in interest rates from time to time.
As of June 30, 2011, we had outstanding approximately $350.1 million of fixed-rate Notes,
approximately $11.2 million of capital lease obligations, and $93.6 million available for borrowing
under our $100.0 million revolving credit facility, at floating rates, subject to certain
conditions. 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 as of June 30, 2011 to be
$385.9 million compared to the carrying value of $350.1 million.
As of June 30, 2010, we had outstanding approximately $247.1 million of fixed-rate Notes,
approximately $12.7 million of capital lease obligations, and $69.1 million available for borrowing
under a $75.0 million revolving credit facility, at floating rates, subject to certain conditions.
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 as of June 30, 2010 to be $252.5
million compared to the carrying value of $247.1 million.
We are exposed to the risk of changes in interest rates if it is necessary to acquire
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 do not have any material foreign currency or commodity price risk.
|
|
|
ITEM 8. |
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Reference is made to the information set forth beginning on page F-1.
|
|
|
ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
46
|
|
|
ITEM 9A. |
|
CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
We carried out an evaluation as of the last day of the period covered by this Annual Report on
Form 10-K, 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 as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934 (Exchange Act). Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures are
effective and are designed to ensure that information required to be disclosed by us in reports
filed or submitted under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SECs rules and forms. 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.
There have been no changes in our internal control over financial reporting during the year
ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
Managements Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). All
internal control systems, no matter how well designed, have inherent limitations. Therefore, even
those systems determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Under the supervision and with the participation
of our management, including our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of our internal control over financial reporting based
on the framework in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Based on our evaluation under the framework in Internal ControlIntegrated Framework, our
management concluded that our internal control over financial reporting was effective as of June
30, 2011.
ITEM 9B. OTHER INFORMATION
Not applicable.
47
PART III
|
|
|
ITEM 10. |
|
DIRECTOR, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The following table sets forth the names, ages and positions of our directors and executive
officers as of June 30, 2011. Additional biographical information for each individual is provided
in the text following the table.
|
|
|
|
|
|
|
Name |
|
Age |
|
|
Position |
Daniel Caruso
|
|
47 |
|
|
President, Chief Executive Officer, and Director |
Kenneth desGarennes
|
|
40 |
|
|
Chief Financial Officer and Treasurer |
Scott Beer
|
|
42 |
|
|
General Counsel and Secretary |
David Howson
|
|
40 |
|
|
President, Zayo Bandwidth |
Glenn S. Russo
|
|
52 |
|
|
President, Zayo Networks |
Chris Morley
|
|
37 |
|
|
President, zColo |
Matthew Erickson
|
|
34 |
|
|
President, Zayo Fiber Solutions |
Rick Connor
|
|
62 |
|
|
Director, Compensation Committee Member and Audit Committee Chairman |
Michael Choe
|
|
39 |
|
|
Director and Compensation Committee Member |
John Siegel
|
|
42 |
|
|
Director and Audit Committee Member |
Gillis Cashman
|
|
36 |
|
|
Director and Audit Committee Member |
John Downer
|
|
53 |
|
|
Director and Compensation Committee Member |
Management Team
Daniel Caruso, one of our cofounders, has served as our President and Chief Executive Officer
since our inception in 2007. Between 2004 and 2006, Mr. Caruso was President and CEO of ICG
Communications, Inc. (ICG). In 2004, he led a buyout of ICG and took it private. In 2006, ICG was
sold to Level 3 Communications, Inc. (Level 3). Prior to ICG, Mr. Caruso was one of the founding
executives of Level 3, and served as their Group Vice President from 1997 through 2003 where he was
responsible for Level 3s engineering, construction, and operations organization and most of its
lines of business and marketing functions. Prior to Level 3, Mr. Caruso was a member of the MFS
Communications Company, Inc. senior management team. He began his career at Illinois Bell Telephone
Company, a former subsidiary of Ameritech Corporation. Mr. Caruso is an investor in, and currently
serves as the executive Chairman of, Envysion, Inc., where he is responsible for setting the
strategic direction of the company and mentoring the executive team. He holds an MBA from the
University of Chicago and a BS in Mechanical Engineering from the University of Illinois.
Kenneth desGarennes has served as our Chief Financial Officer and Treasurer since October
2007. From November 2003 to October 2007, Mr. desGarennes served as Chief Financial Officer for
Wire One Communications, Inc. Prior to joining Wire One, Mr. desGarennes was a Senior Director at
The Gores Group, LLC, a technology-focused private equity firm. Mr. desGarennes started his career
as a commercial banking officer with First Union Bank before moving to Accenture plc, where he
worked for 6 years in a corporate development role. Mr. desGarennes received his BS in finance from
the University of Maryland in College Park.
Scott Beer has served as our General Counsel and Secretary since May 2007. From August 2006 to
May 2007, Mr. Beer worked for Level 3 as VP of Carrier Relations, where he was responsible for
vendor relations, contract negotiations and various off-net cost management initiatives. Prior to
Level 3s acquisition of ICG, Mr. Beer was VP and General Counsel of ICG, overseeing all legal and
regulatory matters for the company from September 2004 to August 2006. Before starting with ICG,
Mr. Beer was in house counsel at MCI WorldCom Network Services Inc. supporting the Mass Markets
Finance Department for three years. He began his legal career as an associate attorney for McGloin,
Davenport, Severson & Snow, PC, where he was a commercial litigator and represented several large
communication companies. Mr. Beer holds a Juris Doctorate from Detroit College of Law at Michigan
State University. He earned his B.A. from Michigan State in Communications and Pre-law.
David Howson has served as the President of Zayo Bandwidth since November 2010. Mr. Howson
joined the Company in June 2010 as President of the zColo business unit. From April 1998 to May
2010 Mr. Howson served as part of the management team at Level 3 serving as Senior Vice President
from 2004 to 2010, where he was responsible for various operations roles. Before joining Level 3,
Mr. Howson worked for a subsidiary of MFS Communications responsible for the design and
construction of fiber networks and colocation facilities in Europe, Asia and Australia. Mr. Howson
earned his Engineering degree from Oxford Brookes University in England.
48
Glenn Russo joined the Company in September 2008 as the President of the Zayo Enterprise
Networks business unit. In January of 2011, Mr. Russo was appointed to the position of President
of Zayo Networks. From September 2000 to August 2008, Mr. Russo served as part of the management
team at Level 3. He acted as Senior Vice President from 2003 to 2008, where he was responsible for
transport and infrastructure services across North America and Europe. Before joining Level 3, Mr.
Russo was a senior executive at Bridgeworks, a regional network services company in Texas, and
spent 16 years with ExxonMobils global chemical product division in a range of IT, sales and
finance leadership positions. Mr. Russo earned his Engineering degree from Cornell University.
Chris Morley has served as President of zColo since November 2010. Mr. Morley joined the
Company in 2009 as Chief Financial Officer and Head of Product Management for the Zayo Bandwidth
business unit. From 2008 until joining the Company in 2009 Mr. Morley acted as an independent
consultant advising operating companies and private equity investors on strategy, merger and
acquisition due diligence and execution, and operational improvements. During 2006 and 2007 Mr.
Morley served as part of the management team for One Communications Corporation serving as Chief
Integration Officer and the Executive Vice President of Operations and Networks. From 1999 to 2006
Mr. Morley served as part of the management team for Conversent Communications, LLC serving as
Executive Vice President of Operations and Engineering. Mr. Morley received his B.S. in Finance
from the University of Denver.
Matthew Erickson has served as the President of Zayo Fiber Solutions since July 2010. Prior to
his current role, Mr. Erickson held roles in corporate development and product and vendor
management since our inception in 2007. Prior to joining us, Mr. Erickson was at ICG, where he was
Vice President of Marketing & Product Management from October 2004 to July 2006. Prior to ICG, Mr.
Erickson was at Level 3 where he held various roles including Internet, transport and
infrastructure product management and corporate strategy/development. Mr. Erickson began his career
at PricewaterhouseCoopers in the audit and financial advisory services groups. Mr. Erickson
received his B.S. in Accounting from Colorado State University.
Directors
Rick Connor has served as a Director and Chairman of the audit committee since June 2010. Mr.
Connor is currently retired. Prior to his retirement in 2009, he was an audit partner with KPMG LLP
where he served clients in the telecommunications and media, and energy industries for 38 years.
During the last 12 years of his career he served as the Managing Partner of KPMGs Denver office.
Mr. Connor earned his B.S. degree in accounting from the University of Colorado. Mr. Connor was
appointed Director and the Chairman of the Audit Committee as a result of his extensive technical
accounting and auditing background, knowledge of SEC filing requirements and experience with
telecommunications clients.
Michael Choe has served as a Director since March 2009. Mr. Choe is currently a Managing
Director at Charlesbank Capital Partners LLC, where he is responsible for executing and monitoring
investments in companies. He joined Harvard Private Capital Group, the predecessor to Charlesbank,
in 1997, and was appointed as Managing Director in 2006. Prior to that he was with McKinsey &
Company, where he focused on corporate strategy work in energy, health care and media. Mr. Choe
graduated from Harvard University with a BA in Biology. Mr. Choe is a member of the Board of
Directors of DEI Holdings, Inc., Horn Industrial Services, LLC and OnCore Manufacturing, LLC. Mr.
Choe was appointed Director as a result of his extensive experience with mergers and acquisitions
of middle-market companies.
John Siegel has served as a Director since May 2007. Mr. Siegel has been a Partner of
Columbia Capital since April 2000, where he focuses on communication services investments. Mr.
Siegel is a member of the Board of Directors of euNetworks, Cologix,
GTS Central Europe, mindSHIFT Technologies, Inc., Presidio, Incorporated, and Teliris, Inc.
Prior to Columbia, Mr. Siegel held positions with Morgan Stanley Capital Partners, Fidelity
Ventures, and the Investment Banking Division of Alex. Brown & Sons, Incorporated. Mr. Siegel
received his B.A. from Princeton University and his M.B.A. from Harvard Business School. Mr.
Siegel was appointed Director as a result of his vast knowledge of the telecommunications industry
obtained over his career of investing primarily in the telecommunications/data services arena.
49
Gillis Cashman has served as a Director since May 2007. Mr. Cashman currently serves as a
Managing Partner of M/C Partners, where he focuses on telecom and media infrastructure. He joined
M/C Partners as an associate in 1999 and was promoted to partner in 2006 before his appointment to
his current position in 2007. From 1997 to 1999, he was with Salomon Smith Barney in the Global
Telecommunications Corporate Finance Group, where he focused on mergers and acquisitions in the
wireline and wireless segments of the telecommunications industry. Mr. Cashman currently serves as
the Chairman of Baja Broadband Holding Company, LLC, on the Board of Directors of Corelink Data
Centers, and CSDVRS, GTS Central Europe and Plum Choice, Inc. Mr. Cashman received an AB in
economics from Duke University. Mr. Cashman was appointed Director as a result his merger and
acquisition experience and portfolio company management evidenced by his current position at M/C
Partners where he leads the Broadband Infrastructure and Services portion of the M/C Partners
portfolio.
John Downer has served as Director since May 2007. Mr. Downer joined the Oak Investment
Partners team as Director-Private Equity in 2003 following a 14-year career as a Managing Director
at Cornerstone Equity Investors, LLC, a middle-market private equity firm with over $1.2 billion
under management. At Cornerstone, Mr. Downer led the management buyout of a number of technology
and tech-related companies and acted as the lead investor for numerous later-stage expansion
financings. Prior to Cornerstone, Mr. Downer worked at the private equity groups at T. Rowe Price
and the Harvard Management Company. Mr. Downer currently serves as a director of Geotrace
Technologies, Inc., LumaSense Technologies, Inc., and Plastic Logic Russia and Enterprise Sourcing
Services. He is currently a Trustee of Phillips Exeter Academy. Mr. Downer earned his BA, JD, and
MBA from Harvard University. Mr. Downer was appointed Director as a result of his knowledge of
mergers and acquisitions, legal, financing and operations gathered over his private equity career.
Departed Officers and Directors
In November 2010, John Scarano, one of our founders and President of Zayo Bandwidth and Chief
Operating Officer from the Companys inception through November 2010, voluntarily resigned from the
Company. There were no disagreements between Mr. Scarano and the Company or any officer or
director of the Company which led to Mr. Scaranos resignation. Mr. Scarano resignation was a
result of his desire to pursue and concentrate on other business matters. In November 2010, Mr.
Howson assumed Mr. Scaranos responsibilities as President of Zayo Bandwidth.
In March of 2011, Don Detampel resigned from the Companys Board of Directors. Mr. Detampels
voluntary resignation was a result of his pursuit of alternative endeavors which could have
resulted in both constraints on his time and potential business conflicts. There were no
disagreements between Mr. Detampel and the Company or any officer or director of the Company which
led to Mr. Detampels resignation. Mr. Detampel acted as one of Zayos first two independent
directors and served on the Board of Directors since July of 2010. With the resignation, Mr.
Detampel also resigned from his role as Chairman of the Companys Compensation Committee and as a
member of the Audit Committee.
Committees of the Board
Audit Committee
Our Audit Committee is currently composed of Mr. Connor, Mr. Cashman and Mr. Siegel, each of
whom is a non-employee member of the board.
Code of Ethics
We have adopted a written code of conduct that serves as the code of ethics applicable to our
directors, officers and employees, including our principal executive officer and senior financial
officers, in accordance with Section 406 of the Sarbanes-Oxley Act of 2002 and the rules of the
SEC. In the event that we make any changes to, or provide any waivers from, the provisions of our
code of conduct applicable to our principal executive officer and senior financial officers, we
intend to disclose these events on our website or in a report on Form 8-K within four business days
of such event. This code of conduct is available in the Corporate Governance section of our
website at http://investor.zayo.com/corporate-governance. A copy of our code of conduct will be
provided to any person without charge upon request, by contacting [insert desired contact person
for these requests name, address and phone]
50
|
|
|
ITEM 11. |
|
EXECUTIVE COMPENSATION |
Compensation Discussion and Analysis
The following Compensation Discussion and Analysis describes the material elements of
compensation for our executive officers. When we refer to executive in this section, we mean our
five executives listed in the Summary Compensation Table, below.
Compensation Objectives
The objective of our compensation practices is to attract, retain, and motivate the highest
quality employees and executives who share our core value of enhancing equity-holder value. We
believe that the primary goal of management is to create value for our stakeholders and we have
designed our compensation program around this philosophy. Substantially all of our employees have a
material portion of their compensation tied to the Companys performance, and a large portion of
the overall compensation of our executives is comprised of long-term compensation.
Elements of Executive Compensation
The components of compensation for our executives are base salary, quarterly non-equity
incentive compensation, equity participation, and benefits. In addition, in limited circumstances,
the Compensation Committee may exercise its discretion to pay other cash bonuses. Total
compensation is targeted at or above the median for the industry, depending on the executives
experience, historical performance and demands of the position. Total compensation increases with
position and responsibility. Pursuant to our objective of aligning our executives interests with
the interests of our equity holders, we create compensation packages that meet or exceed general
industry levels by combining base salaries that are at or below industry levels with bonuses and
equity incentives that are at or above industry levels. The percentage of compensation that is at
risk also increases with position and responsibility. At risk compensation includes potential
quarterly payouts under our non-equity incentive compensation plan and long-term incentive awards.
Executives with greater roles in, and responsibility for, achieving our performance goals bear a
greater proportion of the risk that those goals are not achieved and receive a greater proportion
of the rewards if goals are met or surpassed.
Base Salary. We provide our executives with a base salary to provide them with an
immediate financial incentive. Base salaries are determined based on (1) a review of salary ranges
for similar positions at companies of similar size based on annual revenues, (2) the specific
experience level of the executive, and (3) expected contributions by the executive. Base salaries
are generally at or below our peer companies. Base salaries are approved by the Boards
Compensation Committee and are based on the recommendation of our CEO, Mr. Caruso. Base salaries
are reviewed and adjusted from time to time based on individual merit, promotions or other changes
in job responsibilities. There are no automatic increases in base salary.
Our co-founder, Mr. Caruso, currently receives a minimal base salary. In lieu of receiving a
market based salary, Mr. Caruso elected to receive substantially all of his compensation in the
form of equity awards.
Non-Equity Incentive Compensation Plan. Consistent with our compensation objectives described
above, we also have a quarterly non-equity incentive compensation plan in which most of our
salaried employees, including our executives, participate. Similar to base salaries, this plan
provides our executives with potential cash payments which act as an incentive for current
performance, while also encouraging behavior that is consistent with our long-term goals. In
support of our compensation objectives, target payout amounts under this plan are generally above
what management estimates to be the industry median, so that when combined with below or at median
salaries, they create total cash compensation at or above the median of our industry generally.
We make these non-equity incentive compensation plan payments to participating executives if
quarterly financial targets (generally a modified calculation of adjusted EBITDA) and certain
business unit objectives are met. The financial targets and business unit objectives are proposed
by the CEO (who does not participate in the non-equity incentive compensation plan) and are
approved by the Compensation Committee. Our CEO recommends to the Compensation Committee the
quarterly payouts under this plan, from 0% to 200% of an individual or a groups target payout,
based on the relative achievement of the financial targets and business unit objectives. The actual
financial results may be adjusted up or down to account for certain non-recurring or unusual
events, if approved by the Compensation Committee.
51
The business unit objectives that were set in fiscal 2011 consisted of financial
performance objectives, strategy initiatives, executive initiatives and financial management goals,
at the business unit level. The business unit objectives established for the company reflect a mix
of near term projects and longer term improvement initiatives. Actual payouts under the plan are
determined based on our CEOs quantitative and qualitative evaluation of performance against the
objectives and are approved by our Compensation Committee.
The table below shows the total target payouts and actual payouts under the non-equity
incentive compensation plan for Fiscal 2011 for our Chief Executive Officer, Chief Financial
Officer, and three most highly compensated other executive officers. We refer to these five people
as our named executive officers.
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|
|
|
|
Plan |
|
|
Plan |
|
|
|
Target |
|
|
Actual |
|
Name |
|
Payout |
|
|
Payout |
|
Daniel Caruso |
|
$ |
|
|
|
$ |
|
|
Kenneth desGarennes |
|
$ |
102,000 |
|
|
$ |
130,980 |
|
David Howson |
|
$ |
80,932 |
|
|
$ |
103,397 |
|
Glenn Russo |
|
$ |
105,000 |
|
|
$ |
76,875 |
|
Marty Snella |
|
$ |
93,500 |
|
|
$ |
108,625 |
|
Upon reevaluating the current ratio of base salary, bonus and equity of our named
executives, we may increase their bonus targets in connection with any increase in their base
salaries with the approval of the Compensation Committee.
Our CEO, Mr. Caruso, does not earn a quarterly payment under the non-equity incentive
compensation plan.
Equity. A significant percentage of total compensation for our executives is allocated to
equity compensation. We believe equity ownership encourages executives to behave like owners and
provides a clear link between the interest of executives and those of equity holders.
Certain employees, including our executives, are granted common units in CII, our indirect
parent company. Upon a distribution at CII, the holders of common units are entitled to share in
the proceeds of a distribution after certain obligations to the preferred unit holders are met. See
Note 12: Equity of our Fiscal 2011 Consolidated Financial Statements for additional information on
members equity of CII, including the common units.
Certain executives also received preferred units in CII. The preferred unit holders are not
entitled to receive dividends or distributions (although CII may elect to include holders of
preferred units in distributions at its discretion). Upon a distribution at CII the holders of
preferred units are entitled to receive their unreturned capital contributions and a priority
return of 6% prior to any distributions being made to common unit holders. After the unreturned
capital contributions and priority returns are satisfied, preferred unit holders receive 80-85% of
the proceeds of a distribution while the common unit holders receive the remaining 15-20%,
depending on the aggregate preferred investor return on their investments.
Common units are awarded to executives upon hiring and at any time thereafter at the
discretion of the Compensation Committee based on the executives past or expected role in
increasing our equity value. All of the granted common units are subject to the terms of employee
equity agreements covering vesting and transfer, among other terms.
In Fiscal 2011, each of the named executive officers received incremental grants based on the
Compensation Committees subjective evaluation of their overall performance and expected
contribution to the future increase in CIIs overall equity value.
52
Bonus. Under the terms of his offer letter, Mr. Howson was entitled to a signing bonus equal
to $60,000, which was paid during Fiscal 2011.
Benefits. We offer our executives the same health and welfare benefit and disability plans
that we offer to all of our employees.
Determination of Executive Compensation
Our CEO, Mr. Caruso, makes recommendations to the Compensation Committee regarding the total
compensation of each executive (excluding himself), including base salary, target bonus, and equity
compensation, as well as the financial targets and business unit objectives which determine bonus
payouts. The Compensation Committee considers the CEOs recommendations in consultation with the
full Board, and makes all final decisions for the total amount of compensation and each element of
compensation for our executives, including Mr. Caruso.
Mr. Caruso and the Compensation Committee use their general knowledge of the compensation
practices of other similar telecommunications companies and other private equity-owned companies in
the formulation of their recommendations and decisions. The day-to-day design and administration of
savings, health, welfare and paid time-off plans and policies applicable to our employees in
general, including our executives, are handled by company management and our professional employee
organization, ADP.
Employment and Equity Arrangements
During Fiscal 2011, our named executives have been granted the following preferred and common
units in CII as equity compensation for services rendered.
|
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|
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|
|
|
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|
|
First vesting |
|
|
|
|
|
|
Grant date fair |
|
Named executive/Equity class |
|
Units |
|
|
date |
|
|
Vesting End |
|
|
value |
|
Daniel Caruso |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred B |
|
|
970,000 |
1 |
|
|
10/31/2010 |
|
|
|
10/31/2013 |
|
|
$ |
2.48 |
|
Common D |
|
|
8,096,118 |
2 |
|
|
1/1/2011 |
|
|
|
1/1/2014 |
|
|
$ |
0.00 |
|
Common E |
|
|
2,007,425 |
2 |
|
|
5/20/2011 |
|
|
|
5/20/2014 |
|
|
$ |
0.23 |
|
|
Kenneth deGarennes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common D |
|
|
5,152,075 |
2 |
|
|
1/1/2011 |
|
|
|
1/1/2014 |
|
|
$ |
0.00 |
|
Common E |
|
|
795,519 |
2 |
|
|
5/20/2011 |
|
|
|
5/20/2014 |
|
|
$ |
0.23 |
|
|
Glenn Russo |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common D |
|
|
110,000 |
2 |
|
|
1/1/2011 |
|
|
|
1/1/2014 |
|
|
$ |
0.00 |
|
Common E |
|
|
500,000 |
2 |
|
|
5/20/2011 |
|
|
|
5/20/2014 |
|
|
$ |
0.23 |
|
|
Marty Snella |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common D |
|
|
1,840,027 |
2 |
|
|
1/1/2012 |
|
|
|
1/1/2014 |
|
|
$ |
0.00 |
|
|
David Howson |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common B |
|
|
500,000 |
3 |
|
|
5/26/2011 |
|
|
|
5/27/2014 |
|
|
$ |
0.33 |
|
Common D |
|
|
2,145,027 |
2 |
|
|
1/1/2012 |
|
|
|
1/1/2015 |
|
|
$ |
0.00 |
|
|
|
|
1 |
|
Mr. Carusos Preferred B shares vest ratably each quarter over a period of three
years. |
|
2 |
|
Class D and E common units vest 33.33 percent on the first vesting date and the
remaining units vest pro-rata on a monthly basis over a period of two years after the first
vesting date. |
|
3 |
|
Mr. Howsons Class B common units vest 33.33 percent on the first vesting date and the
remaining units vest pro-rata on a monthly basis over a period of two years after the first
vesting date. |
53
Accelerated Vesting. Under the respective Employee Equity Agreements for Messrs. desGarennes,
Russo, Snella and Howson, each of their unvested Units will immediately vest five months after the
consummation of a sale of CII, provided that the relevant employee has remained continuously
employed from the date of the relevant Employee Equity Agreement through the date of such sale and
does not voluntarily terminate his employment prior to the expiration of such five months, if (i)
all of the consideration paid in respect of such sale consists of cash or certain marketable
securities or (ii) in the event that the consideration consists of other than cash or such
securities, the board of directors of CII determines that such sale constituted a management
control acquisition. For purposes of such Employee Equity Agreement, a sale of CII means any of
(a) a merger or consolidation of CII or its subsidiaries into or with any other person or persons,
or a transfer of units in a single transaction or a series of transactions, in which in any case
the members of CII or the members of its subsidiaries immediately prior to such merger,
consolidation, sale, exchange, conveyance or other disposition or first of such series of
transactions possess less than a majority of the voting power of CIIs or its subsidiaries or any
successor entitys issued and outstanding capital securities immediately after such transaction or
series of such transactions; or (b) a single transaction or series of transactions, pursuant to
which a person or persons who are not direct or indirect wholly-owned subsidiaries of CII acquire
all or substantially all of CIIs or its subsidiaries assets determined on a consolidated basis,
in each case, other than (i) the issuance of additional capital securities in a public offering or
private offering for the account of CII or (ii) a foreclosure or similar transfer of equity
occurring in connection with a creditor exercising remedies upon the default of any indebtedness of
CII. Further, for purposes of such Employee Equity Agreement, management control acquisition is
defined as a sale of CII with respect to which (i) immediately prior to such sale of CII, Dan
Caruso is serving CII as chief executive officer and (ii) after giving effect to the consummation
of the sale of CII, Dan Caruso is not offered the opportunity to serve as the chief executive
officer of the combined company resulting from such sale of CII.
Under the Vesting Agreements for Mr. Caruso, the unvested Preferred Units and Common Units
will, upon a sale of CII, immediately vest, provided that the executive remains employed by CII or
one of its subsidiaries. For purposes of the Vesting Agreements, sale of CII means any of the
following: (a) a merger or consolidation of CII or its subsidiaries into or with any other person
or persons, or a transfer of units in a single transaction or a series of transactions, in which in
any case the members of CII or the members of its subsidiaries immediately prior to such merger,
consolidation, sale, exchange, conveyance or other disposition or first of such series of
transactions possess less than a majority of the voting power of CIIs or its subsidiaries or any
successor entitys issued and outstanding capital securities immediately after such transaction or
series of such transactions; (b) a single transaction or series of transactions, pursuant to which
a person or persons who are not direct or indirect wholly-owned subsidiaries of CII acquire all or
substantially all of CIIs or its subsidiaries assets determined on a consolidated basis, in each
case whether pursuant to a sale, lease, transfer, exclusive license or other disposition outside of
the ordinary course of business.
54
Summary Compensation Table
The following summary compensation table sets forth information concerning the annual and
long-term compensation earned by our named executive officers.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive Plan |
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|
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|
|
Fiscal |
|
|
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|
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|
|
Stock |
|
|
Compensation |
|
|
|
|
Name and Principal Position |
|
Year |
|
|
Salary ($) |
|
|
Bonus ($) |
|
|
Awards ($)(1) |
|
|
($)(2) |
|
|
Total ($) |
|
Daniel Caruso |
|
|
2009 |
|
|
|
10,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,951 |
|
Chief Executive Officer |
|
|
2010 |
|
|
|
10,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,951 |
|
|
|
|
2011 |
|
|
|
10,951 |
|
|
|
|
|
|
|
2,867,308 |
|
|
|
|
|
|
|
2,878,259 |
|
Kenneth desGarennes |
|
|
2009 |
|
|
|
210,000 |
|
|
|
|
|
|
|
|
|
|
|
68,250 |
|
|
|
278,250 |
|
Chief Financial Officer |
|
|
2010 |
|
|
|
225,000 |
|
|
|
|
|
|
|
|
|
|
|
122,880 |
|
|
|
347,880 |
|
|
|
|
2011 |
|
|
|
240,000 |
|
|
|
|
|
|
|
182,969 |
|
|
|
130,980 |
|
|
|
553,949 |
|
David Howson |
|
|
2009 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
President, Zayo Bandwidth |
|
|
2010 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
2011 |
|
|
|
240,000 |
|
|
|
60,000 |
|
|
|
165,000 |
|
|
|
103,397 |
|
|
|
568,397 |
|
Glenn Russo |
|
|
2009 |
|
|
|
211,682 |
|
|
|
114,750 |
(3) |
|
|
64,000 |
|
|
|
|
|
|
|
390,432 |
|
President, Zayo Networks |
|
|
2010 |
|
|
|
255,000 |
|
|
|
38,250 |
(3) |
|
|
|
|
|
|
38,250 |
|
|
|
331,500 |
|
|
|
|
2011 |
|
|
|
244,375 |
|
|
|
|
|
|
|
115,000 |
|
|
|
76,875 |
|
|
|
436,250 |
|
Marty Snella |
|
|
2009 |
|
|
|
200,000 |
|
|
|
|
|
|
|
|
|
|
|
60,000 |
|
|
|
260,000 |
|
Senior Vice President of |
|
|
2010 |
|
|
|
201,667 |
|
|
|
|
|
|
|
|
|
|
|
138,500 |
|
|
|
340,167 |
|
Operations, Zayo Bandwidth |
|
|
2011 |
|
|
|
220,000 |
|
|
|
|
|
|
|
|
|
|
|
108,625 |
|
|
|
328,625 |
|
|
|
|
(1) |
|
Amounts shown reflect the grant date fair value calculated in accordance with
Financial Accounting Standards Board Accounting Standards Codification 718-10-10, for the
fiscal years ended June 30, 2011, June 30, 2010 and June 30, 2009. Assumptions used to
determine these values can be found in Note 14: Fair Value Measurements, of our Consolidated
Financial Statements. |
|
(2) |
|
Comprises compensation which we describe under Compensation Discussion and
Analysis Elements of Executive Compensation Non-Equity Incentive Compensation Plan. |
|
(3) |
|
Mr. Russos bonus was guaranteed at 150% of his target bonus for the quarters ended
December 31, 2008, March 31, 2009, June 30, 2009, and September 30, 2009. |
55
Grants of Plan Based Awards in Fiscal 2011
The following table provides information about grants of plan based awards to our named
executive officers in Fiscal 2011 and non-equity incentive plan award information for Fiscal 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other |
|
|
|
|
|
|
|
|
|
|
Fiscal 2011 |
|
|
Stock Awards: |
|
|
Grant Date |
|
|
|
|
|
|
|
Non-Equity |
|
|
Number of |
|
|
Fair Value |
|
|
|
|
|
|
|
Incentive Plan |
|
|
Shares of |
|
|
of Stock and |
|
|
|
Grant |
|
|
Targets |
|
|
Stock or |
|
|
Option |
|
Name |
|
Date |
|
|
Threshold |
|
|
Target ($) |
|
|
Maximum |
|
|
Units (#)(2) |
|
|
Awards ($) |
|
Daniel Caruso |
|
|
12/29/10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
390,000 |
|
|
|
967,200 |
|
|
|
|
01/05/11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
580,000 |
|
|
|
1,438,400 |
|
|
|
|
01/24/11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,096,118 |
|
|
|
0 |
|
|
|
|
05/20/11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,007,425 |
|
|
|
461,708 |
|
Kenneth desGarennes |
|
|
N/A |
|
|
|
0 |
|
|
|
102,000 |
|
|
|
204,000 |
|
|
|
|
|
|
|
0 |
|
|
|
|
01/24/11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,152,075 |
|
|
|
0 |
|
|
|
|
05/20/11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
795,519 |
|
|
|
182,970 |
|
David Howson |
|
|
N/A |
|
|
|
0 |
|
|
|
84,000 |
|
|
|
168,000 |
|
|
|
|
|
|
|
|
|
|
|
|
1/24/11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,145,027 |
|
|
|
|
|
|
|
|
3/10/11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500,000 |
|
|
|
165,000 |
|
Glenn Russo |
|
|
N/A |
|
|
|
0 |
|
|
|
111,000 |
|
|
|
222,000 |
|
|
|
|
|
|
|
0 |
|
|
|
|
01/24/11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,000 |
|
|
|
0 |
|
|
|
|
05/20/11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500,000 |
|
|
|
115,000 |
|
Marty Snella |
|
|
N/A |
|
|
|
0 |
|
|
|
93,500 |
|
|
|
187,000 |
|
|
|
|
|
|
|
0 |
|
|
|
|
01/24/11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,840,027 |
|
|
|
0 |
|
|
|
|
(1) |
|
These figures represent the threshold, target and maximum annual cash payout
opportunity for each executive under our non-equity incentive compensation plan during Fiscal
2011 (See Elements of Compensation Non-Equity Incentive Compensation Plan for
additional information regarding this plan and the actual payouts for Fiscal 2011). |
|
(2) |
|
The awards shown in this column vest as set forth under the heading Employment
and Equity Arrangements. |
Outstanding Equity Awards at 2011 Fiscal Year End
The table below lists the number and value of equity awards that have not vested at year
end of Fiscal 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Value of |
|
|
|
Number of Shares |
|
|
Shares or Units of |
|
|
|
or Units of Stock that |
|
|
Stock that have not |
|
Name |
|
have not Vested (#) |
|
|
Vested ($)(1) |
|
Daniel Caruso |
|
|
11,356,043 |
(2)(7) |
|
|
5,371,204 |
|
Kenneth desGarennes |
|
|
7,624,853 |
(3) (8) |
|
|
2,817,651 |
|
David Howson |
|
|
2,509,610 |
(4)(9) |
|
|
876,417 |
|
Glenn Russo |
|
|
1,360,000 |
(5)(10) |
|
|
684,725 |
|
Marty Snella |
|
|
2,484,992 |
(6) (11) |
|
|
952,242 |
|
|
|
|
(1) |
|
Market value is based on the following fair value estimates at the end of
Fiscal 2011. |
|
|
|
|
|
Class |
|
Fair Value |
|
Preferred Unit A |
|
$ |
2.10 |
|
Preferred Unit B |
|
$ |
2.80 |
|
Common Unit A |
|
$ |
0.81 |
|
Common Unit B |
|
$ |
0.58 |
|
Common Unit C |
|
$ |
0.33 |
|
Common Unit D |
|
$ |
0.31 |
|
Common Unit E |
|
$ |
0.23 |
|
|
|
|
(2) |
|
Includes unvested Class B, D and E Common Units and Class B Preferred Units. |
56
|
|
|
(3) |
|
Includes unvested Class A, B, D and E Common Units. |
|
(4) |
|
Includes unvested Class B and D Common Units. |
|
(5) |
|
Includes unvested Class A, B, D and E Common Units. |
|
(6) |
|
Includes unvested Class A, B, C and D Common Units. |
|
(7) |
|
5,584,384, 3,687,948 and 2,083,711 units will vest during Fiscal 2012, 2013 and
2014, respectively. |
|
(8) |
|
3,962,409 2,540,865 and 1,121,580 units will vest during Fiscal 2012, 2013 and 2014,
respectively. |
|
(9) |
|
1,190,363, 840,009, and 479,238 units will vest during Fiscal 2012, 2013 and 2014,
respectively. |
|
(10) |
|
733,522, 390,833 and 235,644 units will vest during Fiscal 2012, 2013 and 2014,
respectively. |
|
(11) |
|
1,349,540, 822,648 and 312,805 units will vest during Fiscal 2012, 2013 and 2014,
respectively. |
Option Exercises and Stock Vested in 2011
The table below sets forth the equity awards that vested during Fiscal 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Value of |
|
|
|
Number of Shares |
|
|
Shares or Units of |
|
|
|
or Units of Stock |
|
|
Stock that Vested |
|
Name |
|
that Vested in 2011 (#) |
|
|
in 2011 ($)(1) |
|
Daniel Caruso |
|
|
4,515,764 |
|
|
|
7,048,744 |
|
Kenneth desGarennes |
|
|
1,681,778 |
|
|
|
2,817,651 |
|
David Howson |
|
|
135,417 |
|
|
|
78,542 |
|
Glenn Russo |
|
|
562,500 |
|
|
|
412,500 |
|
Marty Snella |
|
|
583,750 |
|
|
|
399,488 |
|
|
|
|
(1) |
|
See Option Exercises and Stock Vested in 2011 for June 30, 2011 fair
value estimates by class. |
Pension Benefits for Fiscal 2011
We do not maintain a defined benefit pension plan and there were no pension benefits
earned by our executives in the year ended June 30, 2011.
Nonqualified Defined Contribution and Other Nonqualified Deferred Compensation Plans
We do not have any nonqualified defined contribution or other nonqualified deferred
compensation plans covering our executives.
57
Potential Payments upon Termination or Change-in-Control
As a general practice the executives are not entitled to any payments upon termination or
change-in-control other than those rights provided in the employee equity agreements. See
Employment and Equity Arrangements above for information regarding vesting of equity in CII upon a
change of control of CII. The following table sets forth information about the market value of
unvested units held by each of the named executives which would have accelerated upon a change in
control on the last day of Fiscal Year 2011
|
|
|
|
|
|
|
Market Value of |
|
|
|
Unvested Units |
|
|
|
as at June 30, |
|
|
|
2011 |
|
|
|
that would vest |
|
Name |
|
upon Change in Control |
|
Daniel Caruso |
|
$ |
5,371,204 |
|
Kenneth desGarennes |
|
$ |
1,681,778 |
|
David Howson |
|
$ |
876,417 |
|
Glenn Russo |
|
$ |
684,725 |
|
Marty Snella |
|
$ |
952,242 |
|
Director Compensation
Prior to June 18, 2010, our Board was comprised of our Chief Executive Officer and
representatives from a subset of our private equity investors. Neither our employee director nor
the director representatives from our private equity investors received any compensation for their
services on either the Board or Committees of the Board during Fiscal 2010. On June 18, 2010 we
expanded our Board to include two independent directors not affiliated with our current investor
base. Upon the expansion of the Board, we instituted a compensation program for independent
directors. The following table details the compensation paid to non-employee directors during
Fiscal 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned or |
|
|
|
|
|
|
Non-equity |
|
|
|
|
|
|
|
|
|
Paid in Cash |
|
|
|
|
|
|
incentive plan |
|
|
All other |
|
|
|
|
Name |
|
($) |
|
|
Equity awards |
|
|
compensation |
|
|
Compensation |
|
|
Total |
|
Rick Connor |
|
$ |
42,000 |
|
|
$ |
11,500 |
|
|
$ |
|
|
|
$ |
55,524 |
|
|
$ |
109,024 |
|
Don Detampel |
|
$ |
37,001 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
48,583 |
|
|
$ |
85,584 |
|
The independent board member compensation plan consists of an annual retainer of $25,000 for
each independent director for their Board membership and separate annual fees for committee
chairmanship and membership. These separate fees for independent directors are comprised of an
annual fee of $12,500 for the chairmanship of the audit committee and $5,000 for the chairmanship
of the compensation committee. In addition, each independent director who is a member, other than
the chairman, of the audit committee receives an annual fee of $5,000 and an independent director
who is a member, other than the chairman, of the compensation committee receives an annual fee of
$2,500. Independent board members also receive a per-meeting fee of $1,000 for attendance at
in-person Board meetings.
During Fiscal 2011, Mr. Connor was granted 63,739 Class D Common Units of which 33.3 percent
will vest on January 1, 2012 and the remainder will vest pro rata on a monthly basis over the
two-year period ending on January 1, 2014. The grant date fair value of Mr. Connors Class D Common
Units was $0. Mr. Connor was also granted 50,000 Class E Common Units of which 33.3 percent will
vest on May 20, 2012, and the remainder will vest pro rata on a monthly basis over a the two- year
period ending on May 20, 2014. The grant date fair value of Mr. Connors Class E Common Units was
$11,500. We have also agreed to pay each independent director an amount sufficient to reimburse
them for 50% of the applicable income taxes on the Class B Preferred Units granted to them in
Fiscal 2010. Pursuant to the compensation program for independent directors, during Fiscal 2011,
Mr. Connor received $97,524, including $55,524 to cover an estimate of the taxes assessed against
the Class B preferred units granted to Mr. Connor during Fiscal 2010.
58
We reimburse our non-employee directors for travel, lodging and other reasonable
out-of-pocket expenses in connection with the attendance at Board and committee meetings. We also
provide liability insurance for our directors and officers.
On March 24, 2011, Don Detampel resigned from our Board of Directors. Mr. Detampels voluntary
resignation was a result of his pursuit of alternative endeavors which could result in constraints
on his time and potential business conflicts. There were no disagreements between Mr. Detampel and
the Company or any officer or director of the Company which led to Mr. Detampels resignation. Mr.
Detampel acted as one of our first two independent directors and served on our Board of Directors
since July 2, 2010. With the resignation, Mr. Detampel also resigned from his role as Chairman of
the Companys Compensation Committee and as a member of the Audit Committee. In connection with
his resignation, Mr. Detampel forfeited on all of his unvested equity grants which included 63,926
Class B Preferred Units, 110,935 Class C Common Units and 55,572 Class D Common Units. During
Fiscal 2011, pursuant to the compensation program for independent directors, Mr. Detampel received
$85,584, including $48,583 to cover an estimate of the taxes assessed against Mr. Detampels Class
B preferred unit grant.
Other Matters Relating to Management
Daniel Caruso a founder of the Zayo Group and owns a substantial amount of equity of CII,
our indirect parent company. Mr. Caruso currently acts our President and Chief Executive Officer,
but has not entered into an employment agreement with us or any entity affiliated with us that
contractually determines his rights and obligations. On May 22, 2007, however, Mr. Caruso entered
into a Founder Noncompetition Agreement with CII and on December 31, 2007, he entered into a
Vesting Agreement with regard to certain equity in CII. The noncompetition agreement of Mr. Caruso
terminated on October 31, 2010 and was replaced with a revised noncompetition agreement which
expires on October 31, 2013. Pursuant to the noncompetition agreement, Mr. Caruso is, during the
term of the agreement, not permitted to own, manage, work for, provide assistance to or be
connected in any other manner with a business engaged in owning or operating fiber networks, other
than with respect to us, subject to exceptions noted below.
Mr. Caruso is an investor in Envysion, Inc. and GTS Central Europe and currently serves as the
executive Chairman of Envysion, Inc. Envysion, Inc. is engaged in managed video as a service and
is not a direct competitor of the Zayo Group.
Mr. Caruso, despite the fact that he does not have an employment agreement with Zayo Group,
LLC or any of its affiliates, intends to devote the vast majority of his business time to Zayo
Group, LLC and its subsidiaries.
Compensation Committee Interlocks and Insider Participation
During Fiscal 2011, none of the members of the Compensation Committee served, or has at any
time served, as an officer or employee of our company or any of our subsidiaries. In addition, none
of our executive officers has served as a member of a compensation committee, or other committee
serving an equivalent function of any other entity.
Report of the Compensation Committee
The Compensation Committee, which is composed solely of non-employee directors of the Board of
Directors, assists the Board in fulfilling its responsibilities with regard to compensation
matters, and is responsible under its charter for determining the compensation of Zayo Group, LLCs
executive officers. The Compensation Committee has reviewed and discussed Item 11 Executive
Compensation within this Annual Report, including the compensation of the Companys CEO, Dan
Caruso, and CFO, Ken desGarennes. Based on this review and discussion, the Compensation Committee
recommended to the Board of Directors that the Executive Compensation section be included in Zayo
Groups Fiscal 2011 Annual Report on Form 10-K.
THE COMPENSATION COMMITTEE
Michael Choe, Chairman
Rick Connor
John Downer
59
|
|
|
ITEM 12. |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS |
One hundred percent of our equity is owned, indirectly, by CII. The following table sets forth
the beneficial ownership of our indirect parent company, CII, by each person or entity that is
known to us to own more than 5% of CIIs outstanding membership interests and each of our executive
officers and directors who owns an interest in CII as of September 9, 2011. CIIs membership
interests are comprised of Preferred Class A Units, Preferred Class B Units, and Common Units
(divided into Class A, B, C, D and E Common Units). The Common Units do not carry voting rights.
Upon a liquidation of the Company, the holders of the preferred units are entitled to receive their
unreturned capital contributions and a priority return of 6% prior to any distributions being made
to common unit holders. After the unreturned capital contributions and priority returns are
satisfied, preferred unit holders receive 80% to 85% of the proceeds of a distribution while the
common unit holders receive the remaining 15% to 20%, depending on the aggregate preferred investor
return on investment. As of September 9, 2011, CII had 220,006,071 Preferred Class A Units
outstanding, 18,936,580 Preferred Class B Units outstanding and 109,812,741 common units
outstanding. Beneficial ownership is determined in accordance with the rules of the SEC. Except as
otherwise indicated, to our knowledge, the persons named in the table below have sole voting and
investment power with respect to all units shown as owned by them except as otherwise set forth in
the notes to the table and subject to community property laws, where applicable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred |
|
|
|
|
|
|
Preferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A |
|
|
|
|
|
|
Class B |
|
|
|
|
|
|
|
|
|
|
|
|
|
Units |
|
|
Percent |
|
|
Units |
|
|
Percent |
|
|
|
|
|
|
Percent |
|
|
|
Beneficially |
|
|
of |
|
|
Beneficially |
|
|
of |
|
|
Common |
|
|
of |
|
Name of Beneficial Owner |
|
Owned |
|
|
Class |
|
|
Owned |
|
|
Class |
|
|
Units |
|
|
Class |
|
5% Beneficial Owners of CII |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Battery Ventures(1) |
|
|
22,439,636 |
|
|
|
10.2 |
% |
|
|
908,330 |
|
|
|
2.4 |
% |
|
|
|
|
|
|
|
|
Centennial Ventures(2) |
|
|
13,199,787 |
|
|
|
6.0 |
% |
|
|
3,027,767 |
|
|
|
8.0 |
% |
|
|
|
|
|
|
|
|
Charlesbank Capital Partners(3)(8) |
|
|
16,189,149 |
|
|
|
7.4 |
% |
|
|
21,042,981 |
|
|
|
55.9 |
% |
|
|
|
|
|
|
|
|
Columbia Capital(4)(9) |
|
|
51,056,575 |
|
|
|
23.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
M/C Partners(5)(10) |
|
|
51,013,255 |
|
|
|
23.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morgan Stanley Alternative Investment Partners(6) |
|
|
6,107,143 |
|
|
|
2.8 |
% |
|
|
8,629,136 |
|
|
|
22.9 |
% |
|
|
|
|
|
|
|
|
Oak Investment Partners XII, Limited Partnership(7)(11) |
|
|
51,928,571 |
|
|
|
23.6 |
% |
|
|
2,724,990 |
|
|
|
7.2 |
% |
|
|
|
|
|
|
|
|
Our Directors |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel Caruso |
|
|
4,665,333 |
|
|
|
2.1 |
% |
|
|
970,000 |
|
|
|
2.6 |
% |
|
|
29,275,765 |
|
|
|
26.7 |
% |
Michael Choe(8) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Siegel(9) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gillis Cashman(10) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Downer(11) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rick Connor |
|
|
|
|
|
|
|
|
|
|
73,059 |
|
|
|
0.2 |
% |
|
|
240,522 |
|
|
|
0.2 |
% |
Our Named Executive Officers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth desGarennes |
|
|
25,000 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
12,674,705 |
|
|
|
11.5 |
% |
David Howson |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,645,027 |
|
|
|
2.4 |
% |
Glenn S. Russo |
|
|
100,000 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
2,610,000 |
|
|
|
0.2 |
% |
Marty Snella |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,091,694 |
|
|
|
3.7 |
% |
All directors and executive officers as a group |
|
|
7,350,999 |
|
|
|
3.3 |
% |
|
|
1,043,059 |
|
|
|
2.8 |
% |
|
|
61,139293 |
|
|
|
55.0 |
% |
60
|
|
|
(1) |
|
Aggregate holdings of Battery Ventures VII, L.P., Battery Investment Partners VII,
LLC, and Battery Ventures VII, L.P. The address for all three entities is 930 Winter Street,
Suite 2500, Waltham, MA 02451. |
|
(2) |
|
Aggregate holdings of Centennial Ventures VII, L.P. and Centennial Entrepreneurs
Fund VII, L.P. The address for both entities is 1428 Fifteenth Street, Denver, Colorado 80202. |
|
(3) |
|
Aggregate holdings of Charlesbank Equity Fund VI, Limited Partnership, CB Offshore
Equity Fund VI, Charlesbank Equity Coinvestment Fund VI, LP, and Charlesbank Equity
Coinvestment Partners, LP. The address for all four entities is 200 Clarendon, 5th Floor,
Boston, MA 02116. |
|
(4) |
|
Aggregate holdings of Columbia Capital Equity Partners IV (QP), L.P., Columbia
Capital Equity Partners IV (QPCO), L.P., Columbia Capital Employee Investors IV, L.P.,
Columbia Capital Equity Partners III (QP), L.P., Columbia Capital Equity Partners III (Cayman)
L.P., Columbia Capital Equity Partners III (AI), L.P., Columbia Capital Investors III, L.L.C.,
and Columbia Capital Employee Investors III, L.L.C. The address for all seven entities is 201
N. Union Street, Suite 300, Alexandria, VA, 22314. |
|
(5) |
|
Aggregate holdings of M/C Partners VI, L.P., M/C Venture Investors, L.L.C., M/C
Partners V, L.P., and Chestnut Venture Partners, L.P. The address for all four entities is 75
State Street, Suite 2500, Boston, MA, 02109. |
|
(6) |
|
Aggregate holdings of Yawlbreak & Co FTBO GTB Capital Partners LP, Morgan Stanley
Private Markets Fund IV LP, Stormbay & Co FTBO Vijverpoort Hulzen C.V. The address for all
three entities is 100 Front Street, Suite 400, West Conshohocken, PA 19428-2881. |
|
(7) |
|
Address is 525 University Avenue, Suite 1300, Palo Alto, CA 94301. |
|
(8) |
|
Michael Choe is the Managing Director of Charlesbank Capital Partners. |
|
(9) |
|
John Siegel is a Partner of Columbia Capital. |
|
(10) |
|
Gillis Cashman is a General Partner of M/C Partners. |
|
(11) |
|
John Downer is the Director-Private Equity of Oak Investment Partners. |
61
|
|
|
ITEM 13. |
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Onvoy
We acquired Onvoy on November 7, 2007 at which time Onvoy operated as a vertically
integrated telecommunications company. Subsequent to our acquisition of Onvoy, we separated the
business of Onvoy into three distinct operating business units. Two of the business units of Onvoy
were integrated into our Zayo Bandwidth and Zayo Enterprise Networks business units following the
acquisition. The third business unit, Onvoy Voice Services, remained with Onvoy.
During the third quarter of 2010, management determined that the services provided by
Onvoy did not fit within the Companys current business model of providing telecom and internet
infrastructure services, and the Company therefore spun-off Onvoy to Holdings, the parent of the
Company.
On April 1, 2011, after completing a restructuring of our operating segments, we
determined that the ZEN unit no longer fit within our current business model and we spun the ZEN
unit to our ultimate parent CII. CII subsequently contributed the assets and liabilities of ZEN
to its Onvoy subsidiary.
We have certain ongoing contractual relationships with Onvoy, which are based on agreements
entered into at market rates between Onvoy and us.
The contractual relationships between us and Onvoy cover the following services:
Services Provided to Onvoy
We have entered into a Master Services Agreement with Onvoy which requires us to provide
the following services to Onvoy:
|
|
|
Transport services for circuits. |
|
|
|
Leases of colocation racks in various markets. |
|
|
|
Fiber and optronics management. |
|
|
|
Leases of colocation racks at the colocation facility at 60 Hudson Street, New York,
New York. |
Services Provided by Onvoy
We have entered into a Master Services Agreement with Onvoy which requires Onvoy to
provide the following services to us:
|
|
|
Agent services for customer referrals. |
|
|
|
|
Fiber IRU and services related to fiber in Minnesota. |
|
|
|
|
Transport services covering lit services. |
|
|
|
|
Sublease for space in Minneapolis and Plymouth, Minnesota. |
|
|
|
|
Lease of colocation racks. |
|
|
|
|
Agreements covering VOIP and switching services. |
In addition to the services and contracts described above, we have entered into transition
services agreements with Onvoy that outline each partys responsibility with regards to payment to,
and separation of services associated with, shared vendors. Furthermore, we have entered into a
management agreement with Onvoy which relates to certain services provided for Onvoy by our
management, such as compensation and benefits,
insurance, tax, financial services and other corporate support.
62
Subsequent to the April 1, 2011 spin-off of ZEN and the March 12, 2010 spin-off of Onvoy,
the revenue and expenses associated with transactions with ZEN and Onvoy have been recorded in the
results from continuing operations. The following table represents the revenue and expense
transactions recognized with these related-parties subsequent to their spin-off dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
OVS |
|
|
ZEN |
|
|
Total |
|
|
OVS |
|
|
ZEN |
|
|
Total |
|
Revenue |
|
$ |
4,475 |
|
|
$ |
508 |
|
|
$ |
4,983 |
|
|
$ |
1,436 |
|
|
$ |
|
|
|
$ |
1,436 |
|
Operating costs |
|
|
404 |
|
|
|
|
|
|
|
404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
161 |
|
|
|
99 |
|
|
|
260 |
|
|
|
564 |
|
|
|
|
|
|
|
564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
$ |
3,910 |
|
|
$ |
409 |
|
|
$ |
4,319 |
|
|
$ |
872 |
|
|
$ |
|
|
|
$ |
872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We, or Onvoy, may terminate existing contracts in the future or we may enter into additional
or other contractual arrangements with Onvoy as a result of which our contractual relationship with
Onvoy and the payments among us and Onvoy pursuant to such contracts may substantially change.
As of June 30, 2011, the Company had a receivable balance due from Onvoy, in the amount of
$187, related to services the Company provided to OVS and/or ZEN.
Purchase of Notes
On September 14, 2010, Dan Caruso, our President, Chief Executive Officer and Director,
purchased $500,000 (face amount) of our Notes in connection with our September 20, 2010 $100.0
million Note offering. The purchase price of the Notes was $516,000, including the premium on the
Notes and accrued interest.
Transactions with CII
In March, 2011, CII made an interest payment on our behalf related to our $350 million Senior
Secured Notes. As of June 30, 2011, the Company had a liability due to CII as a result of this
payment in the amount of $4,590 which is payable on demand.
Director Independence
Our companys board of directors is comprised of a majority of non-independent directors.
Although the Companys equity is not publicly traded, the Company utilized the definition of
director independence as defined in Rule 5605(a)(2) of the Marketplace Rules of the NASDAQ Stock
Market. Rick Connor, our Audit Committee Chairman, is our only independent director. Our board of
directors has an audit committee and compensation committee. Each member of the compensation
committee is a non-employee director as defined in Rule 16b-3 of the Exchange Act and is an outside
director as defined in Section 162(m) of the Internal Revenue Code.
63
|
|
|
ITEM 14. |
|
PRINCIPAL ACCOUNTING FEES AND SERVICES |
We first engaged Grant Thornton, LLP to be our independent registered public accounting firm
in March 2008. The aggregate fees billed to us for each of the years ended June 30, 2011 and 2010,
for professional accounting services, including Grant Thornton, LLPs audit of our annual
consolidated financial statements, are set forth in the table below:
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30 |
|
|
|
2011 |
|
|
2010 |
|
|
Audit Fees |
|
$ |
475,620 |
|
|
$ |
522,080 |
|
Audit Related Fees |
|
|
62,730 |
|
|
|
162,424 |
|
Tax Fees |
|
|
127,735 |
|
|
|
137,298 |
|
|
|
|
|
|
|
|
Total |
|
$ |
666,085 |
|
|
$ |
821,802 |
|
|
|
|
|
|
|
|
For purposes of the preceding table, the professional fees are classified as follows:
|
|
|
Audit feesThese are fees billed for the fiscal years shown for professional services
performed for the audit of the Companys consolidated financial statements for that year,
comfort letters and consents. Audit fees for each year shown include amounts that have been
billed to us through September 9, 2011 and any additional amounts that are expected to be
billed to us thereafter. The Fiscal 2011 audit fees also include the fees for services
provided by Grant Thornton, LLP during the period in connection with the reviews of the
Companys interim consolidated financial statements. |
|
|
|
Audit-related feesThese are fees billed for assurance and related services that were
performed in the fiscal years shown and that are traditionally performed by our independent
certified public accounting firm. More specifically, these services include the audits of
historical financial statements required to be included as exhibits to our Registration
Statement on Form S-4 filed with the SEC on October 18, 2010 and audits associated with the
Companys stimulus awards. |
|
|
|
Tax feesThese are fees billed for all professional services performed in the year
shown by professional staff of our independent registered public accounting firms tax
division except those services related to the audit of our financial statements. These
include fees for tax compliance, tax planning and tax advice. Tax compliance involves
preparation of original and amended tax returns, refund claims and tax payment services.
Tax planning and tax advice encompass a diverse range of subjects, including assistance
with tax audits and appeals, tax advice related to mergers, acquisitions and dispositions,
and requests for rulings or technical advice from taxing authorities. |
Audit Committee Pre-Approval Policy and Procedures. The Audit Committee must review and
pre-approve all audit and non-audit services provided by Grant Thornton, LLP, our independent
registered public accounting firm. In conducting reviews of audit and non-audit services, the
Audit Committee will determine whether the provision of such services would impair Grant Thorntons
independence. The Audit Committee will only pre-approve services that it believes will not impair
Grant Thorntons independence.
64
PART IV
|
|
|
ITEM 15. |
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
Documents Filed as Part of this Report
1. Financial Statements
2. Exhibits
The Exhibits required by this item are listed in the Exhibit Index. Each management contract
and compensatory plan or arrangement is denoted with a + in the Exhibit Index.
Financial statements and financial statement schedules required to be filed for the registrant
under Items 8 or 15 are set forth following the index page at page F-l. Exhibits filed as a part of
this report are listed below. Exhibits incorporated by reference are indicated in parentheses
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description of Exhibit |
|
2.1 |
|
|
Agreement and Plan of Merger by and among Zayo Group, LLC, Zayo
AFS Acquisition Company, Inc., American Fiber Systems Holdings
Corp. and Robert E. Ingalls Jr., as the Equityholder
Representative, dated June 24, 2010 (incorporated by reference to
Exhibit 10.33 of our Registration Statement on form S-4 filed with
the SEC on October 18, 2010). |
|
|
|
|
|
|
2.2 |
|
|
Membership Interest Purchase Agreement by and among AGL Networks,
LLC, AGL Investments, Inc., and Zayo Group, LLC, dated March 23,
2010 (incorporated by reference to Exhibit 10.34 of our
Registration Statement on form S-4 filed with the SEC on October
18, 2010). |
|
|
|
|
|
|
2.3 |
|
|
Agreement and Plan of Merger dated as of May 28, 2009 by and among
Zayo Group, LLC, Zayo Merger Sub, Inc., a Delaware corporation,
and FiberNet Telecom Group, Inc., a Delaware corporation
(incorporated by reference to Exhibit 10.35 of our Registration
Statement on form S-4 filed with the SEC on October 18, 2010). |
|
|
|
|
|
|
3.1 |
|
|
Certificate of Formation of Zayo Group, LLC (incorporated by
reference to Exhibit 3.1 of our Registration Statement on Form S-4
filed with the SEC on October 18, 2010). |
|
|
|
|
|
|
3.2 |
|
|
Operating Agreement of Zayo Group, LLC (incorporated by reference
to Exhibit 3.2 of our Registration Statement on Form S-4 filed
with the SEC on October 18, 2010). |
|
|
|
|
|
|
4.1 |
|
|
Indenture, dated as of March 12, 2010, between Zayo Group, LLC,
Zayo Capital, Inc., the Guarantors party thereto and The Bank of
New York Mellon Trust Company, N.A., as Trustee (including form
of note)(incorporated by reference to Exhibit 4.1 of our
Registration Statement on Form S-4 filed with the SEC on October
18, 2010). |
|
|
|
|
|
|
4.2 |
|
|
First Supplemental Indenture, dated as of September 13, 2010,
between Zayo Fiber Solutions, LLC and The Bank of New York Mellon
Trust Company, N.A., as Trustee (incorporated by reference to
Exhibit 4.2 of our Registration Statement on Form S-4 filed with
the SEC on October 18, 2010). |
65
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description of Exhibit |
|
4.3 |
|
|
Second Supplemental Indenture, dated as of September 20, 2010, among
Zayo Group, LLC, Zayo Capital, Inc., the Guarantors party thereto and
The Bank of New York Mellon Trust Company, N.A., as Trustee
(including form of note) (incorporated by reference to Exhibit 4.3 of
our Registration Statement on Form S-4 filed with the SEC on October
18, 2010). |
|
|
|
|
|
|
4.4 |
|
|
Third Supplemental Indenture, dated as of November 5, 2010, among
American Fiber Systems Holding Corp., American Fiber Systems, Inc.,
and The Bank of New York Mellon Trust Company, N.A., as Trustee
(incorporated by reference to Exhibit 4.4 of Amendment No. 1 of our
Registration Statement on Form S-4 filed with the SEC on November 8,
2010). |
|
|
|
|
|
|
10.1 |
|
|
Credit Agreement, dated as of March 12, 2010, by and among Zayo
Group, LLC and Zayo Capital, Inc., as Borrowers, the persons party
thereto from time to time as Guarantors, the financial institutions
party thereto from time to time as Lenders, SunTrust Bank, as Issuing
Bank, Morgan Stanley & Co. Incorporated and RBC Capital Markets
Corporation, as Co-Syndication Agents, SunTrust Bank, as
Administrative Agent, and SunTrust Robinson Humphrey, Inc., as Sole
Lead Arrangers (incorporated by reference to Exhibit 10.1 of our
Registration Statement on Form S-4 filed with the SEC on October 18,
2010). |
|
|
|
|
|
|
10.2 |
|
|
Guaranty Supplement to the March 12, 2010 Credit Agreement, dated as
of August 16, 2010, by Zayo Fiber Solutions, LLC, in favor of
SunTrust Bank, in its capacity as Administrative Agent (incorporated
by reference to Exhibit 10.2 of our Registration Statement on Form
S-4 filed with the SEC on October 18, 2010). |
|
|
|
|
|
|
10.4 |
|
|
Guaranty Supplement to the March 12, 2010 Credit Agreement, dated as
of November 5, 2010, by American Fiber Systems, Inc., in favor of
SunTrust Bank, in its capacity as Administrative Agent (incorporated
by reference to Exhibit 10.4 of Amendment No. 1 of our Registration
Statement on Form S-4 filed with the SEC on November 8, 2010). |
|
|
|
|
|
|
10.5 |
|
|
Amendment to the March 12, 2010 Credit Agreement, dated as of
September 13, 2010, by and among Zayo Group, LLC and Zayo Capital,
Inc., as Borrowers, the persons party thereto from time to time as
Guarantors, the financial institutions party thereto from time to
time as Lenders, SunTrust Bank, as Issuing Bank, Morgan Stanley & Co.
Incorporated and RBC Capital Markets Corporation, as Co-Syndication
Agents, SunTrust Bank, as Administrative Agent, and SunTrust Robinson
Humphrey, Inc., as Sole Lead Arrangers (incorporated by reference to
Exhibit 10.5 of our Registration Statement on Form S-4 filed with the
SEC on October 18, 2010). |
|
|
|
|
|
|
10.6 |
|
|
Security Agreement, dated as of March 12, 2010, among the Grantors
party thereto and SunTrust Bank, in its capacity as Collateral Agent
for the secured parties (incorporated by reference to Exhibit 10.6 of
our Registration Statement on Form S-4 filed with the SEC on October
18, 2010). |
|
|
|
|
|
|
10.7 |
|
|
Security Agreement Supplement No. 1 to the March 12, 2010 Security
Agreement, dated as of August 16, 2010, between Zayo Fiber Solutions,
LLC and SunTrust Bank, in its capacity as Collateral Agent for the
secured parties (incorporated by reference to Exhibit 10.7 of our
Registration Statement on Form S-4 filed with the SEC on October 18,
2010). |
|
|
|
|
|
|
10.8 |
|
|
Security Agreement Supplement No. 2 to the March 12, 2010 Security
Agreement, dated as of November 5, 2010, among American Fiber Systems
Holding Corp., American Fiber Systems, Inc. and SunTrust Bank, in it
capacity as Collateral Agent for the Secured Parties (incorporated
by reference to Exhibit 10.8 of Amendment No. 1 of our Registration
Statement on Form S-4 filed with the SEC on November 8, 2010) |
66
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description of Exhibit |
|
10.9 |
|
|
Trademark Security Agreement, dated as of March 12, 2010, among the
Grantors party thereto and SunTrust Bank, in its capacity as
Collateral Agent for the secured parties (incorporated by reference
to Exhibit 10.9 of our Registration Statement on Form S-4 filed with
the SEC on October 18, 2010). |
|
|
|
|
|
|
10.10 |
|
|
Collateral Agency and Intercreditor Agreement, dated as of March 12,
2010, among Zayo Group, LLC, Zayo Capital, Inc., and the other
Grantors referred to therein, SunTrust Bank, as Joint Collateral
Agent and Revolving Loan Agent for the lender under the credit
agreement, and The Bank of New York Mellon Trust Company, N.A., as
Initial Notes Authorized Representative (incorporated by reference
to Exhibit 10.10 of our Registration Statement on Form S-4 filed
with the SEC on October 18, 2010). |
|
|
|
|
|
|
10.11 |
|
|
Joinder and Amendment Agreement to the March 12, 2010 Collateral
Agency and Intercreditor Agreement, dated as of September 20, 2010,
among Zayo Group, LLC, Zayo Capital, Inc., and the other Grantors
referred to therein, SunTrust Bank, as Joint Collateral Agent and
Revolving Loan Agent for the lender under the credit agreement, and
The Bank of New York Mellon Trust Company, N.A., as the Initial
Notes Authorized Representative and the Additional Notes Authorized
Representative (incorporated by reference to Exhibit 10.11 of our
Registration Statement on Form S-4 filed with the SEC on October 18,
2010). |
|
|
|
|
|
|
10.12 |
|
|
Founder Noncompetition Agreement, dated as of May 22, 2007, by and
between Communications Infrastructure Investments, LLC and Dan
Caruso (incorporated by reference to Exhibit 10.12 of our
Registration Statement on Form S-4 filed with the SEC on October 18,
2010). + |
|
|
|
|
|
|
10.13 |
|
|
Vesting Agreement, dated as of December 31, 2007, by and among
Communications Infrastructure Investments, LLC, Daniel P. Caruso,
and the Founder Investors (as defined therein), as amended by the
Amendment to Vesting Agreement, effective as of March 21, 2008, the
Second Amendment to Vesting Agreement, effective as of October 20,
2009, and the Third Amendment to the Vesting Agreement, effective as
of March 19, 2010 (incorporated by reference to Exhibit 10.13 of our
Registration Statement on Form S-4 filed with the SEC on October 18,
2010). + |
|
|
|
|
|
|
10.14 |
|
|
Employee Equity Agreement, dated as of March 21, 2008, by and
between Communications Infrastructure Investments, LLC, and Kenneth
desGarennes (incorporated by reference to Exhibit 10.14 of our
Registration Statement on Form S-4 filed with the SEC on October 18,
2010). + |
|
|
|
|
|
|
10.15 |
|
|
Employee Equity Agreement, dated as of October 31, 2008, by and
between Communications Infrastructure Investments, LLC, and Kenneth
desGarennes (incorporated by reference to Exhibit 10.15 of our
Registration Statement on Form S-4 filed with the SEC on October 18,
2010). + |
|
|
|
|
|
|
10.16 |
|
|
Employee Equity Agreement, dated as of October 20, 2009, by and
between Communications Infrastructure Investments, LLC, and Kenneth
desGarennes (incorporated by reference to Exhibit 10.16 of our
Registration Statement on Form S-4 filed with the SEC on October 18,
2010). + |
|
|
|
|
|
|
10.17 |
|
|
Employee Equity Agreement, dated as of March 19, 2010, by and
between Communications Infrastructure Investments, LLC, and Kenneth
desGarennes (incorporated by reference to Exhibit 10.17 of our
Registration Statement on Form S-4 filed with the SEC on October 18,
2010). + |
|
|
|
|
|
|
10.18 |
|
|
Founder Noncompetition Agreement, dated as of May 22, 2007, by and
between Communications Infrastructure Investments, LLC and John
Scarano. (incorporated by reference to Exhibit 10.18 of our
Registration Statement on Form S-4 filed with the SEC on October 18,
2010). + |
|
|
|
|
|
|
10.19 |
|
|
Vesting Agreement, dated as of January 10, 2008, by and among
Communications Infrastructure Investments, LLC, John L. Scarano, and
the Founder Investors (as defined therein), as amended by the
Amendment to Vesting Agreement, effective as of March 21, 2008, the
Second Amendment to Vesting Agreement, effective as of October 20,
2009, and the Third Amendment to the Vesting Agreement, effective as
of March 19, 2010 (incorporated by reference to Exhibit 10.19 of our
Registration Statement on Form S-4 filed with the SEC on October 18,
2010). + |
|
|
|
|
|
|
10.20 |
|
|
Offer Letter from Zayo Group to Glenn Russo, dated August 8, 2008
(incorporated by reference to Exhibit 10.20 of our Registration
Statement on Form S-4 filed with the SEC on October 18, 2010). + |
67
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description of Exhibit |
|
10.21 |
|
|
Class A Equity Agreement, dated as of November 19, 2008, by and
between Communications Infrastructure Investments, LLC, Glenn Russo,
and VP Holdings, LLC (incorporated by reference to Exhibit 10.21 of
our Registration Statement on Form S-4 filed with the SEC on October
18, 2010). + |
|
|
|
|
|
|
10.22 |
|
|
Class A Equity Agreement, dated as of November 19, 2008, by and
between VP Holdings, LLC, and Glenn Russo (incorporated by reference
to Exhibit 10.22 of our Registration Statement on Form S-4 filed
with the SEC on October 18, 2010). + |
|
|
|
|
|
|
10.23 |
|
|
Employee Equity Agreement, dated as of October 31, 2008, by and
between Communications Infrastructure Investments, LLC, and Glenn
Russo (incorporated by reference to Exhibit 10.23 of our
Registration Statement on Form S-4 filed with the SEC on October 18,
2010). + |
|
|
|
|
|
|
10.24 |
|
|
Employee Equity Agreement, dated as of March 19, 2010, by and
between Communications Infrastructure Investments, LLC, and Glenn S.
Russo (incorporated by reference to Exhibit 10.24 of our
Registration Statement on Form S-4 filed with the SEC on October 18,
2010). + |
|
|
|
|
|
|
10.25 |
|
|
Employee Equity Agreement, dated as of March 31, 2008, by and
between Communications Infrastructure Investments, LLC, and Martin
Snella (incorporated by reference to Exhibit 10.25 of our
Registration Statement on Form S-4 filed with the SEC on October 18,
2010). + |
|
|
|
|
|
|
10.26 |
|
|
Employee Equity Agreement, dated as of March 31, 2008, by and
between Communications Infrastructure Investments, LLC, and Martin
Snella (incorporated by reference to Exhibit 10.26 of our
Registration Statement on Form S-4 filed with the SEC on October 18,
2010). + |
|
|
|
|
|
|
10.27 |
|
|
Employee Equity Agreement, dated as of October 31, 2008, by and
between Communications Infrastructure Investments, LLC, and Martin
Snella (incorporated by reference to Exhibit 10.27 of our
Registration Statement on Form S-4 filed with the SEC on October 18,
2010). + |
|
|
|
|
|
|
10.28 |
|
|
Employee Equity Agreement, dated as of October 20, 2009, by and
between Communications Infrastructure Investments, LLC, and Martin
Snella (incorporated by reference to Exhibit 10.28 of our
Registration Statement on Form S-4 filed with the SEC on October 18,
2010). + |
|
|
|
|
|
|
10.29 |
|
|
Employee Equity Agreement, dated as of May 27, 2010, by and between
Communications Infrastructure Investments, LLC, and Martin Snella
(incorporated by reference to Exhibit 10.29 of our Registration
Statement on Form S-4 filed with the SEC on October 18, 2010). + |
|
|
|
|
|
|
10.30 |
|
|
Employee Equity Agreement, dated as of January 2, 2008, by and
between Communications Infrastructure Investments, LLC, and Kenneth
desGarennes (incorporated by reference to Exhibit 10.38 of Amendment
No. 1 of our Registration Statement on Form S-4 filed with the SEC
on November 8, 2010). + |
|
|
|
|
|
|
10.31 |
|
|
Employee Equity Agreement, dated as of March 19, 2010, by and
between Communications Infrastructure Investments, LLC, and Martin
Snella (incorporated by reference to Exhibit 10.39 of Amendment No.
1 of our Registration Statement on Form S-4 filed with the SEC on
November 8, 2010). + |
|
|
|
|
|
|
10.32 |
|
|
Agreement of Lease, dated as of February 17, 1998, by and between 60
Hudson Owner LLC (successor to Westport Communications LLC and
Hudson Telegraph Associates L.P., formerly known as Hudson Telegraph
Associates), a Delaware limited liability company, Zayo Colocation,
Inc. (successor by name change of FiberNet Telecom Group, Inc.),
FiberNet Telecom, Inc. (successor by merger to FiberNet Equal
Access, L.L.C.), and Zayo Group, LLC (as guarantor), as assigned on
January 1, 2001, as amended on January 1, 2001, December 4, 2003,
October 29, 2004, March 1, 2007, April 4, 2007, May 26, 2009 and
March 12, 2010 (incorporated by reference to Exhibit 10.36 of our
Registration Statement on Form S-4 filed with the SEC on October 18,
2010). |
68
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description of Exhibit |
|
10.33 |
|
|
Agreement of Lease, dated as of April 1, 2001, between 60 Hudson
Owner LLC (successor to Westport Communications LLC and Hudson
Telegraph Associates, L.P., formerly known as Hudson Telegraph
Associates), a Delaware limited liability company, FiberNet Telecom,
Inc. (successor by merger to FiberNet Equal Access L.L.C.), Zayo
Colocation, Inc. (successor by change of name to FiberNet Telecom
Group, Inc.), and Zayo Group, LLC (as guarantor), as assigned on
April 1, 2001, as amended on January 30, 2002, November 7, 2002,
April 1, 2003, October 31, 2003, October 29, 2004, January 31, 2005,
January 11, 2007, March 2, 2007, April 4, 2007, May 26, 2009 and
March 12, 2010 (incorporated by reference to Exhibit 10.37 of our
Registration Statement on Form S-4 filed with the SEC on October 18,
2010). |
|
|
|
|
|
|
10.34 |
|
|
Vesting Agreement between Communications Infrastructure Investments,
LLC; Daniel P. Caruso; and Bear Equity, LLC, dated December 29, 2010
(incorporated by reference to Exhibit 10.1 of our Current Report on
Form 8-K filed with the SEC on January 13, 2011). + |
|
|
|
|
|
|
10.35 |
|
|
Vesting Agreement between Communications Infrastructure Investments,
LLC; Daniel P. Caruso; and Bear Equity, LLC, dated January 5, 2011
(incorporated by reference to Exhibit 10.2 of our Current Report on
Form 8-K filed with the SEC on January 13, 2011). + |
|
|
|
|
|
|
10.36 |
|
|
Employee Equity Agreement, dated as of March 10, 2011, by and
between Communications Infrastructure Investments, LLC, and David
Howson. + |
|
|
|
|
|
|
10.37 |
|
|
Offer Letter from Zayo Group to David Howson, dated May 28, 2010. + |
|
|
|
|
|
|
10.38 |
|
|
Noncompetition Agreement between Communications Infrastructure
Investments, LLC and Dan Caruso dated December 29, 2010. |
|
|
|
|
|
|
10.39 |
|
|
Form of Class D Common Unit Employee Equity Agreement. + |
|
|
|
|
|
|
10.40 |
|
|
Form of Class E Common Unit Employee Equity Agreement. + |
|
|
|
|
|
|
10.41 |
|
|
Fourth Amendment to Vesting Agreement by and among Communications
Infrastructure Investments, LLC, Daniel Caruso and the Founder
Investors dated January 24, 2011. + |
|
|
|
|
|
|
10.42 |
|
|
Fifth Amendment to Vesting Agreement by and among Communications
Infrastructure Investments, LLC, Daniel Caruso and the Founder
Investors dated June 1, 2011. + |
|
|
|
|
|
|
12.1 |
|
|
Statement of Computation of Ratio of Earnings to Fixed Charges. |
|
|
|
|
|
|
21.1 |
|
|
List of subsidiaries of the Company. |
|
|
|
|
|
|
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. |
69
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Members
Zayo Group, LLC and Subsidiaries
We have audited the accompanying consolidated balance
sheets of Zayo Group, LLC (a Delaware limited liability corporation)
and subsidiaries (collectively, the Company) as of June 30, 2011 and 2010, and the related consolidated
statements of operations, members equity, and cash flows for each of the three years in the period
ended June 30, 2011. These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards
of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Zayo Group, LLC and subsidiaries
as of June 30, 2011 and 2010, and the consolidated results of their operations and their
consolidated cash flows for each of the three years in the period ended June 30, 2011, in
conformity with accounting principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
Denver, Colorado
September 9, 2011
F-1
ZAYO GROUP, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
25,394 |
|
|
$ |
87,864 |
|
Trade receivables, net of allowance of $799 and $498 as of June 30, 2011 and 2010, respectively |
|
|
13,983 |
|
|
|
11,551 |
|
Due from related-parties |
|
|
187 |
|
|
|
626 |
|
Prepaid expenses |
|
|
6,388 |
|
|
|
4,810 |
|
Deferred income taxes |
|
|
3,343 |
|
|
|
4,060 |
|
Other assets, current |
|
|
645 |
|
|
|
334 |
|
Assets of discontinued operations, current |
|
|
|
|
|
|
3,061 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
49,940 |
|
|
|
112,306 |
|
|
|
|
|
|
|
|
|
|
Property and equipment, net of accumulated depreciation of $101,941 and $54,077 as of June 30,
2011 and 2010, respectively |
|
|
518,513 |
|
|
|
297,889 |
|
Intangible assets, net of accumulated amortization of $37,980 and $25,421 as of June 30, 2011 and
2010, respectively |
|
|
104,672 |
|
|
|
56,714 |
|
Goodwill |
|
|
83,820 |
|
|
|
67,854 |
|
Deferred income taxes |
|
|
|
|
|
|
8,508 |
|
Debt issuance costs, net |
|
|
11,446 |
|
|
|
9,560 |
|
Investment in US Carrier |
|
|
15,075 |
|
|
|
|
|
Other assets, non-current |
|
|
5,795 |
|
|
|
4,866 |
|
Assets of discontinued operations, non-current |
|
|
|
|
|
|
8,143 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
789,261 |
|
|
$ |
565,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and members equity |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
12,988 |
|
|
$ |
10,015 |
|
Accrued liabilities |
|
|
22,453 |
|
|
|
17,152 |
|
Accrued interest |
|
|
10,627 |
|
|
|
7,794 |
|
Capital lease obligations, current |
|
|
950 |
|
|
|
1,673 |
|
Due to related-parties |
|
|
4,590 |
|
|
|
|
|
Deferred revenue, current |
|
|
15,664 |
|
|
|
8,091 |
|
Liabilities of discontinued operations, current |
|
|
|
|
|
|
1,740 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
67,272 |
|
|
|
46,465 |
|
|
|
|
|
|
|
|
|
|
Capital lease obligations, non-current |
|
|
10,224 |
|
|
|
11,033 |
|
Long-term debt |
|
|
354,414 |
|
|
|
247,080 |
|
Deferred revenue, non-current |
|
|
63,893 |
|
|
|
22,605 |
|
Stock-based compensation liability |
|
|
45,067 |
|
|
|
21,556 |
|
Deferred tax liability |
|
|
8,322 |
|
|
|
|
|
Other long term liabilities |
|
|
2,724 |
|
|
|
2,397 |
|
Liabilities of discontinued operations, non-current |
|
|
|
|
|
|
1,568 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
551,916 |
|
|
|
352,704 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 15) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members equity |
|
|
|
|
|
|
|
|
Members interest |
|
|
245,433 |
|
|
|
217,129 |
|
Accumulated deficit |
|
|
(8,088 |
) |
|
|
(3,993 |
) |
|
|
|
|
|
|
|
Total members equity |
|
|
237,345 |
|
|
|
213,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity |
|
$ |
789,261 |
|
|
$ |
565,840 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-2
ZAYO GROUP, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
287,235 |
|
|
$ |
199,330 |
|
|
$ |
125,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs, excluding depreciation and amortization |
|
|
71,528 |
|
|
|
62,688 |
|
|
|
37,792 |
|
Selling, general and administrative expenses |
|
|
89,846 |
|
|
|
65,911 |
|
|
|
51,493 |
|
Stock-based compensation |
|
|
24,310 |
|
|
|
18,168 |
|
|
|
6,412 |
|
Depreciation and amortization |
|
|
60,463 |
|
|
|
38,738 |
|
|
|
26,554 |
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
246,147 |
|
|
|
185,505 |
|
|
|
122,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
41,088 |
|
|
|
13,825 |
|
|
|
3,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income/(expense) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(33,414 |
) |
|
|
(18,692 |
) |
|
|
(15,245 |
) |
Other (expense)/income, net |
|
|
(126 |
) |
|
|
1,526 |
|
|
|
234 |
|
Gain on bargain purchase |
|
|
|
|
|
|
9,081 |
|
|
|
|
|
Loss on extinguishment of debt |
|
|
|
|
|
|
(5,881 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net |
|
|
(33,540 |
) |
|
|
(13,966 |
) |
|
|
(15,011 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings/(loss) from continuing operations before provision for income taxes |
|
|
7,548 |
|
|
|
(141 |
) |
|
|
(11,923 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision/(benefit) for income taxes |
|
|
12,542 |
|
|
|
4,823 |
|
|
|
(2,321 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(4,994 |
) |
|
|
(4,964 |
) |
|
|
(9,602 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued operations, net of income taxes |
|
|
899 |
|
|
|
5,425 |
|
|
|
7,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/earnings |
|
$ |
(4,095 |
) |
|
$ |
461 |
|
|
$ |
(2,247 |
) |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-3
ZAYO GROUP, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF MEMBERS EQUITY
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members |
|
|
Accumulated |
|
|
Total Members |
|
|
|
interest |
|
|
Deficit |
|
|
equity |
|
Balance at July 1, 2008 |
|
$ |
179,878 |
|
|
$ |
(2,207 |
) |
|
$ |
177,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contributed (cash) |
|
|
35,546 |
|
|
|
|
|
|
|
35,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock-based compensation |
|
|
2,049 |
|
|
|
|
|
|
|
2,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
(2,247 |
) |
|
|
(2,247 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2009 |
|
|
217,473 |
|
|
|
(4,454 |
) |
|
|
213,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contributed (cash) |
|
|
39,800 |
|
|
|
|
|
|
|
39,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash settlements with Parent, net |
|
|
1,200 |
|
|
|
|
|
|
|
1,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock-based compensation |
|
|
1,195 |
|
|
|
|
|
|
|
1,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spin-off of Onvoy Voice Services, Inc. |
|
|
(42,539 |
) |
|
|
|
|
|
|
(42,539 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
461 |
|
|
|
461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010 |
|
|
217,129 |
|
|
|
(3,993 |
) |
|
|
213,136 |
|
|
|
|
|
|
|
|
|
|
|
|
Capital contributed (cash) |
|
|
36,450 |
|
|
|
|
|
|
|
36,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash settlements with Parent, net |
|
|
(2,598 |
) |
|
|
|
|
|
|
(2,598 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock-based compensation |
|
|
820 |
|
|
|
|
|
|
|
820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spin-off of Zayo Enterprise Networks, LLC |
|
|
(6,368 |
) |
|
|
|
|
|
|
(6,368 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
(4,095 |
) |
|
|
(4,095 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2011 |
|
$ |
245,433 |
|
|
$ |
(8,088 |
) |
|
$ |
237,345 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
ZAYO GROUP, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/earnings |
|
$ |
(4,095 |
) |
|
$ |
461 |
|
|
$ |
(2,247 |
) |
Earnings from discontinued operations |
|
|
899 |
|
|
|
5,425 |
|
|
|
7,355 |
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(4,994 |
) |
|
|
(4,964 |
) |
|
|
(9,602 |
) |
Adjustments to reconcile net loss to net cash provided by operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
60,463 |
|
|
|
38,738 |
|
|
|
26,554 |
|
Loss on extinguishment of debt |
|
|
|
|
|
|
5,881 |
|
|
|
|
|
Loss on disposal of property and equipment |
|
|
84 |
|
|
|
|
|
|
|
66 |
|
Provision for bad debts |
|
|
794 |
|
|
|
168 |
|
|
|
209 |
|
Amortization of deferred financing costs and discount on debt |
|
|
2,781 |
|
|
|
1,624 |
|
|
|
1,114 |
|
Accretion of premium on debt |
|
|
(368 |
) |
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
24,310 |
|
|
|
18,168 |
|
|
|
6,412 |
|
Unrealized loss on interest rate swap |
|
|
|
|
|
|
744 |
|
|
|
3,143 |
|
Gain on bargain purchase |
|
|
|
|
|
|
(9,081 |
) |
|
|
|
|
Amortization of deferred revenue |
|
|
(8,976 |
) |
|
|
(3,500 |
) |
|
|
(2,011 |
) |
Deferred income taxes |
|
|
11,093 |
|
|
|
4,068 |
|
|
|
(2,074 |
) |
Changes in operating assets and liabilities, net of acquisitions |
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables |
|
|
2,449 |
|
|
|
801 |
|
|
|
2,494 |
|
Interest rate swap |
|
|
(566 |
) |
|
|
(2,462 |
) |
|
|
(859 |
) |
Prepaid expenses |
|
|
(638 |
) |
|
|
(271 |
) |
|
|
(895 |
) |
Other assets |
|
|
2,440 |
|
|
|
21 |
|
|
|
(1,024 |
) |
Accounts payable and accrued liabilities |
|
|
1,409 |
|
|
|
6,429 |
|
|
|
(4,249 |
) |
Payables to related-parties |
|
|
4,944 |
|
|
|
(422 |
) |
|
|
872 |
|
Customer prepayments |
|
|
4,629 |
|
|
|
2,243 |
|
|
|
4,839 |
|
Other liabilities |
|
|
(2,800 |
) |
|
|
15 |
|
|
|
(322 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operating activities |
|
|
97,054 |
|
|
|
58,200 |
|
|
|
24,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(116,068 |
) |
|
|
(58,821 |
) |
|
|
(61,614 |
) |
Broadband stimulus grants received |
|
|
3,544 |
|
|
|
70 |
|
|
|
|
|
Proceeds from sale of property and equipment |
|
|
28 |
|
|
|
|
|
|
|
|
|
Merger with American Fiber Systems Holdings Corporation, net of cash acquired |
|
|
(110,000 |
) |
|
|
|
|
|
|
|
|
Acquisition of AGL Networks, LLC, net of cash acquired |
|
|
(73,666 |
) |
|
|
|
|
|
|
|
|
Acquisition of FiberNet Telecom Group, Inc., net of cash acquired |
|
|
|
|
|
|
(96,571 |
) |
|
|
|
|
Acquisition of Citynet Fiber network, LLC, net of cash acquired |
|
|
|
|
|
|
|
|
|
|
(35 |
) |
Acquisition of Northwest Telephone, Inc., net of cash acquired |
|
|
|
|
|
|
|
|
|
|
618 |
|
Acquisition of Columbia Fiber Solutions, LLC, net of cash acquired |
|
|
|
|
|
|
|
|
|
|
(12,091 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(296,162 |
) |
|
|
(155,322 |
) |
|
|
(73,122 |
) |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
(Continued)
F-5
ZAYO GROUP, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Equity contributions |
|
$ |
36,450 |
|
|
$ |
39,800 |
|
|
$ |
35,546 |
|
Proceeds from long-term debt |
|
|
103,000 |
|
|
|
276,948 |
|
|
|
47,000 |
|
Principal repayments on long-term debt |
|
|
|
|
|
|
(166,193 |
) |
|
|
(10,677 |
) |
Changes in restricted cash |
|
|
578 |
|
|
|
(564 |
) |
|
|
|
|
Principal repayments on capital lease obligations |
|
|
(1,732 |
) |
|
|
(2,192 |
) |
|
|
(2,267 |
) |
Deferred financing costs |
|
|
(4,106 |
) |
|
|
(12,353 |
) |
|
|
(1,681 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
134,190 |
|
|
|
135,446 |
|
|
|
67,921 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
|
2,622 |
|
|
|
13,923 |
|
|
|
15,673 |
|
Investing activities |
|
|
(382 |
) |
|
|
(1,809 |
) |
|
|
(1,556 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by discontinued operations |
|
|
2,240 |
|
|
|
12,114 |
|
|
|
14,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease)/increase in cash and cash equivalents |
|
|
(62,678 |
) |
|
|
50,438 |
|
|
|
33,583 |
|
Cash and cash equivalents, beginning of period |
|
|
87,864 |
|
|
|
38,019 |
|
|
|
4,388 |
|
Increase/(decrease) in cash and cash equivalents of discontinued operations |
|
|
208 |
|
|
|
(593 |
) |
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
25,394 |
|
|
$ |
87,864 |
|
|
$ |
38,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash, investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
31,938 |
|
|
$ |
6,215 |
|
|
$ |
10,845 |
|
Cash paid for income taxes |
|
|
2,974 |
|
|
|
257 |
|
|
|
326 |
|
Non-cash additions to property and equipment from capital leases |
|
|
200 |
|
|
|
324 |
|
|
|
1,650 |
|
Increase/(decrease) in accounts payable and accrued expenses for purchases
of property and equipment |
|
|
5,911 |
|
|
|
3,357 |
|
|
|
(1,415 |
) |
Promissory Note issued as consideration for American Fibers Systems
Holding Corporation merger |
|
|
4,500 |
|
|
|
|
|
|
|
|
|
Refer to Note 3 Acquisitions, to the Companys consolidated financial statements for
details of the Companys recent acquisitions and Note 4 Spin-off of Business Units, for details
of the Companys discontinued operations.
Refer to Note 12 Equity, to the Companys consolidated financial statements for details of
the non-cash capital transactions.
The accompanying notes are an integral part of these consolidated financial statements.
F-6
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
Zayo Group, LLC, a Delaware Limited Liability Company, formerly CII Holdco, Inc., and, prior
to that, Zayo Bandwidth, Inc., was formed on May 4, 2007, and is the operating parent company of a
number of subsidiaries engaged in telecommunication and internet infrastructure services. Zayo
Group, LLC and its subsidiaries are collectively referred to as Zayo Group or the Company.
Headquartered in Louisville, Colorado, the Company operates an integrated metropolitan and
nationwide fiber optic infrastructure to offer:
|
|
|
Dark and lit bandwidth infrastructure services on metro and regional fiber
networks. |
|
|
|
Colocation and interconnection services. |
Zayo Group, LLC is wholly owned by Zayo Group Holdings, Inc., (Holdings) which in turn is
wholly-owned by Communications Infrastructure Investments, LLC (CII).
(2) BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include all the accounts of the
Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have
been eliminated in consolidation. The accompanying consolidated financial statements and
related notes have been prepared in accordance with accounting principles generally accepted
in the United States of America (GAAP).
Unless otherwise noted, dollar amounts and disclosures throughout the Companys Notes to
the consolidated financial statements relate to the Companys continuing operations and are
presented in thousands of dollars.
|
b. |
|
Spin-off of Business Units |
On April 1, 2011, the Company completed a spin-off of its Zayo Enterprise Networks
(ZEN) business unit. Additionally, on March 12, 2010, the Company spun-off of its Onvoy
Voice Services (Onvoy) business unit. The Company distributed all of the assets and
liabilities of ZEN and Onvoy to Holdings on the respective spin-off dates.
Management determined that it had discontinued all significant cash flows and continuing
involvement with respect to ZEN and Onvoys operations and therefore considers these to be
discontinued operations. During the years ended June 30, 2011, 2010 and 2009, the results of
the operations of ZEN and Onvoy have been aggregated and are presented in a single caption
entitled, Earnings from discontinued operations, net of income taxes on the accompanying
consolidated statements of operations. Management has not allocated any general corporate
overhead to amounts presented in discontinued operations, nor has it elected to allocate
interest costs.
The preparation of the Companys 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,
reserves for disputed line cost billings, determining useful lives for depreciation and
amortization, assessing the need for impairment charges (including those related to intangible
assets and goodwill), allocating purchase price among the fair values of assets acquired and
liabilities assumed, accounting for income taxes and related valuation allowance against
deferred tax assets, estimating the stock-based compensation liability, and various other
items. 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.
F-7
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
|
d. |
|
Cash and Cash Equivalents and Restricted Cash |
The Company considers all highly liquid investments with original maturities of three
months or less to be cash and cash equivalents. Cash equivalents are stated at cost, which
approximates fair value. Restricted cash consists of cash balances held by various financial
institutions as collateral for letters of credit and surety bonds. These balances are
reclassified to cash and cash equivalents when the underlying obligation is satisfied, or in
accordance with the governing agreement. Restricted cash balances expected to become
unrestricted during the next twelve months are recorded as current assets. Restricted cash
balances which are not expected to become unrestricted during the next twelve months are
recorded as other assets, non-current.
Investments in which the Company does not have significant influence over the investee,
or investments that do not have a readily determinable fair value are recorded using the cost
method of accounting. Under this method, the investment is recorded in the balance sheet at
historical cost. Subsequently, the Company recognizes as income any dividends received that
are distributed from earnings since the date of initial investment. Dividends received that
are distributed from earnings prior to the date of acquisition are recorded as a reduction of
the cost of the investment. Cost method investments are reviewed for impairment if factors
indicate that a decrease in value of the investment has occurred.
Trade receivables are recorded at the invoiced amount and do not bear interest. The
Company 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 customers
financial condition, the amount of receivables in dispute, 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.
|
g. |
|
Property and Equipment |
The Companys 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, are capitalized. Depreciation is
calculated on a straight-line basis over the assets estimated useful lives from the date
placed into service. Management estimates 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.
Equipment acquired under capital leases is recorded at the lower of the fair value of the
asset or the net present value of the minimum lease payments at the inception of the lease.
Depreciation of equipment held under capital leases is included in depreciation and
amortization expense, and is calculated on a straight-line basis over the estimated useful
lives of the assets, or the related lease term, whichever is shorter.
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 years
ended June 30, 2011, 2010 or 2009.
The Company capitalizes interest for all assets that require a period of time to get them
ready for their intended use.
F-8
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
|
h. |
|
Goodwill and Purchased Intangibles |
Goodwill represents the excess of the purchase price over the fair value of the net
identifiable assets acquired in a business combination. Goodwill is reviewed for impairment at
least annually in April and when a triggering event occurs between impairment test dates. The
goodwill impairment test is a two-step test. Under the first step, the estimated fair value of
the reporting unit is compared with its carrying value (including goodwill). If the estimated
fair value of the reporting unit is less than its carrying value, an indication of goodwill
impairment exists for the reporting unit and the enterprise must perform step two of the
impairment test (measurement). Under step two, an impairment loss is recognized for any excess
of the carrying amount of the reporting units goodwill over the implied fair value of that
goodwill. The implied fair value of goodwill is determined by allocating the fair value of the
reporting unit in a manner similar to a purchase price allocation. The residual fair value
after this allocation is the implied fair value of the reporting unit goodwill. Fair value of
the reporting unit is determined using a discounted cash flow analysis. If the fair value of
the reporting unit exceeds its carrying value, step two does not need to be performed.
Intangible assets with definite useful lives are amortized over their respective
estimated useful lives and reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. No impairment charges
were recorded for goodwill or intangibles during the years ended June 30, 2011, 2010 or 2009.
|
i. |
|
Derivative Financial Instruments |
The Company from time-to-time utilizes interest rate swaps to mitigate its exposure to
interest rate risk. Derivative instruments are recorded in the balance sheet as either assets
or liabilities, measured at fair value. Changes in fair value are recognized in earnings. The
Company has historically entered into interest rate swaps to convert a portion of its
floating-rate debt to fixed-rate debt and did not elect to apply hedge accounting. The
interest rate differentials to be paid or received under such derivatives and the changes in
the fair value of the instruments are recognized and recorded as adjustments to interest
expense. The principal objectives of the derivative instruments are to minimize the interest
rate risks associated with financing activities. The Company does not use financial
instruments for trading purposes. The Company utilized interest rate swap contracts in
connection with obtaining the Companys term loans, which were fully paid-off in March 2010.
These swaps expired in September 2010. See Note 9 Long-term Debt, for further discussion of
the Companys debt obligations and Note 14 Fair Value Measurements, for a discussion of the
fair value of the interest rate swaps.
The Company recognizes revenues derived from leasing fiber optic telecommunications
infrastructure and the provision of telecommunications and colocation services when the
service has been provided and when there is persuasive evidence of an arrangement, the fee is
fixed or determinable, and 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. The remainder of revenue is
billed in arrears on a transactional basis determined by customer usage. Fees billed in
connection with customer installations and other up-front charges are deferred and recognized
as revenue ratably over the contract term.
The Company typically records revenues from leases of dark fiber including, indefeasible
rights-of-use (IRU) agreements, as services are provided. Dark fiber IRU agreements
generally require the customer to make a down payment upon execution of the agreement; however
in some cases the Company receives up to the entire lease payment at the inception of the
lease and recognizes the revenue ratably over the lease term. IRU contract terms are reviewed
to determine if the terms would require sales-type accounting treatment, which would result in
revenue recognition upon the execution of the contract. Sales-type accounting treatment is
required for dark fiber leases when the agreements provide for the transfer of legal title to
the dark fiber to the customer at the end of the agreements term and the following criteria
have been met:
|
|
|
the sale has been consummated; |
|
|
|
the customers initial and continuing investments are adequate to
demonstrate a commitment to pay for the property; |
|
|
|
|
the Companys receivable is not subject to future subordination; and |
|
|
|
the Company has transferred to the buyer the usual risks and rewards of
ownership in a transaction that is in substance a sale and does not have a
substantial continuing involvement with the property. |
F-9
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
During the year ended June 30, 2011, the Company recognized revenue in the amount of
$1,100 related to a fiber sale. The Company did not enter into any contracts during the years
ended June 30, 2010 or 2009 that required sales-type accounting treatment.
|
k. |
|
Operating Costs and Accrued Liabilities |
The Company leases certain network facilities, primarily circuits, from other local
exchange carriers to augment its owned infrastructure for which it is generally billed a fixed
monthly fee. The Company also uses the facilities of other carriers for which it is billed on
a usage basis.
The Company recognizes the cost of these facilities or services when it is incurred in
accordance with contractual requirements. The Company disputes incorrect billings. The most
prevalent types of disputes include disputes for circuits that are not disconnected on a
timely basis and usage bills with incorrect or inadequate call detail records. Depending on
the type and complexity of the issues involved, it may take several quarters to resolve
disputes.
In determining the amount of such operating expenses and related accrued liabilities to
reflect in its consolidated financial statements, management considers the adequacy of
documentation of disconnect notices, compliance with prevailing contractual requirements for
submitting such disconnect notices and disputes to the provider of the facilities, and
compliance with its interconnection agreements with these carriers. Significant judgment is
required in estimating the ultimate outcome of the dispute resolution process, as well as any
other amounts that may be incurred to conclude the negotiations or settle any litigation.
|
l. |
|
Stock-Based Compensation |
The common units granted by the Companys ultimate parent company, CII, are considered
stock-based compensation with terms that require the awards to be classified as liabilities.
As such, the Company accounts for these awards as a liability and re-measures the liability at
each reporting date. These awards vest over a period of three or four years and may fully vest
subsequent to a liquidation event.
The preferred units granted by the Companys ultimate parent company, CII, are considered
stock-based compensation with terms that require the awards to be classified as equity. As
such, the Company accounts for these awards as equity, which requires the cost to be measured
at the grant date based on the fair value of the award and which is recognized as expense over
the requisite service period.
Determining the fair value of share-based awards at the grant date and subsequent
reporting dates requires judgment. If actual results differ significantly from these
estimates, stock-based compensation expense and the Companys results of operations could be
materially impacted.
The Company receives grant moneys from the National Telecommunications and Information
Administration (NTIA) Broadband Technology Opportunity Program. The Company recognizes
government grants when it is probable that the Company will comply with the conditions
attached to the grant arrangement and the grant will be received. The Company accounts for
grant moneys received for reimbursement of capital expenditures as a reduction from the cost
of the asset in arriving at its book value. The grant is thus recognized in earnings over the
useful life of a depreciable asset by way of a reduced depreciation charge.
F-10
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
The Company recognizes income taxes under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in earnings in the period that
includes the enactment date.
There are various factors that may cause tax assumptions to change in the near term, and
the Company may have to record a future valuation allowance against its deferred tax assets.
The Company recognizes the benefit of an uncertain tax position taken or expected to be taken
on its income tax returns if it is more likely than not that such tax position will be
sustained based on its technical merits.
The Company records interest related to unrecognized tax benefits and penalties in income
tax expense.
|
o. |
|
Fair Value of Financial Instruments |
The Company adopted ASC 820-10 Fair Value Measurements, for its financial assets and
liabilities effective June 30, 2009. This pronouncement defines fair value, establishes a
framework for measuring fair value, and requires expanded disclosures about fair value
measurements. ASC 820-10 emphasizes that fair value is a market-based measurement, not an
entity-specific measurement, and defines fair value as the price that would be received to
sell an asset or transfer a liability in an orderly transaction between market participants at
the measurement date. ASC 820-10 discusses valuation techniques, such as the market approach
(comparable market prices), the income approach (present value of future income or cash flow)
and the cost approach (cost to replace the service capacity of an asset or replacement cost),
which are each based upon observable and unobservable inputs. Observable inputs reflect market
data obtained from independent sources, while unobservable inputs reflect the Companys market
assumptions.
Fair Value Hierarchy
ASC 820-10 establishes a fair value hierarchy that requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring fair value. A
financial instruments categorization within the fair value hierarchy is based upon the lowest
level of input that is significant to the fair value measurement. GAAP establishes three
levels of inputs that may be used to measure fair value:
Level 1
Inputs to the valuation methodology are unadjusted quoted prices for identical assets or
liabilities in active markets that the Company has the ability to access.
Level 2
Inputs to the valuation methodology include:
|
|
|
quoted prices for similar assets or liabilities in active markets; |
|
|
|
quoted prices for identical or similar assets or liabilities in inactive
markets; |
|
|
|
inputs other than quoted prices that are observable for the asset or
liability; and |
|
|
|
inputs that are derived principally from or corroborated by observable market
data by correlation or other means. |
If the asset or liability has a specified (contractual) term, the Level 2 input must be
observable for substantially the full term of the asset or liability.
F-11
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
Level 3
Inputs to the valuation methodology are unobservable and significant to the fair value
measurement.
The Company views fair value as the price that would be received from selling an asset or
paid to transfer a liability in an orderly transaction between market participants at the
measurement date. When determining the fair value measurements for assets and liabilities
required to be recorded at fair value, management considers the principal or most advantageous
market in which it would transact and considers assumptions that market participants would use
when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of
nonperformance.
|
p. |
|
Concentration of Credit Risk |
Financial instruments that potentially subject the Company to concentration of credit
risk consist principally of cash investments and accounts receivable. The Company does not
enter into financial instruments for trading or speculative purposes. The Companys cash and
cash equivalents are primarily held in commercial bank accounts in the United States of
America. Account balances generally exceed federally insured limits; however, the Company
limits its cash investments to high-quality financial institutions in order to minimize its
credit risk.
The Companys trade receivables, which are unsecured, are geographically dispersed.
During the year ended June 30, 2011 and 2010, the Company had one customer that accounted for
12 percent of the total revenue recognized during each period. No customers represented
greater than 10 percent of total revenue during the year ended June 30, 2009. As of June 30,
2011 the Company had one customer with a trade receivable balance of 12 percent of total
receivables. No other customers trade receivable balance as of June 30, 2011 or 2010 exceeded
10 percent of the Companys consolidated net trade receivable balance.
|
q. |
|
Recently Issued Accounting Standards |
From time to time, the FASB or other standards-setting bodies issue new accounting
pronouncements. Updates to ASCs are communicated through issuance of an Accounting Standards
Update (ASU).
In December 2010, the FASB issued ASU Number 2010-29, Disclosure of Supplementary Pro
Forma Information for Business Combinations. This ASU clarifies the disclosure requirements
for pro forma presentation of revenue and earnings related to a business combination. The
Company elected to early adopt this guidance during the second quarter of Fiscal 2011. See
Note 3 Acquisitions, for the required pro forma presentation related to the Companys
acquisitions during the periods presented.
(3) ACQUISITIONS
Since the formation of Zayo Group, LLC in May 2007, the Company has consummated 12 business
combinations. The consummation of the acquisitions was executed as part of the Companys business
strategy of expanding through acquisitions. The acquisition 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.
The accompanying consolidated financial statements include the operations and financial
position of the acquired entities from their respective acquisition dates.
Acquisitions during the year ended June 30, 2011
American Fiber Systems Holding Corporation (AFS)
On October 1, 2010, the Company completed a merger with American Fiber Systems Holding
Corporation, the parent company of American Fiber Systems, Inc. The AFS merger was consummated
with the exchange of $110,000 in cash and a $4,500 non-interest bearing promissory note due in 2012
for all of the interest in AFS. The Company calculated the fair market value of the promissory note
to be $4,141 resulting in an aggregate purchase price of $114,141. The purchase price was based
upon the valuation of both the business and assets directly owned by AFS and its ownership interest
in US Carrier Telecom Holdings, LLC (US Carrier). There was no contingent consideration
associated with the purchase. The acquisition was financed with cash on hand and proceeds from the
issuance of the Companys $100,000 note issuance See Note 9, Long-Term Debt.
AFS is a provider of lit and dark bandwidth infrastructure services in nine metropolitan
markets: Atlanta, Georgia; Boise, Idaho; Cleveland, Ohio; Kansas City, Missouri; Las Vegas, Nevada;
Minneapolis, Minnesota; Nashville, Tennessee; Reno, Nevada and Salt Lake City, Utah. AFS owns and
operates approximately 1,251 routes miles and over 172,415 fiber miles of fiber networks.
F-12
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
The following table presents the Companys preliminary allocation, which is subject to
change, of the purchase price to the assets acquired and liabilities assumed, based on their
estimated fair values on the acquisition date.
|
|
|
|
|
|
|
AFS |
|
Acquisition date |
|
October 1, 2010 |
|
Current assets |
|
$ |
3,808 |
|
Property and equipment |
|
|
56,481 |
|
Intangibles customer relationships |
|
|
57,082 |
|
Goodwill |
|
|
15,746 |
|
Investment in US Carrier |
|
|
15,075 |
|
Other assets |
|
|
335 |
|
|
|
|
|
Total assets acquired |
|
|
148,527 |
|
|
|
|
|
Current liabilities |
|
|
3,396 |
|
Deferred revenue |
|
|
23,905 |
|
Deferred tax liability |
|
|
3,958 |
|
Other liabilities |
|
|
3,127 |
|
|
|
|
|
Total liabilities assumed |
|
|
34,386 |
|
|
|
|
|
Net assets acquired |
|
|
114,141 |
|
Seller Note payable to former AFS Holdings owners |
|
|
(4,141 |
) |
|
|
|
|
Net cash paid |
|
$ |
110,000 |
|
|
|
|
|
The goodwill of $15,746 arising from the AFS merger consists of the synergies and
economies-of-scale expected from the AFS merger. The goodwill associated with the AFS merger is not
deductible for tax purposes. The Company has allocated the goodwill to the business units that are
expected to benefit from the acquired goodwill. The allocation was determined based on the excess
of the fair value of the acquired business over the fair value of the individual assets acquired
and liabilities assumed that are assigned to the business units. Goodwill of $8,076 and $7,670 was
allocated to the Zayo Bandwidth and Zayo Fiber Solutions business units, respectively.
In connection with the AFS merger, the Company acquired significant customer relationships.
These relationships represent a valuable intangible asset as the Company anticipates continued
business from the AFS customer base. The Company valued the AFS customer relationships utilizing
the multi-period excess earnings valuation technique which resulted in a fair market value of
$57,082.
In connection with the AFS merger, the previous owners had entered into various agreements,
including indefeasible rights-of-use agreements with other telecommunication service providers to
lease them fiber and other bandwidth infrastructure. The Company recorded the acquired deferred
revenue balance at the acquisition date at fair market value, which was determined based upon
managements assessment of the future costs to be incurred in connection with the Companys
continued legal obligation associated with the acquired deferred revenue plus a reasonable profit
margin. A fair value of $23,905 was assigned to the acquired deferred revenue balance of AFS. The
balance of the deferred revenue with no remaining obligations was not recorded. The acquired
deferred revenue is expected to be recognized over the next five to twenty years.
During the year ended June 30, 2011 the Company recorded purchase accounting adjustments to
various assets and liabilities acquired in the AFS Merger resulting in a net increase to the
acquired goodwill balance of $1,703 which is reflected in the table above.
AGL Networks, LLC (AGL Networks)
On July 1, 2010 the Company acquired all of the equity interest in AGL Networks. AGL Networks
is a communication service provider focused on providing dark fiber services to its customers who
are primarily located in the Atlanta, Georgia; Phoenix, Arizona; and Charlotte, North Carolina
markets. AGL Networks operated a network of approximately 786 route miles and over 190,000 fiber
miles. The purchase price of this acquisition, after post-close adjustments, was $73,666. The
acquisition was financed with cash on hand. There was no contingent consideration associated with
the purchase.
F-13
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
The following table presents the Companys allocation of the purchase price to the assets
acquired and liabilities assumed, based on their estimated fair values.
|
|
|
|
|
|
|
AGL Networks |
|
Acquisition date |
|
July 1, 2010 |
|
Current assets |
|
$ |
3,714 |
|
Property and equipment |
|
|
93,136 |
|
Intangibles customer relationships |
|
|
3,433 |
|
Goodwill |
|
|
220 |
|
Other assets |
|
|
680 |
|
|
|
|
|
Total assets acquired |
|
|
101,183 |
|
|
|
|
|
Current liabilities |
|
|
1,006 |
|
Deferred revenue |
|
|
26,511 |
|
|
|
|
|
Total liabilities assumed |
|
|
27,517 |
|
|
|
|
|
Net assets acquired |
|
$ |
73,666 |
|
|
|
|
|
Purchase consideration/Net cash paid |
|
$ |
73,666 |
|
|
|
|
|
The goodwill of $220 arising from the AGL Networks acquisition consists of the synergies and
economies-of-scale expected from combining the operations of AGL Networks and the Company. The
goodwill associated with the AGL Networks acquisitions is deductible for tax purposes. The full
amount of the goodwill recognized in the AGL Networks acquisition has been assigned to the Zayo
Fiber Solutions business unit.
In connection with the AGL Networks acquisition, the Company acquired certain customer
relationships. These relationships represent a valuable intangible asset as the Company
anticipates continued business from the AGL Networks customer base. The Company valued the AGL
Networks customer relationships utilizing the multi-period excess earnings valuation technique
which resulted in a fair market value of $3,433.
In connection with the AGL Networks acquisition, the previous owners had entered into various
agreements, including indefeasible rights-of-use agreements with other telecommunication service
providers to lease them fiber and other bandwidth infrastructure. The Company recorded the acquired
deferred revenue balance at the acquisition date at fair market value which was determined based
upon managements assessment of the future costs to be incurred in connection with the Companys
continued legal obligation associated with the acquired deferred revenue plus a reasonable profit
margin. A fair value of $26,511 was assigned to the acquired deferred revenue balance of AGL
Networks. The balance of the deferred revenue with no remaining obligations was not recorded. The
acquired deferred revenue is expected to be recognized over the next five to twenty years.
During the year ended June 30, 2011, the Company had various purchase accounting adjustments
related to various assets and liabilities acquired in the AGL acquisition resulting in a net
increase to the acquired goodwill balance of $153 which is reflected in the table above.
Acquisition costs
The Company incurred acquisition-related costs of $865 which have been charged to selling,
general and administrative expenses during the year ended June 30, 2011.
Acquisition during the year ended June 30, 2010
FiberNet Networks Telecom Group, Inc. (FiberNet)
On September 9, 2009, the Company acquired all of the outstanding equity interest in FiberNet.
The purchase price of this acquisition, after post-close adjustments, was $96,571. The acquisition
was financed with cash on hand. There was no contingent consideration associated with the
purchase.
F-14
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
FiberNet was a communications service provider focused on providing complex interconnection
services which enabled the exchange of voice, video, and data traffic between global networks.
FiberNet owned and operated integrated colocation facilities and diverse transport routes
principally in New York and New Jersey. FiberNets network infrastructure and facilities were
designed to provide comprehensive broadband interconnectivity for the worlds largest network
operators, including leading domestic and international telecommunications carriers, service
providers, and enterprises.
The following table presents the allocation of the purchase price to the assets acquired and
liabilities assumed, and are based on their estimated fair values.
|
|
|
|
|
|
|
FiberNet |
|
Acquisition date |
|
September 9, 2009 |
|
Current assets |
|
$ |
16,824 |
|
Property and equipment |
|
|
50,734 |
|
Intangibles |
|
|
43,900 |
|
Deferred income taxes |
|
|
19,659 |
|
Other assets |
|
|
838 |
|
|
|
|
|
Total assets acquired |
|
|
131,955 |
|
|
|
|
|
Current liabilities |
|
|
11,534 |
|
Deferred revenue |
|
|
7,257 |
|
|
|
|
|
Total liabilities assumed |
|
|
18,791 |
|
|
|
|
|
Net assets acquired |
|
|
113,164 |
|
Excess of net assets over purchase consideration (bargain purchase) |
|
|
9,081 |
|
|
|
|
|
Purchase consideration |
|
|
104,083 |
|
Less cash acquired |
|
|
(7,512 |
) |
|
|
|
|
Net cash paid |
|
$ |
96,571 |
|
|
|
|
|
In connection with the FiberNet acquisition, the Company recognized a gain on bargain
purchase. The gain of $9,081 was a result of recording of deferred income tax assets for the Net
Operating Loss carryforwards (NOLs) of FiberNet, in view of the Companys evaluation that these
deferred income tax assets will more likely than not be realized. This determination was made and
the Company recorded the gain on bargain purchase in June of 2010. Upon the determination that the
Company was going to recognize a gain related to the bargain purchase, the Company reassessed its
valuation assumptions utilized as part of the acquisition accounting. No adjustments to the
acquisition accounting valuations were identified as a result of managements reassessment.
In connection with the FiberNet acquisition, the Company acquired $500 in tradenames and
$43,400 in customer relationships. These relationships represent a valuable intangible asset as
the Company anticipates continued business from the FiberNet acquired customer base. The company
valued the acquired customer relationships utilizing the multi-period excess earnings valuation
technique which resulted in a fair market value of $43,400.
In connection with the FiberNet acquisition, the previous owners had entered into various
agreements, including indefeasible rights-of-use agreements with other telecommunication service
providers to lease them fiber and other bandwidth infrastructure. The Company recorded the acquired
deferred revenue balance at the acquisition date at fair market value, which was determined based
upon managements assessment of the future costs to be incurred in connection with the Companys
continued legal obligation associated with the acquired deferred revenue plus a reasonable profit
margin. A fair value of $7,257 was assigned to the acquired deferred revenue balance of FiberNet.
The balance of the deferred revenue with no remaining obligations was not recorded. The acquired
deferred revenue is expected to be recognized over the next five to twenty years.
Acquisition costs
The Company incurred acquisition-related costs of $1,299 which have been charged to selling,
general and administrative expenses during the year ended June 30, 2010.
Acquisition during the year ended June 30, 2009
Columbia Fiber Solutions (CFS)
On September 30, 2008 the Company acquired all of the outstanding equity interests in CFS.
CFS is a provider of leased dark fiber services and fiber-based Ethernet services over a
transparent LAN (TLS) infrastructure in the Inland Northwest.
F-15
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
The following table presents the allocation of the purchase price to the assets acquired
and liabilities assumed, based on their estimated fair values:
|
|
|
|
|
Acquisition date |
|
CFS
September 30, 2008 |
|
Current assets |
|
$ |
461 |
|
Property and equipment |
|
|
4,772 |
|
Intangibles |
|
|
3,412 |
|
Goodwill |
|
|
4,170 |
|
|
|
|
|
Total assets acquired |
|
|
12,815 |
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
500 |
|
Deferred revenue |
|
|
154 |
|
|
|
|
|
Total liabilities assumed |
|
|
654 |
|
|
|
|
|
Purchase consideration |
|
|
12,161 |
|
Less cash acquired |
|
|
70 |
|
|
|
|
|
Net cash paid |
|
$ |
12,091 |
|
|
|
|
|
The full amount of the goodwill associated with the CFS acquisition was allocated to the Zayo
Bandwidth business unit and is deductible for tax purposes. The goodwill consists of the synergies
and economies-of-scale expected from combining the operations of CFS and the Company.
During the year ended June 30, 2009, an addition of $35 to the purchase price of the February
2008 acquisition of Citynet Fiber Networks, LLC was recorded due to additional acquisition related
expenses incurred. The purchase price of the Companys May 2008 acquisition of Northwest
Telephone, Inc. was reduced by $618 due to the seller not being able to fulfill some of the closing
conditions resulting in the Company receiving additional purchase consideration from escrow in the
amount of $618 during the year ended June 30, 2009.
Acquisition costs
The Company incurred acquisition-related costs of $719 which have been charged to selling,
general and administrative expenses during the year ended June 30, 2009.
Pro-forma Financial Information (unaudited)
The unaudited pro-forma results presented below include the effects of the Companys September
2009 acquisition of FiberNet, the July 2010 acquisition of AGL Networks, and the October 2010
Merger with AFS as if the acquisitions and Merger had been consummated as of July 1, 2009. The
pro-forma loss for the years ended June 30, 2011 and 2010 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 a reduction to revenue as a result of the acquisition
date valuation of acquired deferred revenue balances. The pro-forma revenue and loss figures below
include a reduction to revenue resulting from purchase accounting adjustments associated with
certain acquired deferred revenue balances that did not represent continuing obligations of the
Company. The pro-forma results also include interest expense associated with debt used to fund the
acquisitions. The pro-forma results for the year ended June 30, 2011 includes a non-recurring
adjustment to earnings related to historical compensation expense related to the compensation paid
to executives and employees that was directly attributable to the AFS merger. However, the pro
forma results do not include any anticipated synergies or other expected benefits of the
acquisitions. Accordingly, 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 and Merger been consummated as of July 1, 2009.
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
Revenue |
|
$ |
295,137 |
|
|
$ |
266,865 |
|
Loss from continuing operations |
|
$ |
(7,719 |
) |
|
$ |
(1,231 |
) |
F-16
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
(4) SPIN-OFF OF BUSINESS UNITS
During the year ended June 30, 2010, management determined that the services provided by one
of the Companys business units Onvoy did not fit within the Companys current business model of
providing bandwidth infrastructure, colocation and interconnection services, and the Company
therefore spun-off Onvoy to Holdings, the parent of the Company.
Effective January 1, 2011, the Company finalized a restructuring of its business units which
resulted in the segments more closely aligning with their product offerings rather than a
combination of product offerings and customer demographics. See Note 16 Segment Reporting, for
discussion of the restructuring. Prior to the restructuring, the ZEN unit held a mix of bandwidth
infrastructure, colocation, interconnection, competitive local exchange carrier (CLEC) and
enterprise product offerings. Subsequent to the restructuring, the remaining ZEN unit consisted of
only CLEC and enterprise product offerings. As the product offerings provided by the restructured
ZEN unit fall outside of the Companys business model, the segment was spun-off to Holdings on
April 1, 2011.
Consistent with the discontinued operations reporting provisions of ASC 205-20, Discontinued
Operations, management determined that it has discontinued all significant cash flows and
continuing involvement with respect to the Onvoy and ZEN operations effective March 12, 2010 and
April 1, 2011, respectively. Therefore, for the years ended June 30, 2011, 2010 and 2009, the
results of the operations of Onvoy and ZEN, prior to their spin-off dates, have been aggregated in
a single caption entitled, Earnings from discontinued operations, net of income taxes on the
accompanying consolidated statements of operations. The Company has not allocated any general
corporate overhead to amounts presented in discontinued operations, nor has it elected to allocate
interest costs.
Earnings from discontinued operations, net of income taxes in the accompanying consolidated
statements of operations are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
OVS |
|
|
ZEN |
|
|
Total |
|
|
OVS |
|
|
ZEN |
|
|
Total |
|
|
OVS |
|
|
ZEN |
|
|
Total |
|
Revenue |
|
$ |
|
|
|
$ |
16,722 |
|
|
$ |
16,722 |
|
|
$ |
28,489 |
|
|
$ |
24,715 |
|
|
$ |
53,204 |
|
|
$ |
38,721 |
|
|
$ |
25,465 |
|
|
$ |
64,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
|
|
|
$ |
1,537 |
|
|
$ |
1,537 |
|
|
$ |
6,037 |
|
|
$ |
3,500 |
|
|
$ |
9,537 |
|
|
$ |
11,687 |
|
|
$ |
527 |
|
|
$ |
12,214 |
|
Income tax expense |
|
|
|
|
|
|
638 |
|
|
|
638 |
|
|
|
2,642 |
|
|
|
1,470 |
|
|
|
4,112 |
|
|
|
4,644 |
|
|
|
215 |
|
|
|
4,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued operations, net of
income taxes |
|
$ |
|
|
|
$ |
899 |
|
|
$ |
899 |
|
|
$ |
3,395 |
|
|
$ |
2,030 |
|
|
$ |
5,425 |
|
|
$ |
7,043 |
|
|
$ |
312 |
|
|
$ |
7,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a detail of the assets and liabilities associated with ZEN classified as
assets and liabilities of discontinued operations on the accompanying consolidated balance sheet as
of June 30, 2010:
|
|
|
|
|
|
|
As of June 30, |
|
|
|
2010 |
|
Assets of discontinued operations |
|
|
|
|
Current assets |
|
$ |
3,061 |
|
Property and equipment, net |
|
|
4,022 |
|
Intangible assets, net |
|
|
3,137 |
|
Goodwill |
|
|
897 |
|
Other assets |
|
|
87 |
|
|
|
|
|
Total assets |
|
$ |
11,204 |
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operations |
|
|
|
|
Current liabilities |
|
$ |
1,740 |
|
Deferred tax liability |
|
|
1,458 |
|
Other liabilities |
|
|
110 |
|
|
|
|
|
Total liabilities |
|
$ |
3,308 |
|
|
|
|
|
F-17
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
The Company continues to have ongoing contractual relationships with ZEN and Onvoy, which
are based on agreements which were entered into at estimated market rates. The Company has
contractual relationships to provide ZEN and Onvoy with certain data and colocation services and
ZEN and Onvoy have contractual relationships to provide the Company with certain voice and
enterprise services. Prior to March 12, 2010 and April 1, 2011, transactions with OVS and ZEN,
respectively, were eliminated upon consolidation. Since their respective spin-off dates,
transactions with ZEN and Onvoy have been included in the Companys results of operations. See
Note 16 Related-Party Transactions, for a discussion of transactions with ZEN and Onvoy
subsequent to their spin-off dates.
(5) INVESTMENT
In connection with the AFS merger, the Company acquired an ownership interest in US Carrier.
US Carrier is a regional provider of certain telecommunication services to and from cities and
rural communities throughout Georgia and other states in the Southeast United States. AFS Inc.s
continued ownership in US Carrier is comprised of 55% of the outstanding Class A membership units
and 34% of the outstanding Class B membership units. Subsequent to the AFS merger, the board of
managers of US Carrier has recognized AFS Inc.s economic interest in US Carrier; however, the
board of managers has claimed that the AFS merger at the American Fiber Systems Holdings
Corporation level resulted in an unauthorized transfer of AFS Inc.s ownership interest under the
US Carrier operating agreement which would result in a loss of the AFS Inc.s voting interest. The
Company has requested the financial information which would be necessary to account for the US
Carrier investment utilizing the equity method of accounting but has been denied this information
by the board of managers of US Carrier. The Company has also requested that US Carrier recognize
AFS Inc.s continued and uninterrupted representation on the board of managers but such requests
have been denied. AFS Inc. has filed an arbitration proceeding against US Carrier to protect its
ownership position in US Carrier, including all of its rights under the US Carrier operating
agreement. Although the Company has a significant ownership position in US Carrier, at this time
and in light of US Carriers wrongful actions, AFS Inc. is unable to exercise significant influence
over US Carriers operating and financial policies and as such the Company has accounted for this
investment utilizing the cost method of accounting.
At the time of the AFS Merger, management estimated the fair market value of its interest in
US Carrier to be $15,075. In valuing the Companys interest in US Carrier, management used both an
income- and market- based approach to estimate the acquisition date fair market value. Since the
acquisition, the Company has not received any dividend payments from US Carrier nor has the Company
invested any additional capital in US Carrier.
(6) PROPERTY AND EQUIPMENT
Property and equipment, including assets held under capital leases, was comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
useful lives (in |
|
|
As of June 30 |
|
|
|
years) |
|
|
2011 |
|
|
2010 |
|
Land |
|
N/A |
|
|
$ |
228 |
|
|
$ |
209 |
|
Building improvements and site improvements |
|
8 to15 |
|
|
|
11,692 |
|
|
|
8,999 |
|
Furniture, fixtures and office equipment |
|
3 to7 |
|
|
|
1,295 |
|
|
|
1,124 |
|
Computer hardware |
|
2 to 5 |
|
|
|
3,461 |
|
|
|
2,595 |
|
Software |
|
2 to 3 |
|
|
|
4,243 |
|
|
|
3,095 |
|
Machinery and equipment |
|
3 to 7 |
|
|
|
6,469 |
|
|
|
3,568 |
|
Fiber optic equipment |
|
4 to 8 |
|
|
|
326,163 |
|
|
|
127,379 |
|
Circuit switch equipment |
|
10 |
|
|
|
7,378 |
|
|
|
6,938 |
|
Packet switch equipment |
|
3 to 5 |
|
|
|
20,727 |
|
|
|
17,786 |
|
Fiber optic network |
|
8 to 20 |
|
|
|
192,926 |
|
|
|
140,098 |
|
Construction in progress |
|
N/A |
|
|
|
45,872 |
|
|
|
40,175 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
620,454 |
|
|
|
351,966 |
|
Less accumulated depreciation |
|
|
|
|
|
|
(101,941 |
) |
|
|
(54,077 |
) |
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
|
|
|
$ |
518,513 |
|
|
$ |
297,889 |
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation expense, including depreciation of assets held under capital leases, for
the years ended June 30, 2011, 2010 and 2009 was $47,905, $27,703 and $17,737, respectively.
F-18
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
Included within the Companys property and equipment balance are capital leases with a cost of
$12,215 (net of accumulated depreciation of $3,611) and $14,055 (net of accumulated depreciation of
$3,037) as of June 30, 2011 and 2010, respectively. The Company recognized depreciation expense
associated with assets under capital leases of $1,272, $1,293 and $1,253 for the years ended June
30, 2011, 2010 and 2009, respectively.
During the years ended June 30, 2011 and 2010, the Company received a total of $3,544 and $70,
respectively, in grant money from the NTIAs Broadband Technology Opportunities Program (the
Program) for reimbursement of property and equipment expenditures. The Company has accounted for
these funds as a reduction of the cost of its fiber optic network. The Company anticipates the
receipt of an additional $34,979 in grant money related to grant agreements entered into under the
Broadband Technology Opportunities Program as of June 30, 2011 which will offset capital
expenditures in future periods. See Note 15 Commitments and Contingencies- Other Commitments.
During the year ended June 30, 2011, the Company capitalized interest in the amount of $3,691.
No interest was capitalized during the years ended June 30, 2010 or 2009. The Company capitalized
$6,230, $3,278 and $2,524 of labor to fixed-asset accounts during the years ended June 30, 2011,
2010 and 2009, respectively.
(7) GOODWILL
The changes in the carrying amount of goodwill during the years ended June 30, 2011 and 2010
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zayo Bandwidth |
|
|
Zayo Fiber Solution |
|
|
zColo |
|
|
Total |
|
As of July 1, 2009 |
|
|
67,854 |
|
|
|
|
|
|
|
|
|
|
|
67,854 |
|
Additions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers |
|
|
(24 |
) |
|
|
|
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010 |
|
|
67,830 |
|
|
|
|
|
|
|
24 |
|
|
|
67,854 |
|
Additions |
|
|
8,076 |
|
|
|
7,890 |
|
|
|
|
|
|
|
15,966 |
|
Transfers |
|
|
(4,192 |
) |
|
|
4,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011 |
|
$ |
71,714 |
|
|
$ |
12,082 |
|
|
$ |
24 |
|
|
$ |
83,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As discussed in Note 17 Segment Reporting, the Company established a new business unit
Zayo Fiber Solutions, in connection with the AGL Networks acquisition. As a result of the creation
of this business unit, certain assets and liabilities which align with the business goals of the
new segment were transferred from the Companys existing segments to the Zayo Fiber Solutions
segment. The assets and liabilities that were transferred to Zayo Fiber Solutions represent the
Companys assets and liabilities that support the Companys dark fiber infrastructure and customer
base. All of the assets and liabilities associated with the Companys acquisition of Columbia Fiber
Solutions (CFS) in September of 2008 align with the business objective of the Zayo Fiber
Solutions segment and as such were transferred to this segment on July 1, 2010, including the
goodwill of $4,170, which was recognized as a result of the CFS acquisition.
Effective January 1, 2011, the Company restructured its business units to more closely align
with its product offerings See Note 17 Segment Reporting. The restructuring resulted in the
ZEN unit transferring its bandwidth infrastructure products to the Zayo Bandwidth (ZB) unit, its
dark fiber assets to the Zayo Fiber Solutions (ZFS) unit, and its colocation products the zColo
unit. Prior to the restructuring, the ZEN unit had a goodwill balance of $2,203. This goodwill
balance was allocated to the ZB, ZFS and zColo units based on the relative fair values of the net
assets transferred to these segments and the portion of the net assets that were retained in the
ZEN unit. The restructuring resulted in $1,261 of ZENs historical goodwill balance being
allocated to the ZB business unit, $22 to the ZFS unit, and $24 to the zColo unit. The remaining
$896 of the historical ZEN goodwill balance remains with the spun-off ZEN unit. The allocation of
ZENs historical goodwill balance, is reflected in the June 30, 2010 goodwill balance with the
exception of the $22 allocated to ZFS which was transferred from the ZB unit to ZFS upon ZFSs
formation on July 1, 2010.
F-19
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
(8) INTANGIBLE ASSETS
Identifiable acquisition-related intangible assets as of June 30, 2011 and 2010 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
|
|
|
|
Amount |
|
|
Amortization |
|
|
Net |
|
June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
133,317 |
|
|
$ |
(28,645 |
) |
|
$ |
104,672 |
|
Non-compete agreements |
|
|
8,835 |
|
|
|
(8,835 |
) |
|
|
|
|
Tradenames |
|
|
500 |
|
|
|
(500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
142,652 |
|
|
$ |
(37,980 |
) |
|
$ |
104,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
72,800 |
|
|
$ |
(16,381 |
) |
|
$ |
56,419 |
|
Non-compete agreements |
|
|
8,835 |
|
|
|
(8,623 |
) |
|
|
212 |
|
Tradenames |
|
|
500 |
|
|
|
(417 |
) |
|
|
83 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
82,135 |
|
|
$ |
(25,421 |
) |
|
$ |
56,714 |
|
|
|
|
|
|
|
|
|
|
|
The amortization of intangible assets for the years ended June 30, 2011, 2010 and 2009 was
$12,558, $11,035 and $8,817, respectively. Estimated future amortization of intangible assets is
as follows:
|
|
|
|
|
Year ending June 30, |
|
|
|
|
2012 |
|
$ |
13,289 |
|
2013 |
|
|
13,289 |
|
2014 |
|
|
11,073 |
|
2015 |
|
|
8,693 |
|
2016 |
|
|
8,598 |
|
Thereafter |
|
|
49,730 |
|
|
|
|
|
Total |
|
$ |
104,672 |
|
|
|
|
|
(9) LONG-TERM DEBT
In March 2010, the Company co-issued, with its 100 percent owned finance subsidiary Zayo
Capital Inc. (at an issue price of 98.779%), $250,000 of Senior Secured Notes (the Notes). The
Notes bear interest at 10.25% annually and are due on March 15, 2017. The net proceeds from this
debt issuance were approximately $239,050 after deducting the discount on the Notes of $3,052 and
debt issuance costs of approximately $7,898. The Notes are being accreted to their par value over
the term of the Notes as additional interest expense. The effective interest rate of the Notes
issued in March is 10.87%. The Company used a portion of the proceeds from this issuance of the
Notes to repay its term loans in March of 2010.
In September 2010, the Company completed an offering of an additional $100,000 in Notes (at an
issue price of 103%). These Notes are part of the same series as the $250,000 Senior Secured Notes
and also accrue interest at a rate of 10.25% and mature on March 15, 2017. The net proceeds from
this debt issuance were approximately $98,954 after adding the premium on the Notes of $3,000 and
deducting debt issuance costs of approximately $4,046. The effective interest rate on the Notes
issued in September is 10.41%. The Company used a portion of the proceeds from this issuance of the
Notes to fund the merger with AFS (See Note 3 Acquisitions).
The balance of the Notes was $350,147 and $247,080 at June 30, 2011 and 2010, net of
unamortized premiums and discounts of $147 and ($2,920), respectively.
In October 2010, in connection with the AFS merger, the former owners of AFS provided the
Company with a promissory note in the amount of $4,500. The note is a non-interest bearing note
and is due in full on October 1, 2012. The Company recorded this note at its fair market value on
the acquisition date, which was determined to be $4,141. Management estimated the imputed interest
associated with this note on the acquisition date to be $359, which is being recognized over the
term of the promissory note. During the year ended June 30, 2011, the Company recognized interest
expense and a corresponding increase to the promissory note obligation of $126.
F-20
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
In September 2009, the Company entered into a $30,000 term loan to finance the FiberNet
acquisition. This loan was paid off in March 2010 with the proceeds from the Notes issued in March,
2010.
In March 2010, the Company also entered into a revolving line-of-credit (the Revolver).
Concurrent with offering the $100,000 Notes in September 2010, the Company amended the terms of its
Revolver to increase the borrowing capacity from $75,000 to $100,000 (adjusted for letter of credit
usage). The Company has capitalized $2,248 in debt issuance costs associated with the new Revolver.
The Revolver expires on March 1, 2014 and bears interest at the option of the Company at
either a base rate or as a Eurodollar rate plus the applicable margin which is based on the
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applicable Margin for |
|
|
Applicable Margin for |
|
Level |
|
Leverage Ratio |
|
LIBOR Advances |
|
|
Base Rate Advances |
|
I |
|
Greater than or equal to 3.25 to 1.00 |
|
|
4.50 |
% |
|
|
3.50 |
% |
II |
|
Greater than or equal to 2.50 to 1.00 but less than 3.25 to 1.00 |
|
|
4.00 |
% |
|
|
3.00 |
% |
III |
|
Greater than or equal to 1.75 to 1.00 but less than 2.50 to 1.00 |
|
|
3.75 |
% |
|
|
2.75 |
% |
IV |
|
Less than 1.75 to 1.00 |
|
|
3.50 |
% |
|
|
2.50 |
% |
The leverage ratio as defined in the credit agreement is determined based on the Companys
total outstanding debt (including capital leases) divided by the previous quarters annualized
earnings before interest expense, income taxes, depreciation and amortization. In addition to the
interest rate on outstanding borrowings, the Company is required to pay an unused line fee of 0.5%
on any undrawn portion of the Revolver.
As of June 30, 2011 and 2010, no amounts were outstanding under the Revolver. Standby letters
of credit were outstanding in the amount of $6,420 resulting in $93,580 being available on the
Revolver as of June 30, 2011. Outstanding letters of credit backed by the Revolver accrue interest
at a rate ranging from 3.5 to 4.5 percent per annum based upon the Companys leverage ratio. As of
June 30, 2011, the interest rate was 4.0 percent.
Guarantees
The Notes are fully and unconditionally guaranteed, jointly and severally, on a senior secured
basis by all of the Companys current and future domestic restricted subsidiaries. The Notes were
co-issued with Zayo Group Capital, Inc., which is a 100 percent owned finance subsidiary of the
parent and does not have independent assets or operations.
Debt issuance costs
Debt issuance costs have been capitalized on the accompanying consolidated balance sheets and
are being amortized using the effective interest rate method over the term of the borrowing
agreements, unless terminated earlier, at which time the unamortized costs are immediately
expensed. The unamortized debt issuance costs of $5,881 associated with the term loans (Tranche A
through D) and the Revolver maturing in 2013 were expensed in March 2010 upon the settlement of
those credit agreements. The balance of debt issuance costs as of June 30, 2011 and 2010 was
$11,446 (net of accumulated amortization of $2,746) and $9,560 (net of accumulated amortization of
$526), respectively. Interest expense associated with the amortization of debt issuance costs was
$2,220, $1,624 and $1,114 during the years ended June 30, 2011, 2010 and 2009, respectively.
Debt covenants
The Companys credit agreement associated with the $100,000 Revolver contains two financial
covenants: (1) a maximum leverage ratio and (2) a minimum fixed-charge coverage ratio.
Leverage ratio: The Company must not exceed a consolidated leverage ratio, which is defined as
funded debt to annualized earnings before interest, taxes, depreciation and amortization,
non-cash charges or reserves and certain extraordinary or non-recurring gains or losses
(modified EBITDA) of 4.25x the last quarters annualized modified EBITDA.
F-21
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
Fixed-charge coverage ratio: The Company must maintain a consolidated fixed-charge coverage
ratio, as determined under the credit agreement, of at least 1.1x for the periods ending March 31
and June 30, 2011; 1.15x for the periods ending September 30 and December 31, 2011 and March 31
and June 30, 2012; and 1.25x for the periods ending September 30, 2012 and each fiscal quarter
thereafter.
The Companys credit agreement restricts certain dividend payments to the Companys parent.
Under the terms of the agreement, if the Companys Revolver availability is in excess of $32,500
the Company may pay an annual dividend to its parent of up to $45,000, which is limited based upon
the following leverage ratios:
|
|
|
|
|
Leverage Ratio |
|
Maximum Annual Dividend Payment |
|
≥ 3.5x |
|
$ |
|
|
< 3.5x but ≥ 2.5x |
|
$ |
25,000 |
|
<,2.5x but ≥ 1.5x |
|
$ |
35,000 |
|
<1.5x |
|
$ |
45,000 |
|
The Company does not have any restrictions on its subsidiaries ability to pay dividends to
Zayo Group.
The Companys credit agreement contains customary representations and warranties, affirmative
and negative covenants, and 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 indebtedness in excess of $10,000, insolvency or inability to
pay debts, bankruptcy, or a change of control.
The Company was in compliance with all covenants associated with its Notes and credit
agreement as of June 30, 2011.
Redemption rights
At any time prior to March 15, 2013, the Company may redeem all or part of the Notes at a
redemption price equal to the sum of (i) 100 percent of the principal amount thereof, plus (ii) the
applicable premium as of the date of redemption, plus (iii) accrued and unpaid interest and
additional interest, if any, to the date of redemption, subject to the rights of the holders of the
Notes on the relevant record date to receive interest due on the relevant interest payment date.
The applicable premium is the greater of (i) 1.0% of the principal amount of the redeemed Notes and
(ii) the excess of (A) the present value at the date of redemption of (1) the redemption price of
the Notes at March 15, 2013, plus (2) all remaining required interest payments due on such Notes
through March 15, 2013 (excluding accrued but unpaid interest to the date of redemption),
discounted to present value using a discount rate equal to the Treasury Rate plus 50 basis points,
over (B) the principal amount of such Notes.
On or after March 15, 2013, the Company may redeem all or part of the Notes, at the redemption
prices (expressed as percentages of principal amount and set forth below), plus accrued and unpaid
interest and additional interest, if any, thereon, to the applicable redemption date, subject to
the rights of the holders of the Notes on the relevant record date to receive interest due on the
relevant interest payment date, if redeemed during the 12-month period beginning on March 15 of the
years indicated below:
|
|
|
|
|
Year |
|
Redemption Price |
|
2013 |
|
|
105.125 |
% |
2014 |
|
|
102.563 |
% |
2015 and thereafter |
|
|
100.000 |
% |
In the event of an equity offering, at any time prior to March 15, 2013, the Company may
redeem up to 35% of the aggregate principal amount of the Notes issued under the Companys
indenture at a redemption price of 110.25% of the principal amount thereof, plus accrued and unpaid
interest and additional interest, if any, thereon to the redemption date, subject to the rights of
the holders of the Notes on the relevant record date to receive interest due on the relevant
interest payment date, with the net cash proceeds of one or more equity offerings, provided that at
least (i) 65% of the aggregate principal amount of the Notes issued under the indenture remains
outstanding immediately after the occurrence of such redemption and (ii) the redemption must occur
within 90 days of the date of the closing of such equity offering.
F-22
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
The Company may purchase the Notes in open-market transactions, tender offers, or otherwise.
The Company is not required to make any mandatory redemption or sinking fund payments with respect
to the Notes.
Interest rate derivatives
On June 30, 2008, the Company entered into an interest rate swap agreement on a notional value
of $60,000 with a maturity date of September 13, 2010. There was no up-front cost for this
agreement. The contract stated that the Company shall pay 3.69% fixed for the term of the
agreement. The counterparty either paid to the Company or received from the Company the difference
between actual LIBOR and the fixed rate.
On March 23, 2009, the Company entered into another interest rate swap agreement on a notional
value of $40,000 with a maturity date of September 13, 2010. There was no up-front cost for this
agreement. The contract stated that the Company shall pay 1.42% fixed for the term of the
agreement. The counterparty either paid to the Company or received from the Company the difference
between actual LIBOR and the fixed rate.
Any changes in fair value of interest rate swaps are recorded as an increase or decrease in
interest expense in the consolidated statements of operations for the applicable period. During the
years ended June 30, 2011, 2010 and 2009, $0, $744 and $3,143, respectively were recorded as an
increase in interest expense for the change in the fair value of the interest rate swaps.
The Company made payments on the swaps of $566, $2,462 and $859 during the years ended June
30, 2011, 2010 and 2009, respectively. The liability associated with the swaps was $566 as of June
30, 2010 and is classified as an accrued expense on the consolidated balance sheets.
(10) INCOME TAXES
The Company, a limited liability company, is taxed at its parent level, Holdings. All income
tax balances resulting from the operations of Zayo Group are pushed down to the Company.
The Companys provision for income taxes is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Federal income taxes current |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Federal income taxes deferred |
|
|
10,140 |
|
|
|
3,556 |
|
|
|
(1,806 |
) |
|
|
|
|
|
|
|
|
|
|
Provision for federal income taxes |
|
|
10,140 |
|
|
|
3,556 |
|
|
|
(1,806 |
) |
|
|
|
|
|
|
|
|
|
|
State income taxes current |
|
|
1,449 |
|
|
|
755 |
|
|
|
(247 |
) |
State income taxes deferred |
|
|
953 |
|
|
|
512 |
|
|
|
(268 |
) |
|
|
|
|
|
|
|
|
|
|
Provision for state income taxes |
|
|
2,402 |
|
|
|
1,267 |
|
|
|
(515 |
) |
|
|
|
|
|
|
|
|
|
|
Provision/(benefit) for income taxes |
|
$ |
12,542 |
|
|
$ |
4,823 |
|
|
$ |
(2,321 |
) |
|
|
|
|
|
|
|
|
|
|
The Companys 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/deduction, such as stock-based
compensation expenses that are deductible for financial reporting purposes but not deductible for
tax purposes.
F-23
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
A reconciliation of the actual income tax provision and the tax computed by applying the U.S.
federal rate (34%) to the earnings before income taxes for each of the years in the three-year
period ended June 30, 2011 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Expected provision at statutory rate of 34% |
|
$ |
2,566 |
|
|
$ |
(48 |
) |
|
$ |
(4,053 |
) |
Increase due to: |
|
|
|
|
|
|
|
|
|
|
|
|
Non-deductible stock-based compensation |
|
|
7,824 |
|
|
|
6,177 |
|
|
|
2,158 |
|
State income taxes, net of federal benefit |
|
|
1,564 |
|
|
|
786 |
|
|
|
(248 |
) |
Transactions costs not deductible for tax purposes |
|
|
294 |
|
|
|
385 |
|
|
|
|
|
Non-taxable gain on bargain purchase |
|
|
|
|
|
|
(3,078 |
) |
|
|
|
|
Other, net |
|
|
294 |
|
|
|
601 |
|
|
|
(178 |
) |
|
|
|
|
|
|
|
|
|
|
Provision/(benefit) for income taxes |
|
$ |
12,542 |
|
|
$ |
4,823 |
|
|
$ |
(2,321 |
) |
|
|
|
|
|
|
|
|
|
|
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
taxes assets and deferred tax liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
Deferred income tax assets |
|
|
|
|
|
|
|
|
Net operating loss carry forwards |
|
$ |
48,545 |
|
|
$ |
37,907 |
|
Alternate minimum tax credit carryforwards |
|
|
78 |
|
|
|
78 |
|
Deferred revenue |
|
|
13,655 |
|
|
|
8,752 |
|
Unrealized loss on interest rate swaps |
|
|
|
|
|
|
223 |
|
Accrued expenses |
|
|
3,030 |
|
|
|
676 |
|
Other liabilities |
|
|
1,775 |
|
|
|
354 |
|
Allowance for doubtful accounts |
|
|
826 |
|
|
|
1,168 |
|
Other |
|
|
2 |
|
|
|
1 |
|
|
|
|
|
|
|
|
Total deferred income tax assets |
|
|
67,911 |
|
|
|
49,159 |
|
|
|
|
|
|
|
|
Deferred income tax liabilities |
|
|
|
|
|
|
|
|
Property and equipment |
|
|
33,804 |
|
|
|
23,942 |
|
Intangible assets |
|
|
34,515 |
|
|
|
12,649 |
|
Investment in unconsolidated subsidiary |
|
|
4,164 |
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax liabilities |
|
|
72,483 |
|
|
|
36,591 |
|
|
|
|
|
|
|
|
Less: Valuation allowance |
|
|
(407 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax (liability)/assets |
|
$ |
(4,979 |
) |
|
$ |
12,568 |
|
|
|
|
|
|
|
|
As of June 30, 2011 and June 30, 2010, the Company had $127,368 and $101,551 of net
operating loss (NOLs) carry forwards, respectively. The Company acquired $5,060 of NOLs in the
Northwest Telephone acquisition, $94,655 of NOLs in the FiberNet acquisition and $41,261 of NOLs in
the AFS acquisition. Each of these acquisitions, however, was a change in ownership within the
meaning of Section 382 of the Internal Revenue Code and, as a result, such NOLs are subject to an
annual limitation, and thus the Company is limited in its ability to use such NOLs to reduce its
income tax liabilities. The current annual NOL usage limitation related to the Companys acquired
NOLs is $11,206. Additionally the Company generated $2,321 of NOLs for the years ended June 30,
2009 and 2008 which are also available to offset future taxable income.
For the year ended June 30, 2011, the Company estimated that is will utilize $27,962 of its
acquired NOL carryforwards including $10,990 of Onvoys NOL carryforwards to offset taxable income
See Note 12 Equity, for a discussion of the tax sharing agreement between the Company and Onvoy.
During the period from the spin-off date of Onvoy, March 12, 2010, through June 30, 2010, the
Company estimated that it would utilize $3,011 of Onvoys NOL carryforwards to offset fiscal year
2010 taxable income. The tax effected benefit resulting from the expected utilization of Onvoy
NOL carryforwards of $3,737 and $1,200 during the years ended June 30, 2011 and 2010, respectively,
have been reflected on the statement of members equity.
F-24
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
The Companys NOLs, if not utilized to reduce taxable income in future periods, will
expire in various amounts beginning in 2015 and ending in 2029. As of June 30, 2011 management
believes it is more-likely-than-not that the Company will not be able to utilize $1,044 of the
NOLs acquired from the FiberNet acquisition; as such the Company has recorded a $407 valuation
allowance against such NOLs to reflect the portion of NOLs that the Company does not expect to use.
The Company is subject to audit by various taxing authorities, and these audits may result in
proposed assessments where the ultimate resolution results in the Company owing additional income
taxes. The statute of limitations is open with respect to tax years 2007 to 2010 however, to the
extent that the Company has an NOL balance which was generated in a tax year outside of this
statute of limitations period, such tax years will remain open until such NOLs are utilized by the
Company. The Company establishes reserves, when the management believes there is uncertainty with
respect to certain positions and the Company may not succeed in realizing the tax benefits. The
Company recognizes the effect of income tax positions only if those positions are more likely than
not of being sustained. Recognized income tax positions are measured at the largest amount that is
greater than 50% likely of being realized. Changes in recognition or measurement are reflected in
the period in which the change in judgment occurs. Prior to the adoption, the Company recognized
the effect of income tax positions only if such positions were probable of being sustained. The
application of income tax law is inherently complex, as such; it requires many subjective
assumptions and judgments regarding income tax exposures. Interpretations of and guidance
surrounding income tax laws and regulations change over time; as such, changes in these subjective
assumptions and judgments can materially affect amounts recognized in the balance sheets and
statements of operations. At June 30, 2011 and June 30, 2010, there were no unrecognized tax
benefits. As of June 30, 2011 and June 30, 2010, there was no accrued interest or penalties related
to uncertain tax positions.
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. The Companys evaluation encompassed
(i) a review of its recent history of profitability for the past three years (excluding permanent
book versus tax differences) and (ii) a review of internal financial forecasts demonstrating its
expected capacity to utilize deferred tax assets.
(11) ACCRUED LIABILITIES
Accrued liabilities included in current liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
Accrued compensation and benefits |
|
$ |
3,451 |
|
|
$ |
3,488 |
|
Accrued property and equipment purchases |
|
|
4,592 |
|
|
|
2,419 |
|
Network expense accruals |
|
|
1,375 |
|
|
|
349 |
|
Accrued income taxes |
|
|
834 |
|
|
|
535 |
|
Other accrued taxes |
|
|
3,000 |
|
|
|
3,216 |
|
Deferred lease obligations |
|
|
1,822 |
|
|
|
425 |
|
Other accruals |
|
|
7,379 |
|
|
|
6,720 |
|
|
|
|
|
|
|
|
Total |
|
$ |
22,453 |
|
|
$ |
17,152 |
|
|
|
|
|
|
|
|
(12) EQUITY
Zayo Group, LLC was initially formed on May 4, 2007, and is a wholly-owned subsidiary of
Holdings, which in turn is wholly owned by 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 Companys members equity.
During the years ended June 30, 2011, 2010 and 2009, CII contributed $36,450, $39,800 and
$35,546, respectively in capital to the Company through Holdings. CII funded these amounts from
equity contributions from its investors. As of June 30, 2011, the equity commitments from CIIs
investors have been fulfilled.
F-25
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
CII has issued preferred units to certain executives as compensation. The terms of these
preferred unit awards require equity accounting treatment. As such, the Company estimates the fair
value of these equity awards on the grant date and recognizes the related expense over the vesting
period of the awards.
During fiscal year 2008, CII issued 6,400,000 Class A preferred units in CII to the two
founders of the Company. The vesting for these units was completed in September 2010. Management
estimated the fair value of the equity awards on the grant date to be $6,400. Stock-based
compensation expense recognized in connection with these Class A units issued for the years ended
June 30, 2011, 2010 and 2009 was $240, $1,150 and $1,628, respectively. These Class A Preferred
Units were in lieu of any significant cash compensation to the founders during the period beginning
on May 1, 2007 and ending October 31, 2010.
CII issued 465,000 Class A preferred units to three of the Companys executives in fiscal
2009. The Class A preferred units issued to two of the executives vested during the year ended June
30, 2009 and the remaining units issued to the third executive became fully vested in February
2010. Management estimated the fair value of the equity awards on the grant date to be $465.
Stock-based compensation expense recognized for these grants during the years ended June 30, 2010
and 2009 was $45 and $421, respectively.
In June 2010, CII issued 136,985 Class B preferred units to two of the Companys Board
members. The Class B preferred units issued vest over a period of four years. Management estimated
the fair value of the equity awards on the grant date to be $312. In March of 2011, one of these
Board members resigned from his position resulting in a forfeiture of the 63,926 Class B preferred
units issued to the Board member. The grant date fair market value of the 73,059 class B preferred
units issued to the remaining Board member was determined to be $167. Stock-based compensation
expense recognized for this grant during the years ended June 30, 2011 and 2010 was $42 and $3,
respectively.
In December 2010, CII issued 390,000 Class B preferred units to a founder of the Company.
Management estimated the fair value of the equity awards on the grant date to be $967 based on a
weighted average of various market and income based valuation approaches. The Company recognizes
the related expense over the vesting period of three years which began October 31, 2010. In
January of 2011, CII issued an additional 580,000 Class B preferred units to the same founder. The
Company estimated the fair value of these equity awards on the grant date to be $1,438 and the
Company recognizes the related expense over a vesting period of three years which began October 31,
2010. The preferred units issued to the Company founder are in lieu of any significant cash
compensation for the founder during the three year vesting period that started on October 31, 2010.
Stock-based compensation expense recognized for these Class B preferred units during the year
ended June 30, 2011 was $535.
As these awards have been issued by CII to employees and Directors of the Company as
compensation, the related expense has been recorded by the Company in the accompanying consolidated
statements of operations.
ZEN was spun-off from the Company on April 1, 2011 to its parent Holdings (see Note 4
Spin-Off of Business Units). As a result of the spin-off the Companys members interest account
was reduced by the book value of ZEN of $6,368, during the year ended June 30, 2011.
On March 12, 2010, Onvoy was spun-off from the Company to Holdings (see Note 4 Spin-Off of
Business Units). As a result of the spin-off the Companys members interest account was reduced
by the book value of Onvoy of $42,539, during the year ended June 30, 2010.
In connection with the spin-offs, the Company entered into a tax-sharing agreement with ZEN,
OVS and Holdings, the taxable entity. The agreement allows for the sharing of the Holdings NOL
carryforward balance between the Company and Onvoy however, to the extent that any entity utilizes
NOLs that were generated by another entity, the entities will settle the related-party transfer of
deferred tax asset associated with such NOLs and other deferred-tax transfers between the companies
via an increase or decrease to the respective entities members equity. During the years ended
June 30, 2011 and 2010, the Company utilized $10,990 and $3,001, respectively, of gross NOLs of
Onvoy resulting in a non-cash capital contribution from Holdings in the amount of $3,737 and $1,200
during the respective periods. The increase in the Companys members interest account resulting
from the utilizations of Onvoys NOLs is reflected in the Statement of Members Equity. Offsetting
this increase to members equity during the year ended
June 30, 2011 was a $5,955 adjustment to the
allocation of the deferred tax liabilities of Holdings from Onvoy to the Company subsequent to the
spin-off. Additionally, during the year ended June 30, 2011, the Company settled a net
related-party receivable in the amount of $380 via a non-cash dividend to Holdings resulting in a
decrease to the Companys members interest account.
F-26
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
(13) STOCK COMPENSATION
The Company has been given authorization by CII to issue 125,000,000 of CIIs common units as
profits interest awards to employees and directors. As of June 30, 2010, CII had three classes of
common units with different liquidation preferences Class A, B and C units. During the year
ended June 30, 2011, CII issued two additional classes of common units: Class D and E. Common
units are issued to employees and to independent directors and are allocated by the Chief Executive
Officer and the board of managers on the terms and conditions specified in the employee equity
agreement. At June 30, 2011, 109,812,741 common units were issued and outstanding to employees and
directors of the Company and 15,187,259 common units were available to be issued.
The common units are considered to be stock-based compensation with terms that require the
awards to be classified as liabilities. As such, the Company accounts for these awards as a
liability and re-measures the liability at each reporting date until the date of settlement.
As of June 30, 2011 and 2010, the estimated fair value of the common units was as follows:
|
|
|
|
|
|
|
|
|
|
|
As of June 30, |
|
Common Unit Class |
|
2011 |
|
|
2010 |
|
|
|
(estimated per share value) |
|
Class A |
|
$ |
0.81 |
|
|
$ |
0.49 |
|
Class B |
|
$ |
0.58 |
|
|
$ |
0.28 |
|
Class C |
|
$ |
0.33 |
|
|
$ |
0.03 |
|
Class D |
|
$ |
0.31 |
|
|
|
n/a |
|
Class E |
|
$ |
0.23 |
|
|
|
n/a |
|
The estimated fair value of the common units was obtained from a valuation report prepared by
an independent valuation firm as of the respective dates.
The liability associated with the common units was $45,067 and $21,556 as of June 30, 2011 and
2010, respectively. The stock-based compensation expenses associated with the common units was
$23,490, $16,973 and $4,366 during the years ended June 30, 2011, 2010 and 2009, respectively.
The holders of common units are not entitled to transfer their units or receive dividends or
distributions, except at the discretion of the Board of Directors. Upon a liquidation of CII, or
upon a non-liquidating distribution, the holders of common units share in the proceeds after the
capital contributions of the CII preferred unit holders plus their priority return of 6% per annum
has been reimbursed. The remaining proceeds from a liquidation event are distributed between the
preferred and common unit holders on a scale ranging from 85% to the preferred unit holders and 15%
to the common unit holders to 80% to the preferred unit holders and 20% to the common unit holders.
The percentage allocated to the common unit holders is dependent upon the return multiple realized
by the Class A preferred unit holders. The maximum incremental allocation of proceeds from a
liquidation event to common unit holders, of 20 percent, occurs if the return multiple realized by
the Class A preferred unit holders reaches 3.5 times the Class A preferred holders combined
capital contributions. As discussed above, the Class A common unit holders receive proceeds from a
liquidation event once the preferred shareholders capital contributions and accrued dividends are
returned. The Class B common unit holders begin sharing in the proceeds of a liquidation event
once the Class A common unit holders have been distributed a total of $15,000 of the liquidation
proceeds. The Class C common unit holders begin sharing in the proceeds of a liquidation event
once the earlier common unit classes have been distributed a combined $40,000 in proceeds. The
Class D common unit holders begin sharing in the proceeds of a liquidation event once the earlier
common unit classes have been distributed a combined $45,000 in proceeds. Lastly, the Class E
common unit holders begin sharing in the proceeds of a liquidation event once the earlier common
unit classes have been distributed a combined $75,000 in proceeds.
F-27
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
The following table represents the activity as it relates to common unit issuances and
forfeitures during the years ended June 30, 2011, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A |
|
|
Class B |
|
|
Class C |
|
|
Class D |
|
|
Class E |
|
|
Totals |
|
Balance at June 30, 2008 |
|
|
44,530,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,530,655 |
|
Common units issued |
|
|
5,494,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,494,665 |
|
Common units forfeited |
|
|
(2,162,262 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,162,262 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 20, 2009 |
|
|
47,863,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,863,058 |
|
Common units issued |
|
|
|
|
|
|
18,964,500 |
|
|
|
3,330,218 |
|
|
|
|
|
|
|
|
|
|
|
22,294,718 |
|
Common units forfeited |
|
|
(424,271 |
) |
|
|
(710,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,134,271 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010 |
|
|
47,438,787 |
|
|
|
18,254,500 |
|
|
|
3,330,218 |
|
|
|
|
|
|
|
|
|
|
|
69,023,505 |
|
Common units issued |
|
|
|
|
|
|
500,000 |
|
|
|
|
|
|
|
32,499,173 |
|
|
|
10,445,905 |
|
|
|
43,445,078 |
|
Common units forfeited |
|
|
(341,659 |
) |
|
|
(1,506,980 |
) |
|
|
(505,000 |
) |
|
|
(147,203 |
) |
|
|
(155,000 |
) |
|
|
(2,655,842 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 20, 2011 |
|
|
47,097,128 |
|
|
|
17,247,520 |
|
|
|
2,825,218 |
|
|
|
32,351,970 |
|
|
|
10,290,905 |
|
|
|
109,812,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table represents the activity as it relates to common units vested since
the Companys inception:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, |
|
|
|
|
|
|
Un-vested and |
|
Common Units Vested |
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
Total Vested |
|
|
Outstanding |
|
Class A |
|
|
14,602,642 |
|
|
|
12,968,534 |
|
|
|
12,573,357 |
|
|
|
6,523,678 |
|
|
|
46,668,211 |
|
|
|
428,917 |
|
Class B |
|
|
|
|
|
|
|
|
|
|
5,523,680 |
|
|
|
4,868,342 |
|
|
|
10,392,022 |
|
|
|
6,855,498 |
|
Class C |
|
|
|
|
|
|
|
|
|
|
239,583 |
|
|
|
750,267 |
|
|
|
989,850 |
|
|
|
1,835,368 |
|
Class D |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,351,970 |
|
Class E |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,290,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Vested |
|
|
14,602,642 |
|
|
|
12,968,534 |
|
|
|
18,336,620 |
|
|
|
12,142,287 |
|
|
|
58,050,083 |
|
|
|
51,762,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In estimating the fair value of share-based awards, the Company has historically
evaluated both market and income based valuation techniques. The income approach was based on
managements projected free cash flows. The market based approach, estimates the fair value based
on the prices paid by investors and acquirers of interest of comparable companies in the public and
private markets. The valuation was based on a weighted average of the market and income valuation
techniques. As a result of the Companys expansion since inception and due to the fact that the
committed capital from the Companys ultimate investors has been fully funded, the potential of a
liquidation event for the Companys shareholders in the future has increased. As such, management
revised the market based approach utilized in the valuation of the common units to account for
potential liquidation events.
During the year ended June 30, 2011, the Company employed a probability-weighted estimated
return method to value the common units. The method estimates the value of the units based on an
analysis of values of the enterprise assuming various future outcomes. The estimated fair value
of the common units is based on a probability-weighted present value of expected future proceeds to
the Companys shareholders, considering each potential liquidity scenario available to the
Companys investors as well as preferential rights of each security. This approach utilizes a
variety of assumptions regarding the likelihood of a certain scenario occurring, if the event
involves a transaction, the potential timing of such an event, and the potential valuation that
each scenario might yield. The potential future outcomes that were considered by management were
remaining a private company with the same ownership, a sale or merger, an initial public offering
(IPO), and a partial recapitalization.
(14) FAIR VALUE MEASUREMENTS
The Companys financial instruments consist of cash and cash equivalents, restricted cash,
trade receivable, accounts payable, interest rate swaps, long-term debt and stock-based
compensation. The carrying values of cash and cash equivalents, restricted cash, trade receivable,
and accounts payable approximated their fair values at June 30, 2011 and 2010 due to the short
maturity of these instruments. Interest rate swaps are recorded in the consolidated balance sheets
at fair value. The carrying value of the Companys Notes reflects the original amounts borrowed,
net of unamortized discounts or accretion of premiums and was $350,147 and $247,080 as of June 30,
2011 and 2010, respectively. Based on current market interest rates for debt of similar terms and
average maturities and based on recent transactions, the fair value of the Notes balance as of June
30, 2011 and 2010, is estimated to be $385,875 and $252,500, respectively. The Company recorded
its promissory note with the previous owners of AFS at its fair value on the acquisition date,
which was determined to be $4,141. Management estimated the imputed interest associated with this
note to be $359, which is being recognized through March 2017. The fair value of this note is not
re-measured each reporting period; however, based on current interest rates for debt instruments
with similar maturity dates, the June 30, 2011 book value of the AFS promissory note approximates
fair value. The Company records its stock-based compensation liability at its estimated fair
value.
F-28
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
Financial instruments measured at fair value on a recurring basis are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level |
|
|
June 30, 2011 |
|
|
June 30, 2010 |
|
Liabilities Recorded at Fair Value in the Financial Statements: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap liabilities |
|
Level 2 |
|
$ |
|
|
|
$ |
566 |
|
Stock-based compensation liability |
|
Level 3 |
|
|
45,067 |
|
|
|
21,556 |
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities recorded at fair value in the consolidated financial statements |
|
|
|
|
|
$ |
45,067 |
|
|
$ |
22,122 |
|
|
|
|
|
|
|
|
|
|
|
|
The 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 market value of the interest rate swaps resulted in an increase of $744 and $3,143 to interest
expense during the years ended June 30, 2010 and 2009, respectively.
We use a third party valuation firm to assist in the valuation of our common units each
reporting period and preferred units when granted. In developing a value for these units, we
utilize a two-step valuation approach. In the first step we estimate the value of our equity
instruments through an analysis of valuations associated with various future potential liquidity
scenarios for our shareholders. A composite valuation is developed based upon the
probability-weighted present values of each of the scenarios. The second step involves allocating
this value across our capital structure. The valuation is conducted in consideration of the
guidance provided in the American Institute of Certified Public Accountant (AICPA) Practice Aid
Valuation of Privately-Held Company Equity Securities Issued as Compensation and with adherence
to the Uniform Standards of Professional Appraisal Practice (USPAP) set forth by the Appraisal
Foundation.
(15) COMMITMENTS AND CONTINGENCIES
Capital Leases
Future contractual payments under the terms of the Companys capital lease obligations
were as follows:
|
|
|
|
|
Year ending June 30, |
|
|
|
|
2012 |
|
$ |
1,769 |
|
2013 |
|
|
1,754 |
|
2014 |
|
|
1,721 |
|
2015 |
|
|
1,681 |
|
2016 |
|
|
1,494 |
|
Thereafter |
|
|
7,298 |
|
|
|
|
|
Total minimum lease payments |
|
|
15,717 |
|
|
|
|
|
Less amounts representing interest |
|
|
(4,543 |
) |
Less current portion |
|
|
(950 |
) |
|
|
|
|
Capital lease obligations, less current portion |
|
$ |
10,224 |
|
|
|
|
|
The weighted average interest rate on capital lease obligations was 10.37% and 12.1% as of
June 30, 2011 and 2010, respectively.
Operating Leases
The Company leases office space, warehouse space, network assets, switching and transport
sites, points of presence and equipment under non-cancelable operating leases. Lease expense was
$38,375, $29,634 and $14,981 for the years ended June 30, 2011, 2010 and 2009, respectively.
For scheduled rent escalation clauses during the lease terms or for rental payments commencing
at a date other than the date of initial occupancy, the Company records minimum rental expenses on
a straight-line basis over the terms of the leases. When the straight-line expense recorded
exceeds the cash outflows during the respective period, the Company records a deferred rent
liability on the consolidated balance sheets and amortizes the deferred rent over the terms of the
leases.
F-29
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
Minimum contractual lease payments due under the Companys long-term operating leases are
as follows:
|
|
|
|
|
Year ending June 30, |
|
|
|
|
2012 |
|
$ |
23,353 |
|
2013 |
|
|
21,241 |
|
2014 |
|
|
19,270 |
|
2015 |
|
|
18,042 |
|
2016 |
|
|
15,834 |
|
Thereafter |
|
|
81,059 |
|
|
|
|
|
|
|
$ |
178,799 |
|
|
|
|
|
Purchase commitments
At June 30, 2011, the Company was contractually committed for $22,822 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.
Outstanding letters of credit
As of June 30, 2011, the Company had $6,420 in outstanding letters of credit, which were
primarily entered into in connection with various lease agreements.
Other commitments
In February 2010, the Company was awarded an NTIA Broadband Technology Opportunities Program
grant for a fiber network project in Indiana (the Indiana Stimulus Project). The Indiana
Stimulus Project involves approximately $31,425 of capital expenditures, of which $25,100 is to be
funded by a government grant and approximately $6,285 is to be funded by the Company. In connection
with this project, 626 route miles of fiber are to be constructed and lit. The Company began
capitalizing certain preconstruction costs associated with this project in April of 2010 and began
receiving grant funds in May 2010. As of June 30, 2011, the Company has been reimbursed for $96 of
expenses and $3,339 of capital expenditures related to the Indiana Stimulus Project. As of June
30, 2011, the Company has incurred $1,021 of capital expenditures which are pending reimbursement
from the program. The Company also contributed $4,400 of pre-existing network assets to the
project. The Company anticipates this project will be completed within the next two years.
In July 2010, the Company was awarded from the NTIA Broadband Technology Opportunities Program
a $13,383 grant to construct 286 miles of fiber network in Anoka County, Minnesota, outside of
Minneapolis (the Anoka Stimulus Project). The Anoka Stimulus Project involves approximately
$19,117 of capital expenditures, of which $13,383 is to be funded by a government grant and
approximately $5,735 is to be funded by the Company. As of June 30, 2011, the Company has been
reimbursed for $121 of expenses and $275 of capital expenditures related to the Indiana Stimulus
Project. As of June 30, 2011, the Company has incurred $32 of capital expenditures that are
pending reimbursement from the program. The Company anticipates this project will be completed
within the next two years.
Contingencies
In the normal course of business, the Company is party to various outstanding legal
proceedings, claims, commitments, and contingent liabilities. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse effect on the Companys
financial condition, results of operations, or cash flows.
F-30
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
(16) RELATED-PARTY TRANSACTIONS
As of June 30, 2011, the Company had a due to related-party balance with CII of $4,590 which
is payable on demand. The liability with CII relates to an interest payment made by CII on the
Companys Notes.
As of June 30, 2011 and 2010, the Company had a receivable balance due from Onvoy in the
amount of $187 and $626, respectively, related to services the Company provided to OVS and/or ZEN.
See Note 4 Spin-Off of Business Units, for a discussion of the types of services ZEN, Onvoy and
the Company continue to provide each other subsequent to their spin-off dates.
Subsequent to the April 1, 2011 spin-off of ZEN and the March 12, 2010 spin-off of Onvoy, the
revenue and expenses associated with transactions with ZEN and Onvoy have been recorded in the
results from continuing operations. The following table represents the revenue and expense
transactions recognized with these related-parties subsequent to their spin-off dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
OVS |
|
|
ZEN |
|
|
Total |
|
|
OVS |
|
|
ZEN |
|
|
Total |
|
Revenue |
|
$ |
4,475 |
|
|
$ |
508 |
|
|
$ |
4,983 |
|
|
$ |
1,436 |
|
|
$ |
|
|
|
$ |
1,436 |
|
Operating costs |
|
|
404 |
|
|
|
|
|
|
|
404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
161 |
|
|
|
99 |
|
|
|
260 |
|
|
|
564 |
|
|
|
|
|
|
|
564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
$ |
3,910 |
|
|
$ |
409 |
|
|
$ |
4,319 |
|
|
$ |
872 |
|
|
$ |
|
|
|
$ |
872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On September 14, 2010, Dan Caruso, the Companys President, Chief Executive Officer and
Director of Zayo Group, LLC, purchased $500 of the Companys Notes in connection with the Companys
$100,000 Notes offering in September 2010. The purchase price of the notes acquired by Mr. Caruso
was $516 after considering the premium on the notes and accrued interest.
(17) SEGMENT REPORTING
A business unit is a component of an entity that has all of the following characteristics:
|
|
|
It engages in business activities from which it may earn revenues and incur
expenses. |
|
|
|
|
Its operating results are regularly reviewed by the entitys chief operating
decision maker to make decisions about resources to be allocated to the segment and
assess its performance. |
|
|
|
|
Its discrete financial information is available. |
The Companys business units have historically been identified by both the products they offer
and the customers they serve. Effective January 1, 2011, management approved a restructuring of
the ZEN unit, which resulted in all of the Companys business units more closely aligning with
their product offerings rather than a combination of product offerings and customer demographics.
The restructuring of the ZEN unit resulted in the ZEN unit transferring its bandwidth
infrastructure products to the ZB unit and its colocation products to the zColo unit. The
restructured ZEN unit, which contained only the Companys legacy managed services and CLEC product
offerings, was spun-off to Holdings on April 1, 2011.
Subsequent to the restructuring, the ZB unit offers primarily lit bandwidth infrastructure
services and the zColo unit provides colocation and inter-connection transport services. The
Company has restated the comparative historical segment financial information below to account for
the restructuring of the business units.
In connection with the AGL Networks acquisition (See Note 3 Acquisitions), Zayo established
the ZFS unit. ZFS is dedicated to marketing and supporting dark fiber related services. Prior to
the formation of the ZFS unit, the Companys dark fiber assets and the related revenues and
expenses associated with dark fiber customers were allocated between ZB and ZEN based upon the
nature and size of the customers receiving the dark fiber services. Upon the formation of the ZFS
business units, effective July 1, 2011, dark fiber assets of the Company and the related revenues
and expense associated with dark fiber customers were allocated to the ZFS business unit.
F-31
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
Prior to the formation of the zColo and the ZFS units, the Company generated income from
colocation and dark fiber products. The historical operating results from these product offerings
were primarily reflected in the results of the ZB business unit. The Company has not restated the
historical ZB unit information to carve-out the operating results related to colocation product
offerings prior to the September 30, 2009 formation of the zColo unit or dark fiber services prior
to the July 1, 2010 formation of the ZFS unit as management has determined it is impractical to do
so.
Revenues for all of the Companys products are included in one of these three business units.
The results of operations for each business unit include an allocation of certain corporate
overhead costs. The allocation is based on a percentage that represents managements estimate of
the relative burden each segment bears of corporate overhead costs. Identifiable assets for each
business unit are reconciled to total consolidated assets including unallocated corporate assets
and intercompany eliminations. Unallocated corporate assets consist primarily of cash, deferred tax
assets, and debt issuance costs.
The following tables summarize significant financial information of each of the segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the year ended June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate/ |
|
|
|
|
|
|
ZB |
|
|
zColo |
|
|
ZFS |
|
|
eliminations |
|
|
Total |
|
Revenue |
|
$ |
214,110 |
|
|
$ |
33,899 |
|
|
$ |
44,549 |
|
|
$ |
|
|
|
$ |
292,558 |
|
Intersegment revenue |
|
|
(2,056 |
) |
|
|
(3,267 |
) |
|
|
|
|
|
|
|
|
|
|
(5,323 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers |
|
|
212,054 |
|
|
|
30,632 |
|
|
|
44,549 |
|
|
|
|
|
|
|
287,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (revenue less operating costs excluding
depreciation and amortization) |
|
|
158,461 |
|
|
|
17,700 |
|
|
|
43,152 |
|
|
|
(3,606 |
) |
|
|
215,707 |
|
Depreciation and amortization |
|
|
41,521 |
|
|
|
5,393 |
|
|
|
13,549 |
|
|
|
|
|
|
|
60,463 |
|
Operating income/(loss) |
|
|
38,264 |
|
|
|
6,120 |
|
|
|
10,796 |
|
|
|
(14,092 |
) |
|
|
41,088 |
|
Interest expense |
|
|
(960 |
) |
|
|
(225 |
) |
|
|
(15 |
) |
|
|
(32,214 |
) |
|
|
(33,414 |
) |
Other (expense)/income, net |
|
|
(54 |
) |
|
|
|
|
|
|
7 |
|
|
|
(79 |
) |
|
|
(126 |
) |
Earnings from continuing operations before provision for
income taxes |
|
|
37,249 |
|
|
|
5,895 |
|
|
|
10,788 |
|
|
|
(46,384 |
) |
|
|
7,548 |
|
Total assets |
|
|
491,337 |
|
|
|
52,161 |
|
|
|
211,315 |
|
|
|
34,448 |
|
|
|
789,261 |
|
Capital expenditures, net of stimulus grant reimbursements |
|
|
99,062 |
|
|
|
1,543 |
|
|
|
11,919 |
|
|
|
|
|
|
|
112,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the year ended June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate/ |
|
|
|
|
|
|
ZB |
|
|
zColo |
|
|
ZFS |
|
|
eliminations |
|
|
Total |
|
Revenue |
|
$ |
183,085 |
|
|
$ |
23,993 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
207,078 |
|
Intersegment revenue |
|
|
(5,833 |
) |
|
|
(1,915 |
) |
|
|
|
|
|
|
|
|
|
|
(7,748 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers |
|
|
177,252 |
|
|
|
22,078 |
|
|
|
|
|
|
|
|
|
|
|
199,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (revenue less operating costs excluding
depreciation and amortization) |
|
|
131,331 |
|
|
|
13,025 |
|
|
|
|
|
|
|
(7,714 |
) |
|
|
136,642 |
|
Depreciation and amortization |
|
|
34,225 |
|
|
|
4,513 |
|
|
|
|
|
|
|
|
|
|
|
38,738 |
|
Operating income/(loss) |
|
|
27,336 |
|
|
|
4,409 |
|
|
|
|
|
|
|
(17,920 |
) |
|
|
13,825 |
|
Interest expense |
|
|
(1,130 |
) |
|
|
(164 |
) |
|
|
|
|
|
|
(17,398 |
) |
|
|
(18,692 |
) |
Loss on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,881 |
) |
|
|
(5,881 |
) |
Gain on bargain purchase |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,081 |
|
|
|
9,081 |
|
Other income, net |
|
|
382 |
|
|
|
|
|
|
|
|
|
|
|
1,144 |
|
|
|
1,526 |
|
Earnings from continuing operations before provision for
income taxes |
|
|
26,588 |
|
|
|
4,245 |
|
|
|
|
|
|
|
(30,974 |
) |
|
|
(141 |
) |
Total assets |
|
|
397,150 |
|
|
|
56,774 |
|
|
|
|
|
|
|
111,916 |
|
|
|
565,840 |
|
Capital expenditures, net of stimulus grant reimbursements |
|
|
58,117 |
|
|
|
634 |
|
|
|
|
|
|
|
|
|
|
|
58,751 |
|
F-32
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the year ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate/ |
|
|
|
|
|
|
ZB |
|
|
zColo |
|
|
ZFS |
|
|
eliminations |
|
|
Total |
|
Revenue |
|
$ |
129,282 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
129,282 |
|
Intersegment revenue |
|
|
(3,943 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,943 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers |
|
|
125,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (revenue less
operating costs excluding
depreciation and amortization) |
|
|
95,712 |
|
|
|
|
|
|
|
|
|
|
|
(8,165 |
) |
|
|
87,547 |
|
Depreciation and amortization |
|
|
26,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,554 |
|
Operating income/(loss) |
|
|
16,407 |
|
|
|
|
|
|
|
|
|
|
|
(13,319 |
) |
|
|
3,088 |
|
Interest expense |
|
|
(1,182 |
) |
|
|
|
|
|
|
|
|
|
|
(14,063 |
) |
|
|
(15,245 |
) |
Other income, net |
|
|
54 |
|
|
|
|
|
|
|
|
|
|
|
180 |
|
|
|
234 |
|
Earnings from continuing
operations before provision
for income taxes |
|
|
15,279 |
|
|
|
|
|
|
|
|
|
|
|
(27,202 |
) |
|
|
(11,923 |
) |
Total assets |
|
|
316,511 |
|
|
|
|
|
|
|
|
|
|
|
105,651 |
|
|
|
422,162 |
|
Capital expenditures, net of
stimulus grant reimbursements |
|
|
61,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,614 |
|
(18) CONDENSED CONSOLIDATING FINANCIAL INFORMATION
On June 30, 2011, the Company completed a rollup of certain legal subsidiaries into Zayo Group,
LLC. The rollup included the merger of the following legal subsidiaries up and into Zayo Group,
LLC: (i) Zayo Bandwidth, LLC; (ii) Zayo Fiber Solutions, LLC; (iii) Zayo Bandwidth Tennessee, LLC;
and (iv) Adesta Communications, Inc. In connection with the rollup, the assets, liabilities and
operating results of these legacy subsidiaries were consolidated with and into the Zayo Group, LLC
entity. Prior to the rollup, Zayo Group, LLC did not have significant independent assets or
operations. Subsequent to the rollup, Zayo Colocation , Inc. (and its subsidiaries), American
Fiber Systems Holding Corp (and its subsidiary American Fiber Systems, Inc.), and Zayo Capital,
Inc. remain the only wholly owned legal subsidiaries of the Company.
In March 2010, the Company co-issued, with its 100 percent owned finance subsidiary Zayo
Capital, Inc. (at an issue price of 98.779%) $250,000 of Senior Secured Notes. The notes bear
interest at 10.25% annually and are due on March 15, 2017.
In September 2010, the Company completed an offering of an additional $100,000 in notes (at an
issue price of 103%). These notes are part of the same series as the $250,000 Senior Secured Notes
and also accrue interest at a rate of 10.25% and mature on March 15, 2017.
Both note issuances are fully and unconditionally guaranteed, jointly and severally, on a
senior secured basis by all of the Companys current and future domestic restricted subsidiaries.
Zayo Capital, Inc., the co-issuer of both Note issuances, does not have independent assets or
operations.
The accompanying condensed consolidating financial information has been prepared and presented
pursuant to SEC Regulation S-X Rule 3-10 Financial statements of guarantors and affiliates whose
securities collateralize an issue registered or being registered.
The operating activities of the separate legal entities included in the Companys 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, LLC and Zayo Colocation, Inc. provide services to each other during the normal
course of business. These transactions are eliminated in the consolidated results of the Company.
Zayo Colocation, Inc. was formed in September of 2009; as such, the financial information presented
below is included for only the years ended June 30, 2011 and 2010.
F-33
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
Condensed Consolidating Balance Sheets
June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zayo |
|
|
|
|
|
|
|
|
|
Zayo Group, |
|
|
Colocation, |
|
|
|
|
|
|
|
|
|
LLC |
|
|
Inc. |
|
|
Eliminations |
|
|
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
24,213 |
|
|
$ |
1,181 |
|
|
$ |
|
|
|
$ |
25,394 |
|
Trade receivables, net |
|
|
11,856 |
|
|
|
2,127 |
|
|
|
|
|
|
|
13,983 |
|
Due from related parties |
|
|
2,182 |
|
|
|
|
|
|
|
(1,995 |
) |
|
|
187 |
|
Prepaid expenses |
|
|
5,517 |
|
|
|
871 |
|
|
|
|
|
|
|
6,388 |
|
Deferred income taxes |
|
|
3,343 |
|
|
|
|
|
|
|
|
|
|
|
3,343 |
|
Other current assets |
|
|
640 |
|
|
|
5 |
|
|
|
|
|
|
|
645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
47,751 |
|
|
|
4,184 |
|
|
|
(1,995 |
) |
|
|
49,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
486,847 |
|
|
|
31,666 |
|
|
|
|
|
|
|
518,513 |
|
Intangible assets, net |
|
|
89,117 |
|
|
|
15,555 |
|
|
|
|
|
|
|
104,672 |
|
Goodwill |
|
|
83,796 |
|
|
|
24 |
|
|
|
|
|
|
|
83,820 |
|
Debt issuance costs, net |
|
|
11,446 |
|
|
|
|
|
|
|
|
|
|
|
11,446 |
|
Investment in US Carrier |
|
|
15,075 |
|
|
|
|
|
|
|
|
|
|
|
15,075 |
|
Other assets, non-current |
|
|
5,060 |
|
|
|
735 |
|
|
|
|
|
|
|
5,795 |
|
Investment in subsidiary |
|
|
45,594 |
|
|
|
|
|
|
|
(45,594 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
784,686 |
|
|
$ |
52,164 |
|
|
$ |
(47,589 |
) |
|
$ |
789,261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and members equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
12,287 |
|
|
$ |
701 |
|
|
$ |
|
|
|
$ |
12,988 |
|
Accrued liabilities |
|
|
19,122 |
|
|
|
3,331 |
|
|
|
|
|
|
|
22,453 |
|
Accrued interest |
|
|
10,627 |
|
|
|
|
|
|
|
|
|
|
|
10,627 |
|
Capital lease obligation, current |
|
|
950 |
|
|
|
|
|
|
|
|
|
|
|
950 |
|
Due to related parties |
|
|
6,364 |
|
|
|
221 |
|
|
|
(1,995 |
) |
|
|
4,590 |
|
Deferred revenue, current |
|
|
15,341 |
|
|
|
323 |
|
|
|
|
|
|
|
15,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
64,691 |
|
|
|
4,576 |
|
|
|
(1,995 |
) |
|
|
67,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations, non-current |
|
|
10,224 |
|
|
|
|
|
|
|
|
|
|
|
10,224 |
|
Long-term debt |
|
|
354,414 |
|
|
|
|
|
|
|
|
|
|
|
354,414 |
|
Deferred revenue, non-current |
|
|
62,704 |
|
|
|
1,189 |
|
|
|
|
|
|
|
63,893 |
|
Stock-based compensation liability |
|
|
44,263 |
|
|
|
804 |
|
|
|
|
|
|
|
45,067 |
|
Deferred tax liability |
|
|
8,322 |
|
|
|
|
|
|
|
|
|
|
|
8,322 |
|
Other long term liabilities |
|
|
2,724 |
|
|
|
|
|
|
|
|
|
|
|
2,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
547,342 |
|
|
|
6,569 |
|
|
|
(1,995 |
) |
|
|
551,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members interest |
|
|
255,572 |
|
|
|
35,455 |
|
|
|
(45,594 |
) |
|
|
245,433 |
|
(Accumulated deficit)/retained earnings |
|
|
(18,228 |
) |
|
|
10,140 |
|
|
|
|
|
|
|
(8,088 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total members equity |
|
|
237,344 |
|
|
|
45,595 |
|
|
|
(45,594 |
) |
|
|
237,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity |
|
$ |
784,686 |
|
|
$ |
52,164 |
|
|
$ |
(47,589 |
) |
|
$ |
789,261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-34
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
Condensed Consolidating Balance Sheets
June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zayo |
|
|
|
|
|
|
|
|
|
Zayo Group, |
|
|
Colocation, |
|
|
|
|
|
|
|
|
|
LLC |
|
|
Inc. |
|
|
Eliminations |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
84,967 |
|
|
$ |
2,897 |
|
|
$ |
|
|
|
$ |
87,864 |
|
Trade receivables, net |
|
|
9,998 |
|
|
|
1,553 |
|
|
|
|
|
|
|
11,551 |
|
Due from related parties |
|
|
1,426 |
|
|
|
138 |
|
|
|
(938 |
) |
|
|
626 |
|
Prepaid expenses |
|
|
4,083 |
|
|
|
727 |
|
|
|
|
|
|
|
4,810 |
|
Deferred income taxes |
|
|
4,060 |
|
|
|
|
|
|
|
|
|
|
|
4,060 |
|
Other current assets |
|
|
332 |
|
|
|
2 |
|
|
|
|
|
|
|
334 |
|
Assets of discontinued operations, current |
|
|
3,061 |
|
|
|
|
|
|
|
|
|
|
|
3,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
107,927 |
|
|
|
5,317 |
|
|
|
(938 |
) |
|
|
112,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
264,791 |
|
|
|
33,098 |
|
|
|
|
|
|
|
297,889 |
|
Intangible assets, net |
|
|
39,217 |
|
|
|
17,497 |
|
|
|
|
|
|
|
56,714 |
|
Goodwill |
|
|
67,830 |
|
|
|
24 |
|
|
|
|
|
|
|
67,854 |
|
Deferred income taxes |
|
|
8,508 |
|
|
|
|
|
|
|
|
|
|
|
8,508 |
|
Debt issuance costs, net |
|
|
9,560 |
|
|
|
|
|
|
|
|
|
|
|
9,560 |
|
Other assets |
|
|
4,027 |
|
|
|
839 |
|
|
|
|
|
|
|
4,866 |
|
Investment in subsidiary |
|
|
53,708 |
|
|
|
|
|
|
|
(53,708 |
) |
|
|
|
|
Assets of discontinued operations, non-current |
|
|
8,143 |
|
|
|
|
|
|
|
|
|
|
|
8,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
563,711 |
|
|
$ |
56,775 |
|
|
$ |
(54,646 |
) |
|
$ |
565,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and members equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
9,442 |
|
|
$ |
573 |
|
|
$ |
|
|
|
$ |
10,015 |
|
Accrued liabilities |
|
|
16,284 |
|
|
|
868 |
|
|
|
|
|
|
|
17,152 |
|
Accrued interest |
|
|
7,794 |
|
|
|
|
|
|
|
|
|
|
|
7,794 |
|
Capital lease obligations, current |
|
|
1,673 |
|
|
|
|
|
|
|
|
|
|
|
1,673 |
|
Due to related parties |
|
|
811 |
|
|
|
127 |
|
|
|
(938 |
) |
|
|
|
|
Deferred revenue, current portion |
|
|
7,845 |
|
|
|
246 |
|
|
|
|
|
|
|
8,091 |
|
Liabilities of discontinued operations, current |
|
|
1,740 |
|
|
|
|
|
|
|
|
|
|
|
1,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
45,589 |
|
|
|
1,814 |
|
|
|
(938 |
) |
|
|
46,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations, non-current |
|
|
11,033 |
|
|
|
|
|
|
|
|
|
|
|
11,033 |
|
Long-term debt |
|
|
247,080 |
|
|
|
|
|
|
|
|
|
|
|
247,080 |
|
Deferred revenue, non-current |
|
|
21,391 |
|
|
|
1,214 |
|
|
|
|
|
|
|
22,605 |
|
Stock-based compensation liability |
|
|
21,517 |
|
|
|
39 |
|
|
|
|
|
|
|
21,556 |
|
Other long term liabilities |
|
|
2,397 |
|
|
|
|
|
|
|
|
|
|
|
2,397 |
|
Liabilities of discontinued operations, non-current |
|
|
1,568 |
|
|
|
|
|
|
|
|
|
|
|
1,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
350,575 |
|
|
|
3,067 |
|
|
|
(938 |
) |
|
|
352,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members interest |
|
|
221,374 |
|
|
|
49,463 |
|
|
|
(53,708 |
) |
|
|
217,129 |
|
(Accumulated deficit)/retained earnings |
|
|
(8,238 |
) |
|
|
4,245 |
|
|
|
|
|
|
|
(3,993 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total members equity |
|
|
213,136 |
|
|
|
53,708 |
|
|
|
(53,708 |
) |
|
|
213,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity |
|
$ |
563,711 |
|
|
$ |
56,775 |
|
|
$ |
(54,646 |
) |
|
$ |
565,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-35
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
Condensed Consolidating Statements of Operations
June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zayo |
|
|
|
|
|
|
|
|
|
Zayo Group, |
|
|
Colocation, |
|
|
|
|
|
|
|
|
|
LLC |
|
|
Inc. |
|
|
Eliminations |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
258,659 |
|
|
$ |
33,899 |
|
|
$ |
(5,323 |
) |
|
$ |
287,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs, excluding depreciation and amortization |
|
|
57,047 |
|
|
|
16,199 |
|
|
|
(1,718 |
) |
|
|
71,528 |
|
Selling, general and administrative expenses |
|
|
86,686 |
|
|
|
5,594 |
|
|
|
(2,434 |
) |
|
|
89,846 |
|
Stock-based compensation |
|
|
23,717 |
|
|
|
593 |
|
|
|
|
|
|
|
24,310 |
|
Depreciation and amortization |
|
|
55,071 |
|
|
|
5,392 |
|
|
|
|
|
|
|
60,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
222,521 |
|
|
|
27,778 |
|
|
|
(4,152 |
) |
|
|
246,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
36,138 |
|
|
|
6,121 |
|
|
|
(1,171 |
) |
|
|
41,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(33,189 |
) |
|
|
(225 |
) |
|
|
|
|
|
|
(33,414 |
) |
Other expense |
|
|
(126 |
) |
|
|
|
|
|
|
|
|
|
|
(126 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net |
|
|
(33,315 |
) |
|
|
(225 |
) |
|
|
|
|
|
|
(33,540 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings/(loss) from continuing operations before income
taxes |
|
|
2,823 |
|
|
|
5,896 |
|
|
|
(1,171 |
) |
|
|
7,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
12,542 |
|
|
|
|
|
|
|
|
|
|
|
12,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/earnings from continuing operations |
|
|
(9,719 |
) |
|
|
5,896 |
|
|
|
(1,171 |
) |
|
|
(4,994 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued operations, net of income taxes |
|
|
899 |
|
|
|
|
|
|
|
|
|
|
|
899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/earnings |
|
$ |
(8,820 |
) |
|
$ |
5,896 |
|
|
$ |
(1,171 |
) |
|
$ |
(4,095 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
F-36
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
Condensed Consolidating Statements of Operations
June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zayo |
|
|
|
|
|
|
|
|
|
Zayo Group, |
|
|
Colocation, |
|
|
|
|
|
|
|
|
|
LLC |
|
|
Inc. |
|
|
Eliminations |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
183,085 |
|
|
$ |
23,993 |
|
|
$ |
(7,748 |
) |
|
$ |
199,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs, excluding depreciation and amortization |
|
|
51,754 |
|
|
|
10,968 |
|
|
|
(34 |
) |
|
|
62,688 |
|
Selling, general and administrative expenses |
|
|
64,266 |
|
|
|
4,065 |
|
|
|
(2,420 |
) |
|
|
65,911 |
|
Stock-based compensation |
|
|
18,129 |
|
|
|
39 |
|
|
|
|
|
|
|
18,168 |
|
Depreciation and amortization |
|
|
34,225 |
|
|
|
4,513 |
|
|
|
|
|
|
|
38,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
168,374 |
|
|
|
19,585 |
|
|
|
(2,454 |
) |
|
|
185,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
14,711 |
|
|
|
4,408 |
|
|
|
(5,294 |
) |
|
|
13,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(18,529 |
) |
|
|
(163 |
) |
|
|
|
|
|
|
(18,692 |
) |
Other income |
|
|
10,607 |
|
|
|
|
|
|
|
|
|
|
|
10,607 |
|
Loss on extinguishment of debt |
|
|
(5,881 |
) |
|
|
|
|
|
|
|
|
|
|
(5,881 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net |
|
|
(13,803 |
) |
|
|
(163 |
) |
|
|
|
|
|
|
(13,966 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings/(loss) from continuing operations before income
taxes |
|
|
908 |
|
|
|
4,245 |
|
|
|
(5,294 |
) |
|
|
(141 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
4,823 |
|
|
|
|
|
|
|
|
|
|
|
4,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/earnings from continuing operations |
|
|
(3,915 |
) |
|
|
4,245 |
|
|
|
(5,294 |
) |
|
|
(4,964 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued operations, net of income taxes |
|
|
5,425 |
|
|
|
|
|
|
|
|
|
|
|
5,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings/(loss) |
|
$ |
1,510 |
|
|
$ |
4,245 |
|
|
$ |
(5,294 |
) |
|
$ |
461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-37
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
Condensed Consolidating Statements of Cash Flows
June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zayo |
|
|
|
|
|
|
Zayo Group, |
|
|
Colocation, |
|
|
|
|
|
|
LLC |
|
|
Inc. |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operating activities |
|
$ |
83,860 |
|
|
$ |
13,194 |
|
|
$ |
97,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(110,981 |
) |
|
|
(1,543 |
) |
|
|
(112,524 |
) |
Proceeds from sale of equipment |
|
|
28 |
|
|
|
|
|
|
|
28 |
|
Acquisitions, net of cash acquired |
|
|
(183,666 |
) |
|
|
|
|
|
|
(183,666 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(294,619 |
) |
|
|
(1,543 |
) |
|
|
(296,162 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity contributions |
|
|
36,450 |
|
|
|
|
|
|
|
36,450 |
|
Dividend received/(paid) |
|
|
13,320 |
|
|
|
(13,320 |
) |
|
|
|
|
Proceeds from borrowings |
|
|
103,000 |
|
|
|
|
|
|
|
103,000 |
|
Principal repayments on capital lease obligations |
|
|
(1,732 |
) |
|
|
|
|
|
|
(1,732 |
) |
Changes in restricted cash |
|
|
578 |
|
|
|
|
|
|
|
578 |
|
Deferred financing costs |
|
|
(4,106 |
) |
|
|
|
|
|
|
(4,106 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided/(used) by financing activities |
|
|
147,510 |
|
|
|
(13,320 |
) |
|
|
134,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
|
2,622 |
|
|
|
|
|
|
|
2,622 |
|
Investing activities |
|
|
(382 |
) |
|
|
|
|
|
|
(382 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by discontinued operations |
|
|
2,240 |
|
|
|
|
|
|
|
2,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(61,009 |
) |
|
|
(1,669 |
) |
|
|
(62,678 |
) |
Cash and cash equivalents, beginning of year |
|
|
84,967 |
|
|
|
2,897 |
|
|
|
87,864 |
|
(Increase)/ decrease in cash and cash equivalents of discontinued operations |
|
|
(973 |
) |
|
|
1,181 |
|
|
|
208 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
22,985 |
|
|
$ |
2,409 |
|
|
$ |
25,394 |
|
|
|
|
|
|
|
|
|
|
|
F-38
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zayo |
|
|
|
|
|
|
Zayo Group, |
|
|
Colocation, |
|
|
|
|
|
|
LLC |
|
|
Inc. |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operating activities |
|
$ |
49,310 |
|
|
$ |
8,890 |
|
|
$ |
58,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(58,117 |
) |
|
|
(634 |
) |
|
|
(58,751 |
) |
Acquisitions, net of cash acquired |
|
|
(45,576 |
) |
|
|
(50,995 |
) |
|
|
(96,571 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(103,693 |
) |
|
|
(51,629 |
) |
|
|
(155,322 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity contributions |
|
|
(11,195 |
) |
|
|
50,995 |
|
|
|
39,800 |
|
Dividend received/(paid) |
|
|
5,359 |
|
|
|
(5,359 |
) |
|
|
|
|
Proceeds from borrowings |
|
|
276,948 |
|
|
|
|
|
|
|
276,948 |
|
Principal repayments on debt obligations |
|
|
(166,193 |
) |
|
|
|
|
|
|
(166,193 |
) |
Principal repayments on capital lease obligations |
|
|
(2,192 |
) |
|
|
|
|
|
|
(2,192 |
) |
Change in restricted cash |
|
|
(564 |
) |
|
|
|
|
|
|
(564 |
) |
Deferred financing costs |
|
|
(12,353 |
) |
|
|
|
|
|
|
(12,353 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
89,810 |
|
|
|
45,636 |
|
|
|
135,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
|
13,923 |
|
|
|
|
|
|
|
13,923 |
|
Investing activities |
|
|
(1,809 |
) |
|
|
|
|
|
|
(1,809 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided/(used) by discontinued operations |
|
|
12,114 |
|
|
|
|
|
|
|
12,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
47,541 |
|
|
|
2,897 |
|
|
|
50,438 |
|
Cash and cash equivalents, beginning of year |
|
|
38,019 |
|
|
|
|
|
|
|
38,019 |
|
(Increase)/ decrease in cash and cash equivalents of discontinued operations |
|
|
(593 |
) |
|
|
|
|
|
|
(593 |
) |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
84,967 |
|
|
$ |
2,897 |
|
|
$ |
87,864 |
|
|
|
|
|
|
|
|
|
|
|
F-39
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
(19) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents the unaudited quarterly results for the year-ended June 30,
2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 Quarter Ended |
|
|
|
September 30 |
|
|
December 31 |
|
|
March 31 |
|
|
June 30 |
|
|
Total |
|
Revenue |
|
$ |
62,926 |
(1) |
|
$ |
72,287 |
(2) |
|
$ |
74,182 |
|
|
$ |
77,840 |
|
|
$ |
287,235 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs, excluding depreciation and amortization |
|
|
17,038 |
(1) |
|
|
17,904 |
(2) |
|
|
18,389 |
|
|
|
18,197 |
|
|
|
71,528 |
|
Selling, general and administrative expenses |
|
|
20,284 |
(1) |
|
|
23,938 |
(2) |
|
|
23,201 |
|
|
|
22,423 |
|
|
|
89,846 |
|
Stock-based compensation |
|
|
5,131 |
|
|
|
1,859 |
|
|
|
21,826 |
(3) |
|
|
(4,506 |
) (4) |
|
|
24,310 |
|
Depreciation and amortization |
|
|
11,809 |
|
|
|
15,881 |
|
|
|
16,209 |
|
|
|
16,564 |
|
|
|
60,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
54,262 |
|
|
|
59,582 |
|
|
|
79,625 |
|
|
|
52,678 |
|
|
|
246,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income/(loss) |
|
|
8,664 |
|
|
|
12,705 |
|
|
|
(5,443 |
) |
|
|
25,162 |
|
|
|
41,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(6,257 |
) |
|
|
(9,032 |
) |
|
|
(9,004 |
) |
|
|
(9,121 |
) |
|
|
(33,414 |
) |
Other (expense)/ income, net |
|
|
(161 |
) |
|
|
(16 |
) |
|
|
69 |
|
|
|
(18 |
) |
|
|
(126 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net |
|
|
(6,418 |
) |
|
|
(9,048 |
) |
|
|
(8,935 |
) |
|
|
(9,139 |
) |
|
|
(33,540 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings/(loss) from continuing operations before income taxes |
|
|
2,246 |
|
|
|
3,657 |
|
|
|
(14,378 |
) |
|
|
16,023 |
|
|
|
7,548 |
|
(Provision) for income taxes |
|
|
(2,800 |
) |
|
|
(2,094 |
) |
|
|
(2,583 |
) |
|
|
(5,065 |
) |
|
|
(12,542 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/earnings from continuing operations |
|
$ |
(554 |
) |
|
$ |
1,563 |
|
|
$ |
(16,961 |
) |
|
$ |
10,958 |
|
|
$ |
(4,994 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings/(loss) from discontinued operations, net of income
taxes |
|
|
281 |
|
|
|
317 |
|
|
|
301 |
|
|
|
|
|
|
|
899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings/(loss) |
|
$ |
(273 |
) |
|
$ |
1,880 |
|
|
$ |
(16,660 |
) |
|
$ |
10,958 |
|
|
$ |
(4,095 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Company realized an increase in revenue beginning July 1, 2010 as a result
of the acquisition of AGL. As a result of the acquisition the Company incurred additional
operating and selling, general and administrative expenses attributed to the additional
revenues associated with the acquisition. |
|
(2) |
|
The Company realized an increase in revenue beginning October 1, 2010 as a result of
the merger with AFS. As a result of the merger the Company incurred additional operating and
selling, general and administrative expenses attributed to the additional revenues associated
with the acquisition. |
|
(3) |
|
Stock-based compensation expense increased significantly during the quarter ended
March 31, 2011 as a result of an increase in the estimated value of the common units granted
to the Companys employees and additional units vesting during the quarters. See Note 13
Stock Compensation. |
|
(4) |
|
The Company recorded a reduction to stock-based compensation expense during the
quarter ended June 30, 2011 as a result of the issuance of Class E common units during the
quarter which diluted the value of earlier common unit issuances. See Note 13 Stock
Compensation. |
F-40
ZAYO GROUP, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(in thousands)
The following table presents the unaudited quarterly results for the year-ended June 30,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Quarter Ended |
|
|
|
September 30 |
|
|
December 31 |
|
|
March 31 |
|
|
June 30 |
|
|
Total |
|
Revenue |
|
$ |
39,469 |
|
|
$ |
52,156 |
(1) |
|
$ |
52,687 |
|
|
$ |
55,018 |
|
|
$ |
199,330 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs, excluding depreciation and amortization |
|
|
11,825 |
|
|
|
17,150 |
(1) |
|
|
16,941 |
|
|
|
16,772 |
|
|
|
62,688 |
|
Selling, general and administrative expenses |
|
|
14,873 |
|
|
|
17,039 |
(1) |
|
|
16,794 |
|
|
|
17,205 |
|
|
|
65,911 |
|
Stock-based compensation |
|
|
845 |
|
|
|
588 |
|
|
|
11,799 |
(2) |
|
|
4,936 |
(2) |
|
|
18,168 |
|
Depreciation and amortization |
|
|
8,384 |
|
|
|
10,088 |
|
|
|
9,889 |
|
|
|
10,377 |
|
|
|
38,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
35,927 |
|
|
|
44,865 |
|
|
|
55,423 |
|
|
|
49,290 |
|
|
|
185,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income/(loss) |
|
|
3,542 |
|
|
|
7,291 |
|
|
|
(2,736 |
) |
|
|
5,728 |
|
|
|
13,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(3,570 |
) |
|
|
(3,241 |
) |
|
|
(4,449 |
) |
|
|
(7,432 |
)(3) |
|
|
(18,692 |
) |
Other income |
|
|
5 |
|
|
|
|
|
|
|
1,001 |
|
|
|
9,601 |
(4) |
|
|
10,607 |
|
Loss on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
(5,881 |
)(3) |
|
|
|
|
|
|
(5,881 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense)/income, net |
|
|
(3,565 |
) |
|
|
(3,241 |
) |
|
|
(9,329 |
) |
|
|
2,169 |
|
|
|
(13,966 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/earnings from continuing operations before income taxes |
|
|
(22 |
) |
|
|
4,051 |
|
|
|
(12,065 |
) |
|
|
7,895 |
|
|
|
(141 |
) |
Provision for income taxes |
|
|
651 |
|
|
|
1,127 |
|
|
|
210 |
|
|
|
2,835 |
|
|
|
4,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/earnings from continuing operations |
|
$ |
(673 |
) |
|
$ |
2,924 |
|
|
$ |
(12,275 |
) |
|
$ |
5,060 |
|
|
$ |
(4,964 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued operations, net of income taxes |
|
|
2,271 |
|
|
|
1,130 |
|
|
|
1,490 |
|
|
|
534 |
|
|
|
5,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings/(loss) |
|
$ |
1,598 |
|
|
$ |
4,054 |
|
|
$ |
(10,785 |
) |
|
$ |
5,594 |
|
|
$ |
461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Company realized an increase in revenue beginning September 9, 2009 as a
result of the acquisition of Fibernet. As a result of the acquisition the Company incurred
additional operating and selling, general and administrative expenses attributed to the
additional revenues associated with the acquisition. |
|
(2) |
|
Stock-based compensation expense increased significantly during the quarters ended
March 31, 2010 and June 30, 2010 as a result of an increase in the value of the common units
granted to the Companys employees and additional units vesting during these quarters. See
Note 13 Stock Compensation. |
|
(3) |
|
Interest expense increased during the quarter ended June 30, 2010 primarily as a
result of the notes offering which closed on March 12, 2010. Interest expense increased as a
result of the higher interest rates on the notes as compared to the senior debt which was
repaid on March 12, 2010 and as a result of the larger debt balance during the quarter. As a
result of paying off the senior notes with the proceeds from the notes offering, the Company
wrote off $5,881 in unamortized debt issuance costs during the quarter ended March 31, 2010.
See Note 9 Long Term Debt. |
|
(4) |
|
During the year ended June 30, 2010 the Company recognized a gain on bargain
purchase of $9,081 associated with the Fibernet acquisition. See Note 3 Acquisitions. |
F-41
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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, this 9th day of September, 2011.
|
|
|
|
|
|
ZAYO GROUP, LLC
|
|
|
By: |
/s/ Ken desGarennes
|
|
|
|
Ken desGarennes |
|
|
|
Chief Financial Officer |
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ Dan Caruso
Dan Caruso
|
|
Chief Executive Officer, Director
|
|
September 9, 2011 |
|
|
|
|
|
/s/ Gillis Cashman
Gillis Cashman
|
|
Director
|
|
September 9, 2011 |
|
|
|
|
|
/s/ Michael Choe
Michael Choe
|
|
Director
|
|
September 9, 2011 |
|
|
|
|
|
/s/ Rick Connor
Rick Connor
|
|
Director
|
|
September 9, 2011 |
|
|
|
|
|
/s/ John Downer
John Downer
|
|
Director
|
|
September 9, 2011 |
|
|
|
|
|
/s/ John Siegel
John Siegel
|
|
Director
|
|
September 9, 2011 |