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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
☐☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
For the fiscal year ended June 30, 2017
OR
OF 1934
Commission File Number: 001-36690
Zayo Group Holdings, Inc.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
26-1398293
(I.R.S. Employer
Identification No.)
1805 29th Street, Suite 2050,
Boulder, CO 80301
(Address of Principal Executive Offices)
(303) 381-4683
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, par value $0.001 per share
Name of Exchange on Which Registered
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes ☐ No ☒
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes ☒ No ☐
Indicate by check mark 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 registrant’s 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. ☐
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,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company
☒
☐ (Do not check if a smaller reporting company)
☐
Accelerated filer
Smaller reporting company
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of December 31, 2016, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $6.0 billion based on
the closing price as reported on the New York Stock Exchange.
As of August 17, 2017, the number of outstanding shares of common stock of Zayo Group Holdings, Inc. was 24 6,484,108 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement for the 2017 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.
Table of Contents
INDEX
GLOSSARY OF TERMS
PART I.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II.
Item 5.
BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURE
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Item 6.
Item 7.
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Item 7A.
Item 8.
Item 9.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
Item 9A.
Item 9B
FINANCIAL DISCLOSURE
CONTROLS AND PROCEDURES
OTHER INFORMATION
PART III.
Item 10.
Item 11.
Item 12.
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Item 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV.
Item 15
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
SIGNATURES
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34
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GLOSSARY OF TERMS
Our industry uses many terms and acronyms that may not be familiar to you. To assist you in reading this Annual Report on
Form 10-K, we have provided definitions of some of these terms below.
Bandwidth infrastructure —Dark fiber, mobile infrastructure and lit bandwidth services provided over fiber networks, and
datacenter‑based colocation and interconnection services. Fiber‑based bandwidth infrastructure services that are lit (i.e., provided by
using optronics that “light” the fiber) include wavelengths, Ethernet, IP and SONET; fiber‑based services that are not lit are sold as
dark fiber capacity. Datacenter‑based bandwidth infrastructure services include colocation (space and power) as well as
interconnection within facilities.
Capacity —The information‑carrying ability of a telecommunications service. Below is a list of some common units of
capacity for various lit bandwidth services:
1G, 2.5G, 10G, 40G and 100G— Data communication circuits capable of transmitting over Wavelengths at 1G,
2.5G, 10G, 40G, and 100G, respectively.
10Mb and 100Mb— Data communication circuits capable of transmitting over Ethernet at 10 Mb and 100 Mb,
respectively.
Carrier —A provider of communications services that commonly include voice, data, and Internet services.
Carrier hotel —A building containing many carriers, 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.
Cellular tower —An outdoor structure primarily used to attach and house antennae used by wireless carriers to aggregate and
transmit mobile voice and data.
CLEC —Competitive local exchange carrier; provides local telecommunications services in competition with the ILEC.
Colocation —The housing of transport equipment, other communications equipment, servers and storage devices within the
same location. Operators of these colocation facilities typically also 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.
Conduit —A pipe usually made of metal, ceramic, or plastic that protects buried fiber optic cables.
Cybersecurity — Preventative techniques used to protect the integrity of networks, programs and data from attack, damage,
or unauthorized access.
Dark fiber —Fiber that has not yet been connected to telecommunications transmission equipment or optronics and,
therefore, has not yet been activated or “lit” by the fiber cable owner.
Datacenter —A facility used to house computer systems, backup storage devices, routers, services and other Internet and
other telecommunications equipment. Datacenters generally have environmental controls (air conditioning, fire suppression, etc.),
redundant/backup power supplies, redundant data communications connections and high security.
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 up to 40 wavelength channels.
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 —Fiber, or fiber optic cables, are thin filaments of glass through which light beams are transmitted over long distances.
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Fiber miles —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 144 count fiber installed, it would represent a 10x144 or 1,440 fiber miles.
Fiber‑to‑the‑Tower or FTT —The connection of cellular towers to the wider terrestrial network via fiber connections.
G —Gigabits per second, a measure of telecommunications transmission speed. One gigabit equals one billion bits of
information.
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.
IRU and IRU contract —Indefeasible right of use. The exclusive, unrestricted, and indefeasible right to use one, a pair, or
more strands of fiber of a fiber cable. IRU contracts are typically long‑term in nature (20 years) and may or may not contain
restrictions on the use of the fiber by the lessee.
ISP —Internet service provider; provides access to the Internet for consumers and businesses.
Mb —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 datacenter 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 datacenter, 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.
Object-Based Storage — A cost effective data storage service which manages data as objects and has the ability to store large
volumes of unstructured data.
OC —Optical carrier level; a measure of the transmission rate of optical telecommunications traffic. For example, OC‑3
corresponds to 155 Mb. See the definition of “Capacity,” above.
On‑net —Describes a location or service that is directly and fully supported by fiber.
Optronics —Various types of equipment that are commonly used to light fiber. Optronics include systems that are capable of
providing wavelength, Ethernet, IP, SONET, and other service over fiber optic cable.
POP —Point‑of‑presence; a location in a building separate from colocation facilities and datacenters that houses equipment
used to provide telecom or Bandwidth Infrastructure services.
Private cloud — A type of cloud computing that involves a distinct and secure cloud-based computing environment
dedicated to a single organization.
Private line —Dedicated private bandwidth circuit that generally utilizes SONET, Ethernet and Wavelength technology used
to connect various locations.
Route miles —The length, measured in non‑overlapping miles, of a fiber network. That is the actual number of miles that a
network cable traverses. Route miles are distinct from fiber miles (see fiber miles definition).
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Small cell —A location other than a cellular tower or building that is used to attach an antennae used by a wireless carriers to
aggregate and transmit mobile voice and data. Typically, the location is a light pole, traffic light, or other small separate purpose
structure.
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.
Switch —An electronic device that selects the path that voice, data and Internet traffic take or use on a network.
Transport —A dedicated telecommunication service to move data, Internet, voice, video or wireless traffic from one location
to another.
Wavelength —A channel of light that carries telecommunications traffic through the process of wavelength‑division
multiplexing.
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ITEM 1. BUSINESS
Overview
PART I
Zayo Group Holdings, Inc. (the “Company”, “we” or “us”) is a large and fast growing provider of bandwidth infrastructure
in the United States, Canada and Europe. Our products and services enable mission-critical, high-bandwidth applications, such as
cloud-based computing, video, mobile, social media, machine-to-machine connectivity, and other bandwidth-intensive
applications. Key products include leased dark fiber, fiber to cellular towers and small cell sites, dedicated wavelength
connections, Ethernet, IP connectivity, cloud services and other high-bandwidth offerings. We provide our services over a unique
set of dense metro, regional, and long-haul fiber networks and through our interconnect-oriented data center facilities. Our fiber
networks and data center facilities are critical components of the overall physical network architecture of the Internet and private
networks. Our customer base includes some of the largest and most sophisticated consumers of bandwidth infrastructure services,
such as wireless service providers; telecommunications service providers; financial services companies; social networking, media,
and web content companies; education, research, and healthcare institutions; and governmental agencies. We typically provide
our bandwidth infrastructure services for a fixed monthly recurring fee under contracts that vary between one and twenty years in
length. We operate our business with a unique focus on capital allocation and financial performance with the ultimate goal of
maximizing equity value for our stockholders. Our core values center on partnership, alignment, and transparency with our three
primary constituent groups - employees, customers, and stockholders.
We were founded in 2007 with the investment thesis of building a bandwidth infrastructure platform to take advantage of
the favorable Internet, data, and wireless growth trends driving the on-going demand for bandwidth infrastructure, and to be an
active participant in the consolidation of the industry. The growth of cloud-based computing, video, mobile and social media
applications, machine-to-machine connectivity, and other bandwidth-intensive applications continues to drive rapidly increasing
consumption of bandwidth on a global basis. As an early believer in the enduring nature of these trends, we assembled our asset
base and built a business model specifically to provide high-bandwidth connectivity to customers whose businesses depend most
on the continuous and growing demand for bandwidth. As a core tenet of our strategy for capitalizing on these industry trends, we
have been a leading industry consolidator and have acquired 41 bandwidth infrastructure businesses and assets to date. Our
owned, secure, and redundant fiber network and data centers serve as the foundation for our bandwidth solutions and allow us to
offer customers dark fiber solutions, network connectivity and colocation and cloud infrastructure services. We believe the
continuously growing demand for stable and secure bandwidth from service providers, enterprises and consumers, combined with
our unique and dense metro, regional, and long-haul networks, position us as a mission-critical infrastructure supplier to the
largest users of bandwidth.
Our network footprint includes both large and small metro geographies, the extended suburban regions of many cities, and
the large rural, national and international links that connect our metro networks. We believe that our network assets would be
difficult to replicate given the geographic reach, network density, and capital investment required. As of June 30, 2017, our fiber
networks span over 123,841 route miles and 10,438,246 fiber miles (representing an average of 84 fibers per route), serve 391
geographic markets in the United States, Canada and Europe, and connect to approximately 31,000 buildings, including
approximately 7,500 cellular towers and 1,141 data centers. We own fiber networks in large metro areas, such as New York,
Chicago, San Francisco, Paris, and London, as well as smaller metro areas, such as Allentown, Pennsylvania, Fargo, North
Dakota, and Spokane, Washington. Our networks allow us to provide our high-bandwidth infrastructure services to our customers
over redundant fiber facilities between key customer locations. We believe our ownership and the location and density of our
expansive network footprint allow us to more competitively service our target customers’ bandwidth infrastructure needs at the
local, regional, national, and international level relative to other regional bandwidth infrastructure service providers or long-haul
carriers. We also provide our network-neutral colocation and interconnection services utilizing our own data centers located
within major carrier hotels and other strategic buildings in 49 locations throughout the United States, Canada and Europe and
operate approximately 870,000 square feet of billable colocation space.
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The density and geographic reach of our network footprint allow us to provide tailored bandwidth infrastructure solutions
on our own network (“on-net”) that address the current and future bandwidth needs of our customers. Our dense metro and
regional networks have high fiber counts that enable us to provide our dark fiber solutions, network connectivity and colocation
and cloud infrastructure services. Our networks are deep and scalable, meaning we have spare fiber, conduit access rights and/or
rights of way rights that allow us to continue to add capacity to our network as our existing and new customers’ demand for our
services increases. In addition, many of our core network technologies provide capacity through which we can continue to add
wavelengths to our network without consuming additional fiber. We also believe the density and diversity of our networks
provide a strong and growing competitive barrier to protect our existing revenue base. We believe our networks provide
significant opportunity to organically connect to new customer locations, data centers, towers, or small cell locations to help us
achieve an attractive return on our capital deployed. Since our founding, we have assembled a large portfolio of fiber networks
and colocation assets through both acquisitions and customer demand-driven investments in property and equipment. From our
inception to date, we have completed acquisitions with an aggregate purchase consideration, net of cash acquired, totaling
approximately $6.5 billion. For the period from July 1, 2014 through June 30, 2017, we also invested approximately $2.1 billion
in capital expenditures, exclusive of acquisitions and stimulus grant reimbursements, primarily to expand the reach and capacity
of our networks. As of June 30, 2017, our total debt (including capital lease obligations and before any unamortized discounts,
premiums and debt issuance costs) was $5,710.3 million and was primarily incurred in connection with acquisitions.
Our business model focuses on providing on-net bandwidth infrastructure solutions to our customers, which results in what
we refer to as “infrastructure economics.” Infrastructure economics are characterized by attractive revenue visibility and strong
margins coupled with operating leverage for new revenue, success-based capital investments with low maintenance capital needs,
and the ability to generate significant cash flow over time. For the year ended June 30, 2017, approximately 89% of our revenue
was recurring in nature. Our capital expenditure investments are primarily success-based, meaning that before we commit
resources to expand our network, we have a signed customer contract that will provide us with an attractive return on the required
capital investment. After committing capital to connect additional customer sites, our goal is to sell additional high-bandwidth
connectivity on these new routes at a relatively low incremental cost, which further enhances the return we extract from our asset
base. Finally, the combination of our scale and infrastructure economics results in the ability to generate meaningful free cash
flow over time.
Our management is intensely focused on creating equity value for our stockholders. Our equity value creation philosophy
includes regular and rigorous financial and operational measurement, financial transparency (both internally and externally), and
clear alignment of interests among employees, management, and stockholders. Our real-time measurement and reporting system
serves as the foundation for our decision making and our extensive financial and operational disclosure. We also believe in
fostering an entrepreneurial culture that aligns the interests of our employees, management, and stockholders.
We are a Delaware corporation formed in 2007. As of June 30, 2017, we had 3,794 employees.
Our fiscal year ends June 30 each year and we refer to the fiscal year ended June 30, 2017 as “Fiscal 2017”, the fiscal year
ended June 30, 2016 as “Fiscal 2016”, and the fiscal year ended June 30, 2015 as “Fiscal 2015”.
Bandwidth Infrastructure Industry
We are a bandwidth infrastructure provider, and our services are a critical component of the broader global communications
industry. Bandwidth infrastructure, consisting primarily of fiber networks and interconnect-oriented colocation facilities, plays a
fundamental role in the communications value chain, similar to other types of infrastructure such as data centers and cellular
towers. Bandwidth infrastructure assets are a critical resource, connecting data centers, cellular towers, and other carrier and
private networks to support the substantial growth in global data, voice and video consumption by both business and individual
consumers.
Industry History
Our industry has changed substantially over the years. The first phase of the bandwidth infrastructure industry occurred
with the advent of the Internet and the ensuing dot com era in the late 1990s. This led to the first major wave of fiber network
deployments as a number of companies of varying backgrounds invested billions of dollars in fiber network construction
throughout the U.S., Canada and Europe. These fiber network developers included companies with
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national and international plans (e.g., Level 3 Communications, Qwest Communications, Williams Communications) and more
regional plans (e.g., 360networks, Progress Telecom, OnFiber). Following these network builds, many of the fiber companies
struggled in the early 2000s due to the lack of sufficient demand for their high-bandwidth services. Bandwidth demand during this
timeframe was limited by the fact that many bandwidth-intensive applications (e.g. streaming video, cloud, mobile broadband, big
data analytics, etc.) were either not yet contemplated or still very early in their life cycle. Instead, the majority of traffic at the
time was low-bandwidth services such as voice and dial-up modem connections. In addition, the similarity of the fiber routes
deployed resulted in significant overcapacity and associated pricing pressure, leaving a “last mile” gap and heavy competition and
overcapacity along these routes. These two primary factors combined to significantly limit the fiber network providers’ operating
cash flows, resulting in the majority of these companies transitioning their business models, consolidating and/or seeking
bankruptcy protection.
In the following years, a substantial expansion in computing power and bandwidth-intensive applications drove meaningful
bandwidth traffic growth. This growth highlighted the need to address the “last mile” gap by bringing bandwidth capacity directly
to both the consumer and business end user. The capacity and performance of the consumer last mile connection was primarily
addressed by the expansion of cable networks and through mobile network development by wireless carriers (supported by
cellular tower operators). The growing bandwidth demand of business end users was addressed by a number of focused fiber
developers constructing new networks to directly connect to data centers, cellular towers, government facilities, schools, hospitals
and other locations with high-bandwidth needs. These fiber network companies were generally local or regional in nature, and
were most often either survivors of the initial fiber development wave, subsidiaries of a utility parent, or owned by entrepreneurs.
This period is also noted for increased financial discipline following the large speculative capital deployments of the dot com era.
This is the timeframe and industry environment in which our Company was founded.
The Industry Today
The acceleration in the development of bandwidth-intensive devices and applications has resulted in a significant need to
further fill in the “last mile” gap, leading to substantial capital investments in fiber networks by bandwidth infrastructure
providers. Bandwidth infrastructure service providers support applications such as high definition television broadcasting and
video; online streaming video; cloud applications replacing in-house enterprise software platforms; and explosive mobile data
consumption (Cisco found that, in 2016, global mobile data traffic was equivalent to 18x the volume of global mobile traffic five
years earlier in 2011). Companies whose services require large amounts of bandwidth and enterprises that consume large amounts
of bandwidth are struggling to adapt to this rapidly evolving landscape, and the bandwidth infrastructure industry is growing in
economic importance as it addresses this critical need. In addition to these demand trends, there has been significant consolidation
amongst the bandwidth infrastructure services providers, validating a core tenet of the Company’s founding investment thesis.
Since inception we have made 41 acquisitions in the US, Europe and Canada with an aggregate purchase consideration, net of
cash acquired, totaling approximately $6.5 billion.
Industry Participants
We view the participants in today’s communications industry in two distinct categories:
·
Providers of Infrastructure . Companies that own and operate infrastructure assets that are used to market and
deliver infrastructure services. We believe these assets would be difficult to replicate given the significant
capital, time, permitting, and expertise required. Providers of infrastructure typically enjoy long-term customer
contracts, a highly visible and recurring revenue base, and attractive margins. We further categorize these
providers of infrastructure as follows:
o
Bandwidth Infrastructure Providers: Owners of bandwidth infrastructure assets comprised of fiber
networks and interconnect-oriented colocation facilities. Bandwidth infrastructure services include dark
fiber, lit services (wavelengths, Ethernet, IP, and SONET), and colocation and interconnection services
for the purpose of transporting mission-critical traffic including data, voice, and video.
o Data Center Providers: Owners of data center facilities that include raised floor, power and cooling
infrastructure. These facilities house and support networking and computing equipment for carrier
networks, enterprise cloud platforms, content distribution networks, and other mission-critical
applications.
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o Cellular Tower Providers: Owners of cellular towers, the physical infrastructure upon which
antennas and associated equipment are co-located for the wireless carrier industry.
· Users of Infrastructure. Users of infrastructure may purchase infrastructure services either to provide value-
added services to their customers or for their own private network requirements. We further categorize these
users of infrastructure as follows:
o Communications Service Providers . Communication service providers, such as wireless service
providers, ILECs, CLECs, and ISPs, are companies that use infrastructure to package, market, and sell
value-added communications services such as voice, Internet, data, video, wireless, and hosting
solutions.
o
End Users. End users are public sector entities and private enterprises that purchase infrastructure
services for their own internal networks. Note that end users may also address their needs by
purchasing value-added services from communications service providers.
The Market Opportunity
The proliferation of smart devices and mobile broadband, real-time streaming video, social networks, online gaming,
machine-to-machine connectivity, big data analytics, and cloud computing will continue to drive substantial consumer and
business demand for bandwidth. Cisco estimates that mobile data traffic will grow at a compound annual growth rate of 47%
from 2016 to 2021 and that IP traffic will grow at a compound annual growth rate of 24% from 2016 to 2021.
Communications service providers develop and deliver value-added solutions that are tailored to mass market residential
and enterprise customers whose needs continue to grow and evolve as bandwidth trends expand. Given this rapid growth and the
complexity and cost of building and maintaining networks, communications service providers are increasingly looking to
bandwidth infrastructure providers to augment the reach and performance of their own networks and support the delivery of the
services their customers demand. As this dynamic continues, bandwidth infrastructure providers will become further entrenched
as mission-critical partners to the communications service providers.
Similarly, end users such as private enterprises (e.g., media/content providers, financial institutions, and hospital systems)
and public sector entities (e.g., governmental agencies and school districts) have experienced significant growth and change in the
role that bandwidth plays within their organizations. As these needs continue to grow in both volume and criticality, end users
will increasingly choose to directly procure bandwidth infrastructure services in order to gain more security, control and scale in
their internal network operations. An example of this disintermediation is the trend of large school districts, adapting to e-
education requirements, directly purchasing dark fiber as a replacement to more value-added solutions. We believe that, as these
dynamics play out across all industries, the number of end users directly seeking bandwidth infrastructure services will continue
to expand.
By focusing on the reach, density, and performance of their physical networks, bandwidth infrastructure providers can
deliver customized services to communications service providers and end users more quickly and with superior economics than
these users could otherwise self-provide. Whether providing fiber connectivity to a wireless provider’s towers to enable mobile
broadband, supplying a national communications service provider with a metro fiber footprint in new markets, providing a lit
bandwidth connection to multiple enterprise data centers for an industrial company, providing interconnection capabilities to a
hosting company within a data center, or solving for the next society-impacting innovation, bandwidth infrastructure providers
will continue to invest in and expand their infrastructure assets to meet this growing demand.
Given the natural economies of scale, there has been significant consolidation among bandwidth infrastructure providers,
particularly in the U.S. We believe this consolidation trend will continue in the U.S. and is beginning in Europe and Canada.
Combined with the barriers to new entrants, we foresee a decreasing number of bandwidth infrastructure providers against a
backdrop of continued strong demand for their services.
Our Bandwidth Infrastructure Assets
Our bandwidth infrastructure assets consist of our fiber networks, the optronic equipment used to provide our lit services
over our fiber networks, and our data centers where we provide colocation and interconnection services.
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Our Fiber Networks
Our network footprint includes both large and small metro geographies, the extended suburban regions of many cities, and
the large rural, national and international fiber links that connect our metro networks. We believe that our network assets would
be difficult to replicate given the geographic reach, network density, and capital investment required. Our fiber networks span
over 123,841 route miles and 10,438,246 fiber miles (representing an average of 84 fibers per route), serve approximately 391
geographic markets in the United States, Canada and Europe, and connect approximately 31,000 buildings, including
approximately 7,500 cellular towers and 1,141 data centers. Our networks allow us to provide our high-bandwidth infrastructure
services to our customers over redundant fiber facilities between critical customer locations. We believe the location and density
of our expansive network footprint allow us to more competitively service our target customers’ bandwidth infrastructure needs at
the local, regional, national, and international level relative to other regional bandwidth infrastructure service providers or long-
haul carriers. Our fiber networks also have the following key attributes:
·
·
Extensive Coverage. Our fiber networks are located across large and small metro geographies, the extended metro
and suburban regions of many cities, and traverse large rural areas to connect metro markets. This network coverage
allows us to address our target customers’ needs in a variety of geographies and for a variety of applications, all
while remaining “on-net” and maintaining infrastructure economics.
Scalable Network Architecture. Our networks are scalable, meaning we often have spare fiber, conduit access
rights and/or rights of way that allow us to continue to add capacity to our network as our customers’ demand for
our services increases. In addition, the majority of our core fiber network segments utilize DWDM systems, nearly
all of which have spare capacity through which we can continue to add wavelengths to our network without
consuming additional fiber.
· Modern Fiber and Optronics. Our modern fiber networks support current generation optronic equipment
including DWDM systems, carrier class Ethernet switches and IP routers. This equipment is used to provide our lit
services. The vast majority of our networks are capable of supporting next generation technologies with minimal
capital investment.
Metro Fiber Networks . We use our metro fiber networks to provide bandwidth infrastructure services within the metro
markets that we serve. Our metro networks are most commonly used in the following two scenarios. First, to provide service
between on-net buildings that are located in the same geographic market. Second, to connect our on-net buildings within a metro
market to another metro market via our regional and/or long-haul networks. We continue to expand our metro fiber networks
within the metro geography and into the surrounding suburban areas as we extend to additional buildings to meet new demand on
a success basis. Success-based expansion means that before we commit resources to expand our network, we have a signed
customer contract that will provide us with an attractive return on required capital. In many of our metro markets, we have high
count fiber cables (sometimes as many as 864 fibers per cable) and in some cases multiple spare conduits on our metro fiber
routes. On individual segments where our fiber capacity becomes highly utilized, we seek to augment that capacity also on a
success basis.
Regional and Long-haul Fiber Networks . We use our regional fiber networks to provide bandwidth infrastructure
services between the metro markets that we serve. Our regional and long-haul networks are most commonly used in the following
three scenarios. First, to provide service between on-net buildings that are located in different large markets (for example,
Chicago and New York). Second, to connect our on-net buildings in small and mid-sized markets back to major data centers,
wireless switching centers, and carrier hotels in larger markets (for example, between Lima, Ohio and Cleveland, Ohio). Third,
occasionally our networks provide service between on-net buildings in two different small or mid-sized 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 segments and markets to our regional and long-haul networks on a success basis, supported by a customer
contract. We have deployed current generation DWDM technologies across the majority of our regional and long-haul networks,
allowing a current maximum scaling to four terabytes (i.e. 4,000G) of bandwidth and the ability to add capacity as demand for
bandwidth increases. We expect that as technology continues to advance, we will augment and invest in our regional and long-
haul networks accordingly.
Fiber-to-the-Tower Networks . We operate fiber-to-the-tower networks across our fiber network footprint and connect to
approximately 7,500 cellular towers. These FTT networks provide our customers with bandwidth infrastructure services that offer
significantly improved speed, scale, performance and service levels relative to legacy
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copper and microwave networks. Our FTT networks are scalable, which means that we can quickly and easily increase the
amount of bandwidth that we provide to each of the towers as our customers’ wireless data networks grow. Our FTT markets are
generally in areas where we already have dense fiber networks (either metro or regional), which affords us the ability to offer
ring-protected mobile infrastructure services. We are increasingly providing dark fiber services on our FTT networks.
Through these fiber networks, we provide service to approximately 31,000 on-net buildings and are continually making
success-based capital investments to increase our on-net building footprint. On-net buildings are buildings that are directly
connected via fiber to our long-haul, regional, metro, and FTT 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 primarily consist of the following:
· Data Centers, Carrier Hotels and Central Offices. These buildings house multiple consumers of bandwidth
infrastructure services, serving as telecommunications and content exchange points. Our fiber networks generally
connect the most important of these buildings in the markets where we operate. We have over 1,900 of these types
of facilities connected to our network.
·
Single-Tenant, High-Bandwidth Locations. Generally these are other telecom, media or Internet content buildings
that house a single large consumer of bandwidth infrastructure services. Examples of these buildings include video
aggregation sites, mobile switching centers and carrier POPs. Our network is connected to these buildings only
when the tenant is a customer. We currently have over 3,300 single-tenant, high-bandwidth locations on-net.
· Cellular Towers. We connect to cellular towers and other locations that house wireless antennas. We have
approximately 7,500 cellular towers on-net. Typically, towers have multiple tenants, which provides us with the
opportunity to sell services to those additional tenants.
·
Enterprise Buildings. Our network extends to over 19,600 enterprise buildings. This grouping contains a mix of
single-tenant and multi-tenant enterprise buildings and includes hospitals, corporate data centers, schools,
government buildings, research centers and other key corporate locations that require bandwidth infrastructure
services.
Our Data Centers
Many of our data center facilities are located in some of the most important carrier hotels in North America, including 60 Hudson
Street and 111 8th Avenue in New York; 165 Halsey Street in Newark; 401 N. Broad Street in Philadelphia; 1 Summer Street in
Boston; 1950 N. Stemmons Freeway and 2323 Bryan Street in Dallas; 2001 6th Street in Seattle; and 151 Front Street in Toronto.
We have the exclusive right to operate and provide colocation and interconnection services in the Meet-Me Room at 60 Hudson
Street. We also have colocation facilities located in Atlanta, Ashburn, Austin, Amsterdam, Chicago, Cleveland, Denver, Las
Vegas, Los Angeles, Memphis, Miami, Minneapolis, Montreal, Nashville, Paris, Phoenix, San Diego, Santa Clara, Toronto and
four additional locations in Europe. All of our facilities are network-neutral, have ample power to meet customer needs, backup
power in the form of batteries and generators, air conditioning, modern fire suppression equipment, 24/7 security and equipment
monitoring, and redundant cooling capabilities. We have long-term leases with the owners of each of the buildings where we
provide colocation services. Our colocation facilities total approximately 870,000 square feet of billable colocation space.
Underlying Rights
We have the necessary right-of-way agreements and other required rights, including state and federal government
authorization, to allow us to maintain and expand our fiber networks that 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 rights-of-way under long-term contracts.
Our Segments and Services
We provide high-bandwidth infrastructure services over our extensive metro, regional, and long-haul fiber networks and
through our interconnect-oriented datacenter facilities. We provide our products and services through our six operating segments:
Fiber Solutions, Transport, Enterprise Networks, Zayo Colocation (zColo), Allstream and Other.
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Across our segments, we operate individual Strategic Product Groups (“SPGs”) . Each SPG has financial accountability and
decision-making authority, which promotes agility in the fast-moving markets we serve. Financial information for each of our
operating segments and our domestic and foreign operations is contained in Note 15 – Segment Reporting to our consolidated
financial statements.
Fiber Solutions . Through the Fiber Solutions segment, we provide raw bandwidth infrastructure to customers that require
more control of their internal networks. These services include dark fiber, dedicated lit networks and mobile infrastructure (fiber-
to-the-tower and small cell). Dark fiber is a physically separate and secure, private platform for dedicated bandwidth. The
Company leases dark fiber pairs (usually 2 to 12 total fibers) to our customers, who “light” the fiber using their own optronics.
Our mobile infrastructure services provide direct fiber connections to cell towers, small cells, hub sites, and mobile switching
centers. Fiber Solutions customers include carriers and other communication service providers, Internet service providers,
wireless service providers, major media and content companies, large enterprises, and other companies that have the expertise to
run their own fiber optic networks or require interconnected technical space. The contract terms in the Fiber Solutions segment
tend to range from three to twenty years.
Transport. The Transport segment provides lit bandwidth infrastructure solutions over our metro, regional, and long-haul
fiber networks. The segment uses optronics to light the fiber, and our customers pay for service based on the amount and type of
bandwidth they purchase. Our services within this segment include wavelengths, wholesale IP services and SONET. We target
customers who require a minimum of 10G of bandwidth across their networks. Transport customers include carriers, content
providers, financial services companies, healthcare, government entities, education institutions and other medium and large
enterprises. The contract terms in this segment tend to range from two to five years. SPGs within the Transport segment include:
·
·
·
Zayo Wavelength Services (“Waves”). Through our Waves SPG, we provide lit bandwidth infrastructure services to
customers by using optical wavelength technology. The service is provided by using DWDM optronic equipment to
“multiplex” multiple channels (i.e., wavelengths) of dedicated capacity on a single fiber pair. The wavelength group
provides its services in speeds of 1G, 2.5G, 10G, 40G, and 100G. Customers include carriers, financial services
companies, healthcare, government institutions, education institutions and other enterprises. Services are typically
provided for terms between one and five years for a fixed recurring monthly fee and in some cases an additional
upfront, non-recurring fee.
Internet Protocol (“IP”) Transit. The IP Transit SPG provides lit bandwidth infrastructure services to its customers
utilizing Internet Protocol technology. IP technology transports data across multiple circuits over a shared
infrastructure from the customer source to the customer required destination. Information leaving the source is
divided into multiple packets and each packet traverses the network utilizing the most efficient path and means
available, as determined by a network of IP routers. Packets of information may travel across different physical
circuits or paths in order to reach the destination, at which point the packets are reassembled to form the complete
communication. Services are generally used to exchange or access traffic on the public Internet. Services are
provided in speeds ranging from 10Mb to 100G on a single customer port interface. Customers include regional
telecommunications and cable carriers, ISPs, enterprises, educational institutions and content companies. Services
are typically provided for terms between one and three years for a fixed recurring monthly fee and in some cases a
usage-based and/or an additional upfront, non-recurring fee. Pricing is generally a function of bandwidth capacity
and transport required to carry traffic from the customer location to a public Internet exchange.
Zayo SONET Services. Our SONET Services SPG provides lit bandwidth infrastructure services to its customers
utilizing SONET technology. SONET is a standardized protocol that transfers multiple digital bit streams over
optical fiber using lasers. SONET technology is often used to support private line services. This protocol enables
transmission of voice, data and video at high speeds. SONET networks are protected, which provides for virtually
instantaneous restoration of service in the event of a fiber cut or equipment failure. Services are provided in speeds
ranging from DS-1 (1.54Mb) to OC-192 (10G) of capacity. Customers in this group are largely carriers. Services are
typically provided for terms between one and five years for a fixed recurring monthly fee and in some cases an
additional upfront, non-recurring fee. SONET is generally a legacy product that is gradually being replaced by
Ethernet, wavelength and dark fiber services. As a result, the SONET SPG generally manages its business to
maximize cash generation and deploys minimal growth capital.
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Enterprise Networks . The Enterprise Networks segment provides communication solutions to medium and large enterprises. Our
services within this segment include Ethernet, enterprise private and connectivity services, managed services and cloud based
compute and storage products. Solutions range from point-to-point data connections to multi-site managed networks to
international outsourced IT infrastructure environments. SPGs within the Enterprise Networks segment include:
·
·
Zayo Ethernet Services . Our Ethernet Services SPG provides lit bandwidth infrastructure services to its
customers utilizing Ethernet technology. Ethernet services are offered in metro markets as well as between metro
areas (intercity) in point-to-point and multi-point configurations. Unlike data transmission over a dedicated
wavelength network, information transmitted over Ethernet is transferred in a packet or frame across the network.
The frame enables the data to navigate across a shared infrastructure in order to reach the customer required
destination. Services are provided in speeds ranging from 10Mb to 10G. Customers include carriers, financial
services companies, healthcare, government institutions, education institutions and other enterprises. Services are
typically provided for terms between one and five years for a fixed recurring monthly fee and in some cases an
additional upfront, non-recurring fee.
Enterprise Private and Connectivity (“EPIC”) . Our EPIC SPG provides lit bandwidth infrastructure services to its
customers utilizing Internet Protocol and managed Wide Area Network (“WAN”) technology. Services are
generally used to exchange or access traffic on the public Internet and include Dedicated Internet Access (“DIA”),
IP Virtual Private Networks (“VPN”) and Distributed Denial of Service (“DDos”) mitigation services. Services are
typically provided for terms between one and ten years for a fixed recurring monthly fee and in some cases an
additional upfront, non-recurring fee. Pricing is generally a function of bandwidth capacity and transport required to
carry traffic from customer location to an Internet gateway.
· Managed Security Services (“MSS”). Our MSS SPG provides technical resources to prevent, detect and respond to
malicious threats, specializing in content and web filtering, authentication and identity management, cloud security
and encryption.
·
Zayo Cloud Services (“Cloud”). The Zayo Cloud Services SPG combines private cloud, public cloud and managed
services in order to provide its customers infrastructure as a service (IaaS) which enables on-demand scaling and
virtual computing in hybrid environments.
Zayo Colocation (“zColo") . The Colocation segment provides data center infrastructure solutions to a broad range of
enterprise, carrier, cloud, and content customers. Our services within this segment include the provision of colocation space,
power and interconnection services in North America and Western Europe. Solutions range in size from single cabinet solutions
to 1MW+ data center infrastructure environments. Our data centers also support a large component of our networking equipment
for the purpose of aggregating and distributing data, voice, Internet, and video traffic. The contract terms in this segment tend to
range from two to five years.
Allstream . The Allstream segment provides Voice, SIP Trunking, Unified Communications and scalable data services using a
variety of technologies for businesses. Allstream also provides services to approximately 70,000 customers in the small and
medium business market while leveraging its extensive network and product offerings. These include IP, internet, voice, IP
Trunking, cloud private branch exchange, collaboration services and Unified Communications. SPG’s within the Allstream
segment include:
·
·
Voice. The Voice SPG provides a full range of local voice services allowing business customers to complete
telephone calls in their local exchange, as well as make long distance, toll-free and related calls. Unified
Communications is the integration of real-time communication services such as telephony (including Cloud-based
IP telephony), instant messaging and video conferencing with non-real-time communication services, such as
integrated voicemail and e-mail. Unified Communications provides a set of products that give users the ability to
work and communicate across multiple devices, media types and geographies.
Small and Medium Business (“SMB”) . The SMB SPG offers a range of data services that help small and medium
business customers implement the right data and networking solutions for their business. Those
scalable data services make use of technologies including Ethernet services, IP/MPLS VPN Solutions, and
wavelength services.
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Other. The Other segment is primarily comprised of Zayo Professional Services (“ZPS”) . ZPS provides network and technical
resources to customers who wish to leverage our expertise in designing, acquiring and maintaining networks. Services are
typically provided for a term of one year for a fixed recurring monthly fee in the case of network and on an hourly basis for
technical resources (usage revenue). ZPS also generates revenue via telecommunication equipment sales.
During Fiscal 2017, we changed our reportable segments. With the continued increase in our scope and scale, effective
January 1, 2017, our chief operating decision maker ("CODM"), who is our Chief Executive Officer, implemented certain
organizational changes to the management and operation of the business that directly impact how the CODM makes resource
allocation decisions and manages the Company. The change in structure had the impact of revising our reportable segments and
re-aligning our existing SPGs within these segments. The change in structure also had the impact of consolidating and/or
regrouping existing SPGs and product offerings among our reportable segments and disaggregating the legacy Zayo Canada
segment among the existing SPGs and a new Allstream reportable segment. The change in structure also resulted in adjustments
to intercompany pricing which more closely align to third party pricing on the services which are provided between our SPGs.
Our legacy SPGs included Dark Fiber and Mobile Infrastructure Group (“MIG”). Effective January 1, 2017, the Dark Fiber
and MIG SPGs were merged together and are now reported as part of the Fiber Solutions reporting segment. Waves and Ethernet
services that are provided on dedicated dark fiber strands and colocation facilities that support only dark fiber customers which
were historically reported as part of the Waves, Ethernet or zColo SPGs were transferred to the Fiber Solutions reportable
segment effective January 1, 2017 (the “Dedicated Services Transfers”).
Our legacy Waves, IP and Sonet SPGs, after giving effect to the Dedicated Services Transfers, are now reported under the
Company’s Transport reportable segment.
Our legacy Ethernet and Cloud SPGs, after giving effect to the Dedicated Services Transfers, are now reported under the
Company’s Enterprise Networks segment.
Our legacy Zayo Canada reporting segment was disaggregated based upon the products offered by the legacy Zayo Canada
segment to our existing SPGs and two new SPGs were established: Voice and SMB.
All prior period segment level financial and operating metrics included in this Annual Report have been recast to conform to
the current period presentation for comparability.
Our Operations
Network Management and Operations
Our primary network operating center (“NOC”) is located in Tulsa, Oklahoma and provides 24 hours per day, 365 days per
year monitoring and network surveillance. As part of our business continuity plan, our primary NOC is backed up by several
regional operations centers located in Washington, D.C.; Allentown, Pennsylvania; and Butte, Montana. 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.
Information Technology
Our Information Technology systems have been designed and built specifically for the needs of a focused bandwidth
infrastructure provider primarily leveraging the salesforce.com platform. This platform was adopted at our inception and has been
enhanced over time to integrate all of our acquired companies and increase functionality in every area.
Our current systems’ capability is mature, and we view our application functionality as a competitive advantage in our
industry. Our system is differentiated from the typical telecom industry technology solution consisting of separate and loosely
integrated sales force automation, customer relationship management, provisioning, mapping, inventory, financial, provisioning
and other systems with multiple, sometimes conflicting databases.
We have also developed within our salesforce.com platform a proprietary capability we call Tranzact. Tranzact is a set of
tools and processes designed to enhance the speed and simplicity of procuring bandwidth infrastructure services. We believe
Tranzact will further increase our competitive advantage in delivering bandwidth infrastructure solutions.
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We have a fully implemented business continuity and disaster recovery plan that provides near real-time data access from
physically diverse data centers (Dallas and Washington, D.C.). We further protect our data with off-site data storage practices.
Our Sales and Marketing Organization
Our business primarily engages in direct sales through our sales organization, consisting of 250 sales representatives as of
June 30, 2017. Each of these sales representatives is part of an enterprise or carrier focused sales team led by a sales director
whose team is responsible for meeting a set of quarterly bookings targets. The sales organization sells services across all our
SPGs. The sales representatives are directly supported by sales management, engineering, solutions engineering and marketing
staff.
The sales organization is organized into direct sales channels that generally align around both region and customer. Each of
these channels maintains dedicated sales and solutions engineering support resources. There are three direct sales channels in
North America and one in Europe, each of which are geographically focused supporting key customers, particularly in the
financial, webscale, media and gaming, data center, and government verticals. In addition to those regional channels, there are
dedicated teams focused on our wireline and wireless customers and ecosystem across all geographies.
In addition to the direct channels discussed above, an indirect sales channel manages our channel partner program with
various high value telecom sales agents.
Our direct sales force is compensated through a unique system relative to typical industry practices. Sales staff are
compensated through salary and incentive compensation, which is comprised of cash and equity. Incentive compensation is
achieved based upon the net present value (“NPV”) of the contracted services sold, the incremental revenue related to contracted
services sold and the effective management of churn related to the accounts they manage. We believe that this compensation
system best aligns the interests of our salespeople, management and our stockholders. It also is an example of the financial
philosophy and culture that we have developed since our inception
Separate from the sales groups, we have a corporate marketing group that is responsible for our web presence, customer
facing mapping tools, marketing campaigns, and public relations. The sales organization is further supported by product
management teams that are organized into the SPGs.
Our Customers
Our customers generally have a significant and growing need for the bandwidth 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 in the education, healthcare,
financial services, governmental and technology entities. Our largest single customer, based on recurring revenue, accounted for
approximately 8% of our revenue during the year ended June 30, 2017, and total revenues from our top ten customers accounted
for approximately 27% of our revenue during the same period. These customers are multinational organizations with substantial
liquidity and access to capital, and whose bandwidth needs are mission-critical to their own businesses and strategies. While these
large customers generally have a finite set of master contracts with us, they procure a large volume of individual services with us,
each of which has its own service detail and term.
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.
Our Business Strategy
In pursuit of our mission, our Business Strategy includes the following key elements:
·
Focus on Bandwidth Infrastructure. We expect that bandwidth needs for mobile applications, cloud-based
computing, and machine-to-machine connectivity will continue to grow with the continued adoption of bandwidth-
intensive devices, as well as the escalating demand for Internet-delivered video. We focus on providing high-
bandwidth infrastructure solutions, which we believe are essential in the
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consumption and delivery of bandwidth-intensive applications and services by enterprise customers and
communications service providers. We believe our disciplined approach to providing these critical services to our
targeted customers enables us to offer a high level of customer service, while at the same time being responsive to
changes in the marketplace.
·
·
Target Large Consumers of Bandwidth . Our asset base and product suite are geared for large consumers of
bandwidth with high connectivity requirements. The majority of our customers require more than 10G of
bandwidth; many of our customers require multiple terabytes of bandwidth. Our revenue base is generally
characterized by customers with a high bandwidth spend, consisting of a large number of individual services and
increasing bandwidth infrastructure service demand. Tailoring our operations around these products, services and
customers allows us to operate efficiently and meet these large consumers’ requirements for mission-critical
infrastructure.
Leverage Our Extensive Asset Base by Selling Services on Our Network . Targeting our sales efforts to services
that utilize our existing fiber networks and data centers enables us to limit our reliance on third-party service
providers. We believe this in turn produces high incremental margins, which helps us expand consolidated
margins, achieve attractive returns on the capital we invest, and realize significant levered free cash flow. We also
believe this enables us to provide our customers with a superior level of customer service due to the relative ease
in responding to customer service inquiries over one contiguous fiber network. Our existing networks enable us to
sell additional bandwidth to our existing customers as their capacity needs grow.
· Continue to Expand Our Infrastructure Assets. Our ability to rapidly add network capacity to meet the growing
requirements of our customers is an important component of our value proposition. We will continue to seek
opportunities to expand our network footprint where supporting customer contracts provide an attractive return on
our investment. The expansion of our network footprint also provides the ancillary benefit of bringing other
potential customer locations within reach. We design our networks with additional capacity so that increasing
bandwidth capacity can be deployed economically and efficiently. Capital expenditures are primarily success-
based.
·
·
Leverage Our Existing Relationships and Assets to Innovate. We believe we possess a unique set of assets and
management systems designed to deliver customer solutions tailored to specific trends we observe in the
marketplace. Our high-energy, entrepreneurial culture fosters employee innovation on an ongoing basis in
response to specific customer requirements. Furthermore, we plan to continue to commit capital to new lines of
infrastructure businesses that leverage our existing assets. For example, we are expanding into small cell
infrastructure services provided to wireless services providers. These services entail us providing dark fiber and
related services from a small cell location back to a mobile switching center. We provide the fiber-based transport
over our existing and/or newly constructed fiber networks. In addition, we provide network-neutral space and
power for wireless service providers to co-locate their small cell antennas and ancillary equipment.
Intelligently Expand Through Acquisitions . We have made 41 acquisitions to date for an aggregate purchase
price, net of cash, of $6.5 billion. We believe we have consistently demonstrated an ability to acquire and
effectively integrate companies, realize cost synergies, and organically grow revenue post-acquisition.
Acquisitions have the ability to increase the scale of our operations, which in turn affords us the ability to expand
our operating leverage, extend our network reach, and broaden our customer base. We believe our ability to
realize significant cost synergies through acquisitions provides us with a competitive advantage in future
consolidation opportunities within our industry. We will continue to evaluate potential acquisition opportunities
and are regularly involved in acquisition discussions. We will evaluate these opportunities based on a number of
criteria, including expected return on capital, the quality of the infrastructure assets, the fit within our existing
businesses, the opportunity to expand our network, and the opportunity to create value through the realization of
cost synergies .
Our Competitive Strengths
We believe the following are among our core competitive strengths and enable us to differentiate ourselves in the markets
we serve:
· Unique Bandwidth Infrastructure Assets. We believe replicating our extensive metro, regional, and long-haul
fiber assets would be difficult given the significant capital, time, permitting, and expertise
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required. Our fiber spans over 123,841 route miles and 10,438,246 fiber miles (representing an average of
84 fibers per route), served 391 geographic markets in the United States, Canada and Europe, and connect to
approximately 31,000 buildings. The majority of the markets that we serve and buildings to which we connect
have few other networks capable of providing similar high-bandwidth infrastructure and connectivity solutions,
which we believe provides us with a sustainable competitive advantage in these markets, and positions us as a
mission-critical infrastructure supplier to the largest users of bandwidth. We believe that the vast majority of
customers using our network, including our lit bandwidth, fiber-to-the-tower, and dark fiber customers, choose our
services due to the quality and reach of our network, and the ability our network gives us to innovate and scale
with their growing bandwidth needs. Additionally, we operate 49 data center facilities, which are located in eleven
of the most important carrier hotels in the U.S., Canada and France. This collective presence, combined with our
high network density, creates a network effect that helps us retain existing customers and attract new customers.
From July 1, 2014 through June 30, 2017, exclusive of acquisitions, we have invested approximately $2.1 billion
of capital in our networks, including expansion and maintenance expenditures.
·
Strong Revenue Growth, Visibility, and Durability. We have consistently grown our organic revenue, as gross
installed revenue has exceeded churn processed in every quarter since we began reporting in March 2010. We
believe our exposure to the enduring trend of increasing bandwidth consumption, combined with our focused
execution, have allowed us to achieve this consistent growth. We typically provide our bandwidth infrastructure
services for a fixed monthly recurring fee under multi-year contracts. Our contract terms range from one year to
twenty years. Our customers use our bandwidth infrastructure to support their mission-critical networks and
applications. The switching costs and effort required to replace our services can be high, particularly for the
services within our Fiber Solutions and Transport segments, given the criticality of our services and the potential
cost and disruption. We believe that increasing bandwidth needs combined with the mission-critical nature of our
services provided under multi-year contracts create strong revenue growth, visibility, and durability, which support
our decision-making abilities and financial stability. We believe that our industry’s high barriers to entry, our
economies of scale and scope and customer switching costs contribute to our strong financial performance.
· Customer Service and Ability to Innovate for Our Customers . Our sales and product professionals work closely
with potential and existing customers to design tailored high-bandwidth connectivity solutions across our SPGs to
meet specific, varying, and evolving customer needs. We are focused on delivering high-quality, reliable service to
our customers. We achieve this by leveraging our contiguous network to expand with our customers as they seek
to build scale, coverage, and/or performance. Additionally, our focus on serving the largest and most sophisticated
users of bandwidth keeps our sales, engineering, and service organizations attuned to the latest technologies,
architectures, and solutions that our customers may seek to implement. We believe our willingness to innovate for
our customers and our dedication to customer service help establish our position as an important infrastructure
supplier and allow us to attract new customers and businesses, sell an increasing amount of services to our existing
customers, and reduce customer turnover.
·
·
Strategic, Operational and Financial Transparency Excellence. As part of our strategy to serve the largest users
of bandwidth, we have completed and integrated 41 acquisitions to date. Our acquired assets have been combined
to create a contiguous network with the ability to provision and maintain local, regional, national, or international
high-bandwidth connections across our SPGs. Our entire network, sales and churn activity, installation pipeline,
NPV commission plans, and all customer contracts are managed through an integrated operating and reporting
platform, which gives management strong visibility into the business and improves our ability to drive return-
maximizing decisions throughout the organization. Our focus on operational and financial transparency not only
allows us to be very nimble in attacking various market opportunities, but also provides us the ability to deliver
disclosure that our stockholders and other stakeholders can use to accurately judge management’s performance
from a capital allocation, financial, and operational perspective.
Financially Focused and Entrepreneurial Culture. Virtually all operational and financial decisions we make are
driven by the standard of maximizing the value of our enterprise. Our sales commission plans use an NPV-based
approach with the goal of encouraging the proper behavior within our sales force, and our SPGs are held to group
level equity internal rate of return (“IRR”) targets set by management. To
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align individual behaviors with stockholder objectives, equity compensation is used throughout the Company, and
our compensation plans include a larger equity component than we believe is standard in our industry. In addition
to striving for industry-leading operational and growth outcomes to drive value creation, we are prepared to use
debt capacity to enhance stockholder returns, but not at the expense of other stakeholders and only at levels we
believe are in the long-term interests of the Company, our customers, and our stockholders. Finally, our owners’
manual, mission, and investor transparency all serve to enhance cultural alignment across the Company and our
stockholders.
·
Experienced Management with Unique Leadership Approach. We have assembled an experienced management
team that we believe is well-qualified to lead our Company and execute our strategy. Our management team has
substantial industry experience in managing and designing fiber networks and network-neutral colocation and
interconnection facilities and in selling and marketing bandwidth infrastructure services. In addition, our
management team has significant experience in acquiring and integrating bandwidth infrastructure and assets. Our
management team is a cohesive unit with a common history that in many cases precedes the Company’s founding.
We also believe that our approach to leadership - operationally, financially, culturally - is unique in our industry
and differentiates us from our competitors.
Our Competition
Fiber Solutions
Given the requirement to own the underlying bandwidth infrastructure assets (e.g., fiber networks) in order to provide dark
fiber solutions services, the competitive environment tends to be less intensive for these products and the barriers to entry high.
The degree of competition and parties in competition vary by physical infrastructure sub-service and by individual market and
fiber route.
Competition in dark fiber services tends to be less intense than for lit bandwidth infrastructure services primarily because a
provider must predominantly own and operate a high count fiber network covering a substantial portion of the geographical
demand in order to compete for a customer’s business. The uniqueness, density and depth (i.e., high fiber count) of our metro,
regional, and long-haul fiber networks is therefore a key differentiating factor. In addition, given that providing dark fiber
services often includes some degree of network expansion, dark fiber providers must also have internal project management
expertise and access to capital to execute on the expansion aspect of the business. Due to the custom nature of most dark fiber
opportunities, many larger lit bandwidth infrastructure providers do not actively market dark fiber as a product, even if they own
fiber networks in the desired geographies. As a result, competition is often more limited in the dark fiber services market and
highly dependent on the local (even sub-market) supply and demand environment. Given this dynamic and the generally longer
contractual term of dark fiber services, dark fiber pricing tends to be more inflationary in nature.
Specific dark fiber competitors vary significantly based on geography, and often a particular solution can be provided by
only one to three carriers that have sufficient fiber in place in the desired area or route. Historically, these competitors have fallen
into two categories: first, privately owned regional bandwidth infrastructure providers with a similar degree of focus (e.g.,
Lightower) and second, single market dark fiber providers with market and fiber construction expertise (e.g., DQE
Communications and Edison Carrier Solutions). More recently other multi-geography competitors have emerged due to
acquisitions in the industry (e.g.,Crown Castle and Uniti).
Competition in mobile infrastructure services tends to mirror dark fiber services because of the need to own and operate an
expansive and deep metro fiber network in order to compete. Given the frequent need to expand upon an existing fiber footprint
in order to access additional cell towers and small cell locations, project management expertise and access to capital is also a key
competitive factor. One additional criterion is that wireless carriers prefer to work with a more finite group of mobile
infrastructure providers on either a metro or regional geographic basis. As a result, the competitive group tends to match that of
dark fiber services, with the addition of two competitive groups. First, local cable providers and ILECs who will sometimes break
from their retail and small enterprise core focus to compete for FTT business, often as a result of legacy copper or coaxial-based
services provided to these towers. Second, microwave backhaul providers who focus on more remote or rural towers that have
lesser bandwidth needs that they can serve with less capital-intensive (and less bandwidth-capable) microwave solutions at a
lower total cost. Examples of these additional mobile infrastructure competitors are Comcast, CenturyLink, Crown Castle,
Conterra and Mobilitie.
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Transport
We believe that some of the key factors that influence our customers’ selection of us as their transport provider are our
ability to provide an on-net service that utilizes our fiber network on an end-to-end basis, the availability of high capacity services
up to 100G or higher as optical technology advances, the uniqueness, quantity and latency of available intercity and metro routes,
the peering capacity and reach of our IP network, the price of the service provided, and the ongoing level of network availability
provided.
Generally, price competition varies depending on the location of the service endpoints and carrier uniqueness of network
assets. We face direct price competition when there are other fiber-based carriers who have intercity networks that leverage
similar fiber routes with similar end to end route latency. Often a particular solution can be provided by only one to three carriers
that have comparable network reach in place. Typically, these competitors are publicly traded communications service providers
that provide bandwidth infrastructure, such as Level 3 Communications, Inc., TeliaSonera, or Cogent Communications, or in
certain geographies are privately-held companies such as Windstream or EU Networks. We may also compete with large, well-
capitalized ILECs, such as AT&T Inc. and CenturyLink, Inc., who have a well established and global IP offering. We believe that
price competition will continue where our competitors have comparable existing fiber and optical networks. Some of our
competitors have long-standing customer relationships, very large enterprise values, and significant access to capital.
Enterprise Networks
Enterprise Networks is focused on offering network connectivity, cloud and cyber security solutions to large multi-site
enterprises. The competition is intense and varied for the enterprise IT business and the specific competitors based on each of the
service categories and geographies. Our key challenges range from aggressive pricing to an evolving competitive field with the
completion of each new merger or acquisition.
From a network connectivity perspective, our competitors range from well-capitalized ILECs such as AT&T Inc., CenturyLink,
Inc./Level3, and Verizon Communications Inc/XO, or publicly traded communications service providers that provide bandwidth
infrastructure, such as Cogent and Windstream. In some geographies, we also compete with Lightower, GTT and Comcast. For
cloud services our competition also varies depending on the type of service. For example, we compete with Dell EMC, HPE and
NetApp in the Private Cloud market but we compete with AWS and Rackspace and smaller cloud service providers for Object-
Based Storage business. In the area of cybersecurity, the competitive field is vast and specialized and will vary depending on the
specific security need ranging from infrastructure security, endpoint security, application security, managed security to threat
analysis and protection, Internet of Things and data security to name a few .
Many of our competitors in the enterprise market are well established with long-standing relationships and we must compete in a
variety of aspects as enterprise IT buyers are tech savvy and well informed. As an example, purchasers of network services
generally base their decisions on the best value, which includes price, route (diversity and latency), flexibility, and customer
service perspective. Two of our key competitive challenges are brand recognition and product set awareness. However, we
believe we are very competitive when we can communicate our capabilities that include our dense, global fiber network, our
ability to implement complex custom solutions and our responsive customer service at a price that meets the customer’s budget.
With Enterprise Networks, we believe we can aggressively compete with the short list of single source global providers.
zColo
The market for our colocation and interconnection services is very competitive. We compete based on location, quality of
service, network-neutrality, breadth of network connectivity options, type and quantity of customers in our data centers, and
location. We compete against both large, public colocation providers who have significant enterprise values, and privately-held,
well-funded colocation providers. 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
globally and are able to attract a customer base that values and requires global reach and scale.
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These focused interconnection and colocation service providers include: Equinix, Coresite, Cologix, Peak 10, Digital
Realty Trust Inc, and QTS Realty Trust Inc. These companies offer similar services and operate in similar markets to us.
Allstream
Allstream serves business customers throughout the United States and Canada. Its communications technologies and
services include a range of scalable IP, cloud, voice and data solutions that help organizations communicate and collaborate more
efficiently and profitably. Our largest competitors in Canada are the incumbent telecommunications companies Bell, TELUS and
Rogers. Our largest U.S. competitors are Masergy, Comcast, WAVE, CenturyLink and Verizon. We also compete with other
telecommunications companies, such as established cable and hydro companies, and smaller companies or re-sellers that have a
more limited network.
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 equity contributions, debt issuances,
proceeds from our initial public offering (“IPO”) and follow-on equity offering, and cash provided by operating activities.
Regulatory Matters
Our operations require that certain of our subsidiaries hold licenses, certificates, and/or other regulatory authorizations from
the Federal Communications Commission (“FCC”), state Public Utilities Commissions (“PUCs”), European and Canadian
telecommunications regulators (such as, Ofcom and ARCEP in Europe and CRTC in Canada) and other foreign regulators, all of
which we have obtained and maintain in the normal course of our business. The FCC, State PUCs and foreign regulators
generally have the power to modify or terminate a carrier’s authority to provide regulated wireline services for failure to comply
with certain federal, state and foreign laws and regulations, and may impose fines or other penalties for violations of the same.
The State PUCs typically have similar powers with respect to the intrastate services that we provide under their jurisdiction. In
addition, we are required to submit periodic reports to the FCC, State PUCs, and foreign regulators documenting interstate,
intrastate and foreign 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 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, local and international 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 and European, Canadian and
other foreign telecommunications proceedings, that such regulations will not have a significant impact on us.
Website Access and Important Investor Information
We file periodic reports, proxy statements, and other information with the Securities and Exchange Commission (the
“SEC”). The public may read or copy any materials we file with, or furnish to, the SEC at the SEC’s Public Reference Room at
100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and
information statements, and other information regarding issuers that file electronically with the SEC.
Our website address is www.zayo.com, and we routinely post important investor information in the “Investors” section of
our website at http://investors.zayo.com/. The information contained on, or that may be accessed through, our website is not part
of this Annual Report on Form 10-K (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
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those reports in the “Investors” section of our website under the heading “SEC Filings”. These reports are made available on our
website as soon as reasonably practicable after we electronically file them with the SEC.
We have adopted a written code of ethics applicable to our directors, officers and employees, including our principal
executive officer and principal financial and accounting officers (or persons performing similar functions), 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 ethics applicable to our executive officers and directors, 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 ethics is available in
the “Corporate Governance” section of our website at http://investors.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” within
the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 (the “Exchange
Act”) and the Private Securities Litigation Reform Act of 1995. These forward-looking statements typically include words 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 discuss 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 management’s 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 Company’s financial and operating prospects, current economic trends, future opportunities, ability to retain
existing customers and attract new ones, the Company’s acquisition strategy and ability to integrate acquired companies and
assets and achieve our planned synergies, 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 “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations” contained within this Annual Report. 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 may be required by law.
ITEM 1A. RISK FACTORS
You should carefully consider the risks described below as well as the other information contained in this Annual Report. If
any of the following risks or uncertainties actually occurs, our business, financial condition, results of operations, cash flow and
prospects could be materially and adversely affected.
Risks Related to our Business
We have historically generated net losses since our inception and could incur losses in the future.
We have historically generated net losses since our inception and could incur losses in the future. These net losses primarily
have been driven by significant depreciation, amortization, interest expense, and stock-based compensation. During Fiscal 2017,
we had depreciation and amortization expense of $606.9 million, stock-based compensation expense of $114.1 million, and
interest expense of $241.5 million. At June 30, 2017, we had $5,710.3 million of total debt (including capital lease obligations
and before any unamortized discounts, premiums and debt issuance costs). We cannot assure you that we will generate net
income in the future.
Since our inception, we have used more cash than we have generated from operations, and we may continue to do so.
Since our inception, we have consistently consumed our entire positive cash flow generated from operating activities with
our investing activities. Our investing activities have consisted principally of the acquisition of businesses as well as material
additions to 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 and equity and debt issuances.
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We intend to continue to invest in expanding our fiber network and our business and pursuing acquisitions that we believe
provide an attractive return on our capital. These investments may continue to exceed the amount of cash flow available from
operations after debt service requirements. To the extent that our investments exceed our cash flow from operations, we plan to
rely on potential future debt or equity issuances, which could increase interest expense or dilute the interest of our stockholders,
as well as cash on hand and borrowings under our revolving credit facility. We cannot assure you, however, that we will be able
to obtain or continue to have access to sufficient capital on reasonable terms, or at all, to successfully grow our business.
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, results of operations, and cash flows.
Our largest single customer, based on recurring revenue, accounted for approximately 8% of our revenue during Fiscal
2017, and total revenues from our top ten customers accounted for approximately 27% of our revenue during Fiscal 2017. We
currently depend, and expect to continue to depend, upon a relatively small number of customers for a significant percentage of
our revenue. Many of these customers are also competitors for some or all of our service offerings. Our customer contracts
typically have terms of one to twenty years. Our customers may elect not to renew these contracts. Furthermore, our customer
contracts are terminable for cause if we breach a material provision of such contracts. 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. Many of our customers are in the telecommunications industry, which is
undergoing consolidation. To the extent that two or more of our customers combine, they may be able to use their greater size to
negotiate lower prices from us and may purchase fewer services from us, especially if their networks overlap. 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 are also subject to credit risk associated with the concentration of our accounts receivable from our key customers. If
one or more of these customers were to become bankrupt, insolvent or otherwise were unable to pay for the services provided by
us, we may incur significant write-offs of accounts receivable or incur impairment charges.
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 customers periodically review their telecommunication infrastructure requirements, and may adjust their plans for the
purchase of additional services from us to fit changed market circumstances or strategic priorities. Any such adjustments may
affect our sales of new contracts, or the renewal of existing ones, which could impact our revenue growth.
Future acquisitions are a component of our strategic plan, and will include integration and other risks that could harm our
business.
We have grown rapidly and intend to continue to acquire complementary businesses and assets, and some of these
acquisitions may be large or in new geographic areas where we do not currently operate. This exposes us to the risk that when we
evaluate a potential acquisition target we over-estimate the target’s 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. Businesses and assets that we have acquired or may acquire in the future may be subject to unknown or contingent
liabilities for which we may have limited or no recourse against the sellers. While we usually require the sellers to indemnify us
with respect to breaches of representations and warranties that survive, such indemnification is often limited and subject to
various materiality thresholds, a significant deductible or an aggregate cap on losses. As a result, there is no guarantee that we
will recover any amounts with respect to losses due to breaches by the sellers of their representations and warranties. In addition,
the total amount of costs and expenses that we may incur with respect to liabilities associated with acquired properties and entities
may exceed our expectations, which may adversely affect our operating results and financial condition.
We have previously engaged in and may continue to engage in acquisitions, such as the AboveNet, Allstream and Electric
Lightwave acquisitions that are large or include products outside of the traditional communications infrastructure product base,
which may present greater challenges to integrate than other acquisitions and may expose us
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to different or additional business risks. Difficulties with integration could cause material customer disruption and dissatisfaction,
which could in turn increase churn and reduce new sales. Additionally, we may not be able to integrate acquired businesses in a
manner that permits us to realize the cost synergies we anticipate in the time, manner, or amount we currently expect, or at all.
Our actual cost synergies, cost savings, growth opportunities, and efficiency and operational benefits resulting from any
acquisition may be lower and may take longer to realize than we currently expect. In addition, some recently acquired companies
have had Adjusted EBITDA margins that were lower than ours, which had a negative impact on our overall Adjusted EBITDA
margins. Electric Lightwave had a lower Adjusted EBITDA margin than we do; future acquisitions may also have lower Adjusted
EBITDA margins. In addition, as a result of our frequent acquisitions, research analysts’ valuation models may not take into
account current acquisitions, or they may not correctly or timely include the effects of such acquisitions, which may cause our
reported results to differ from their expectations.
We may incur additional debt to assist in the funding of these potential transactions, which may increase our leverage.
Further, additional transactions could cause disruption of our ongoing business and divert management’s attention from the
management of daily operations to the closing and integration of the acquired business. Acquisitions also involve other
operational and financial risks such as:
·
·
·
·
·
·
·
·
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;
loss of key employees and salespeople of the acquired business;
liabilities of the acquired business, both unknown and known at the time of the consummation of the acquisition;
discovery that the financial statements we relied on to buy a business were incorrect;
expenses associated with the integration of the operations of the acquired business;
the possibility of future impairment, write-downs of goodwill and other intangibles associated with the acquired
business;
finding 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
determining that the internal controls of the acquired business were inadequate.
We are growing rapidly and may not maintain or 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 also intend to continue to grow our company,
including through acquisitions, some of which may be large. Customers can be reluctant to switch providers of bandwidth
services because it can involve substantial expense and technical difficulty. That can make it harder for us to acquire new
customers through our own sales efforts. Our expansion may place strains on our management and our operational and financial
infrastructure. Our ability to manage our growth will be particularly dependent upon our ability to:
·
expand, develop, and retain an effective sales force and other qualified personnel;
· maintain the quality of our operations and our service offerings;
·
attract customers to switch from their current providers to us in spite of the costs associated with switching providers;
· maintain and enhance our system of internal controls to ensure timely and accurate reporting; and
·
expand our operational information systems in order to support our growth, including integrating new customers
without disruption.
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If we fail to hire and retain qualified executives, managers and employees, our operating results could be harmed.
Our future success depends on our ability to identify, hire, train and retain executives, managers and employees with
technological, engineering, operational, marketing, sales, administrative and managerial skills. There is a shortage of qualified
personnel in several of these fields. We compete with several other companies for this limited pool of potential employees. As our
industry increasingly becomes more competitive, it could become especially difficult to attract and retain top personnel with skills
in high demand. In addition, subject to limited exceptions, none of the members of our management team and other key
employees have long-term employment agreements. For all these reasons, there is no assurance that our efforts to recruit and
retain qualified personnel will be successful.
We have agreements with customers that are dependent on government funding, which may not be available.
We have contracts with customers that include appropriations clauses that permit the customer to terminate the contract if
expected government funding for the project to which the contract relates is unavailable. There is no assurance that the
government funding will be available for these contracts and that they will not be terminated.
In recent years the portion of our revenue relating to government-funded programs such as the E-rate program, a program
mandated by Congress in 1996 and implemented by the FCC in 1997 in order to make telecommunications and information
services more affordable for schools and libraries in America, has increased. There can be no assurance that the E-rate program
and other such programs will continue or will continue to be funded at current levels in the future.
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 could enable customers to claim credits and, under certain conditions, terminate their agreements. Our inability to
meet our service level guarantees could adversely affect our revenue. In Fiscal 2017, lost revenue from failure to meet service
level guarantees was approximately $2.6 million. 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 with us, could impact
our ability to meet our service level agreements.
Any failure of our physical infrastructure or services could lead to significant costs and disruptions.
Our business depends on providing customers with highly reliable service. The services we provide are subject to failure
resulting from numerous factors, including:
·
·
·
·
·
human error;
power loss;
improper building maintenance by the landlords of the buildings in which our data centers are located;
physical or electronic security breaches;
fire, earthquake, hurricane, flood, and other natural disasters;
· water damage;
·
·
the effect of war, terrorism, and any related conflicts or similar events worldwide; and
sabotage and vandalism.
Problems within our network or our data centers, whether within our control or the control of our landlords or other third-
party providers, could result in service interruptions or equipment damage. As current and future customers increase their power
usage in our facilities over time, the remaining available power for future customers could limit our ability to grow our business
and increase occupancy rates or network density within our existing facilities. Accordingly, we may not be able to efficiently
upgrade or change these systems to meet new demands without incurring significant costs that we may not be able to pass on to
our customers. In the past, we have experienced disruptions 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. Given the service level agreement obligations we typically have in our customer contracts,
such disruptions could result in customer credits;
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however, we cannot assume that our customers will accept these credits as compensation in the future, and we may face
additional liability or loss of customers.
We use franchises, licenses, permits, rights-of-way, conduit leases, fiber agreements, and property leases, which could be
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 may result in impairment charges. In order to operate our networks, we must also maintain fiber
leases and IRU agreements that we have with public and private entities. There is no assurance that we will be able to renew those
fiber routes on favorable terms, or at all. If we are unable to renew those fiber routes on favorable terms, we may face increased
costs or reduced revenues.
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.
If we lose or are unable to renew key real property leases where we have located our POPs, it could adversely affect our
services and increase our costs, as we would be required to restructure our network and move our POPs.
Our operations, financial performance and liquidity are materially reliant on key suppliers and vendors.
We depend on a limited number of suppliers and vendors for equipment and services relating to our network infrastructure. To the
extent that proprietary technology of a supplier is an integral component of our network, we may have limited flexibility to
purchase key network components from alternative suppliers. We also rely on a limited number of software vendors to support
our business management systems. In the event it becomes necessary to seek alternative suppliers and vendors, we may be unable
to obtain satisfactory replacement supplies or services on economically attractive terms, on a timely basis, or at all, which could
increase costs or cause disruptions in our services.
We are required to maintain, repair, upgrade, and replace our network and our facilities, the cost of which could materially
impact our results and our failure to do so could irreparably harm our business.
Our business requires that we maintain, repair, upgrade, and periodically replace our facilities and networks. This requires
management time and capital expenditures. 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. 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. We could be subject to significant
network repair and replacement expenses in the event a terrorist attack or a natural disaster damages our network. Further, the
operation of our network requires the coordination and integration of sophisticated and highly specialized hardware and software.
Our failure to maintain or properly operate this can lead to degradations or interruptions in customer service. Our failure to
provide proper customer service could result in claims from our customers, early termination of contracts, and damage to our
reputation.
Our debt level could negatively impact our financial condition, results of operations, cash flows, and business prospects and
could prevent us from fulfilling our obligations under our outstanding indebtedness. In the future, we may incur substantially
more indebtedness, which could further increase the risks associated with our leverage.
As of June 30, 2017, our total debt (including capital lease obligations and before any unamortized discounts, premiums or
debt issuance costs) was $5,710.3 million, primarily consisting of the following indebtedness incurred by our subsidiaries, Zayo
Group, LLC (“ZGL”) and Zayo Capital, Inc. (“Zayo Capital”): $1,430.0 million of 6.00% senior unsecured notes due 2023 (the
“2023 Unsecured Notes”), $900.0 million of 6.375% senior unsecured notes due 2025 (the “2025 Unsecured Notes”), $1,350.0
million of 5.75% senior unsecured notes due 2027 (the “2027 Unsecured Notes”, collectively with the 2023 and 2025 Unsecured
Notes, the “Notes”), a $498.8 million senior secured term loan
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facility due 2021, a $1,429.9 million senior secured term loan facility due 2024 (the “Term Loan Facility”) and $101.6 million in
capital lease obligations. In addition, ZGL and Zayo Capital have a $450.0 million senior secured revolving credit facility (the
“Revolver,” and collectively with the Term Loan Facility, the “Credit Facility”), of which $442.2 million was available at June
30, 2017, subject to certain conditions. Subject to the limitations set forth in the indentures (the “Indentures”) governing the Notes
and the agreement governing the Credit Facilities (the “Credit Agreement”), ZGL 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. Our level
of debt could have important consequences, including the following:
· making it more difficult for us to satisfy our obligations under our debt agreements;
·
·
·
·
·
·
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;
limiting our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions,
and general corporate and other activities;
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
increasing our vulnerability to both general and industry-specific adverse economic conditions;
placing us at a competitive disadvantage relative to less leveraged competitors; and
preventing us from raising the funds necessary to repurchase the Notes tendered to ZGL upon the occurrence of certain
changes of control, which would constitute a default under the Indentures.
Cash payments for interest, net of capitalized interest, which are reflected in our cash flows from operating activities,
during the year ended June 30, 2017 were $195.6 million, and represented 21% of our cash flows from operating activities. Cash
payments related to principal payments on our debt obligations (including capital leases) during the year ended June 30, 2017
were $7.9 million (exclusive of our $1,837.4 million January Term Loan Facility amendment and our $570.1 million prepayment
on our Term Loan Facility), which are reflected in our cash flows from financing activities, and represented less than 1.0% of our
cash flows from operating activities during the period.
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 U.S. or the global economy, or competitive initiatives of our
competitors, are beyond our control.
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:
·
·
·
·
reducing or delaying capital investments;
raising additional capital;
refinancing or restructuring our debt; and
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.
If ZGL is unable to meet its debt service obligations, it would be in default under the terms of the Indentures and the Credit
Agreement, permitting acceleration of the amounts due on the Notes and under the Credit Agreement and
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eliminating our ability to draw on the Revolver. If the amounts outstanding under the Credit Facilities, the Notes, or other future
indebtedness were to be accelerated, we could be forced to file for bankruptcy.
Our debt agreements contain restrictions on our ability to operate our business and to pursue our business strategies, and our
failure to comply with these covenants could result in an acceleration of our indebtedness.
The Indentures and the Credit Agreement each contain, and agreements governing future debt issuances may contain,
covenants that restrict ZGL’s ability to, among other things:
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incur additional indebtedness and issue preferred stock;
pay dividends or make other distributions with respect to any equity interests or make certain investments or other
restricted payments;
create liens;
sell or otherwise dispose of assets, including capital stock of subsidiaries;
incur restrictions on the ability of its restricted subsidiaries to pay dividends or make other payments to it;
consolidate or merge with or into other companies or transfer all, or substantially all, of its assets;
engage in transactions with affiliates;
engage in business other than telecommunications; and
enter into sale and leaseback transactions.
As a result of these covenants, we are limited in the manner in which we may conduct our business, and as a result we may
be unable to engage in favorable business activities or finance future operations or capital needs. The ability to comply with some
of the covenants and restrictions contained in the Indentures and the Credit Agreement may be affected by events beyond our
control. If market or other economic conditions deteriorate, ZGL’s ability to comply with these covenants may be impaired.
In addition, the Credit Agreement requires ZGL to comply with a maximum secured leverage ratio at the end of any fiscal
quarter in the event that usage of the Revolver exceeds 35% of the commitments thereunder. Our ability to comply with this ratio
may be affected by events beyond our control. These restrictions limit our ability to plan for or react to market conditions, meet
capital needs, or otherwise constrain our activities or business plans. They also may adversely affect our ability to finance our
operations, enter into acquisitions, or engage in other business activities that would be in our interest.
A failure to comply with the covenants, ratios, or tests in the Indentures or the Credit Agreement, the agreement governing
any future indebtedness could result in an event of default under the Indentures, the Credit Agreement or such agreement
governing any future indebtedness, as applicable, which if not cured or waived could have a material adverse effect on our
business, financial condition, and results of operations.
An event of default under the Indentures or the agreement governing any future indebtedness could lead to the acceleration
of the obligations under the Notes or such future indebtedness, as applicable. An event of default under the Credit Agreement
would allow the lenders to declare all borrowings outstanding to be due and payable or to terminate the ability to borrow under
the Revolver. If the amounts outstanding under the Credit Facilities, the Notes or other future indebtedness were to be accelerated,
we cannot assure that our assets would be sufficient to repay in full the money owed. In such a situation, we could be forced to
file for bankruptcy.
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, Canada and Europe
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 would be adverse to us. In addition, we may become subject to income tax audits by many tax
jurisdictions throughout the world. It is possible that certain tax positions taken
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by us could result in tax liabilities for us. 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.
We cannot assure you whether, when or in what amounts we will be able to use our net operating losses, or when they will be
depleted.
At June 30, 2017, we had approximately $1,662.5 million of U.S. federal net operating losses (“NOLs”), which relate
primarily to prior acquisitions. Under certain circumstances, these NOLs can be used to offset our future U.S. federal taxable
income. If we experience an “ownership change,” as defined in Section 382 of the Internal Revenue Code and related Treasury
regulations at a time when our market capitalization is below a certain level, our ability to use the NOLs could be substantially
limited. This limit could impact the timing of the usage of the NOLs, thus accelerating cash tax payments or causing NOLs to
expire prior to their use, which could affect the ultimate realization of the NOLs.
Furthermore, transactions that we enter into, as well as transactions by existing or future 5% stockholders that we do not
participate in, could cause us to incur an “ownership change,” which could prevent us from fully utilizing our NOLs to reduce our
federal income taxes. These limitations could cause us not to pursue otherwise favorable acquisitions and other transactions
involving our capital stock, or could reduce the net benefits to be realized from any such transactions. Despite this, we expect to
use substantially all of these NOLs and certain other deferred tax attributes as an offset to our federal future taxable income,
although the timing of that use will depend upon our future earnings and future tax circumstances. If and when our NOLs are fully
utilized, we expect that the amount of our cash flow dedicated to the payment of federal taxes will increase substantially.
We may be subject to interest rate risk and increasing interest rates may increase our interest expense.
Borrowings under each of the Credit Facilities bear, and our future indebtedness may bear, interest at variable rates and
expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness would
increase even though the amount borrowed remained the same, and our net income and cash available for servicing our
indebtedness would decrease.
The international operations of our business expose us to risks that could materially and adversely affect the business.
We have operations and investments outside of the United States, as well as rights to undersea cable capacity extending to
other countries, that expose us to risks inherent in international operations. These include:
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general economic, social and political conditions;
the difficulty of enforcing agreements and collecting receivables through certain foreign legal systems;
tax rates in some foreign countries may exceed those in the U.S.;
foreign currency exchange rates may fluctuate, which could adversely affect our results of operations and the value of
our international assets and investments;
foreign earnings may be subject to withholding requirements or the imposition of tariffs, exchange controls or other
restrictions;
difficulties and costs of compliance with foreign laws and regulations that impose restrictions on our investments and
operations, with penalties for noncompliance, including loss of licenses and monetary fines;
difficulties in obtaining licenses or interconnection arrangements on acceptable terms, if at all; and
changes in U.S. laws and regulations relating to foreign trade and investment.
We may as part of our expansion strategy increase our exposure to international investments and operations.
On June 23, 2016, the United Kingdom (“U.K.”) held a referendum in which voters approved an exit from the European
Union (“E.U.”), commonly referred to as “Brexit.” As a result of the referendum, it is expected that the British government will
begin negotiating the terms of the U.K.’s future relationship with the E.U. Although it is unknown what those terms will be, it is
possible that there will be increased regulatory complexities that may adversely affect our
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operations and financial results. In addition, the announcement of Brexit caused significant volatility in global stock markets and
currency exchange fluctuations that resulted in the strengthening of the U.S. dollar against foreign currencies in which we conduct
business, which may adversely affect our results of operations and the value of our international assets and investments.
Our international operations are subject to the laws and regulations of the U.S. and many foreign countries, including the
U.S. Foreign Corrupt Practices Act, the
Canadian Corruption of Foreign Public Officials Act and the U.K. Bribery Act.
We are subject to a variety of laws regarding our international operations, including the U.S. Foreign Corrupt Practices
Act, the Canadian Corruption of Foreign Public Officials Act and the U.K. Bribery Act of 2010, and regulations issued by U.S.
Customs and Border Protection, the U.S. Bureau of Industry and Security, the U.S. Treasury Department’s Office of Foreign
Assets Control (“OFAC”) and various other foreign governmental agencies. We cannot predict the nature, scope or effect of
future regulatory requirements to which our international operations might be subject or the manner in which existing laws might
be administered or interpreted. Actual or alleged violations of these laws could lead to enforcement actions and financial penalties
that could result in substantial costs.
The U.S. Foreign Corrupt Practices Act, the Canadian Corruption of Foreign Public Officials Act, the U.K. Bribery Act
and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper
payments for the purpose of obtaining or retaining business. Recent years have seen a substantial increase in anti-bribery law
enforcement activity with more frequent and aggressive investigations and enforcement proceedings by both the Department of
Justice and the U.S. Securities and Exchange Commission, increased enforcement activity by non-U.S. regulators and increases in
criminal and civil proceedings brought against companies and individuals. We have created and implemented a program for
compliance with anti-bribery laws. Because our anti-bribery internal control policies and procedures have been recently
implemented, we may have increased exposure to reckless or criminal acts committed by our employees or third-party
intermediaries. Violations of these anti-bribery laws may result in criminal or civil sanctions, which could have a material adverse
effect on our business, financial condition, results of operations and liquidity.
Our international operations expose us to currency risk.
We conduct a portion of our business using the British Pound Sterling (‘‘GBP’’), Canadian Dollar and the Euro.
Appreciation of the U.S. Dollar adversely affects our consolidated revenue. For example, the U.S. Dollar has appreciated
significantly against the GBP, Euro and Canadian Dollar recently, which has impacted our consolidated revenues and Adjusted
EBITDA and may continue to impact future periods. Since we tend to incur costs in the same currency in which those operations
realize revenue, the effect on operating income and operating cash flow is largely mitigated. However, if the U.S. Dollar
continues to appreciate significantly, future revenues, operating income and operating cash flows could be materially affected.
We may be vulnerable to security breaches that could disrupt our operations and adversely affect our business and operations.
Despite security measures and business continuity plans, our information technology networks and infrastructure may be
vulnerable to damage, disruptions, or shutdowns due to unauthorized access, computer viruses, cyber-attacks, distributed denial of
service, and other security breaches. An attack on or security breach of our network could result in interruption or cessation of
services, our inability to meet our service level commitments, and potentially compromise customer data transmitted over our
network. We cannot guarantee that our security measures will not be circumvented, resulting in network failures or interruptions
that could impact our network availability and have a material adverse effect on our business, financial condition, and operational
results. We may be required to expend significant resources to protect against such threats. If an actual or perceived breach of our
security occurs, the market perception of the effectiveness of our security measures could be harmed, and we could lose
customers. Any such events could result in legal claims or penalties, disruption in operations, misappropriation of sensitive data,
damage to our reputation, and/or costly response measures, which could adversely affect our business. Although we maintain
insurance coverage that may, subject to policy terms and conditions (including self-insured deductibles, coverage restrictions and
monetary coverage caps), cover certain aspects of our cyber risks, such insurance coverage may be unavailable or insufficient to
cover our losses.
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We may be subject to litigation that could have a substantial, adverse impact on our business
From time to time we are subject to litigation, including claims related to employment, commercial transactions, construction and
real estate. Irrespective of its merits, litigation may be both lengthy and disruptive to our operations and could cause significant
expenditure and diversion of management attention. While we do not view any of our current litigation to be material, current or
future litigation could have a material adverse effect on our financial position and operating results, on the trading price of our
securities and on our ability to access the capital markets.
If we are unable to renew collective bargaining agreements on satisfactory terms, or we experience strikes, work stoppages or
labor unrest, our business could suffer.
Certain of the employees that we acquired in our Allstream acquisition are covered by collective bargaining agreements.
There can be no assurance that such agreements will be renewed on terms favorable to us. If we are unable to renew such
agreements on satisfactory terms, our labor costs could increase, which would affect our profit margins. Further, changes in
governmental regulations relating to labor relations, or otherwise in our relationship with our employees, including our unionized
employees, may result in strikes, lockouts or other work stoppages, any of which could have an adverse effect on our business,
results of operations and financial condition.
Volatility in the equity markets, interest rates or other factors could substantially increase our pension costs.
We sponsor defined benefit pension plans for certain of our Canadian employees. The difference between plan obligations
and assets, or the funded status of the plans, significantly affects the net periodic benefit costs of our pension plans and the
ongoing funding requirements of those plans. Among other factors, changes in interest rates, mortality rates, early retirement
rates, investment returns, minimum funding requirements and the market value of plan assets can affect the level of plan funding,
cause volatility in the net periodic pension cost and increase our future funding requirements. Legislative and other governmental
regulatory actions may also increase funding requirements for our pension plans’ benefits obligation.
A significant increase in our pension benefit obligations or funding requirements could have a negative impact on our ability
to invest in the business and adversely affect our financial condition and results of operations.
Lapses in disclosure controls and procedures or internal control over financial reporting could materially and adversely affect
our operations, profitability or reputation.
As disclosed in Item 9A, management identified material weaknesses in our internal control over financial reporting in Fiscal
2016 that were remediated during Fiscal 2017. There can be no assurance that our disclosure controls and procedures will be
effective in the future or that we will not experience a material weakness or significant deficiency in internal control over
financial reporting. Any such lapses or deficiencies may materially and adversely affect our business, operating results or
financial condition, may result in restatement of our consolidated financial statements, restrict our ability to access the capital
markets, require us to expend significant resources to correct the lapses or deficiencies, expose us to regulatory or legal
proceedings, including litigation brought by private individuals, subject us to fines, penalties or judgments, harm our reputation,
or otherwise cause a decline in investor confidence and our stock price.
Risks Related to Our Industry
We could face increased competition from companies in the telecommunications and media industries that currently do not
focus on bandwidth infrastructure.
Many of our competitors in the bandwidth infrastructure space are other focused bandwidth infrastructure providers that
operate on a regional or local basis. In some cases, we also compete with communications service providers who also own certain
infrastructure assets and make them available to customers as an infrastructure service. These communication service providers
include ILECs, such as AT&T, Verizon, and CenturyLink, and cable television companies, such as Comcast and Cox.
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Some of these 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. Most of them are also our customers. If ILECs
and cable television companies focus on providing bandwidth infrastructure, it could have a material adverse effect on us. A few
of these competitors also have significant fiber assets that they principally employ in the provision of their communications
services. If any of these competitors with greater resources and/or significant fiber assets chose to focus those resources on
bandwidth infrastructure, our ability to compete in the bandwidth infrastructure industry could be negatively impacted. To the
extent that communication service providers, cable television companies, and other media companies choose to distribute their
content over their own networks that could reduce demand for our services. Additionally, significant new entrants into the
bandwidth services industry would increase supply, which could cause prices for our services to decline.
Consolidation among companies in the telecommunications and cable television industries could further strengthen our
competitors and adversely impact our business.
The telecommunications and cable television industries are intensely competitive and continue to undergo significant
consolidation. There are many reasons for consolidation in these industries, including the desire for communications and cable
television 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 cause customers to disconnect services to move them to their own
networks, or consolidate buying with other bandwidth infrastructure providers. Additionally, consolidation in the industry could
further strengthen our competitors, give them greater financial resources and geographic reach, and allow them to put additional
pressure on prices for bandwidth infrastructure services.
Certain of our services and facilities are subject to regulation that could change or otherwise impact us in an adverse manner.
Communications services and facilities are subject to domestic and international regulation at the federal, state, and local levels.
These regulations affect our business and our existing and potential competitors. Our electronic communications services and
electronic communications networks in Europe, Canada and elsewhere are subject to regulatory oversight by national
communications regulators, such as the United Kingdom’s Office of Communications (“Ofcom”) and France’s Autorité de
Régulation des Communications Électroniques et des Postes (“ARCEP”). In addition, in the United States, both the FCC and the
state public utility commissions or similar regulatory authorities (“State PUCs”) typically require us to maintain licenses, file
periodic reports, pay various regulatory fees and assessments, and to otherwise comply with their regulations. Similarly, in
Canada, we are subject to the rules and oversight of the Canadian Radio-Television and Telecommunications Commission
(“CRTC”), the Minister of Innovation Science and Economic Development, as well as the laws and regulations of other federal
and provincial bodies. Such compliance can be costly and burdensome and may affect the way we conduct our business. Delays
in receiving required regulatory approvals (including approvals relating to acquisitions, investments, or financing activities or for
interconnection agreements with other carriers), the enactment of new and adverse international or domestic legislation or
regulations (including those pertaining to broadband initiatives and net-neutrality), or the denial, modification or termination by a
regulator of any approval or authorization, could have a material adverse effect on our business. Further, the current regulatory
landscape is subject to change through judicial review of current legislation and rulemaking by the FCC, Ofcom, ARCEP, CRTC
and other domestic, foreign, and international rulemaking bodies. These bodies regularly consider changes to their regulatory
framework and fee and other obligations. Changes in current regulation or determinations that we have not complied with existing
regulations and obligations may make it more difficult to obtain the approvals necessary to operate our business, significantly
increase the regulatory fees and other assessments to which we are subject, subject us to potential enforcement proceedings or
audits that could result in fines or other penalties where noncompliance has occurred, or have other adverse effects on our future
operations in the United States, Canada and/or Europe.
We may be liable for the material that content providers distribute over our network.
Although we believe our liability for third party information stored on or transmitted through our networks is limited, the
liability of private network operators is affected both by changing technology and evolving legal principles. As a private network
provider, we could be exposed to legal claims relating to third party content stored or transmitted on our networks. Such claims
could involve, among others, allegations of defamation, invasion of privacy, copyright infringement, or aiding and abetting
restricted activities such as online gambling or pornography. If we decide to
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implement additional measures to reduce our exposure to these risks, or if we are required to defend ourselves against these kinds
of claims, our operating results and financial condition could be negatively affected.
Unfavorable general global economic conditions could negatively impact our operating results and financial condition.
Unfavorable general global 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, including
federal fiscal and monetary policy actions, 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.
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 as well as impact our ability 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.
Changes in our traffic patterns or industry practice could result in increasing peering costs for our IP network.
Peering agreements with other ISPs have allowed us to access the Internet and exchange traffic with these providers. In
most cases, we peer with these ISPs on a payment-free basis, referred to as settlement-free peering. We plan to continue to
leverage this settlement-free peering. If other providers change the terms upon which they allow settlement-free peering or if
changes in Internet traffic patterns, including the ratio of inbound to outbound traffic, cause us to fall below the criteria that these
providers use in allowing settlement-free peering, the costs of operating our Internet backbone will likely increase. Any increases
in costs could have an adverse effect on our margins and our ability to compete in the IP market.
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.
Risks Related to Ownership of Our Common Stock
Our stock price may be volatile or may decline regardless of our operating performance.
The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are
beyond our control. In addition to the other risk factors described herein, these factors include:
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actual or anticipated fluctuations in our revenue and other operating results;
announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint
ventures or capital commitments;
changes in operating performance and stock market valuations of other companies in our industry;
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the addition or loss of significant customers;
fluctuations in the trading volume of our common stock or the size of our public float;
announcements by us with regard to the effectiveness of our internal controls and our ability to accurately report our
financial results;
price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
general economic, legal, regulatory and market conditions unrelated to our performance;
lawsuits threatened or filed against us; and
other events or factors, including those resulting from war, incidents of terrorism or responses to these events.
The stock markets have experienced extreme fluctuations in price and trading volume that have caused and will likely
continue to cause the stock prices of many telecommunications companies to fluctuate in a manner unrelated or disproportionate
to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation
following periods of declining stock prices. If we were to become involved in securities litigation, we could face substantial costs
and be forced to divert resources and the attention of management from our business, which could adversely affect our business.
If securities or industry analysts do not continue to publish or publish inaccurate or unfavorable research about our business,
our stock price and trading volume could decline.
The trading market for our common stock depends on the research and reports that securities or industry analysts publish
about us or our business. Certain securities and industry analysts currently publish research reports with respect to our common
stock and certain of our debt securities. If they fail to publish reports about us or our securities regularly, or otherwise cease to
cover our Company, demand for our stock could decrease and the trading price of our stock could decline. A downgrade of our
stock or the publication of inaccurate or unfavorable research about our business would likely cause our stock price to decline.
Sales of substantial amounts of our common stock in the public market, or the perception that they might occur, could reduce
the price that our common stock might otherwise attain.
We cannot predict what effect, if any, future issuances by us of our common stock will have on the market price of our
common stock. In addition, shares of our common stock that we issue in connection with an acquisition may not be subject to
resale restrictions. The market price of our common stock could drop significantly if certain large holders of our common stock,
or recipients of our common stock in connection with an acquisition, sell all or a significant portion of their shares of common
stock or are perceived by the market as intending to sell these shares other than in an orderly manner. In addition, these sales
could impair our ability to raise capital through the sale of additional common stock in the capital markets.
Delaware law and our amended and restated certificate of incorporation and bylaws contain provisions that could delay or
discourage takeover attempts that our stockholders may consider favorable.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of
delaying or preventing a change of control or changes in our management. These provisions include the following:
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our board of directors is divided into three classes serving staggered three-year terms;
our board of directors has the right to elect a director to fill a vacancy created by the expansion of the board of directors
or due to the resignation or departure of an existing board member;
our directors are not elected by cumulative voting, which would allow less than a majority of stockholders to elect
director candidates;
advance notice of nominations for election to the board of directors or for proposing matters that can be acted upon at a
stockholders meeting is required;
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our board of directors may alter our bylaws without obtaining stockholder approval;
our board of directors may issue, without stockholder approval, up to 50,000,000 shares of preferred stock with terms
set by the board of directors, certain rights of which could be senior to those of our common stock;
stockholders do not have the right to call a special meeting of stockholders or to take action by written consent in lieu
of a meeting;
approval of at least two-thirds of the shares outstanding and entitled to vote thereon is required to amend or repeal, or
adopt any provision inconsistent with, our amended and restated bylaws or the provisions of our amended and restated
certificate of incorporation regarding, among other items, the election and removal of directors; and
directors may be removed from office only for cause.
We have elected not to be governed by the provisions of Section 203 of the Delaware General Corporation Law (the
“DGCL”); however, our amended and restated certificate of incorporation includes similar provisions providing that we may not
engage in certain “business combinations” with any “interested stockholder” for three years following the time that such
stockholder became an interested stockholder, unless the business combination is approved in a prescribed manner. A “business
combination” includes, among other things, a merger, asset or stock sale or other transaction resulting in a financial benefit to the
interested stockholder. An “interested stockholder” is a person who, together with affiliates and associates, owns, or did own,
within three years prior to the determination of interested stockholder status, 15% or more of a corporation’s voting stock.
Pursuant to our amended and restated certificate of incorporation, the term “interested stockholder” does not include certain
entities listed in our certificate of incorporation that were preferred equity holders of CII at the time of our IPO (the “Exempt
Stockholders”), each of their respective affiliates, and any of their respective direct or indirect transferees and any group as to
which such persons are a party.
These provisions may prohibit large stockholders (with the exception of the Exempt Stockholders described above),
particularly those owning 15% or more of our outstanding voting stock, from merging or combining with us. These provisions in
our amended and restated certificate of incorporation and our amended and restated bylaws and the DGCL could discourage
potential takeover attempts, could reduce the price that investors are willing to pay for shares of our common stock in the future
and could potentially result in the market price of our common stock being lower than it otherwise would be.
In addition, our debt agreements may require very significant payments if we have a change of control, which reduces the
possibility that such an event will occur.
Our directors, executive officers, holders of more than 5% of our common stock, together with their affiliates, continue to
have substantial control over the company.
Our directors, executive officers, and holders of more than 5% of our common stock, together with their affiliates,
beneficially owned, in the aggregate, approximately 40% of our outstanding common stock as of June 30, 2017. As a result, these
stockholders, acting together, would have the ability to effectively control the outcome of matters submitted to our stockholders
for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In
addition, these stockholders, acting together, would have the ability to effectively control our management and affairs.
Accordingly, this concentration of ownership might harm the market price of our common stock by:
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delaying, deferring or preventing a change in control;
impeding a merger, consolidation, takeover or other business combination involving us; or
discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control.
We do not intend to pay dividends for the foreseeable future.
We have never declared or paid cash dividends on our common stock. ZGL’s ability to pay dividends to us is limited by the
Credit Agreement and Indentures, which may in turn limit our ability to pay dividends on our common stock. Our ability to pay
dividends may also be restricted by the terms of any future credit agreement or any future debt or preferred securities of ours or of
our subsidiaries. We currently intend to retain any future earnings to finance the
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operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. As a
result, you may only receive a return on your investment in our common stock if the market price of our common stock increases.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
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, 2017, we own or lease approximately 123,841
route miles or 10,438,246 fiber miles. We provide colocation and interconnection services utilizing our own data centers located
within major carrier hotels and other strategic buildings in 49 locations throughout the United States, Canada and Europe. We
generally do not own the buildings where we provide our colocation and interconnection services; however, the zColo group
manages approximately 870,000 square feet of billable colocation space. See “Item 1. Business” for additional discussion related
to our network and colocation properties.
We lease our corporate headquarters in Boulder, Colorado as well as regional offices and sales, administrative and other
support offices. Our corporate headquarters located at 1805 29th Street, Suite 2050, Boulder, Colorado is approximately 30,000
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 averages 17,000 square feet. Each of our business units utilize these
facilities. 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.
ITEM 3. 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 any such pending litigation matters will not have a material adverse effect upon our results of operations, our
consolidated financial condition, or our liquidity.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Holders of Our Common Stock
Our common stock has traded on the New York Stock Exchange (“NYSE”) under the symbol “ZAYO” since October 17,
2014. Prior to that date, there was no public trading market for our common stock. Our IPO was priced at $19.00 per share on
October 16, 2014. The following table sets forth, for the periods indicated, the high and low sales prices per share of our common
stock as reported on the NYSE.
Year Ended June 30, 2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended June 30, 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
30.59
35.65
34.42
35.49
27.16
29.48
29.30
30.65
High
Low
29.62
27.74
27.10
28.27
23.91
21.89
19.59
23.68
On August 17, 2017, the closing price per share of our common stock on the NYSE was $33.36 per share, and there were
approximately 169 stockholders of record of our common stock. The number of holders of record is based upon the actual number
of holders registered at such date and does not include holders of shares in “street name” or persons, partnerships, associates,
corporations or other entities in security position listings maintained by depositories.
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Stock Performance Graph
The following graph illustrates the cumulative total stockholder return on our common stock from our IPO in October 2014
through June 30, 2017, compared to the S&P 500 Index and the NASDAQ Telecommunications Index. The comparison assumes
a hypothetical investment in our common stock and in each of the foregoing indices of $100 at October 17, 2014, and assumes
that all dividends were reinvested. Shareholder returns over the indicated period are based on historical data and should not be
considered indicative of future shareholder returns. The graph and related disclosure in no way reflect our forecast of future
financial performance.
Zayo Group Holdings, Inc. Common Stock
S&P 500 Index
NASDAQ Telecommunications Index
$100
$100
$100
$116.76
$109.26
$109.97
$126.71
$111.14
$108.86
$140.09
$128.19
$123.89
October 17, 2014 June 30, 2015
June 30, 2016
June 30, 2017
The above performance graph shall not be deemed to be incorporated by reference by means of any general statement
incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates such information
by reference, and shall not otherwise be deemed filed under such acts.
Dividend Policy
No dividends have been declared or paid on our shares of common stock. We currently intend to retain all available funds
and any future earnings for use in the operation of our business, and therefore we do not anticipate paying any cash dividends in
the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will
depend upon our financial condition, results of operations, cash flows, capital requirements, and other factors that our board of
directors deems relevant. We are a holding company, and substantially all of our operations are carried out by ZGL and its
subsidiaries. ZGL’s ability to pay dividends to us is limited by the Credit Agreement and Indentures, which may in turn limit our
ability to pay dividends on our common stock. Our ability to pay dividends may also be restricted by the terms of any future
credit agreement or any future debt or preferred securities.
Issuer Purchases of Equity Securities
We did not repurchase any of our common stock in the quarter ended June 30, 2017.
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ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical consolidated financial information for Zayo Group Holdings, Inc. for the
periods and as of the dates indicated. The selected historical consolidated financial information as of and for the years ended June
30, 2017, 2016, 2015, 2014 and 2013 is derived from, and qualified by reference to, our audited consolidated financial statements
and should be read in conjunction with such audited consolidated financial statements and related notes and “Item 7:
Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual
Report. These historical results are not necessarily indicative of the results to be expected in the future.
2017
Year Ended June 30,
2015
(in millions, except for per share data)
2016
2014
2013
Consolidated Statements of Operations Data
Revenue
Operating costs and expenses
Operating income
Other expenses, net
(Loss)/earnings from continuing operations before
income taxes
Provision/(benefit) for income taxes
Income/(loss) from continuing operations
Earnings from discontinued operations, net of income
taxes
Net income/(loss)
Weighted-average shares used to compute net loss per
share:
Basic
Diluted
Income/(loss) from continuing operations per share:
Basic and diluted
Earnings from discontinued operations per share
Basic and diluted
Net income/(loss) per share
Basic and diluted
Consolidated Balance Sheet Data (at period end):
Cash and cash equivalents
Property and equipment, net
Total assets
Long-term debt and capital lease obligations, including
current portion
Total stockholders' equity
$ 2,199.8 $ 1,721.7 $ 1,347.1 $ 1,123.2 $ 1,004.4
894.8
109.6
(279.4)
1,826.0
373.8
(269.7)
1,067.1
56.1
(200.4)
1,178.1
169.0
(333.1)
1,481.4
240.3
(308.0)
104.1
18.4
85.7
(67.7)
8.5
(76.2)
(164.1)
(8.8)
(155.3)
(144.3)
37.3
(181.6)
(169.8)
(24.2)
(145.6)
—
85.7 $
—
(76.2) $
-
(155.3) $
2.3
(179.3) $
8.4
(137.2)
243.9
246.8
243.3
243.3
235.4
235.4
223.0
223.0
223.0
223.0
0.35 $
(0.31) $
(0.66) $
(0.81) $
(0.65)
— $
— $
— $
0.01 $
0.04
0.35 $
(0.31) $
(0.66) $
(0.80) $
(0.61)
220.7 $
5,016.0
8,739.4
170.7 $
4,079.5
6,727.5
308.6 $
3,299.2
6,094.6
297.4 $
2,822.4
4,981.7
91.3
2,437.7
4,152.1
5,639.3
1,410.5
4,136.0
1,219.2
3,701.4
1,211.2
3,179.0
416.4
2,744.8
606.3
$
$
$
$
$
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Table of Contents
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Information contained in this Annual Report on Form 10-K (this “Annual Report”), and in other filings by Zayo Group
Holdings, Inc. (“we” or “us”), with the Securities and Exchange Commission (the “SEC”) that is not historical by nature
constitutes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the
Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. These forward-looking statements
typically include words 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 discuss 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
management’s 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 and achieve our planned synergies, 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 “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.” We caution you not to place undue reliance on these
forward-looking statements, which speak only as of their respective dates. We undertake no obligation to publicly update or
revise forward-looking statements to reflect events or circumstances after the date of this Annual 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 Annual 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 large and fast growing provider of bandwidth infrastructure in the United States, Europe and Canada. Our
products and services enable mission-critical, high-bandwidth applications, such as cloud-based computing, video, mobile, social
media, machine-to-machine connectivity, and other bandwidth-intensive applications. Key products include leased dark fiber,
fiber to cellular towers and small cell sites, dedicated wavelength connections, Ethernet, IP connectivity, cloud services and other
high-bandwidth offerings. We provide our services over a unique set of dense metro, regional, and long-haul fiber networks and
through our interconnect-oriented data center facilities. Our fiber networks and data center facilities are critical components of the
overall physical network architecture of the Internet and private networks. Our customer base includes some of the largest and
most sophisticated consumers of bandwidth infrastructure services, such as wireless service providers; telecommunications
service providers; financial services companies; social networking, media, and web content companies; education, research, and
healthcare institutions; and governmental agencies. We typically provide our bandwidth infrastructure services for a fixed
monthly recurring fee under contracts that vary between one and twenty years in length. We operate our business with a unique
focus on capital allocation and financial performance with the ultimate goal of maximizing equity value for our stockholders. Our
core values center on partnership, alignment, and transparency with our three primary constituent groups-employees, customers,
and stockholders.
On October 22, 2014, we completed an initial public offering (“IPO”) of shares of our common stock, which were listed on
the New York Stock Exchange (“NYSE”) under the ticker symbol “ZAYO”. Prior to the IPO, we were a direct, wholly owned
subsidiary of Communications Infrastructure Investments, LLC ("CII"). Our primary operating subsidiary is Zayo Group, LLC, a
Delaware limited liability company (“ZGL”), and we are headquartered in Boulder, Colorado.
Our fiscal year ends June 30 each year, and we refer to the fiscal year ended June 30, 2017 as “Fiscal 2017,” the fiscal year
ended June 30, 2016 as “Fiscal 2016,” and the fiscal year ended June 30, 2015 as “Fiscal 2015.”
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Our Segments
We use the management approach to determine the segment financial information that should be disaggregated and
presented. The management approach is based on the manner by which management has organized the segments within the
Company for making operating decisions, allocating resources, and assessing performance. With the continued increase
in our scope and scale, effective January 1, 2017, our chief operating decision maker ("CODM"), who is our Chief Executive
Officer, implemented certain organizational changes to the management and operation of the business that directly impact how
the CODM makes resource allocation decisions and manages the Company. The change in structure had the impact of revising
our reportable segments and re-aligning our existing Strategic Product Groups (“SPGs”) within these segments. We have six
reportable segments as described below:
Fiber Solutions. Through the Fiber Solutions segment, we provide raw bandwidth infrastructure to customers that
require more control of their internal networks. These services include dark fiber, dedicated lit networks and mobile
infrastructure (fiber-to-the-tower and small cell). Dark fiber is a physically separate and secure, private platform for
dedicated bandwidth. We lease dark fiber pairs (usually 2 to 12 total fibers) to our customers, who “light” the fiber
using their own optronics. Our mobile infrastructure services provide direct fiber connections to cell towers, small
cells, hub sites, and mobile switching centers. Fiber Solutions customers include carriers and other communication
service providers, Internet service providers, wireless service providers, major media and content companies, large
enterprises, and other companies that have the expertise to run their own fiber optic networks or require
interconnected technical space. The contract terms in the Fiber Solutions segment tend to range from three to twenty
years.
Transport. The Transport segment provides lit bandwidth infrastructure solutions over our metro, regional, and long-
haul fiber networks. The segment uses optronics to light the fiber, and our customers pay for service based on the
amount and type of bandwidth they purchase. The services within this segment include wavelengths, wholesale IP
services and SONET. We target customers who require a minimum of 10G of bandwidth across their networks.
Transport customers include carriers, content providers, financial services companies, healthcare, government
entities, education institutions and other medium and large enterprises. The contract terms in this segment tend to
range from two to five years.
Enterprise Networks. The Enterprise Networks segment provides communication solutions to medium and large
enterprises. Our services within this segment include Ethernet, enterprise private and connectivity services, managed
services and cloud based compute and storage products. Solutions range from point-to-point data connections to
multi-site managed networks to international outsourced IT infrastructure environments.
Zayo Colocation (zColo). The Colocation segment provides data center infrastructure solutions to a broad range of
enterprise, carrier, cloud, and content customers. Our services within this segment include the provision of colocation
space, power and interconnection services in North America and Western Europe. Solutions range in size from
single cabinet solutions to 1MW+ data center infrastructure environments. Our data centers also support a large
component of our networking equipment for the purpose of aggregating and distributing data, voice, Internet, and
video traffic. The contract terms in this segment tend to range from two to five years.
Allstream . The Allstream segment provides Voice, SIP Trunking, Unified Communications and scalable data
services using a variety of technologies for businesses. Voice provides a full range of local voice services allowing
business customers to complete telephone calls in their local exchange, as well as make long distance, toll-free and
related calls. Unified Communications is the integration of real-time communication services such as telephony
(including Cloud-based IP telephony), instant messaging and video conferencing with non-real-time communication
services, such as integrated voicemail and e-mail. Unified Communications provides a set of products that give users
the ability to work and communicate across multiple devices, media types and geographies. Allstream also offers a
range of data services that help small and medium business (“SMB”) customers implement the right data and
networking solutions for their business. Those scalable data services make use of technologies including Ethernet
services, IP/MPLS VPN Solutions, and wavelength services. Allstream provides services to approximately 70,000
customers in the SMB market while leveraging its extensive network and product offerings. These include IP,
internet, voice, IP Trunking, cloud private branch exchange, collaboration services and unified communications.
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Other . Our Other segment is primarily comprised of Zayo Professional Services (“ZPS”). We provide network and
technical resources to customers who wish to leverage our expertise in designing, acquiring and maintaining
networks. Services are typically provided for a term of one year for a fixed recurring monthly fee in the case of
network and on an hourly basis for technical resources (usage revenue). ZPS also generates revenue via
telecommunications equipment sales.
Factors Affecting Our Results of Operations
Business Acquisitions
We were founded in 2007 with the investment thesis of building a bandwidth infrastructure platform to take advantage of
the favorable Internet, data, and wireless growth trends driving the on-going demand for bandwidth infrastructure, and to be an
active participant in the consolidation of the industry. These trends have continued in the years since our founding, despite
volatile economic conditions, and we believe that we are well positioned to continue to capitalize on those trends. We have built a
significant portion of our network and service offerings through 41 acquisitions to date.
As a result of the growth of our business from these acquisitions, and capital expenditures and the increased debt used to
fund those investing activities, our results of operations for the respective periods presented and discussed herein are not
comparable.
Recent Significant Acquisitions
KIO Networks US Data Centers
On May 1, 2017, the Company completed the $11.9 million cash acquisition of Castle Access, Inc.’s (d/b/a “KIO Networks US”)
San Diego data centers. The two data centers, located at 12270 World Trade Drive and 9606 Aero Drive, total more than 100,000
square feet of space and 2 megawatts of critical, IT power, with additional power available. As of June 30, 2017, $1.2 million of
the purchase consideration is held in escrow pending the expiration of the indemnification adjustment period. The acquisition was
funded with cash on hand and was considered a stock purchase for tax purposes.
The results of the acquired KIO Networks US business are included in our operating results beginning May 1, 2017.
Electric Lightwave Parent, Inc.
On March 1, 2017, we acquired Electric Lightwave Parent, Inc. (“Electric Lightwave”) , an infrastructure and telecom
services provider serving 35 markets in the western U.S., for net purchase consideration of $1,426.6 million, net of cash acquired,
subject to certain post-closing adjustments. The acquisition was funded through debt and cash on hand.
The acquisition added 8,100 route miles of long haul fiber and 4,000 miles of dense metro fiber
across Denver, Minneapolis, Phoenix, Portland, Seattle, Sacramento, San Francisco, San Jose, Salt Lake City, Spokane and Boise,
with on-net connectivity to more than 3,100 enterprise buildings and 100 data centers.
The results of the acquired Electric Lightwave business are included in our operating results beginning March 1, 2017.
Santa Clara Data Center
On October 3, 2016, we acquired a data center in Santa Clara, California (the “Santa Clara Data Center”), for net purchase
consideration of $11.3 million. The net purchase consideration, which was valued using a discounted cash flow method, will be
paid in ten quarterly payments of $1.3 million, beginning in the December 2016 quarter. As of June 30, 2017, the remaining
consideration to be paid was $8.9 million.
The Santa Clara Data Center, located at 5101 Lafayette Street, includes 26,900 total square feet and three megawatts of
critical power. The facility also includes high-efficiency power and cooling infrastructure, seismic reinforcement and proximity to
our long haul dark fiber routes between San Francisco and Los Angeles.
The results of the acquired Santa Clara Data Center business are included in our operating results beginning October 3,
2016.
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Clearview
On April 1, 2016, we acquired 100% of the equity interest in Clearview International, LLC, a Texas based colocation and
cloud infrastructure services provider, for cash consideration of $18.3 million. The acquisition was funded with cash on hand.
The acquisition consisted of two Texas data centers. The data centers, located at 6606 LBJ Freeway in Dallas, Texas and
700 Austin Avenue in Waco, Texas, added approximately 30,000 square feet of colocation space, as well as a set of hybrid cloud
infrastructure services that complement our global cloud capabilities.
The results of the acquired Clearview business are included in our operating results beginning April 1, 2016.
Allstream
On January 15, 2016, we acquired 100% of the equity interest in Allstream, Inc. and Allstream Fiber U.S. Inc. (together
“Allstream”) for cash consideration of CAD $422.9 million (or $297.6 million), net of cash acquired, subject to certain post-
closing adjustments. The consideration paid is net of $29.6 million of working capital and other liabilities assumed by us in the
acquisition. The acquisition was funded with an incremental borrowing under our Term Loan Facility (as defined below).
The acquisition added more than 18,000 route miles to our fiber network, including 12,500 miles of long-haul fiber
connecting all major Canadian markets and 5,500 route miles of metro fiber network connecting approximately 3,300 on-net
buildings concentrated in Canada’s top five metropolitan markets.
The operating results of the acquired Allstream business are included in our operating results beginning January 15, 2016.
Viatel
On December 31, 2015, we acquired 100% of the interest in Viatel Infrastructure Europe Ltd, Viatel (UK) Limited, Viatel
France SAS, Viatel Deutschland GmbH and Viatel Nederland BV (collectively “Viatel”) for cash consideration of €92.9 million
(or $101.2 million), net of cash acquired. The acquisition was funded with cash on hand.
The Viatel acquisition provides us with Pan-European intercity and metro fiber capability via a 8,400 kilometer fiber
network across eight countries. The transaction added 12 new metro networks, seven data centers and connectivity to 81 on-net
buildings. Two wholly-owned subsea cable systems provide connectivity on two of Europe’s key routes – London-Amsterdam
and London-Paris.
The operating results of the acquired Viatel business are included in our results beginning January 1, 2016.
Dallas Data Center
On December 31, 2015, we acquired a 36,000 square foot data center located in Dallas, Texas for cash consideration of
$16.6 million. The acquisition was funded with cash on hand.
The operating results of the acquired Dallas Data Center business are included in our results beginning January 1, 2016.
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Table of Contents
Summary of Business Acquisitions
The table below summarizes the dates and purchase prices (which are net of cash acquired and include assumption of debt
and capital leases) of all acquisitions and asset purchases through June 30, 2017.
Acquisition
Memphis Networx
PPL Telecom
Indiana Fiber Works
Onvoy
Voicepipe
Citynet Fiber Networks
Northwest Telephone
CenturyTel Tri-State Markets
Columbia Fiber Solutions
CityNet Holdings Assets
Adesta Assets
Northwest Telephone California
FiberNet
AGL Networks
Dolphini Assets
American Fiber Systems
360networks
MarquisNet
Arialink
AboveNet
FiberGate
USCarrier
FTS
Litecast
Core NAP
Corelink
Access
FiberLink
CoreXchange
Geo
Neo
Colo Facilities Atlanta
IdeaTek Systems
Latisys
Viatel
Stream Dallas Data Center
Allstream
Clearview
Santa Clara Data Center
Electric Lightwave
KIO Networks US Data Centers
Less portion allocated to the discontinued operations of Onvoy, LLC
Total
Date
Acquisition Cost
(in millions)
July 31, 2007
August 24,2007
September 28, 2007
November 7, 2007
November 7, 2007
February 15, 2008
May 30, 2008
July 22, 2008
September 30, 2008
September 30, 2008
September 30, 2008
May 26, 2009
September 9, 2009
July 1, 2010
September 20, 2010
October 1, 2010
December 1, 2011
December 31, 2011
May 1 2012
July 2, 2012
August 31, 2012
October 1, 2012
December 14, 2012
December 31, 2012
May 31, 2013
August 1, 2013
October 1, 2013
October 2, 2013
March 4, 2014
May 16, 2014
July 1, 2014
July 1, 2014
January 1, 2015
February 23, 2015
December 31, 2015
December 31, 2015
January 15, 2016
April 1, 2016
October 3, 2016
March 1, 2017
May 1, 2017
$
$
9.2
46.3
22.6
70.0
2.8
99.2
5.2
2.7
12.1
3.4
6.4
0.0
96.6
73.7
0.2
114.1
317.9
13.6
17.1
2,210.0
118.3
16.1
109.7
22.2
7.1
1.9
40.1
43.1
17.2
292.3
73.9
51.9
52.7
677.8
102.7
16.6
297.6
18.3
11.3
1,426.6
11.9
(62.3)
6,470.1
We completed each of the acquisitions described above, with the exception of Voicepipe and Corelink, with cash raised
through combinations of equity issuances and the incurrence of debt. We acquired Voicepipe from certain existing CII equity
holders in exchange for CII preferred units, and we acquired Corelink with a combination of cash and CII preferred units.
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Table of Contents
Substantial Indebtedness
Term Loan Facility and Revolving Credit Facility
On May 6, 2015, ZGL and Zayo Capital, Inc. (“Zayo Capital”) entered into an Amendment and Restatement Agreement
whereby the Credit Agreement (the “Credit Agreement”) governing their senior secured term loan facility (the “Term Loan
Facility”) and $450.0 million senior secured revolving credit facility (the “Revolver”) was amended and restated in its entirety.
The amended and restated Credit Agreement extended the maturity date of a portion of the then outstanding term loans under the
Term Loan Facility from July 2, 2019 to May 6, 2021. The interest rate margins applicable to the portion of the Term Loan
Facility due in 2021 were decreased by 25 basis points to LIBOR plus 2.75% with a minimum LIBOR of 1.0%. In addition, the
amended and restated Credit Agreement removed the fixed charge coverage ratio covenant and replaced such covenant with a
springing senior secured leverage ratio maintenance requirement applicable only to the Revolver, increased certain lien and debt
baskets, and removed certain covenants related to collateral. The terms of the Term Loan Facility required us to make quarterly
principal payments of $5.1 million plus an annual payment of up to 50% of excess cash flow, as determined in accordance with
the Credit Agreement (no such payment was required during Fiscal 2016 or Fiscal 2017).
Under the amended and restated Credit Agreement, the Revolver matures at the earliest of (i) April 17, 2020, and (ii) six
months prior to the earliest maturity date of the Term Loan Facility, subject to amendment thereof. The Credit Agreement also
allows for letter of credit commitments of up to $50.0 million. The Revolver is subject to a fee per annum of 0.25% to 0.375%
(based on ZGL’s current leverage ratio) of the weighted-average unused capacity, and the undrawn amount of outstanding letters
of credit backed by the Revolver are subject to a 0.25% fee per annum. Outstanding letters of credit backed by the Revolver
accrue interest at a rate ranging from LIBOR plus 2.0% to LIBOR plus 3.0% per annum based upon ZGL’s leverage ratio.
On January 15, 2016, ZGL and Zayo Capital entered into an Incremental Amendment (the “Amendment”) to the Credit
Agreement. Under the terms of the Amendment, the portion of the Term Loan Facility due 2021 was increased by $400.0 million
(the “Incremental Term Loan”). The additional amounts borrowed bear interest at LIBOR plus 3.5% with a minimum LIBOR rate
of 1.0%. The $400.0 million add-on was priced at 99.0%. The issue discount of $4.8 million on the Amendment is being accreted
to interest expense over the term of the Term Loan Facility under the effective interest method. No other terms of the Credit
Agreement were amended. The Incremental Term Loan proceeds were used to fund the Allstream acquisition and for general
corporate purposes.
On July 22, 2016, ZGL and Zayo Capital entered into a Repricing Amendment (the “Repricing Amendment”) to the Credit
Agreement. Per the terms of the Repricing Amendment, the Incremental Term Loan was repriced at par and will bear interest at a
rate of LIBOR plus 2.75%, with a minimum LIBOR rate of 1.0%, which represented a downward adjustment of 75 basis points.
No other terms of the Credit Agreement were amended.
On January 19, 2017, ZGL and Zayo Capital entered into an Incremental Amendment No. 2 (the “Incremental
Amendment”) to the Credit Agreement. Per the terms of the Incremental Amendment, the existing $1.85 billion of term loans
under the Credit Agreement were repriced at 99.75% with one $500.0 million tranche that bears interest at a rate of LIBOR plus
2.0%, with a minimum LIBOR rate of 0.0% and a maturity date of four years from incurrence, which represents a downward
adjustment of 75 basis points along with the lowering of the previous LIBOR floor, and a second $1.35 billion tranche (the “B-2
Term Loan” and along with the $500.0 million tranche, the “Refinancing Term Loans”) that bears interest at a rate of LIBOR plus
2.5%, with a minimum LIBOR rate of 1.0% and a maturity of seven years from incurrence, which represents a downward
adjustment of 25 basis points. In addition, per the terms of the Incremental Amendment, ZGL and Zayo Capital added a new
$650.0 million term loan tranche under the Credit Agreement (the “Electric Lightwave Incremental Term Loan”) that bears
interest at LIBOR plus 2.5%, with a minimum LIBOR rate of 1.0%, with a maturity of seven years from the closing date of the
Incremental Amendment. In connection with the Incremental Amendment the full $2,500.0 million Term Loan Facility including
the Refinancing Term Loans and the Electric Lightwave Incremental Term Loan, was issued at a price of 99.75%. Per the terms
of the Incremental Amendment, the Revolver matures on April 17, 2020. No other material terms of the Credit Agreement were
amended. On April 10, 2017, $570.1 million of the B-2 Term Loan and the Electric Lightwave Incremental Term Loan was
repaid from proceeds of issuance of senior unsecured notes as further discussed below. As of June 30, 2017, $1,928.7 million of
aggregate principal amount was outstanding under the Term Loan Facility.
In connection with the Incremental Amendment in January 2017 and early repayment of a portion of the term loan in April,
we recognized an expense of $18.2 million during Fiscal 2017 associated with debt extinguishment costs. The $18.2 million loss
on extinguishment of debt represents a non-cash expense associated with the write-off of unamortized
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debt issuance costs and the issuance discounts on the portion of the Credit Agreement, as further amended, which was deemed to
have been extinguished in accordance with applicable accounting guidance in connection with the Incremental Amendment and
was extinguished in connection with the early repayment of a portion of the term loan. The loss on extinguishment of debt also
includes certain fees paid to third parties involved in the Incremental Amendment.
On July 20, 2017, ZGL and Zayo Capital entered into a repricing amendment under the Credit Agreement for the
outstanding balances under the B-2 Term Loan and Electric Lightwave Incremental Term Loan (the “Repricing Amendment No.
2”). Per the terms of the Repricing Amendment No. 2, the B-2 Term Loan and Electric Lightwave Incremental Term Loan was
repriced at par and bears interest at a rate of LIBOR plus 2.25%, with a minimum LIBOR rate of 1.0%. No other terms of the
Credit Agreement were amended.
The weighted average interest rates (including margins) on the Term Loan Facility were approximately 3.4% and 3.9% at
June 30, 2017 and June 30, 2016, respectively. Interest rates on the Revolver as of June 30, 2017 and June 30, 2016 were
approximately 3.8% and 3.4%, respectively.
As of June 30, 2017, no amounts were outstanding under the Revolver. Standby letters of credit were outstanding in the
amount of $7.8 million as of June 30, 2017, leaving $442.2 million available under the Revolver, subject to certain conditions.
Senior Unsecured Notes
On January 23, 2015, ZGL and Zayo Capital (together, the “Issuers”) completed a private offering (the “January 2015
Notes Offering”) of $700.0 million aggregate principal amount of 6.00% senior unsecured notes due in 2023 (the “2023
Unsecured Notes”). On March 9, 2015, the Issuers completed a private offering of an additional $730.0 million aggregate
principal amount of 2023 Unsecured Notes at a premium of 1% (the “March 2015 Notes Offering”, and together with the January
2015 Notes Offering, the “2023 Notes Offerings”) resulting in aggregate gross proceeds for the 2023 Unsecured Notes of
$1,437.3 million. The issue premium of $7.3 million on the March 2015 Notes Offering is being accreted against interest expense
over the term of the 2023 Unsecured Notes under the effective interest method. The 2023 Unsecured Notes bear interest at the
rate of 6.00% per year, which is payable on April 1 and October 1 of each year, beginning on October 1, 2015. The 2023
Unsecured Notes will mature on April 1, 2023. The net proceeds from the January 2015 Notes Offering were used to fund the
Latisys acquisition (see Note 3 – Acquisitions to our consolidated financial statements). The net proceeds from the March 2015
Notes Offering were used to redeem the remaining $675.0 million of the Issuers’ then outstanding 2020 Secured Notes (as
defined below) at a price of 105.75% (the “Second Note Redemption”). As part of the Second Note Redemption, we recorded an
early redemption call premium of $38.8 million. The call premium has been recorded as a loss on extinguishment of debt on the
consolidated statement of operations for the year ended June 30, 2015.
On April 14, 2016, ZGL and Zayo Capital completed a private offering of $550.0 million aggregate principal amount of
additional 2025 Unsecured Notes (the “Incremental 2025 Notes”). The Incremental 2025 Notes were an additional issuance of the
existing 6.375% senior unsecured notes due in 2025 (the “2025 Notes” and together with the Incremental 2025 Notes, the “2025
Unsecured Notes”) and were priced at 97.76%. The issue discount of $15.9 million of the Incremental 2025 Notes is being
accreted to interest expense over the term of the Incremental 2025 Notes using the effective interest method. The net proceeds
from the offering plus cash on hand were used to (i) redeem the then outstanding $325.6 million 10.125% senior unsecured notes
due 2020 (the “2020 Unsecured Notes”), including the required $20.3 million make-whole premium and accrued interest, and (ii)
repay $196.0 million of borrowings under the then outstanding secured Term Loan Facility. ZGL and Zayo Capital recorded a
$2.1 million loss on extinguishment of debt associated with the write-off of unamortized debt discount on the Term Loan Facility
accounted for as an extinguishment during the fourth quarter of Fiscal 2016. Following the offering of the Incremental 2025
Notes, $900.0 million aggregate principal amount of the 2025 Unsecured Notes is outstanding.
On January 27, 2017, ZGL and Zayo Capital completed a private offering of $800.0 million aggregate principal amount of
5.75% senior unsecured notes due 2027 (the “2027 Unsecured Notes”). T he net proceeds of the 2027 Unsecured Notes, along
with the Electric Lightwave Incremental Term Loan discussed above, were used to fund the Electric Lightwave acquisition ,
which closed on March 1, 2017.
On April 10, 2017, ZGL and Zayo Capital completed a private offering of $550.0 million aggregate principal amount of 5.75%
senior unsecured notes due 2027 (the “Incremental 2027 Notes”). The Incremental 2027 notes were an
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additional issuance of the existing 2027 Unsecured Notes and were priced at 104.0%. The issue premium of $22.0 million of the
Incremental 2027 Notes is being accreted to interest expense over the term of the 2027 Unsecured Notes using the effective
interest method. The net proceeds from the Incremental 2027 Notes were used to repay certain outstanding balances on the Term
Loan Facility that mature on January 19, 2024. Following the offering of the Incremental 2027 Notes, $1,350.0 million aggregate
principal amount of the 2027 Unsecured Notes was outstanding as of June 30, 2017.
On July 5, 2017, ZGL and Zayo Capital closed a private offering of $300.0 million aggregate principal amount of 5.75%
senior unsecured notes due 2027 (the “July Incremental 2027 Notes”) through an add-on to the 2027 Unsecured Notes issuance
priced at 104.25%. The net proceeds from the July Incremental 2027 Notes were used to further repay certain outstanding
balances on the Term Loan Facility that mature on January 19, 2024, resulting in an aggregate principal amount outstanding of
$1,618.1 million under the Term Loan Facility. Following the offering of the July Incremental 2027 Notes, $1,650.0 million
aggregate principal amount of the 2027 Unsecured Notes are outstanding.
Substantial Capital Expenditures
During Fiscal 2017, 2016, and 2015, we invested $835.5 million, $704.1 million, and $530.4 million, respectively, in
capital expenditures primarily to expand our fiber network to support new customer contracts. We expect to continue to make
significant capital expenditures in future periods.
Background for Review of Our Results of Operations
Revenue
Our revenue is comprised predominately of monthly recurring revenue (“MRR”). MRR is related to an ongoing service that
is generally fixed in price and paid by the customer on a monthly basis. We also report monthly amortized revenue (“MAR”),
which represents the amortization of previously collected upfront charges to customers. Upfront charges are typically related to
IRUs structured as pre-payments rather than monthly recurring payments (though we structure IRUs as both prepaid and
recurring, largely dependent on the customers’ preference) and installation fees. The last category of revenue we report is other
revenue. Other revenue includes credits and adjustments, termination revenue, construction services, and equipment sales.
Our consolidated reported revenue in any given period is a function of our beginning revenue under contract and the impact
of organic growth and acquisition activity. Our organic activity is driven by net new sales (“bookings”), gross installed revenue
(“installs”) and churn processed (“churn”) as further described below.
Net New Sales . Net new sales (“bookings”) represent the dollar amount of orders, to be recorded as MRR and MAR upon
installation, in a period that have been signed by the customer and accepted by our service delivery organization. The dollar
value of bookings is equal to the monthly recurring price that the customer will pay for the services and/or the monthly
amortized amount of the revenue that we will recognize for those services. To the extent a booking is cancelled by the
customer prior to it being installed, it is subtracted from the total bookings number in the period that it is cancelled.
Bookings do not immediately impact revenue until they are installed (gross installed revenue).
Gross Installed Revenue . Installs are the amount of MRR and MAR for services that have been installed, tested, accepted
by the customer, and have been recognized in revenue during a given period. Installs include new services, price increases,
and upgrades.
Churn Processed . Churn is any negative change to MRR and MAR. Churn includes disconnects, negative price changes,
and disconnects associated with upgrades or replacement services. For each period presented, disconnects associated with
attrition and upgrades are the drivers of churn, accounting for more than 80% of negative changes in MRR and MAR while
price changes account for less than 20%. Monthly churn is also presented as a percentage of MRR and MAR (“churn
percentage”).
Given the size and amount of acquisitions we have completed, we have estimated the revenue growth rate associated with
our organic activity in each period reported. Our estimated organic growth rate is calculated as if acquisitions closed during the
periods presented were closed on the first day of the earliest period presented within this
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Annual Report. In calculating this pro-forma growth figure we add the revenue recorded by the acquired companies’ (including
estimated purchase accounting adjustments) for the reporting periods prior to the date of inclusion in our results of operations, and
then calculate the growth rate between the two reported periods. The estimated pro-forma revenue growth rates are not
necessarily indicative of either future results of operations or results that might have been achieved had the acquisitions been
consummated on the first day of the earliest period presented. As we conduct operations outside of the United States of America
and have historically acquired companies with functional currencies other than the United States Dollar (“USD”), the estimated
pro-forma revenue growth rates may not adequately reflect operational performance as a result of changes in foreign currency
exchange rates.
We have foreign subsidiaries that enter into contracts with customers and vendors in currencies other than the USD—
principally the British Pound Sterling (“GBP”) and Canadian Dollar (“CAD”) and to a lesser extent the Euro. Changes in foreign
currency exchange rates impact our revenue and expenses each period. The comparisons excluding the impact of foreign currency
exchange rates assume exchange rates remained constant at the comparative period rate.
Operating Costs and Expenses
Our operating costs and expenses consist of network expense (“Netex”), compensation and benefits, network operations
expense (“Netops”), stock-based compensation expense, other expenses, and depreciation and amortization.
Netex consists of third-party network service costs resulting from our leasing of certain network facilities, primarily leases
of circuits and dark fiber, from carriers to augment our owned infrastructure, for which we are generally billed a fixed monthly
fee. Netex also includes colocation facility costs for rent and license fees paid to the landlords of the buildings in which our
colocation business operates, along with the utility costs to power those facilities. While increases in demand for our services will
drive additional operating costs in our business, consistent with our strategy of leveraging our owned infrastructure assets, we
expect to primarily utilize our existing network infrastructure or build new network infrastructure to meet the demand. In limited
circumstances, we will augment our network with additional circuits or services from third-party providers. Third-party network
service costs include the upfront cost of the initial installation of such circuits. Such costs are included in operating costs in our
consolidated statements of operations over the respective service period.
Compensation and benefits expenses include salaries, wages, incentive compensation and benefits. Employee-related costs
that are directly associated with network construction, service installations (and development of business support systems) are
capitalized and amortized to operating costs and expenses. Compensation and benefits expenses related to the departments
attributed to generating revenue are included in our operating costs line item while compensation and benefits expenses related to
the sales, product, and corporate departments are included in our selling, general and administrative expenses line item of our
consolidated statements of operations.
Netops expense includes all of the non-personnel related expenses of operating and maintaining our network infrastructure,
including contracted maintenance fees, right-of-way costs, rent for cellular towers and other places where fiber is located, pole
attachment fees, and relocation expenses. Such costs are included in operating costs in our consolidated statements of operations.
Prior to our IPO, our stock-based compensation expense contained two components, CII common unit awards classified as
liabilities and, to a lesser extent, CII preferred unit awards classified as equity. For the CII common units granted to employees
and directors, we recognized an expense equal to the fair value of all of those common units that vest during the period plus the
change in fair value of previously vested units, and recorded a liability in respect of those amounts. Following the IPO, our stock-
based compensation expense contains three components: previously granted CII common unit awards and CII preferred unit
awards and restricted stock unit awards made under our new equity compensation program. For previously granted CII common
unit awards, following the IPO, we amortize the offering date fair value of those units (including unvested units) over the vesting
period based on expected settlement behavior with a corresponding adjustment to equity, as the awards no longer have cash
settlement features. For previously granted CII preferred units, we use the straight line method, over the vesting period, to
amortize the fair value of those units, as determined on the date of grant. We recognize stock-based compensation expense for
restricted stock unit awards granted to employees, members of management, and directors based on their estimated grant date fair
value on a straight line basis over the requisite service period, as adjusted for forfeitures. These restricted stock unit awards are
primarily equity classified, except certain awards that have not yet been granted to employees or certain sign-on grants to
members of management that contain guaranteed monetary awards at multiple vesting dates. Following our IPO, subsequent
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changes in the fair value of the CII preferred and common units and restricted stock unit awards granted generally do not affect
the amount of expense we recognize. As of December 31, 2016, all CII preferred and common units were fully vested.
Stock-based compensation expense is included, based on the responsibilities of the awarded recipient, in either our
operating costs or selling, general and administrative expenses in our consolidated statements of operations.
Other expenses include expenses such as property tax, franchise fees, colocation facility maintenance, travel, office expense
and other administrative costs. Other expenses are included in both operating costs and selling, general and administrative
expenses depending on their relationship to generating revenue or association with sales and administration.
Transaction costs include expenses associated with professional services (i.e. legal, accounting, regulatory, etc.) rendered in
connection with acquisitions or disposals (including spin-offs), travel expense, severance expense incurred on the date of
acquisition or disposal, and other direct expenses incurred that are associated with signed and/or closed acquisitions or disposals
and unsuccessful acquisitions. Transaction costs are included in selling, general and administrative expenses in our consolidated
statements of operations.
Results of Operations
Refer to “Item 6. Selected Financial Data” for additional financial information for the indicated periods.
Year Ended June 30, 2017 Compared to the Year Ended June 30, 2016
Revenue
Segment and consolidated revenue:
Fiber Solutions
Transport
Enterprise Networks
zColo
Allstream
Other
Consolidated
* Not meaningful
2017
For the Year Ended June 30,
2016
$ Variance
(in millions)
% Variance
$
$
722.1
440.4
487.4
214.0
314.3
21.6
2,199.8
$
$
648.8
391.4
359.6
195.4
106.2
20.3
1,721.7
$
$
73.3
49.0
127.8
18.6
208.1
1.3
478.1
11 %
13 %
36 %
10 %
*
6 %
28 %
Our total revenue increased by $478.1 million, or 28%, to $2,199.8 million for the year ended June 30, 2017, from $1,721.7
million for the year ended June 30, 2016. The increase in revenue was driven by our Fiscal 2016 and 2017 acquisitions as well as
organic growth.
We estimate that the period-over-period pro-forma organic revenue declined by 0.9%. Our pro-forma revenue decline was
primarily driven by declining revenue from the voice businesses acquired in our Fiscal 2016 and 2017 acquisitions. Offsetting
this pro-forma decline was organic growth resulting from installs that exceeded churn over the course of both periods as a result
of the continued strong demand for bandwidth infrastructure services broadly across our service territory and customer verticals.
· Bookings increased period-over-period from $26.6 million to $26.9 million in combined MRR and MAR, excluding
Allstream. The total contract value associated with bookings for the year ended June 30, 2017 was approximately
$1,490.0 million, excluding Allstream.
· During the year ended June 30, 2017, the Company recognized net installs of $7.1 million as compared to $9.0 million
during the year ended June 30, 2016, excluding Allstream.
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· Monthly churn percentage between the two periods increased to 1.2% from 1.1%, excluding Allstream.
We estimate that the period-over-period acquisition-related revenue growth was approximately 29%.
The average exchange rate between the USD and GBP strengthened by 14.5% during the year ended June 30, 2017. The
average exchange rate between the USD and Euro strengthened by 1.8%. The average exchange rate between the USD and CAD
strengthened by 0.3%. Normalizing our revenue to exclude the impact of foreign currency exchange rate fluctuations, we estimate
that the increase in revenue would have been less between the year ended June 30, 2017 and June 30, 2016 by $14.9 million for a
total revenue increase of $463.2 million, or 27%.
Fiber Solutions . Revenue from our Fiber Solutions segment increased by $73.3 million, or 11%, to $722.1 million from
$648.8 million, for the years ended June 30, 2017 and 2016, respectively. The increase was a result of both acquisition-related and
organic growth.
Transport . Revenue from our Transport segment increased by $49.0 million, or 13%, to $440.4 million from $391.4
million for the years ended June 30, 2017 and 2016, respectively. The increase was a result of both acquisition-related and
organic growth.
Enterprise Networks. Revenue from our Enterprise Networks segment increased by $127.8 million, or 36%, to $487.4
million from $359.6 million for the years ended June 30, 2017 and 2016. The increase was a result of both acquisition related and
organic growth.
zColo. Revenue from our zColo segment increased by $18.6 million, or 10%, to $214.0 million from $195.4 million for
the years ended June 30, 2017 and 2016. The increase was a result of both acquisition related and organic growth.
Allstream. Revenue from our Allstream segment increased by $208.1 million to $314.3 million from $106.2 million for
the years ended June 30, 2017 and 2016. The increase was a result of acquiring the Allstream business on January 15, 2016 and
Electric Lightwave on March 1, 2017 .
Other . Revenue from our Other segment increased by $1.3 million, or 6%, to $21.6 million from $20.3 million, for the
years ended June 30, 2017 and 2016, respectively. The Other segment represented approximately 1% of our total revenue during
the year ended June 30, 2017.
The following table reflects the stratification of our revenues during these periods. The substantial majority of our revenue
continued to come from recurring payments from customers under contractual arrangements.
Monthly recurring revenue
Amortization of deferred revenue
Usage revenue
Other revenue
Total Revenue
$
$
For the Year Ended June 30,
(in millions)
90 % $
5 %
3 %
2 %
100 % $
2016
1,546.0
92.5
45.9
37.3
1,721.7
90 %
5 %
3 %
2 %
100 %
2017
1,963.3
117.6
72.1
46.8
2,199.8
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Operating Costs and Expenses
Segment and consolidated operating costs and expenses:
Fiber Solutions
Transport
Enterprise Networks
zColo
Allstream
Other
Consolidated
* Not meaningful
For the Year Ended June 30,
2017
2016
$ Variance % Variance
(in millions)
$
$
561.3
380.5
408.0
195.6
261.6
19.0
1,826.0
$
478.4 $
351.6
332.4
190.7
110.1
18.2
$ 1,481.4 $
82.9
28.9
75.6
4.9
151.5
0.8
344.6
17 %
8 %
23 %
3 %
*
4 %
23 %
Our operating costs increased by $344.6 million, or 23% to $1,826.0 million for Fiscal 2017 from $1,481.4 million for
Fiscal 2016. The increase in consolidated operating costs was primarily due to increased costs as a result of Fiscal 2017 and Fiscal
2016 acquisitions, and the organic growth of our network footprint , partially offset by a $41.8 million decrease in stock-based
compensation.
Fiber Solutions . Fiber Solutions operating costs increased by $82.9 million, or 17%, to $561.3 million for Fiscal 2017
from $478.4 million for Fiscal 2016. The increase in operating costs and expenses was primarily a result of a $93.2 million
increase in depreciation and amortization as well as our Fiscal 2017 and Fiscal 2016 acquisitions and additional costs associated
with the organic growth of our network, partially offset by a $17.7 million decrease in stock-based compensation.
Transport . Transport operating costs increased by $28.9 million, or 8%, to $380.5 million for Fiscal 2017 from $351.6
million for Fiscal 2016. The increase in operating costs and expenses was primarily a result of our Fiscal 2017 and Fiscal 2016
acquisitions and organic growth of our network.
Enterprise Networks . Enterprise Networks operating costs increased by $75.6 million, or 23%, to $408.0 million
for Fiscal 2017 from $332.4 million for Fiscal 2016. The increase in operating costs and expenses was primarily a result of Fiscal
2017 and 2016 acquisitions and organic growth of our network.
zColo . zColo operating costs increased by $4.9 million, or 3%, to $195.6 million for Fiscal 2017 from $190.7 million for
Fiscal 2016. The increase in operating costs and expenses was primarily a result of Fiscal 2017 and 2016 acquisitions.
Allstream . Allstream operating costs increased by $151.5 million to $261.6 million for Fiscal 2017 from $110.1 million
for Fiscal 2016. The increase in operating costs and expenses was primarily a result of acquiring the Allstream business on
January 15, 2016 and Electric Lightwave on March 1, 2017.
Other. Other operating costs increased by $0.8 million, or 4%, to $19.0 million for Fiscal 2017 from $18.2 million for
Fiscal 2016 as a result of increased revenue from equipment sales.
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The table below sets forth the components of our operating costs and expenses during the years ended June 30, 2017 and
2016:
Netex
Compensation and benefits expenses
Network operations expense
Other expenses
Transaction costs
Stock-based compensation
Depreciation and Amortization
Total operating costs and expenses
For the Year Ended June 30,
2017
2016
$ Variance % Variance
(in millions)
$
$
418.8
273.6
244.7
147.4
20.5
114.1
606.9
1,826.0
$
283.0 $
216.8
194.5
93.4
21.5
155.9
516.3
$ 1,481.4 $
135.8
56.8
50.2
54.0
(1.0)
(41.8)
90.6
344.6
48 %
26 %
26 %
58 %
(5)%
(27)%
18 %
23 %
Netex . Our Netex increased by $135.8 million, or 48%, to $418.8 million for Fiscal 2017 from $283.0 million for Fiscal
2016. The increase in Netex was primarily due to our Fiscal 2017 and Fiscal 2016 acquisitions, partially offset by cost savings, as
planned network related synergies were realized.
Compensation and Benefits Expenses . Compensation and benefits expenses increased by $56.8 million, or 26%, to
$273.6 million for Fiscal 2017 from $216.8 million for Fiscal 2016.
The increase in compensation and benefits expenses reflected the increase in headcount from 3,224 for Fiscal 2016 to 3,794
for Fiscal 2017 to support our growing business, including employees retained from businesses acquired during Fiscal 2017 and
2016.
Network Operations Expenses . Network operations expenses increased by $50.2 million, or 26%, to $244.7 million for
Fiscal 2017 from $194.5 million for Fiscal 2016. The increase principally reflected the organic and inorganic growth of our
network assets and the related expenses of operating that expanded network. Our total network route miles increased
approximately 10% to 123,841 miles at June 30, 2017 from 112,660 miles at June 30, 2016.
Other Expenses . Other expenses increased by $54.0 million, or 58%, to $147.4 million for Fiscal 2017, from $93.4
million for Fiscal 2016. The increase was primarily the result of additional expenses attributable to our Fiscal 2016 and 2017
acquisitions.
Transaction Costs . Transaction costs decreased by $1.0 million, or 5%, to $20.5 million for Fiscal 2017 from $21.5
million for Fiscal 2016. The transaction costs recorded during the periods relate to direct costs associated with completing our
Fiscal 2017 and 2016 acquisitions.
Stock-Based Compensation . Stock-based compensation expense decreased by $41.8 million, or 27%, to $114.1 million
for Fiscal 2017 from $155.9 million for Fiscal 2016. The decrease in stock-based compensation expense was primarily driven by
the remaining tranches of our pre-IPO CII common unit grants becoming fully vested in the quarter ended December 31, 2016.
Depreciation and Amortization
Depreciation and amortization expense increased by $90.6 million, or 18%, to $606.9 million for Fiscal 2017 from $516.3
million for Fiscal 2016. The increase was primarily a result of depreciation related to increased capital expenditures and increased
depreciation and amortization expense associated with our Fiscal 2016 and 2017 acquisitions.
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Total Other Expense, Net
The table below sets forth the components of our total other expense, net for the years ended June 30, 2017 and 2016.
Interest expense
Loss on extinguishment of debt
Foreign currency loss on intercompany loans
Other expense, net
Total other expenses, net
* Not meaningful
For the Year Ended June 30,
2017
2016
$ Variance % Variance
(in millions)
$
$
(241.5)
(18.2)
(10.3)
0.3
(269.7)
$
$
(220.1) $
(33.8)
(53.8)
(0.3)
(308.0) $
(21.4)
15.6
43.5
0.6
38.3
(10)%
46 %
81 %
*
12 %
Interest expense . Interest expense increased by $21.4 million, or 10%, to $241.5 million from $220.1 million for the years
ended June 30, 2017 and 2016, respectively. The increase was primarily a result of an increase in debt from the comparative
period resulting from incremental debt raised to fund our acquisitions of Allstream and Electric Lightwave. Partially offsetting the
increase in interest expense was a benefit resulting from downward repricing of the interest rates on our previous indebtedness.
Loss on extinguishment of debt . Loss on extinguishment of debt decreased to a $18.2 million loss for the year ended June
30, 2017 from a loss of $33.8 million for the year ended June 30, 2016. The $18.2 million loss on extinguishment of debt in Fiscal
2017 represents a non-cash expense associated with the write-off of unamortized debt issuance costs and the issuance discounts
on the portion of the Credit Agreement, as further amended, which was deemed to have been extinguished as well as the portion
extinguished through early prepayment. The loss on extinguishment of debt also includes certain fees paid to third parties
involved in the Incremental Amendment. These expenses were recorded as a loss on extinguishment of debt during Fiscal 2017.
Foreign currency loss on intercompany loans . Foreign currency loss on intercompany loans decreased to a $10.3 million
loss for Fiscal 2017 from a loss of $53.8 million for Fiscal 2016. This non-cash loss was driven by the strengthening of the USD
against the GBP period over period and the related impact on intercompany loans entered into by foreign subsidiaries in their
functional currency.
(Benefit)/provision for Income Taxes
Income tax expense increased over the prior year by $9.9 million, to $18.4 million for Fiscal 2017, from $8.5 million for
Fiscal 2016. Our provision for income tax included both the current provision and a provision for deferred income tax expense
resulting from timing differences between tax and financial reporting accounting bases.
The tax rate for the year ended June 30, 2017 was lower than the statutory rate due to the positive impact of stock-based
compensation expense related to excess tax benefit of vested RSUs and reversal of valuation allowances recorded on certain
foreign subsidiaries.
The tax rate for the year ended June 30, 2017 was negatively impacted by stock-based compensation expense related to the
common units of Communications Infrastructure Investments, LLC (“CII”) of $3.7 million. The quarter ended December 31,
2016, was the final period for stock-based compensation expense associated with the common units of CII.
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The following table reconciles an expected tax provision based on a statutory federal tax rate applied to our earnings before
income tax to our actual provision for income taxes:
Expected tax/(benefit) at the statutory rate
Increase/(decrease) due to:
Stock-based compensation
State income taxes, net of federal benefit
Transaction costs not deductible for tax purposes
Change in statutory tax rate
Change in valuation allowance
Foreign tax rate differential
Other, net
Provision for income taxes
Year Ended June 30, 2016 Compared to the Year Ended June 30, 2015
Revenue
For the Year Ended June 30,
2016
2017
$
(in millions)
36.4
$
(11.7)
2.9
1.9
(1.4)
(10.2)
(3.9)
4.4
18.4
$
$
(23.8)
27.9
(2.1)
1.5
(3.6)
2.8
2.7
3.1
8.5
Segment and consolidated revenue:
Fiber Solutions
Transport
Enterprise Networks
zColo
Allstream
Other
Consolidated
* Not meaningful
2016
For the Year Ended June 30,
2015
$ Variance
(in millions)
% Variance
$
$
648.8
391.4
359.6
195.4
106.2
20.3
1,721.7
$
$
575.6
336.4
285.0
126.9
—
23.2
1,347.1
$
$
73.2
55.0
74.6
68.5
106.2
(2.9)
374.6
13 %
16 %
26 %
54 %
*
(13)%
28 %
Our total revenue increased by $374.6 million, or 28%, to $1,721.7 million for the year ended June 30, 2016, from $1,347.1
million for the year ended June 30, 2015. The increase in revenue was driven by our organic growth as well as Fiscal 2015 and
2016 acquisitions.
We estimate that the period-over-period organic growth was approximately 4%. Our organic growth was driven by installs
that exceeded churn over the course of both periods, resulting from continued strong demand for bandwidth infrastructure
services broadly across our service territory and customer verticals. Additional underlying revenue drivers included:
· Bookings increased period-over-period from $24.8 million to $26.6 million in combined MRR and MAR, excluding
Allstream. The total contract value associated with bookings for the year ended June 30, 2016 was approximately
$1,614.0 million, excluding Allstream.
· During the year ended June 30, 2016, the Company recognized net installs of $9.0 million as compared to $7.2 million
during the year ended June 30, 2015, excluding Allstream.
· Monthly churn percentage between the two periods decreased to 1.1% from 1.2%, excluding Allstream.
We estimate that the period-over-period acquisition-related revenue growth was approximately 24%.
The average exchange rate between the USD and GBP weakened by 5.8% during the year ended June 30, 2016. The
average exchange rate between the USD and Euro weakened by 7.7%. Normalizing our revenue to exclude the impact of foreign
currency exchange rate fluctuations, we estimate that revenue would have increased between the
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year ended June 30, 2016 and June 30, 2015 by an additional $6.3 million for a total revenue increase of $380.9 million, or 28%.
Fiber Solutions . Revenue from our Fiber Solutions segment increased by $73.2 million, or 13%, to $648.8 million from
$575.6 million, for the years ended June 30, 2016 and 2015, respectively. The increase was a result of both organic and
acquisition related growth.
Transport . Revenue from our Transport segment increased by $55.0 million, or 16%, to $391.4 million from $336.4
million for the years ended June 30, 2016 and 2015, respectively. The increase was a result of both organic and acquisition related
growth.
Enterprise
Networks.
Revenue from our Enterprise Networks segment increased by $74.6 million, or 26%, to
$359.6 million from $285.0 million for the years ended June 30, 2016 and 2015, respectively. The increase was a result of both
organic and acquisition related growth.
zColo.
Revenue from our zColo segment increased by $68.5 million, or 54%, to $195.4 million from $126.9 million for
the years ended June 30, 2016 and 2015, respectively. The increase was a result of both organic and acquisition related growth.
Allstream.
Revenue from our Allstream segment was $106.2 million for the year ended December 31, 2016.
Other . Revenue from our Other segment decreased by $2.9 million, or 13%, to $20.3 million from $23.2 million, for the
years ended June 30, 2016 and 2015, respectively. The decrease was the result of the non-recurring nature of revenue related to
the Other segment, which had slightly lower sales in Fiscal 2016 as compared to Fiscal 2015. The Other segment represented
approximately 1% of our total revenue during the year ended June 30, 2016.
The following table reflects the stratification of our revenues during these periods. The substantial majority of our revenue
continued to come from recurring payments from customers under contractual arrangements.
Monthly recurring revenue
Amortization of deferred revenue
Usage revenue
Other revenue
Total Revenue
Operating Costs and Expenses
For the Year Ended June 30,
2016
2015
$
$
1,546.0
92.5
45.9
37.3
1,721.7
(in millions)
90 % $
5 %
3 %
2 %
100 % $
1,211.8
72.1
21.1
42.1
1,347.1
90 %
5 %
2 %
3 %
100 %
Segment and consolidated operating costs and expenses:
Fiber Solutions
Transport
Enterprise Networks
zColo
Allstream
Other
Consolidated
* Not meaningful
For the Year Ended June 30,
2016
2015
$ Variance % Variance
(in millions)
$
$
478.4 $
351.6
332.4
190.7
110.1
18.2
1,481.4 $
495.7 $
318.7
198.3
143.8
—
21.6
1,178.1 $
(17.3)
32.9
134.1
46.9
110.1
(3.4)
303.3
(3)%
10 %
68 %
33 %
*
(16)%
26 %
Our operating costs increased by $303.3 million, or 26% to $1,481.4 million for Fiscal 2016 from $1,178.1 million for
Fiscal 2015. The increase in consolidated operating costs was primarily due to increased costs as a result of Fiscal 2016 and Fiscal
2015 acquisition related growth, and organic growth of our network , partially offset by a $44.8 million decrease in stock-based
compensation.
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Table of Contents
Fiber Solutions . Fiber Solutions operating costs decreased by $17.3 million, or 3%, to $478.4 million for Fiscal 2016
from $495.7 million for Fiscal 2015. The decrease in operating costs and expenses was primarily a result of a $33.9 million
decrease in stock-based compensation, partially offset by increased costs as a result of Fiscal 2016 and Fiscal 2015 acquisitions .
Transport . Transport operating costs increased by $32.9 million, or 10%, to $351.6 million for Fiscal 2016 from $318.7
million for Fiscal 2015. The increase in operating costs and expenses was primarily a result of the timing of our Fiscal 2016 and
Fiscal 2015 acquisitions.
Enterprise
Networks.
Enterprise Networks operating costs increased by $134.1 million, or 68%, to $332.4 million for
Fiscal 2016 from $198.3 million for Fiscal 2015. The increase in operating costs and expenses was primarily a result of the timing
of our Fiscal 2016 and Fiscal 2015 acquisitions.
zColo.
zColo operating costs increased by $46.9 million, or 33%, to $190.7 million for Fiscal 2016 from $143.8 million
for Fiscal 2015. The increase in operating costs and expenses was primarily a result of the timing of our Fiscal 2016 and Fiscal
2015 acquisitions.
Allstream.
Allstream operating costs were $110.1 million for Fiscal 2016.
Other. Other operating costs decreased by $3.4 million, or 16%, to $18.2 million for Fiscal 2016 from $21.6 million for
Fiscal 2015 as a result of decreased revenue from ZPS.
The table below sets forth the components of our operating costs and expenses during the years ended June 30, 2016 and
2015:
Netex
Compensation and benefits expenses
Network operations expense
Other expenses
Transaction costs
Stock-based compensation
Depreciation and Amortization
Total operating costs and expenses
* Not meaningful
For the Year Ended June 30,
2016
2015
$ Variance % Variance
(in millions)
$
$
283.0 $
216.8
194.5
93.4
21.5
155.9
516.3
1,481.4 $
178.3 $
158.6
152.5
75.6
6.2
200.7
406.2
1,178.1 $
104.7
58.2
42.0
17.8
15.3
(44.8)
110.1
303.3
59 %
37 %
28 %
24 %
*
(22)%
27 %
26 %
Netex . Our Netex increased by $104.7 million, or 59%, to $283.0 million for Fiscal 2016 from $178.3 million for Fiscal
2015. The increase in Netex was primarily due to increased facility costs related to the colocation acquisitions completed in Fiscal
2016 and Fiscal 2015, partially offset by cost savings, as planned network related synergies were realized.
Compensation and Benefits Expenses . Compensation and benefits expenses increased by $58.2 million, or 37%, to
$216.8 million for Fiscal 2016 from $158.6 million for Fiscal 2015.
The increase in compensation and benefits reflected the increase in headcount from 1,833 for Fiscal 2015 to 3,224 for
Fiscal 2016 to support our growing business, including employees retained from businesses acquired during Fiscal 2015 and
2016.
Network Operations Expenses . Network operations expenses increased by $42.0 million, or 28%, to $194.5 million for
Fiscal 2016 from $152.5 million for Fiscal 2015. The increase principally reflected the growth of our network assets and the
related expenses of operating that expanded network. Our total network route miles increased approximately 32% to 112,660
miles at June 30, 2016 from 85,644 miles at June 30, 2015.
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Table of Contents
Other Expenses . Other expenses increased by $17.8 million, or 24%, to $93.4 million for Fiscal 2016, from $75.6 million
Fiscal 2015. The increase was primarily the result of additional expenses attributable to our Fiscal 2015 and 2016 acquisitions.
Transaction Costs . Transaction costs increased by $15.3 million to $21.5 million for Fiscal 2016 from $6.2 million for
Fiscal 2015. The increase was due to higher transaction-related costs associated with our Fiscal 2016 acquisitions.
Stock-Based Compensation . Stock-based compensation expense decreased by $44.8 million, or 22%, to $155.9 million
for Fiscal 2016 from $200.7 million for Fiscal 2015.
Prior to our IPO, we recognized changes in the fair value of the CII common units through increases or decreases in stock-
based compensation expense and adjustments to the related stock-based compensation liability. This liability was impacted by
changes in the estimated value of the common units, number of vested common units, and distributions made to holders of the
common units. In connection with the IPO, we re-measured the fair value of the common units at the offering date based on
various projections involving future stock performance, vesting and forfeitures. The fair value of unvested common units on the
offering date is recognized as stock-based compensation expense ratably over the remaining vesting period. The fair value of the
vested common units on the offering date was recorded as incremental stock based compensation during Fiscal 2015, which is the
primary driver of the $44.8 million decrease.
Depreciation and Amortization
Depreciation and amortization expense increased by $110.1 million, or 27%, to $516.3 million for Fiscal 2016 from $406.2
million for Fiscal 2015. The increase was primarily the result of depreciation related to capital expenditures since June 30, 2015
and acquisition-related growth.
Total Other Expense, Net
The table below sets forth the components of our total other expense, net for the years ended June 30, 2016 and 2015.
Interest expense
Loss on extinguishment of debt
Foreign currency loss on intercompany loans
Other expense, net
Total other expenses, net
* Not meaningful
For the Year Ended June 30,
2016
2015
$ Variance % Variance
(in millions)
$
$
(220.1) $
(33.8)
(53.8)
(0.3)
(308.0) $
(214.0) $
(94.3)
(24.4)
(0.4)
(333.1) $
(6.1)
60.5
(29.4)
0.1
25.1
(3)%
*
*
*
8 %
Interest expense . Interest expense increased by $6.1 million, or 3%, to $220.1 million from $214.0 million for the years
ended June 30, 2016 and 2015, respectively. The increase was primarily a result of increased indebtedness during Fiscal 2016,
partially offset by reduced interest rates on our outstanding indebtedness as a result of our Fiscal 2016 debt transactions.
Loss on extinguishment of debt . Loss on extinguishment of debt decreased to a $33.8 million loss for the year ended June
30, 2016 from a loss of $94.3 million for the year ended June 30, 2015. During Fiscal 2016, we redeemed the remaining $325.6
million 2020 Unsecured Notes and repaid $196.0 million on our Term Loan Facility. As part of the redemption and early payment
on the Term Loan Facility, we paid early redemption call premiums totaling $20.3 million and recorded an expense of $13.5
million related to unamortized debt issuance costs and discounts associated with the extinguished indebtedness. These expenses
were recorded as a loss on extinguishment of debt during Fiscal 2016.
During Fiscal 2015, we redeemed our $750.0 million 2020 Secured Notes and a portion of our 2020 Unsecured Notes and
repaid $344.5 million on our Term Loan Facility. As part of the redemptions and early payment on the Term Loan Facility, we
paid early redemption call premiums totaling $62.6 million and recorded an expense of $31.7 million
51
Table of Contents
related to unamortized debt issuance costs and discounts associated with the extinguished indebtedness. These expenses were
recorded as a loss on extinguishment of debt during Fiscal 2015.
Foreign currency (loss)/gain on intercompany loans . Foreign currency (loss) on intercompany loans increased to a loss
of $53.8 million for the year ended June 30, 2016, from a loss of $24.4 million for the year ended June 30, 2015. This non-cash
loss was driven by the strengthening of the USD against the GBP and the related impact on intercompany loans entered into by
foreign subsidiaries in their functional currency.
(Benefit)/provision for Income Taxes
Income tax expense increased over the prior year by $17.3 million, to an income tax expense of $8.5 million for Fiscal
2016, from an income tax benefit of $(8.8) million for Fiscal 2015. Our provision for income taxes included both the current
provision and a provision for deferred income tax expense resulting from timing differences between tax and financial reporting
accounting bases. In addition, as a result of our stock-based compensation related to our CII common and preferred units and
certain transaction costs not being deductible for income tax purposes, our effective tax rate was higher than the statutory rate.
The following table reconciles our expected tax provision based on the statutory federal tax rate applied to our earnings
before income tax to our actual provision for income taxes:
Expected benefit at the statutory rate
Increase/(decrease) due to:
Non-deductible stock-based compensation
State income taxes, net of federal benefit
Transaction costs not deductible for tax purposes
Change in effective tax rate
Change in valuation allowance
Foreign tax rate differential
Other, net
For the Year Ended June 30,
2015
2016
$
(in millions)
(23.8)
$
27.9
(2.1)
1.5
(3.6)
2.8
2.7
3.1
8.5
$
(57.4)
59.4
(7.4)
0.7
(2.2)
—
0.6
(2.5)
(8.8)
Provision/(benefit) for income taxes
$
Adjusted EBITDA
We define Adjusted EBITDA as earnings/(loss) from continuing operations before interest, income taxes, depreciation and
amortization (“EBITDA”) adjusted to exclude acquisition or disposal-related transaction costs, losses on extinguishment of debt,
stock-based compensation, unrealized foreign currency gains (losses) on intercompany loans, and non-cash income (loss) on
equity and cost method investments. We use Adjusted EBITDA to evaluate operating performance, and this financial measure is
among the primary measures used by management for planning and forecasting for future periods. We believe that the
presentation of Adjusted EBITDA is relevant and useful for investors because it allows investors to view results in a manner
similar to the method used by management and facilitates comparison of our results with the results of other companies that have
different financing and capital structures.
We also monitor Adjusted EBITDA because our subsidiaries have debt covenants that restrict their borrowing capacity that
are based on a leverage ratio, which utilizes a modified EBITDA, as defined in our Credit Agreement and the indentures
governing our outstanding Notes. The modified EBITDA is consistent with our definition of Adjusted EBITDA; however, it
includes the pro forma Adjusted EBITDA of and expected cost synergies from the companies acquired by us during the quarter
for which the debt compliance certification is due.
Adjusted EBITDA results, along with other quantitative and qualitative information, are also utilized by management and
our compensation committee for purposes of determining bonus payouts to employees.
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Table of Contents
Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation from, or as a substitute for,
analysis of our results as reported under accounting principles generally accepted in the United States (“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.
Our computation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other
companies because all companies do not calculate Adjusted EBITDA in the same fashion.
Reconciliations from segment and consolidated Adjusted EBITDA to net income/(loss) are as follows:
Fiber
Solutions Transport
Enterprise
Networks zColo Allstream Other
Corp/
Eliminations Total
For the year ended June 30, 2017
Segment and consolidated Adjusted EBITDA
Interest expense
Provision for income taxes
Depreciation and amortization expense
Transaction costs
Stock-based compensation
Loss on extinguishment of debt
Foreign currency loss on intercompany loans
Non-cash loss on investments
Net income/(loss)
$
$
566.3
(135.7)
$
—
(357.4)
(3.7)
(43.8)
—
—
(1.1)
24.6
$
184.2 $
(30.5)
—
(96.6)
(3.3)
(24.3)
—
—
—
29.5 $
(in millions)
178.0 $ 111.9 $
(32.0)
(36.8)
—
—
(77.8)
(62.4)
(1.8)
(7.1)
(13.9)
(28.8)
—
—
—
(0.1)
—
—
42.8 $ (13.6) $
71.3 $
(7.1)
—
(10.9)
(4.6)
(2.8)
—
—
—
45.9 $
5.1
$
—
—
(1.8)
—
(0.5)
—
—
—
$
2.8
—
—
—
— $ 1,116.8
(241.5)
0.6
(18.4)
(18.4)
(606.9)
(20.5)
(114.1)
(18.2)
(10.3)
(1.2)
85.7
(18.2)
(10.2)
(0.1)
(46.3)
$
Fiber
Solutions Transport
For the year ended June 30, 2016
Enterprise
Networks zColo Allstream Other
(in millions)
Corp/
Eliminations Total
Segment and consolidated Adjusted EBITDA $ 499.6
Interest expense
(129.6)
Provision for income taxes
Depreciation and amortization expense
Transaction costs
Stock-based compensation
Loss on extinguishment of debt
Foreign currency gain/(loss) on intercompany loans
Non-cash loss on investments
(264.2)
(3.0)
(61.5)
—
0.3
(1.3)
—
$
168.0 $
(28.0)
0.1
(89.5)
(4.0)
(34.7)
—
0.2
—
145.6 $ 100.9 $
(28.4)
(34.2)
—
0.3
(75.8)
(70.8)
(1.1)
(7.7)
(19.1)
(39.7)
—
—
—
0.3
—
—
16.3 $
—
(0.4)
(14.1)
(5.7)
(0.4)
—
0.3
—
4.5
$
—
—
(1.9)
—
(0.5)
—
—
—
Net income/(loss)
$
40.3
$
12.1 $
(6.2) $ (23.5) $
(4.0) $
2.1
$
53
— $ 934.9
(220.1)
0.1
(8.5)
(8.5)
(516.3)
—
(21.5)
—
(155.9)
—
(33.8)
(53.8)
(1.2)
(33.8)
(54.9)
0.1
(97.0) $
(76.2)
Table of Contents
For the year ended June 30, 2015
Fiber
Solutions Transport
Enterprise
Networks
zColo
Allstream Other
Eliminations Total
(in millions)
Corp/
Segment and consolidated Adjusted EBITDA $
Interest expense
Benefit for income taxes
Depreciation and amortization expense
Transaction costs
Stock-based compensation
Loss on extinguishment of debt
Foreign currency loss on intercompany loans
Non cash loss on investment
Net (loss)/income
400.7
(129.8)
$
—
(223.5)
(1.8)
(95.3)
(53.4)
—
(0.9)
$ (104.0)
$
139.3 $
(26.8)
—
(72.4)
(0.5)
(48.7)
(20.0)
—
—
(29.1) $
172.8 $
(31.8)
—
(42.5)
(0.5)
(42.6)
(19.2)
(0.3)
—
35.9 $
64.7 $
(25.6)
—
(65.9)
(1.1)
(14.6)
(1.7)
—
—
(44.2) $
— $
—
—
—
—
—
—
—
—
— $
5.1
$
—
—
(1.9)
—
0.5
—
—
—
$
3.7
— $
—
8.8
—
(2.3)
—
—
782.6
(214.0)
8.8
(406.2)
(6.2)
(200.7)
(94.3)
(24.4)
(0.9)
$ (155.3)
(24.1)
—
(17.6)
Liquidity and Capital Resources
Our primary sources of liquidity have been cash provided by operations, equity offerings, and incurrence of debt. Our
principal uses of cash have been for acquisitions, capital expenditures, working capital, and debt service requirements. We
anticipate that our principal uses of cash in the future will be for acquisitions, capital expenditures, working capital, and debt
service.
We have financial covenants under the Indentures governing our 6.00% senior unsecured notes due 2023 (the “2023
Unsecured Notes”), the 2025 Unsecured Notes and the 2027 Unsecured Notes (collectively, the “Notes”) and our Credit
Agreement that, under certain circumstances, restrict our ability to incur additional indebtedness. The indentures governing the
Notes limit any increase in ZGL’s secured indebtedness (other than certain forms of secured indebtedness expressly permitted
under such indentures) to a pro forma secured debt ratio of 4.50 times ZGL’s previous quarter’s annualized modified EBITDA (as
defined in the indentures), and limit ZGL’s incurrence of additional indebtedness to a total indebtedness ratio of 6.00 times the
previous quarter’s annualized modified EBITDA. The Credit Agreement also contains a covenant, applicable only to the
Revolver, that ZGL maintain a senior secured leverage ratio below 5.25:1.00 at any time when the aggregate principal amount of
loans outstanding under the Revolver is greater than 35% of the commitments under the Revolver. The Credit Agreement also
requires ZGL and its subsidiaries to comply with customary affirmative and negative covenants, including covenants restricting
the ability of ZGL and its subsidiaries, subject to specified exceptions, to incur additional indebtedness, make additional
guaranties, incur additional liens on assets, or dispose of assets, pay dividends, or make other distributions, voluntarily prepay
certain other indebtedness, enter into transactions with affiliated persons, make investments and amend the terms of certain other
indebtedness. The Credit Agreement contains customary events of default, including among others, non-payment of principal,
interest, or other amounts when due, inaccuracy of representations and warranties, breach of covenants, cross default to certain
other indebtedness, insolvency or inability to pay debts, bankruptcy, or a change of control.
As of June 30, 2017, we had $220.7 million in cash and cash equivalents and a working capital deficit of $105.7 million.
Cash and cash equivalents consist of amounts held in bank accounts and highly-liquid U.S. treasury money market funds.
Although we have a working capital deficit as of June 30, 2017, a substantial portion of the deficit is a result of a current deferred
revenue balance of $146.0 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, 2017 current deferred revenue balance. Additionally, as of June 30, 2017, we had $442.2 million available under our
Revolver, subject to certain conditions. Accordingly, we believe that we have sufficient resources to fund our obligations and
foreseeable liquidity requirements in the near term and for the foreseeable future.
Our capital expenditures increased by $131.4 million, or 19%, during the year ended June 30, 2017 as compared to the year
ended June 30, 2016, to $835.5 million from $704.1 million. The increase in capital expenditures is a result of meeting the needs
of our larger customer base resulting from our acquisitions and organic growth. We expect to continue to invest in our network
for the foreseeable future. These capital expenditures, however, are expected to primarily be success-based; that is, in most
situations, we will not invest the capital until we have an executed customer contract that supports the investment.
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As part of our corporate strategy, we continue to be regularly involved in discussions regarding potential acquisitions of
companies and assets, some of which may be quite large. We expect to fund such acquisitions with cash from operations, debt
issuances (including available borrowings under our $450.0 million Revolver), equity offerings, and available cash on hand. We
regularly assess our projected capital requirements to fund future growth in our business, repay our debt obligations, and support
our other general corporate and operational needs, and we regularly evaluate our opportunities to raise additional capital. As
market conditions permit, we may refinance existing debt, issue new debt or equity securities through the capital markets, or
obtain additional bank financing to fund our projected capital requirements or provide additional liquidity.
Cash Flows
We believe that our cash flows from operating activities, in addition to cash and cash equivalents currently on-hand, will be
sufficient to fund our operating activities and capital expenditures for the foreseeable future, and in any event for at least the next
12 to 18 months. Given the generally volatile global economic climate, no assurance can be given that this will be the case.
We regularly consider acquisitions and additional strategic opportunities, including large acquisitions, which may require
additional debt or equity financing.
The following table sets forth the components of our cash flows for the years ended June 30, 2017, 2016 and 2015.
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
Net Cash Flows from Operating Activities
2017
Year Ended June 30,
2016
(in millions)
2015
$
$
$
909.8
(2,270.3)
1,411.3
$
$
$
714.0
(1,141.6)
291.7
$
$
$
605.4
(1,386.1)
795.7
Net cash flows from operating activities increased by $195.8 million to $909.8 million from $714.0 million during the years
ended June 30, 2017 and 2016, respectively.
Net cash flows from operating activities during the year ended June 30, 2017 include the net income of $85.7 million, plus
the add backs of non-cash items deducted in the determination of net income, principally depreciation and amortization of $606.9
million, stock-based compensation expense of $114.1 million, foreign currency loss on intercompany loans of $10.3 million, loss
on extinguishment of debt of $18.2 million, non-cash interest expense of $9.6 million, and the deferred tax expense of $12.6
million. Also contributing to the cash provided by operating activities were additions to deferred revenue of $200.5 million, less
amortization of deferred revenue of $117.6 million. Cash flow during the period was reduced by the net change in working
capital components of $35.4 million. The $35.4 million cash outflow associated with the change in working capital components
was primarily driven by increases in trade receivables of $7.2 million, decrease of accounts payable and accrued liabilities of $5.2
million and increases in other assets and liabilities of $33.4 million.
Net cash flows from operating activities during the year ended June 30, 2016 include the net loss of $76.2 million, plus the
add backs of non-cash items deducted in the determination of net loss, principally depreciation and amortization of $516.3
million, stock-based compensation expense of $155.9 million, foreign currency loss on intercompany loans of $53.8 million and
non-cash interest expense of $11.9 million, partially offset by the deferred tax benefit of $2.8 million. Also contributing to the
cash provided by operating activities were additions to deferred revenue of $184.0 million, less amortization of deferred revenue
of $111.5 million. Cash flow during the period was reduced by the net change in working capital components of $48.4
million. The $48.4 million cash outflow associated with the change in working capital components was primarily driven by
decrease of accounts payable and accrued liabilities of $36.0 million and increases in other assets and liabilities of $14.3 million.
The increase in net cash flows from operating activities during the year ended June 30, 2017 as compared to the year ended
June 30, 2016 is primarily a result of additional earnings from organic growth and synergies realized from our Fiscal 2016 and
Fiscal 2017 acquisitions.
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Net cash flows from operating activities increased by $108.6 million to $714.0 million from $605.4 million during the years
ended June 30, 2016 and 2015, respectively.
Net cash flows from operating activities during the year ended June 30, 2015 include the net loss of $155.3 million, plus
the add backs of non-cash items deducted in the determination of net loss, principally depreciation and amortization
of $406.2 million, stock-based compensation expense of $200.7 million, foreign currency loss on intercompany loans of $24.4
million and non-cash cash interest expense of $19.7 million plus an add back for $94.3 million associated with a loss on
extinguishment of debt, partially offset by the deferred tax benefit of $13.3 million. Also contributing to the cash provided by
operating activities were additions to deferred revenue of $149.1 million, less amortization of deferred revenue of $72.1
million. Cash flow during the period was reduced by the net change in working capital components
of $51.1 million. The $51.1 million cash outflow associated with the change in working capital components was primarily driven
by increases in trade receivables of $11.2 million, decrease of accounts payable and accrued liabilities of $22.1 million and
increases in other assets and liabilities of $17.8 million.
The increase in net cash flows from operating activities during the year ended June 30, 2016 as compared to the year ended
June 30, 2015 is primarily a result of additional earnings from organic growth and synergies realized from our Fiscal 2015 and
Fiscal 2016 acquisitions, offset in part by increased interest payments.
Cash Flows Used in Investing Activities
We used cash in investing activities of $2,270.3 million, $1,141.6 million and $1,386.1 million during the years ended June
30, 2017, 2016 and 2015, respectively.
During the year ended June 30, 2017, our principal uses of cash for investing activities were $835.5 million in additions to
property and equipment and $1,434.8 million in net cash paid for acquisitions.
During the year ended June 30, 2016, our principal uses of cash for investing activities were $704.1 million in additions to
property and equipment and $437.5 million in net cash paid for acquisitions.
During the year ended June 30, 2015, our principal uses of cash for investing activities were $530.4 million in additions to
property and equipment and $855.7 million in net cash paid for acquisitions.
Cash Flows Provided By Financing Activities
Our net cash provided by financing activities was $1,411.3 million, $291.7 million and $795.7 million during the years
ended June 30, 2017, 2016 and 2015, respectively.
Our cash flows provided by financing activities during the year ended June 30, 2017 are primarily comprised of $3,865.8
million in debt proceeds from the refinancing of our term loan and our $650 million Electric Lightwave Incremental Term Loan,
net of discounts and our aggregate $1,350.0 million issuances of 2027 Unsecured Notes, net of premiums , partially offset by
$2,408.8 million of principal payments and early pre-payment on long-term debt, $6.6 million in principal payments on capital
lease obligations, and $35.4 million in payment of debt issuance costs.
Our cash flows provided by financing activities during the year ended June 30, 2016 are primarily comprised of $929.3
million in aggregate proceeds from our $400 million Incremental Amendment to the Term Loan Facility and $550 million
issuance of additional 2025 Unsecured Notes, net of discounts. These were partially offset by $81.1 million in common stock
repurchases, $535.0 million of principal payments on long-term debt, $4.9 million in principal payments on capital lease
obligations, and $4.2 million in payment of debt issuance costs.
Our cash flows provided by financing activities during the year ended June 30, 2015 are primarily comprised of $1,787.3
million from debt proceeds and $413.7 million of proceeds from equity offerings. These were partially offset by $1,292.0 million
of principal payments on long-term debt and capital lease obligations, $62.6 million of early redemption fees on debt
extinguished, $24.2 million of debt issuance costs and $26.5 million in direct costs associated with the equity offerings.
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Contractual Cash Obligations
The following table represents a summary of our estimated future payments under contractual cash obligations as of June
30, 2017 for continuing operations. 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 these future payments.
Total
Less Than 1
Year
1-3 Years
3-5 Years
More Than 5 Years
Long-term debt (principal and interest)
Operating leases
Purchase obligations
Obligations for access fees
Capital leases (principal and interest)
Total
$
$
7,760.2 $
545.0
379.6
413.0
117.0
9,214.8 $
293.6 $
113.4
343.0
57.6
9.8
817.4 $
(in millions)
591.2 $
192.3
35.7
101.1
16.3
936.6 $
1,041.4 $
100.9
0.9
53.4
16.5
1,213.1 $
5,834.0
138.4
—
200.9
74.4
6,247.7
Our operating leases and purchase commitments include expected payments for our operating facilities, network services
and capacity, communications equipment, and maintenance obligations. Our purchase commitments are primarily success-based,
meaning that before we commit resources to expand our network, we have a signed customer contract that will provide us with an
attractive return on the required capital. The contractual long-term debt payments, above, include an estimate of future interest
expense based on the interest rates in effect on our floating rate debt obligations as of the most recent balance sheet date.
Cash payments for interest, net of capitalized interest, which are reflected in our cash flows from operating activities,
during the year ended June 30, 2017 were $195.6 million and represent 21% of our cash flows from operating activities. We also
made cash payments related to principal payments on our long-term debt and capital lease obligations of $7.9 million (exclusive
of our $1,837.4 million January Term Loan Facility amendment and our $570.1 million prepayment on our Term Loan Facility),
which are reflected in our cash flows from financing activities, and represented less than 1.0% of our cash flows from operating
activities during the period.
Off-Balance Sheet Arrangements
We do not have any special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market
or credit risk support and we do not engage in leasing, hedging, or other similar activities that expose us to any significant
liabilities that are not (i) reflected on the face of the consolidated financial statements, (ii), or disclosed in Note 13- Commitments
and Contingencies to our audited consolidated financial statements, or in the Contractual Cash Obligations table included above.
Recently Issued Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-
04, Simplifying the Accounting for Goodwill Impairment , which simplifies how an entity is required to test goodwill for
impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures goodwill impairment loss by comparing the
implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the amendments in ASU 2017-
04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its
fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The
updated guidance required a prospective adoption. Early adoption was permitted for goodwill impairment test performed on
testing dates after January 1, 2017. We have elected to early adopt the standard during the quarter ended March 31, 2017. We
determined that it is more likely than not that the fair value of our reporting units is greater than their carrying amounts.
In January 2017, the FASB issued ASU 2017-01, “ Business Combinations (Topic 805): Clarifying the Definition of a
Business .” The new standard provides guidance for evaluating whether transactions should be accounted for as acquisitions of
assets or businesses. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2017, with early adoption permitted for transactions for which the acquisition date occurs before the issuance date
or effective date, only when the transaction has not been reported in financial statements
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that have been issued or made available for issuance. We have elected to early adopt the standard as of January 1, 2017 and
applied the provisions of this standard for acquisitions consummated subsequent to that date.
In August 2016, the FASB issued ASU 2016-15, " Statement of Cash Flows (Topic 230): Classifications of Certain Cash
Receipts and Cash Payments. " The new standard provides guidance for eight changes with respect to how cash receipts and cash
payments are classified in the statement of cash flows, with the objective of reducing diversity in practice. The standard is
effective for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2017 , with early adoption
permitted. We do not plan to early adopt, nor do we expect the adoption of this new standard to have a material impact on our
consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases . The new guidance supersedes existing guidance on accounting
for leases in Topic 840 and is intended to increase the transparency and comparability of accounting for lease transactions. ASU
2016-02 requires most leases to be recognized on the balance sheet. Lessees will need to recognize a right-of-use asset and a lease
liability for virtually all leases. The liability will be equal to the present value of lease payments. The asset will be based on the
liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model,
requiring leases to be classified as either operating or finance. Lessor accounting remains similar to the current model, but
updated to align with certain changes to the lessee model and the new revenue recognition standard (ASU 2014-09). The ASU
will require both quantitative and qualitative disclosures regarding key information about leasing arrangements. The standard is
effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is
permitted. The standard must be adopted using a modified retrospective transition, and provides for certain practical expedients.
Transition will require application of the new guidance at the beginning of the earliest comparative period presented. We
established a project team and commenced an initial impact assessment process. To date, we have reviewed a sample of lessee
and lessor arrangements and made preliminary assessments of the impact this standard will have on the consolidated financial
statements. Although we are still assessing the impact of this standard, we expect the new guidance to significantly increase the
reported assets and liabilities on the consolidated balance sheets. There are currently no plans to early adopt this ASU.
On March 30, 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting , which
is intended to improve the accounting for share-based payment transactions as part of the FASB’s simplification initiative. The
ASU changes five aspects of the accounting for share-based payment award transactions that will affect public companies,
including: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures;
(4) minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows
when an employer withholds shares for tax-withholding purposes. We early-adopted ASU 2016-09 effective July 1, 2016. Excess
tax benefits for share-based payments are now recognized against income tax expense rather than additional paid-in capital and
are included in operating cash flows rather than financing cash flows. The recognition of excess tax benefits have been applied
prospectively and prior periods have not been adjusted. We had $15.6 million of excess tax benefits for the year ended June 30,
2017. In addition, we elected to change our accounting policy to account for forfeitures as they occur. The change was applied on
a modified retrospective basis with a cumulative effect adjustment to accumulated deficit of $1.7 million as of July 1, 2016.
Amendments related to minimum statutory tax withholding requirements and the classification of employee taxes paid on the
statement of cash flows when an employer withholds shares for tax-withholding purposes have been adopted prospectively and
did not have a material impact on the consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to
recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.
The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. In July 2015, the FASB
deferred the effective date to annual reporting periods and interim reporting periods within annual reporting periods beginning
after December 15, 2017. Early adoption is permitted as of the original effective date or annual reporting periods and interim
reporting periods within annual reporting periods beginning after December 15, 2016. We do not plan to early adopt ASU 2014-
09. The standard permits the use of either the retrospective or cumulative effect transition method.
In Fiscal 2017, we established a project team and commenced an initial impact assessment process based on a review of a
sample of contracts with our customers. Lease revenue is not included in the scope of ASU 2014-09 and as a result the revenue to
which we must apply the new guidance is generally limited to service revenue, certain maintenance revenue not covered by lease
arrangements and other fees charged to customers. Although we are still assessing the impact of this standard on our consolidated
financial statements, we have preliminarily determined that due to changes in
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the timing of recognition of certain installation services, discounts and promotional credits given to customers, there may be
additional contract assets and liabilities recorded in the consolidated balance sheets upon adoption. Additionally, the requirement
to defer incremental costs incurred to acquire a contract including sales commissions, and recognize such costs over the contract
period or expected customer life may result in additional deferred charges recognized in the consolidated balance sheets and could
have the impact of deferring operating expenses. The assessment of the impact of this standard on our consolidated financial
statements also includes developing new accounting policies, internal controls and procedures and possible changes to our
systems to facilitate the adoption of this accounting policy. We plan to adopt this new standard as of July 1, 2018 and based on
our initial assessment we expect to apply the modified retrospective method, which may result in a cumulative effect adjustment
as of the date of adoption. Our initial assessment of changes to the reporting of our revenue and expenses and anticipated
adoption method may change depending on the results of our ongoing and final assessment of this ASU. Until we are further
along in our assessment, we do not anticipate being able to provide reasonably accurate estimates of the impact of ASU 2014-09.
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 GAAP. 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 restricted stock units, common and preferred units issued as compensation, accruals for
estimated tax and legal liabilities, accruals for exit activities associated with real estate leases, 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.
We often bill customers for upfront charges, which are non-refundable. These charges relate to down payments or
prepayments for future services and are influenced by various business factors including how we and the customer agree to
structure the payment terms. If the upfront payment made by a customer provides no benefit to the customer beyond the contract
term, the upfront charge is deferred and recognized as revenue ratably over the contract term. If the upfront payment provides
benefit to the customer beyond the contract term, the charge is recognized as revenue over the estimated life of the customer
relationship.
Revenue attributable to leases of dark fiber pursuant to IRUs is 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).
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 judgment, estimations and assumptions.
We defer recognition of revenue until cash is collected on certain components of revenue, principally contract termination
charges and late fees.
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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.
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. In accordance with ASU 2016-09, we account for forfeitures as they occur versus estimating forfeitures. We
generally recognize stock-based awards to employees and independent directors based on their grant-date fair values, with no
consideration for future forfeitures. We recognize the fair value of outstanding awards as a charge to operations over the vesting
period.
CII Common Units
The CII common units granted to employees were considered to be stock-based compensation with terms that required the
awards to be classified as liabilities due to cash settlement features. Prior to our IPO, we adjusted the value of the vested portion
of our common unit liability awards to their fair value at the end of each reporting period. We used a third party valuation firm to
assist in the valuation of the CII common units at each reporting period. In developing a value for the common units, a two-step
valuation approach was used. In the first step, we estimated the value of our equity through an analysis of valuations associated
with various future potential liquidity scenarios. The second step involved allocating these values across our capital structure.
We allocated value to each class of common units using the Probability Weighted Expected Return Method (“PWERM”).
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. The potential scenarios that we
considered within the PWERM framework were remaining a private company with the same ownership, a sale or merger, and an
initial public offering. The PWERM utilized a variety of assumptions regarding the likelihood of a certain scenario occurring, if
the scenario involved a transaction, the potential timing of such an event, and the potential valuation that each scenario might
yield.
Based on these scenarios, management calculated the probability-weighted expected return to all of the equity holders. The
resulting enterprise valuation was 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 were satisfied, the remaining proceeds were 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 preferred unit holders and 20% to the common unit holders depending
upon the return multiple to the preferred unit holders, also known as the waterfall allocation.
The value attributable to each class of shares was 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 that we believed indicated a reasonable spectrum of discounts for each of the valuation techniques
utilized. The empirical methods we evaluated relied on datasets procured from observed transactions in equity interests in the
public domain that were perceived to incorporate pricing information related to the marketability (or lack thereof) of the equity
interest itself. These empirical methods included initial public offering studies and restricted stock studies. Theoretical models
utilized in our analysis formed the primary basis for the discount for lack of marketability, and included the Finnerty Average-
Strike Put, the Asian Protective Put and the Black-Scholes-Merton Protective Put.
In connection with our IPO and the related amendment to the CII operating agreement, there was a deemed modification to
the stock compensation arrangements with our current and former employees and directors. As a result, previously issued
common units, which were historically accounted for as liability awards, became classified as equity awards. Prior to
reclassifying our common unit liability to equity, we re-measured the fair value of the CII common units factoring in the change
in fair value resulting from the passage of time and the change in fair value caused by the modification. The fair value of these
previously vested common units was estimated to be $490.2 million on the
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modification date, and this amount is reflected in our consolidated statement of stockholders’ equity as an increase to additional
paid-in capital during the year ended June 30, 2015. During the three months ended December 31, 2016, the remaining CII
common units became fully vested and as such there is no unrecognized compensation cost associated with CII common units as
of June 30, 2017.
Performance Compensation Incentive Program
In October 2014, our Board of Directors adopted the 2014 Performance Compensation Incentive Program (“PCIP”). The
PCIP includes incentive cash compensation and equity (in the form of restricted stock units or “RSUs”). Grants of RSUs under
the PCIP plan are made quarterly for all participants. The PCIP went into effect on October 16, 2014.
The PCIP has the following components:
Part A
Under Part A of the PCIP, all full-time employees, including our executives, are eligible to earn quarterly awards of RSUs.
Each participant in Part A of the PCIP will have a target RSU annual award value, which will be allocated each fiscal quarter. The
number of Part A RSUs granted will be calculated based on the final award value determined by the Compensation Committee
divided by the average closing price of our common stock over the last ten trading days of the respective performance quarter.
Part A RSUs will cliff vest based upon continued employment through the end of the fourth full fiscal quarter ending after the
grant date of the Part A RSU. Thereafter, the RSUs will be converted for an equal number of shares in our common stock.
Additionally, under Part A of the PCIP, awards may be granted to certain employees upon commencement of their employment
with the Company and contain guaranteed monetary awards at graded vesting dates.
Each quarterly Part A award is recorded as a liability as of the end of the respective measurement quarter, as the awards
represent an obligation denominated in a fixed dollar amount to be settled in a variable number of shares during the subsequent
quarter. Upon the issuance of the RSUs, the liability is re-measured, representing the vested portion of the fair value of the actual
number of RSUs issued, and the liability is then reclassified to additional paid-in capital. The remaining unvested value is
expensed through the respective vesting date.
Part B
Under Part B of the PCIP, participants, who include members of our senior management team, are awarded quarterly grants
of RSUs. The number of the RSUs earned by the participants is based on our stock price performance over a four fiscal quarter
measurement period, and Part B RSUs cliff vest based upon continued employment at the end of the measurement period. The
existence of a vesting provision that is associated with the performance of our stock price is a market condition, which affects the
determination of the grant date fair value. Upon vesting, RSUs convert to shares of our common stock.
The grant date fair value of Part B awards issued during a given period are expensed over the performance period. The
grant date fair value is estimated utilizing a Monte Carlo simulation, which uses randomly generated stock-price paths through a
Geometric Brownian Motion stock price simulation. This simulation provides a stochastic projection of the ten-day average
closing stock price ending on the vesting date (i.e., end of performance period), the total stock price performance over the
performance period, and the number of common shares to be issued at the vesting date. Various assumptions are utilized in the
valuation method, including the target stock price performance ranges and respective share payout percentages, our historical
stock price performance and volatility, peer companies’ historical volatility and an appropriate risk-free rate. The aggregate future
value of the grant under each simulation is calculated using the estimated per share value of the common stock at the end of the
restriction period multiplied by the number of common shares projected to be granted at the vesting date. The present value of the
aggregate grant is then calculated under each simulation resulting in a distribution of potential present values. The average of this
present value distribution equals the fair value of the grant.
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Part C
Under Part C of the PCIP, independent directors of the Company are eligible to receive quarterly awards of RSUs.
Independent directors electing to receive a portion of their annual director fees in the form of RSUs are granted a set dollar
amount of Part C RSUs each quarter. The quantity of the Part C RSUs granted is based on the average closing price of the
Company’s common stock over the last ten trading days of the quarter ended immediately prior to the grant date and vest at the
end of each quarter for which the grant was made.
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 Accounting 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 project’s 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 are directly related to
the construction and installation of network infrastructure assets. We have contracted with third party contractors for the
construction and installation of the majority of our fiber network. 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 in years are as follows:
Land
Buildings - leasehold and site improvements
Furniture, fixtures and office equipment
Computer hardware
Software
Machinery and equipment
Fiber optic equipment
Circuit switch equipment
Packet switch equipment
Fiber optic network
Construction in progress
Estimated
useful
lives
(in years)
N/A
15 to 39
3 to 7
3 to 5
3
5 to 7
8
10
5
15 to 20
N/A
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. 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.
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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 asset’s 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.
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 Assets
Deferred tax assets arise from a variety of sources, the most significant being tax losses that can be carried forward to be
utilized against taxable income in future years, deferred revenue and expenses recognized in our statement of operations 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
amount of deferred tax assets recorded on our consolidated balance sheets is influenced by management’s assessment of our
future taxable income with regard to relevant business plan forecasts, the reversal of deferred tax balances, and reasonable tax
planning strategies. 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 the Company to
weight the objective evidence of the recent losses more heavily than subject evidence of projected taxable income. It is reasonably
possible that the Company may reverse the valuation allowance recorded on certain foreign subsidiaries’ deferred tax assets in the
near future.
In connection with several of our acquisitions, we have acquired significant U.S. net operating loss carry forwards
(“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.
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 occurs.
As of June 30, 2017, we had a cumulative U.S. federal NOL carry forward balance of $1,662.5 million. During the year
ending June 30, 2017, we utilized $88.6 million of U.S. NOL carry forwards that were available to offset future taxable
income. Our NOL carry forwards, if not utilized to reduce taxable income in future periods, will expire in
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various amounts beginning in 2019 and ending in 2036. As a result of Internal Revenue Service regulations, we are currently
limited to utilizing a maximum of $952.0 million of acquired NOL carry forwards during Fiscal 2017. However, to the extent that
we do not utilize $952.0 million of our acquired NOL carry forwards during a fiscal year, the difference between the $952.0
million maximum usage and the actual NOLs usage is carried over to the next calendar year. Of our $1,662.5 million NOL carry
forwards balance, $1,473.6 million of these NOL carry forwards were acquired in acquisitions.
As of June 30, 2017, the Company had approximately $389.5 million of foreign jurisdiction net operating loss carry
forwards, primarily in Canada, the United Kingdom and France. The majority of these foreign NOLs have a valuation allowance
reducing the value of the corresponding deferred tax asset in the financial statements due to recent losses.
As of June 30, 2017, the Company had tax-effected state net operating loss carry forwards of approximately $42.1 million,
which are subject to limitations on their utilization and have various expiration dates 2017 through 2036. The Company believes
that only $39.3 million of this balance will be utilized.
Goodwill and Purchased Intangibles
We review goodwill and indefinite-lived intangible assets for impairment at least annually in April, or more frequently if a
triggering event occurs between impairment testing dates.
Intangible assets arising from business combinations, such as acquired customer contracts and relationships (collectively
“customer relationships”), are initially recorded at fair value. We amortize customer relationships primarily over an estimated life
of ten to twenty years using the straight-line method, as this method approximates the timing in which we expect to receive the
benefit from the acquired customer relationship assets. Goodwill represents the excess of the purchase price over the fair value of
the net identifiable assets acquired in a business combination.
Our impairment assessment begins with a qualitative assessment to determine whether it is more likely than not that the fair
value of a reporting unit is less than its carrying value. The qualitative assessment includes comparing the overall financial
performance of the reporting units against the planned results used in the last quantitative goodwill impairment test. Additionally,
each reporting unit’s fair value is assessed in light of certain events and circumstances, including macroeconomic conditions,
industry and market considerations, cost factors, and other relevant entity- and reporting unit-specific events. The selection and
assessment of qualitative factors used to determine whether it is more likely than not that the fair value of a reporting unit exceeds
the carrying value involves significant judgments and estimates. If it is determined under the qualitative assessment that it is more
likely than not that the fair value of a reporting unit is less than its carrying value, then we would recognize an impairment charge
for the amount by which the reporting unit’s carrying amount exceeds that fair value, up to but not exceeding the reporting unit’s
goodwill.
Our impairment assessment for indefinite-lived intangible assets involves comparing the estimated fair value of indefinite-
lived intangible assets to their respective carrying values. To the extent the carrying value of indefinite-lived intangible assets
exceeds the fair value, we will recognize an impairment loss for the difference.
Intangible assets with finite 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.
We recorded no impairment charges for goodwill or intangibles during the years ended June 30, 2017, 2016 and 2015.
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.
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For certain of our larger 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 (up to one year) 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, and the
assumptions and estimates used to determine cash inflows and outflows or other valuation techniques (such as replacement cost).
We determine which discount rates to use based on the risk inherent in the related activity’s current business model and industry
comparisons. Terminal values are based on the expected life of products, 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 estimated or forecasted amounts and the difference could be material.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk consists of changes in interest rates from time to time and market risk arising from changes in
foreign currency exchange rates that could impact our cash flows and earnings.
As of June 30, 2017, we had outstanding $1,430.0 million of 2023 Unsecured Notes, $900.0 million of 2025 Unsecured
Notes, $1,350.0 million of 2027 Unsecured Notes (collectively, the “Notes”), a balance of $1,429.9 million on our Term Loan
Facility due 2024, a balance of $498.8 million on our Term Loan Facility due 2021, and $101.6 million of capital lease
obligations. As of June 30, 2017 we had $442.2 million available for borrowing under our Revolver, 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 to be $3,895.7 million as of June 30, 2017. Our 2023 Unsecured Notes, 2025 Unsecured
Notes, and 2027 Unsecured Notes accrue interest at fixed rates of 6.00%, 6.375%, and 5.75% respectively.
Both our Revolver and our Term Loan Facility accrue interest at floating rates subject to certain conditions. As of June 30,
2017, the weighted average interest rates (including margin) on the Term Loan Facility and our Revolver were approximately
3.4% and 3.8%, respectively. A hypothetical increase in the applicable interest rate on our Term Loan Facility of one percentage
point would increase our annual interest expense by approximately $19.3 million, as a result of the applicable interest rate as of
June 30, 2017. Historically, this impact was limited as a result of the applicable interest rate being below the minimum 1.0%
LIBOR floor on our Term Loan Facility tranche that matures on January 19, 2024.
In August 2012, we entered into interest rate swap agreements with an aggregate notional value of $750.0 million and a
maturity date of June 30, 2017. The contracts state that we pay a 1.67% fixed rate of interest for the term of the agreements,
beginning June 30, 2013. The counterparties pay to us the greater of actual LIBOR or 1.25%. We entered into the swap
arrangements to reduce the risk of increased interest costs associated with potential future increases in LIBOR rates. As of June
30, 2017, the interest rate swap agreements have expired and were not replaced.
We are exposed to the risk of changes in interest rates if it is necessary to seek additional funding to support the expansion
of our business and to support acquisitions. The interest rate that we may be able to obtain on future debt financings will be
dependent on market conditions.
We have exposure to market risk arising from foreign currency exchange rates. During the year ended June 30, 2017, our
foreign activities accounted for 27% of our consolidated revenue. We monitor foreign markets and our commitments in such
markets to assess currency and other risks. Currently, fluctuations in foreign exchange rates do not pose a material risk; a 1%
increase in foreign exchange rates would change consolidated revenue by approximately $5.9 million. To date, we have not
entered into any hedging arrangement designed to limit exposure to foreign currencies. As a result of past European expansion
through acquisitions as well as our acquisitions of Viatel and Allstream our level of foreign activities is expected to increase and
if it does, we may determine that such hedging arrangements would be appropriate and will consider such arrangements to
minimize our exposure to foreign exchange risk.
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We do not have any material 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.
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 of the
Securities Exchange Act of 1934 (the “Exchange Act”). 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 recorded, processed and reported within the time periods specified by the Securities and Exchange
Commission’s rules and forms. Such controls include those designed to ensure that information 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. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of June 30, 2017, our disclosure controls and procedures were effective.
Management’s 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). Our internal control over financial reporting is a process designed by
management, under the supervision of our Chief Executive Officer and Chief Financial Officer and effected by our board of
directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the
United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management, led by our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of internal
control over financial reporting as of June 30, 2017, using the criteria set forth in Internal Control- Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 2013 Framework). Our evaluation of
internal control over financial reporting did not include the internal controls over total assets of $562.0 million and total revenue
of $169.6 million related to the Electric Lightwave operations, which we acquired on March 1, 2017. Based on that evaluation,
management concluded that the Company’s internal control over financial reporting was effective as of June 30, 2017.
KPMG LLP, the Company’s independent registered public accounting firm, has audited the Company’s internal control over
financial reporting, as stated in their report, which is included herein.
Changes in Internal Controls over Financial Reporting
Management of the Company previously identified and disclosed material weaknesses in internal control over financial
reporting related to the Company not having a sufficient number of employees that were adequately trained with respect to COSO
2013 Framework, and the Company not conducting timely monitoring activities to determine the effective operation of control
activities within the information technology organization and revenue recognition with respect to collectability criterion. A
material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the Company’s
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annual or interim financial statements will not be prevented or detected on a timely basis. A deficiency exists when the design or
operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to
prevent or detect misstatements on a timely basis.
Management has modified the Company’s internal control over financial reporting during the current year as a result of
remediation efforts designed to address the material weaknesses. The following actions were implemented:
· Completed training for appropriate accounting, IT and management personnel with regard to COSO 2013
Framework. The applicable guidance and requirements were communicated through internal training meetings by
internal audit and management positions.
· Redesigned and implemented enhanced user and developer access controls and implemented business process
improvements to restrict IT and financial users’ access privileges to IT applications commensurate with their
assigned responsibilities.
· Developed and continuously performed a more comprehensive monitoring process designed to actively monitor
program changes and user access activities to ensure that program changes and user access were appropriate and
that any exceptions are investigated and remediated.
· Management conducted multiple training sessions regarding evidence standards for documenting operating
effectiveness of internal control over financial reporting.
· Hired additional personnel and external resources to assist with remediation efforts and internal control execution,
as well as providing additional training for existing personnel.
·
Formally documented management’s review control over the accounting for revenue recognition collectability
criterion inclusive of management’s expectations, qualitative and quantitative criteria for investigation, level of
precision used in the performance of the review control, and how outliers were identified and addressed.
The Company’s remediation efforts were governed by a Steering Committee, under the direction of the Company’s Chief
Executive Officer and Chief Financial Officer. The status of remediation efforts was regularly reviewed with the Audit
Committee at which time the committee was advised of issues encountered, progress against milestones and key decisions
reached by management of the Company.
Management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, whether any
changes in our internal control over financial reporting that occurred during our last fiscal quarter have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting. In addition to the changes in the
aforementioned remediation efforts, management continues to implement changes in the accounting and technology areas as a
result of our Sarbanes Oxley compliance program. Such changes have included but are not limited to formalizing existing and
establishing new internal controls, implementation of technology solutions, and hiring additional accounting and technology
personnel.
Management believes the changes that have been implemented in the fourth quarter and other ongoing enhancements will
continue to have a material impact on our internal control over financial reporting in future periods as we continue to make
improvements to our Sarbanes Oxley compliance program.
ITEM 9B. OTHER INFORMATION
Not applicable.
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PART III
ITEM 10. DIRECTOR, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item 10 is incorporated by reference to the sections entitled “Proposal 1. Election of
Directors,” “Corporate Governance,” “Executive Officers,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in
our definitive proxy statement for the 2017 Annual Meeting of Stockholders to be filed with the SEC.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference to the sections entitled “Compensation Discussion
and Analysis” and “Compensation Committee Report” in our definitive proxy statement for the 2017 Annual Meeting of
Stockholders to be filed with the SEC.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by this Item 12 is incorporated by reference to the sections entitled “Security Ownership of
Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in our definitive proxy statement for
the 2017 Annual Meeting of Stockholders to be filed with the SEC.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this Item 13 is incorporated by reference to the sections entitled “Certain Relationships and
Related Party Transactions” and “Corporate Governance” in our definitive proxy statement for the 2017 Annual Meeting of
Stockholders to be filed with the SEC.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item 14 is incorporated by reference to the section entitled “Proposal 2. Ratification of
Appointment of Independent Registered Public Accounting Firm” in our definitive proxy statement for the 2017 Annual Meeting
of Stockholders to be filed with the SEC.
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
Documents Filed as Part of this Annual Report
1. Financial Statements
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at June 30, 2017 and 2016
Consolidated Statements of Operations for the Years Ended June 30, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income/(Loss) for the Years Ended June 30, 2017, 2016 and 2015
Consolidated Statements of Stockholders’ Equity for the Years Ended June 30, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the Years Ended June 30, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
F-1
F-3
F-4
F-5
F-6
F-7
F-8
Schedules not indicated above have been omitted because of the absence of the condition under which they are required or
because the information called for is shown in the consolidated financial statements or in the notes thereto.
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-1. Exhibits filed as a part of this report are listed below. Exhibits incorporated by reference
are indicated in parentheses.
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Exhibit No.
2.1**
EXHIBIT INDEX
Description of Exhibit
Agreement and Plan of Merger dated as of November 29, 2016 by and among Zayo Group, LLC, ZELMS,
Inc.Electric Lightwave Parent, Inc., and Fortis Advisors LLC, as the Equityholder Representative (incorporated by
reference to Exhibit 2.1 of our Current Report on Form 8-K/A filed with the SEC on March 7, 2017, File No. 001-
36690).
3.1**
Amended and Restated Certificate of Incorporation of Zayo Group Holdings, Inc. (incorporated by reference to
Exhibit 4.1 of our Registration Statement on Form S-8 filed with the SEC on November 4, 2014, File No. 333-
199856).
3.2**
Amended and Restated Bylaws of Zayo Group Holdings, Inc. (incorporated by reference to Exhibit 4.2 of our
Registration Statement on Form S-8 filed with the SEC on November 4, 2014, File No. 333-199856).
4.1**
4.2**
4.3**
10.1**
10.2**
10.3**
10.4**
Indenture, dated as of January 23, 2015, among Zayo Group, LLC, Zayo Capital, Inc., the guarantors party thereto
and The Bank of New York Mellon Trust Company N.A., as trustee (incorporated by reference to Exhibit 4.1 of
our Current Report on Form 8-K filed with the SEC on January 23, 2015, File No. 001-36690).
Indenture, dated as of May 6, 2015, between Zayo Group, LLC, Zayo Capital, Inc., the guarantors party thereto
and The Bank of New York Mellon Trust Company N.A., as trustee (incorporated by reference to Exhibit 4.1 of
our Current Report on Form 8-K filed with the SEC on May 7, 2015, File No. 001-36690).
Indenture, dated as of January 27, 2017, among Zayo Group, LLC, Zayo Capital, Inc., the guarantors party thereto
and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 of
our Current Report on Form 8-K filed with the SEC on April 11, 2017, File No. 001-36690).
Stockholders Agreement, dated as of October 22, 2014, between Zayo Group Holdings, Inc., on the one hand, and
each Sponsor listed on the signature pages thereto and each stockholder listed on the signature pages thereto, on
the other hand, and any other Person that may become a party to such Agreement after the date and pursuant to the
terms thereof (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed with the SEC on
October 22, 2014, File No. 001-36690).
Registration Rights Agreement, dated as of October 22, 2014, among Zayo Group Holdings, Inc. and those Persons
listed on Schedule A thereto (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed
with the SEC on October 22, 2014, File No. 001-36690).
Amendment and Restatement Agreement, dated as of May 6, 2015, by and among Zayo Group, LLC, Zayo
Capital, Inc., the guarantors party thereto, the lenders party thereto, Morgan Stanley Senior Funding, Inc., as
administrative agent for the term loan facility, and SunTrust Bank, as administrative agent for the revolving loan
facility whereby that certain Credit Agreement, dated as of July 2, 2012, as amended, will be amended and restated
in its entirety in the form of that certain First Amended and Restated Credit Agreement, by and among Zayo
Group, LLC and Zayo Capital, Inc., as borrowers, the guarantors party thereto, the lenders party thereto, Morgan
Stanley Senior Funding, Inc. and SunTrust Bank (incorporated by reference to Exhibit 10.1 of our Current Report
on Form 8-K filed with the SEC on May 7, 2015, File No. 001-36690).
Incremental Amendment to Amended and Restated Credit Agreement dated as of January 15, 2016, by and among
Zayo Group, LLC, Zayo Capital, Inc., Morgan Stanley Senior Funding, Inc., as term facility administrative agent,
SunTrust Bank, as revolving facility administrative agent, and the other lenders signatory thereto (incorporated by
reference to Exhibit 10.1 of our Current Report on Form 8-K filed with the SEC on January 15, 2016, File No.
001-36690).
10.5**
Repricing Amendment to Amended and Restated Credit Agreement, dated as of July 22, 2016, by and among
Zayo Group, LLC, Zayo Capital, Inc., Morgan Stanley Senior Funding, Inc., as term facility administrative agent,
SunTrust Bank, as revolving facility administrative agent, and the other lenders signatory thereto (incorporated by
reference to Exhibit 10.1 of our Current Report on Form 8-K filed with the SEC on July 25, 2016, File No. 001-
36690).
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10.6**
Incremental Amendment No. 2 to Amended and Restated Credit Agreement dated as of January 19, 2017, by and
among Zayo Group, LLC, Zayo Capital, Inc., Morgan Stanley Senior Funding, Inc., as term facility administrative
agent, SunTrust Bank, as revolving facility administrative agent, and the other lenders signatory thereto
(incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed with the SEC on January 25,
2017, File No. 001-36690).
10.7**
Repricing Amendment No. 2 to Amended and Restated Credit Agreement, dated as of July 20, 2017, by and
among Zayo Group, LLC, Zayo Capital, Inc., Morgan Stanley Senior Funding, Inc., as term facility administrative
agent, SunTrust Bank, as revolving facility administrative agent, and the other lenders signatory thereto
(incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed with the SEC on July 21, 2017,
File No. 001-36690).
10.8**+
2014 Stock Incentive Plan (as amended on August 23, 2016) (incorporated by reference to Exhibit 10.2 of our
Quarterly Report on Form 10-Q filed with the SEC on November 9, 2016, File No. 001-36690).
10.9**+
Grant Notice for 2014 Stock Incentive Plan – Restricted Stock Unit Award (Part A Awards) (incorporated by
reference to Exhibit 10.3 of our Quarterly Report on Form 10-Q filed with the SEC on November 9, 2016, File No.
001-36690)
10.10**+
Grant Notice for 2014 Stock Incentive Plan—Restricted Stock Unit Award (Part B Awards) (incorporated by
reference to Exhibit 10.4 of our Quarterly Report on Form 10-Q filed with the SEC on November 9, 2016, File No.
001-36690).
10.11**+
Grant Notice for 2014 Stock Incentive Plan—Restricted Stock Unit Award (Non-Employee Director Awards)
(incorporated by reference to Exhibit 10.23 of our Annual Report on Form 10-K filed with the SEC on September
18, 2015, File No. 001-36690).
10.12**+
Employment Agreement, dated as of July 27, 2016, by and between Zayo Group, LLC and John F. Waters, Jr.
(incorporated by reference to Exhibit 10.5 of our Quarterly Report on Form 10-Q filed with the SEC on November
9, 2016, File No. 001-36690).
10.13**+
Grant Notice for 2014 Stock Incentive Plan—Restricted Stock Unit Award (One-time Sign-On RSUs for John F.
Waters, Jr.) (incorporated by reference to Exhibit 10.6 of our Quarterly Report on Form 10-Q filed with the SEC
on November 9, 2016, File No. 001-36690).
10.14**+
Employment Agreement, dated as of March 31, 2017, by and between Zayo Group, LLC and Andrew Crouch
(incorporated by reference to Exhibit 10.3 of our Quarterly Report on Form 10-Q filed with the SEC on May 10,
2017, File No. 001-36690).
21.1*
23.1*
31.1*
List of Subsidiaries of Zayo Group Holdings, Inc.
Consent of KPMG LLP
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*
Certification of the Registrant, pursuant to 18 U.S.C. Section 1350, as adopted, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
101.INS*
XBRL Instance Document
101.SCH* XBRL Schema Document
101.CAL* XBRL Calculation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* XBRL Label Linkbase Document
101.PRE*
XBRL Presentation Linkbase Document
* Filed or furnished herewith
** Incorporated herein by reference
+ Management contract and/or compensatory plan or arrangement
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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 21 day of August, 2017.
st
Signatures
ZAYO GROUP HOLDINGS, INC.
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
/s/ Dan Caruso
Dan Caruso
/s/ Ken desGarennes
Ken desGarennes
/s/ Philip Canfield
Philip Canfield
/s/ Rick Connor
Rick Connor
/s/ Don Gips
Don Gips
/s/ Steven Kaplan
Steven Kaplan
/s/ Cathy Morris
Cathy Morris
/s/ Nina Richardson
Nina Richardson
/s/ Linda Rottenberg
Linda Rottenberg
/s/ Emily White
Emily White
Title
Date
Chief Executive Officer, Director
(principal executive officer)
Chief Financial Officer
(principal financial and accounting officer)
Director
Director
Director
Director
Director
Director
Director
Director
72
August 21, 2017
August 21, 2017
August 21, 2017
August 21, 2017
August 21, 2017
August 21, 2017
August 21, 2017
August 21, 2017
August 21, 2017
August 21, 2017
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Zayo Group Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Zayo Group Holdings, Inc. and subsidiaries (the Company) as
of June 30, 2017 and 2016, and the related consolidated statements of operations, comprehensive income/(loss), stockholders’
equity, and cash flows for each of the years in the three-year period ended June 30, 2017. These consolidated financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes 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 financial position
of Zayo Group Holdings, Inc. and subsidiaries as of June 30, 2017 and 2016, and the results of their operations and their cash
flows for each of the years in the three-year period ended June 30, 2017, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of June 30, 2017, based on criteria established in Internal Control –
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)), and
our report dated August 21, 2017 expressed an unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.
/s/ KPMG LLP
Denver, Colorado
August 21, 2017
F-1
Table of Contents
The Board of Directors and Stockholders
Zayo Group Holdings, Inc.:
Report of Independent Registered Public Accounting Firm
We have audited Zayo Group Holdings, Inc. and subsidiaries’ (the Company’s) internal control over financial reporting as of June
30, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting (Item 9A) .
Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit 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 effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Zayo Group Holdings, Inc. maintained, in all material respects, effective internal control over financial reporting
as of June 30, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
The Company acquired Electric Lightwave during the year ended June 30, 2017, and management excluded from its assessment
of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2017 Electric Lightwave’s internal
control over financial reporting associated with total assets of $562.0 million and total revenues of $169.6 million included in the
consolidated financial statements of the Company as of and for the year ended June 30, 2017. Our audit of internal control over
financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Electric
Lightwave.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of the Company and subsidiaries as of June 30, 2017 and 2016, and the related consolidated
statements of operations, comprehensive income/(loss), stockholders’ equity, and cash flows for each of the years in the three-
year period ended June 30, 2017, and our report dated August 21, 2017 expressed an unqualified opinion on those consolidated
financial statements.
/s/ KPMG LLP
Denver, Colorado
August 21, 2017
F-2
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ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share amounts)
Assets
Current assets
Cash and cash equivalents
Trade receivables, net of allowance of $9.5 and $7.5 as of June 30, 2017 and June 30,
2016, respectively
Prepaid expenses
Other assets
Total current assets
Property and equipment, net
Intangible assets, net
Goodwill
Deferred income taxes, net
Other assets
Total assets
Liabilities and stockholders' equity
Current liabilities
Current portion of long-term debt
Accounts payable
Accrued liabilities
Accrued interest
Capital lease obligations, current
Deferred revenue, current
Total current liabilities
Long-term debt, non-current
Capital lease obligation, non-current
Deferred revenue, non-current
Deferred income taxes, net
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 13)
Stockholders' equity
June 30,
2017
June 30,
2016
$
220.7 $
170.7
$
$
191.6
68.3
34.0
514.6
5,016.0
1,188.6
1,840.2
38.3
141.7
8,739.4 $
5.0 $
72.4
325.4
63.5
8.0
146.0
620.3
5,532.7
93.6
989.7
40.2
52.4
7,328.9
148.4
68.8
9.2
397.1
4,079.5
934.9
1,214.5
7.0
94.5
6,727.5
—
97.0
225.7
28.6
5.8
129.4
486.5
4,085.3
44.9
793.3
41.3
57.0
5,508.3
Preferred stock, $0.001 par value - 50,000,000 shares authorized; no shares issued and
outstanding as of June 30, 2017 and June 30, 2016, respectively
Common stock, $0.001 par value - 850,000,000 shares authorized; 246,471,551 and
242,649,498 shares issued and outstanding as of June 30, 2017 and June 30, 2016,
respectively
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit
Total stockholders' equity
Total liabilities and stockholders' equity
—
—
0.2
1,884.0
5.4
(479.1)
1,410.5
8,739.4 $
0.2
1,777.6
4.5
(563.1)
1,219.2
6,727.5
$
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Table of Contents
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
Revenue
Operating costs and expenses
Operating costs (excluding depreciation and amortization and including stock-
based compensation—Note 11)
Selling, general and administrative expenses (including stock-based
compensation—Note 11)
Depreciation and amortization
Total operating costs and expenses
Operating income
Other expenses
Interest expense
Loss on extinguishment of debt
Foreign currency loss on intercompany loans
Other income/(expense), net
Total other expenses, net
Income/(loss) from operations before income taxes
Provision/(benefit) for income taxes
Net income/(loss)
Weighted-average shares used to compute net income/(loss) per share:
$
Basic
Diluted
Net income/(loss) per share:
Basic and diluted
2017
2,199.8 $
Year Ended June 30,
2016
1,721.7 $
$
2015
1,347.1
782.9
578.7
413.5
436.2
606.9
1,826.0
373.8
386.4
516.3
1,481.4
240.3
358.4
406.2
1,178.1
169.0
(241.5)
(18.2)
(10.3)
0.3
(269.7)
104.1
18.4
85.7 $
(220.1)
(33.8)
(53.8)
(0.3)
(308.0)
(67.7)
8.5
$
(76.2)
243.9
246.8
243.3
243.3
(214.0)
(94.3)
(24.4)
(0.4)
(333.1)
(164.1)
(8.8)
(155.3)
235.4
235.4
$
0.35 $
(0.31) $
(0.66)
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Table of Contents
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS )
(in millions)
Net income/(loss)
Foreign currency translation adjustments
Defined benefit pension plan adjustments
Comprehensive income/(loss)
2017
Year Ended June 30,
2016
2015
85.7 $
2.1
(1.2)
86.6 $
(76.2) $
12.4
—
(63.8) $
(155.3)
(22.3)
—
(177.6)
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions, except share amounts)
Balance at June 30, 2014
Proceeds from issuance of common stock
Reclassification of common unit liability to
additional paid in capital
Stock-based compensation
Non-cash settlement of note receivable from
Communications Infrastructure Investments,
LLC
Foreign currency translation adjustment
Net loss
Balance at June 30, 2015
Stock-based compensation
Foreign currency translation adjustment
Repurchase and retirement of common shares
Net loss
Balance at June 30, 2016
Stock-based compensation
Cumulative effect adjustment resulting from
adoption of ASU 2016-09 (Note 1)
Foreign currency translation adjustment
Defined benefit pension plan adjustments
Net income
Balance at June 30, 2017
Common
Shares
223,000,000
20,008,679
$
—
—
—
—
—
$
243,008,679
3,114,939
—
(3,474,120)
—
$
242,649,498
3,822,053
—
—
—
—
$
246,471,551
Common
Stock
Additional
paid-in
Capital
Accumulated
Other
Comprehensive
Income/(loss)
Accumulated
Deficit
Note
receivable
from
shareholder
Total
Stockholders'
Equity
$
0.2
—
—
—
—
—
—
0.2
$
—
—
—
—
0.2
$
—
—
—
—
$
0.2
$
755.4
387.2
490.2
95.0
(22.0)
—
—
1,705.8
152.9
$
—
(81.1)
—
1,777.6
104.7
$
1.7
—
—
—
$
1,884.0
14.4
$
—
(331.6)
$
—
—
—
—
—
—
(22.3)
—
(7.9)
$
—
12.4
—
—
4.5
$
—
—
2.1
(1.2)
—
$
5.4
—
—
(155.3)
(486.9)
$
—
—
—
(76.2)
(563.1)
$
—
(1.7)
—
—
85.7
(479.1)
$
(22.0)
$
—
—
—
22.0
—
—
— $
—
—
—
—
— $
—
—
—
—
— $
416.4
387.2
490.2
95.0
—
(22.3)
(155.3)
1,211.2
152.9
12.4
(81.1)
(76.2)
1,219.2
104.7
—
2.1
(1.2)
85.7
1,410.5
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Cash flows from operating activities
Net income/(loss)
Adjustments to reconcile net income/(loss) to net cash provided by operating activities
Depreciation and amortization
Loss on extinguishment of debt
Non-cash interest expense
Stock-based compensation
Amortization of deferred revenue
Additions to deferred revenue
Foreign currency loss on intercompany loans
Excess tax benefit from stock-based compensation
Deferred income taxes
Provision for bad debts
Non-cash loss on investments
Changes in operating assets and liabilities, net of acquisitions
Trade receivables
Accounts payable and accrued liabilities
Other assets and liabilities
Net cash provided by operating activities
Cash flows from investing activities
Purchases of property and equipment
Cash paid for acquisitions, net of cash acquired
Net cash used in investing activities
Cash flows from financing activities
Proceeds from debt
Proceeds from equity offerings
Direct costs associated with initial public offering
Principal payments on long-term debt
Payment of early redemption fees on debt extinguished
Principal payments on capital lease obligations
Payment of debt issue costs
Common stock repurchases
Excess tax benefit from stock-based compensation
Cash paid for Santa Clara acquisition financing arrangement
Net cash provided by financing activities
Net cash flows
Effect of changes in foreign exchange rates on cash
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of period
Supplemental disclosure of non-cash investing and financing activities:
Cash paid for interest, net of capitalized interest
Cash paid for income taxes
Non-cash purchases of equipment through capital leasing
Increase in accounts payable and accrued expenses for purchases of property and equipment
2017
Year Ended June 30,
2016
2015
$
85.7
$
(76.2)
$
(155.3)
606.9
18.2
9.6
114.1
(117.6)
200.5
10.3
—
12.6
3.7
1.2
(7.2)
5.2
(33.4)
909.8
(835.5)
(1,434.8)
(2,270.3)
3,865.8
—
—
(2,408.8)
—
(6.6)
(35.4)
—
—
(3.7)
1,411.3
50.8
(0.8)
50.0
170.7
220.7
195.6
13.1
12.0
16.9
$
$
516.3
33.8
11.9
155.9
(111.5)
184.0
53.8
(7.9)
(2.8)
3.9
1.2
1.9
(36.0)
(14.3)
714.0
(704.1)
(437.5)
(1,141.6)
929.3
—
—
(535.0)
(20.3)
(4.9)
(4.2)
(81.1)
7.9
—
291.7
(135.9)
(2.0)
(137.9)
308.6
170.7
228.5
14.0
7.6
25.7
$
$
406.2
94.3
19.7
200.7
(72.1)
149.1
24.4
—
(13.3)
1.9
0.9
(11.2)
(22.1)
(17.8)
605.4
(530.4)
(855.7)
(1,386.1)
1,787.3
413.7
(26.5)
(1,288.5)
(62.6)
(3.5)
(24.2)
—
—
—
795.7
15.0
(3.8)
11.2
297.4
308.6
191.2
14.5
6.8
8.4
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Table of Contents
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
Business
Zayo Group Holdings, Inc., a Delaware corporation, was formed on November 13, 2007, and is the parent company of a
number of subsidiaries engaged in bandwidth infrastructure services. Zayo Group Holdings, Inc. and its subsidiaries are
collectively referred to as “Zayo Group Holdings” or the “Company.” The Company’s primary operating subsidiary is Zayo
Group, LLC (“ZGL”). Headquartered in Boulder, Colorado, the Company operates bandwidth infrastructure assets, including
fiber networks and data centers, in the United States, Canada and Europe to offer:
·
·
·
Fiber Solutions, including dark fiber, dedicated lit networks and mobile infrastructure services.
Transport services, including wavelength, wholesale IP and SONET services.
Enterprise Networks, including Ethernet, private lines, dedicated Internet and cloud services.
· Colocation, including provision of colocation space and power and interconnection services.
· Voice, unified communications and services dedicated to small and medium sized businesses.
· Other services, including Zayo Professional Services (“ZPS”).
The Company’s shares are listed on the New York Stock Exchange (NYSE) under the ticker symbol “ZAYO”.
(2) BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Presentation
The accompanying consolidated financial statements include all the accounts of the Company and its wholly-owned
subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. The accompanying consolidated
financial statements include the accounts of the Company and its wholly-owned subsidiaries and have been prepared in
accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations
of the Securities and Exchange Commission (the “SEC”) for annual reports on Form 10-K. In the opinion of management, all
adjustments considered necessary for the fair presentation of financial position, results of operations and cash flows of the
Company have been included herein. Unless otherwise noted, dollar amounts and disclosures throughout the Notes to the
consolidated financial statements are presented in millions of dollars.
The Company’s fiscal year ends June 30 each year, and we refer to the fiscal year ended June 30, 2017 as “Fiscal 2017,”
fiscal year ended June 30, 2016 as “Fiscal 2016,” and the fiscal year ended June 30, 2015 as “Fiscal 2015.”
b. Earnings or Loss per Share
Basic earnings or loss per share attributable to the Company’s common shareholders is computed by dividing net earnings
or loss attributable to common shareholders by the weighted average number of common shares outstanding for the
period. Diluted earnings or loss per share attributable to common shareholders presents the dilutive effect, if any, on a per share
basis of potential common shares (such as restricted stock units) as if they had been vested or converted during the periods
presented. No such items were included in the computation of diluted loss per share for Fiscal 2016 and Fiscal 2015 because the
Company incurred a net loss in each of these periods and the effect of inclusion would have been anti-dilutive.
The Company’s computation of diluted income per share for the year ended June 30, 2017 included an adjustment of 2.9
million shares to the weighted-average shares for the dilutive effect of the Part A and Part B units and related issuance of
common shares upon vesting (calculated using the treasury method).
F-8
Table of Contents
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
c. Foreign Currency Translation
For operations outside the U.S. that have functional currencies other than the U.S. dollar, assets and liabilities are translated
to U.S. dollars at period-end exchange rates, and revenue, expenses and cash flows are translated using monthly average exchange
rates during the year. Gains or losses resulting from currency translation are recorded as a component of accumulated other
comprehensive (loss)/income in stockholders’ equity and in the consolidated statements of comprehensive loss. The Company
considers its investments in its foreign subsidiaries to be permanently reinvested.
d. Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period.
Significant estimates are used when establishing allowances for doubtful accounts and accruals for billing disputes, determining
useful lives for depreciation and amortization and accruals for exit activities associated with real estate leases, assessing the need
for impairment charges (including those related to intangible assets and goodwill), determining the fair values of assets acquired
and liabilities assumed in business combinations, accounting for income taxes and related valuation allowances against deferred
tax assets, determining the defined benefit costs and defined benefit obligations related to post-employment benefits, and
estimating certain restricted stock unit grant fair values used to compute the stock-based compensation liability and expense.
Management evaluates these estimates and judgments on an ongoing basis and makes estimates based on historical experience,
current conditions, and various other assumptions that are believed to be reasonable under the circumstances. The results of these
estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and
assessing the accounting treatment with respect to commitments and contingencies. Actual results may differ from these estimates
under different assumptions or conditions .
e. 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. The Company had a non-current
restricted cash balance of $4.5 million as of both June 30, 2017 and 2016.
f. Trade Receivables
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 customer’s financial
condition, and the age of receivables and current payment patterns. Account balances are charged off against the allowance after
all means of collection have been exhausted and the potential for recovery is considered remote.
g. Property and Equipment
The Company’s property and equipment includes assets in service and under construction or development.
Property and equipment is recorded at historical cost or acquisition date fair value. Costs associated directly with network
construction, service installations, and development of business support systems, including employee-related costs, are
capitalized. Depreciation is calculated on a straight-line basis over the asset’s estimated useful life from the date placed into
service or acquired. Management periodically evaluates the estimates of the useful life of property and
F-9
Table of Contents
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
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, 2017, 2016
or 2015, respectively.
The Company capitalizes interest for assets that require a period of time to get them ready for their intended use. The
amount of interest capitalized is based on the Company’s weighted average effective interest rate for outstanding debt obligations
during the respective accounting period.
h. Goodwill and Acquired Intangibles
Intangible assets arising from business combinations, such as acquired customer contracts and relationships, (collectively
“customer relationships”), are initially recorded at fair value. The Company amortizes customer relationships primarily over an
estimated life of 10 to 20 years using an amortization method that approximates the timing in which the Company expects to
receive the benefit from the acquired customer relationship assets. 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, or more frequently if a triggering event occurs between
impairment testing dates. The Company’s impairment assessment begins with a qualitative assessment to determine whether it is
more likely than not that the fair value of a reporting unit is less than its carrying value. The qualitative assessment includes
comparing the overall financial performance of the reporting units against the planned results used in the last quantitative
goodwill impairment test. Additionally, each reporting unit’s fair value is assessed in light of certain events and circumstances,
including macroeconomic conditions, industry and market considerations, cost factors, and other relevant entity- and reporting
unit-specific events. The selection and assessment of qualitative factors used to determine whether it is more likely than not that
the fair value of a reporting unit exceeds the carrying value involves significant judgments and estimates. If it is determined under
the qualitative assessment that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a
single step test is performed to identify and measure impairment and if a reporting unit’s fair value is greater than its carrying
value, the Company recognizes an impairment charge for the amount by which the reporting unit’s carrying amount exceeds its
fair value, up to but not exceeding the reporting unit’s goodwill. See discussion below in “Recently Issued Accounting
Pronouncements” regarding the Company’s early adoption of a new accounting standard during the quarter ended March 31, 2017
which simplifies the requirements for goodwill impairment testing. The Company performed a qualitative assessment for the
years ended June 30, 2017, 2016 and 2015, as well as upon the change in reportable segments during Fiscal 2017 (see Note 15-
Segment Reporting ), and determined it was more likely than not that the fair values of our reporting units are greater than their
carrying amounts.
The Company reviews its indefinite-lived intangible assets for impairment at least annually in April, which involves
comparing the estimated fair value of indefinite-lived intangible assets to their respective carrying values. To the extent the
carrying value of indefinite-lived intangible assets exceeds the fair value, the Company will recognize an impairment loss for the
difference. The Company performed a qualitative assessment to determine whether it was more
F-10
Table of Contents
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
likely than not that the Company’s indefinite-lived intangible assets were impaired and concluded there was no indication of
impairment for the years ended June 30, 2017, 2016 and 2015.
Intangible assets with finite 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 intangible assets during the years ended June 30, 2017, 2016 or 2015,
respectively.
i. Derivative Financial Instruments
Derivative instruments are recorded in the balance sheet as either assets or liabilities, measured at fair value. The Company
has historically entered into interest rate swaps to convert a portion of its floating-rate debt to fixed-rate debt and has not applied
hedge accounting; therefore, the changes in the fair value of the interest rate swaps are recognized in earnings as adjustments to
interest expense. The principal objectives of the derivative instruments are to minimize the cash flow 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 debt instruments entered into during the July 2012 financing transactions. As of June 30,
2017, the Company’s interest rate swap contract has expired and was not replaced.
j. Revenue Recognition
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 there is persuasive evidence of an
arrangement, the fee is fixed or determinable, customer acceptance has been obtained with relevant contract terms, 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 and the remainder is billed in arrears on a transactional basis
determined by customer usage. The Company often bills customers for upfront charges, which are non-refundable. These charges
relate to activation fees, installation charges or prepayments for future services and are influenced by various business factors
including how the Company and customer agree to structure the payment terms. These upfront charges are deferred and
recognized over the underlying contractual term. The Company also defers costs associated with customer activation and
installation to the extent of upfront amounts received from customers, which are recognized as expense over the same period for
which the associated revenue is recognized.
The Company typically records revenues from leases of dark fiber, including indefeasible rights-of-use (“IRU”)
agreements, over the term that the customer is given exclusive access to the assets. Dark fiber IRU agreements generally require
the customer to make a down payment upon the execution of the agreement with monthly IRU fees paid over the contract term;
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. Revenue related to professional services to provide network management and technical
support is recognized as services are provided.
In determining the appropriate amount of revenue and related reserves to reflect in its consolidated financial statements,
management evaluates payment history, credit ratings, customer financial performance, and historical or potential billing disputes
and related estimates are based on these factors and assumptions.
k. Operating Costs and Expenses
The Company’s operating costs and expenses consist primarily of network expense (“Netex”), compensation and benefits,
network operations expense (“Netops”), stock-based compensation, other expenses, and depreciation and amortization.
F-11
Table of Contents
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
Netex consists of third-party network service costs resulting from the leasing of certain network facilities, primarily leases
of circuits and dark fiber, from carriers to augment the Company’s owned infrastructure, for which it is generally billed a fixed
monthly fee. Netex also includes colocation facility costs for rent and license fees paid to the landlords of the buildings in which
the Company’s colocation business operates, along with the utility costs to power those facilities.
Compensation and benefits expenses include salaries, wages, incentive compensation and benefits. Employee-related costs
that are directly associated with network construction, service installations and development of business support systems are
capitalized and amortized to operating costs and expenses over the customer life. Compensation and benefits expenses related to
the departments attributed to generating revenue are included in “Operating costs” while compensation and benefits expenses
related to the sales, product, and corporate departments are included in “Selling, general and administrative expenses” in the
consolidated statements of operations.
Netops expense include all of the non-personnel related expenses of operating and maintaining the network infrastructure,
including contracted maintenance fees, right-of-way costs, rent for cellular towers and other places where fiber is located, pole
attachment fees, and relocation expenses. Netops expense is included in “Operating costs” in the consolidated statements of
operations.
Stock-based compensation expense consists of the fair value of equity based awards granted to employees and independent
directors recognized over their applicable vesting period. Stock-based compensation expense is included, based on the
responsibilities of the awarded recipient, in either “Operating costs” or “Selling, general and administrative expenses” in the
consolidated statements of operations. For additional information regarding our stock-based compensation expense, see (l.) –
Stock-Based Compensation below and Note 11 – Stock-Based Compensation.
Other expenses include expenses such as property tax, franchise fees, and colocation facility maintenance, which relate to
operating our network and are therefore included in “Operating costs” as well as travel, office expense and other administrative
costs that are included in “Selling, general and administrative expenses”. Other expenses are included in either “Operating costs”
or “Selling, general and administrative expenses” in the consolidated statement of operations depending on their relationship to
generating revenue or association with sales and administration.
Transaction costs include expenses associated with professional services (i.e. legal, accounting, regulatory, etc.) rendered in
connection with acquisitions or disposals (including spin-offs), travel expense, severance expense incurred on the date of
acquisition or disposal, and other direct expenses incurred that are associated with signed and/or closed acquisitions or disposals
and unsuccessful acquisitions. Transaction costs are included in “Selling, general and administrative expenses” in the
consolidated statements of operations.
Related to Netex, the Company recognizes the cost of these facilities or services when it is incurred in accordance with
contractual requirements. The Company routinely 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 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 costs that may be incurred to conclude the negotiations or settle any litigation.
l. Stock-Based Compensation
In October 2014, the Company adopted a new incentive plan. The plan includes incentive cash compensation (ICC) and
equity (in the form of restricted stock units). Grants under the incentive plan are made quarterly for all
F-12
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ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
participants. The Company recognizes all quarterly stock-based awards to employees and independent directors, based on their
grant-date fair values, with no consideration for future forfeitures. The Company recognizes the fair value of outstanding awards
as a charge to operations over the vesting period. The Company accounts for forfeitures as they occur.
The Company uses the straight-line method to recognize share-based compensation expense for outstanding share awards
that do not contain a performance condition.
Prior to the Company’s initial public offering (“IPO”), the Company was given authorization by Communications
Infrastructure Investments, LLC (“CII”) to award 625,000,000 of CII’s common units as profits interests to employees, directors,
and affiliates of the Company. The common units were historically considered to be stock-based compensation with terms that
required the awards to be classified as liabilities due to cash settlement features. The vested portion of the awards was reported as
a liability and the fair value was re-measured at each reporting date until the date of settlement, with a corresponding charge (or
credit) to stock-based compensation expense. In connection with the Company’s IPO and the related amendment to the CII
operating agreement, there was a deemed modification to the stock compensation arrangements with the Company’s employees
and directors. As a result, previously issued common units which were historically accounted for as liability awards, became
classified as equity awards.
Determining the fair value of certain 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 Company’s results of
operations could be materially impacted.
For additional information regarding our stock-based compensation, see Note 11 – Stock-Based Compensation .
m. Legal Costs
Costs incurred to hire and retain external legal counsel to advise us on regulatory, litigation and other matters is expensed as
the related services are received.
n. Income Taxes
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.
Estimating the future tax benefit associated with deferred tax assets requires significant judgment. Deferred tax assets arise
from a variety of sources, the most significant being: tax losses that can be carried forward to be utilized against taxable income
in future years, deferred revenue, and expenses recognized in the Company’s financial statements but disallowed in the
Company’s tax return until the associated cash flow occurs.
The Company records a valuation allowance to reduce its deferred tax assets to the amount that is expected to be
recognized. The valuation allowance is established 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.
The Company continues to monitor its financial performance and other evidence each quarter to determine the appropriateness of
the Company’s valuation allowance. At each balance sheet date, existing assessments are reviewed and, if necessary, revised to
reflect changed circumstances.
F-13
Table of Contents
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
The analysis of the Company’s ability to utilize its net operating loss carryforward (“NOL”) balance is based on the
Company’s forecasted taxable income. The forecasted assumptions approximate the Company’s best estimates, including market
growth rates, future pricing, market acceptance of the Company’s products and services, future expected capital investments and
discount rates. If the Company is unable to meet its taxable income forecasts in future periods the Company may change its
conclusion about the appropriateness of the valuation allowance which could create a substantial income tax expense in the
Company’s consolidated statement of operations in the period such change occurs.
Deferred tax liabilities related to investments in foreign subsidiaries and foreign corporate joint ventures that are essentially
permanent in duration are not recognized until it becomes apparent that such amounts will reverse in the foreseeable future.
In accordance with Accounting Standards Update (“ASU”) 2015-17, Balance Sheet Classification of Deferred Taxes , all
deferred tax assets and liabilities are presented as noncurrent.
The Company records interest related to unrecognized tax benefits and penalties in the provision for income taxes.
o. Fair Value of Financial Instruments
Relevant accounting literature defines and establishes a framework for measuring fair value, and requires expanded
disclosures about fair value measurements. It also 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. Valuation techniques that may be used include 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
Company’s market assumptions.
Fair Value Hierarchy
A fair value hierarchy is established that requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based
upon the lowest level of input that is significant to the fair value measurement. The three levels of inputs that are used to measure
fair value are:
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-14
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Level 3
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
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’s cash and cash equivalents are primarily held in commercial bank accounts
in the United States, Canada and Great Britain. The Company limits its cash investments to high-quality financial institutions in
order to minimize its credit risk.
During the years ended June 30, 2017, 2016 and 2015, the Company had no single customer that exceeded 10% of total
revenue. The Company’s trade receivables, which are unsecured, are geographically dispersed. As of June 30, 2017, the Company
had no single customer with a trade receivable balance that exceeded 10% of total receivables. As of June 30, 2016, the Company
had one customer with a trade receivable balance of 11% of total receivables.
q. Employee Benefits
As a result of the Allstream acquisition (see Note 3 – Acquisitions ) the Company acquired certain defined benefit pension
plans, a defined contribution plan and other non-pension post-employment benefit plans. The cost of providing benefits under the
defined benefit pension plans and other non-pension post-employment benefits is determined annually using the projected unit
credit method. These actuarial valuations require the use of assumptions, including the discount rate, expected rate of return on
plan assets, price inflation, expected future salary increases, turnover, retirement, and mortality rate calculations to measure
defined benefit obligations. The discount rate used to calculate the present values of the defined benefit obligation is determined
by reference to market interest rates of high quality corporate bonds at the end of the reporting period. The net defined
liability/(benefit) recognized in our consolidated balance sheet comprises the present value of the projected benefit obligations
less the fair value of plan assets. Annually, all actuarial gains and losses arising from changes in the present value of the defined
benefit obligations are recognized as a component of other comprehensive income/(loss), and are included in accumulated other
comprehensive income/(loss). The changes in the fair value of plan assets are determined in an accounting valuation prepared by
an independent actuary and recognized in the statement of operations during the period in which they occur. Any minimum
funding requirements are considered in the calculation of the economic benefit. For plans recognized by a net defined benefit
liability, minimum funding requirements can also result in an increase in the liability. The Company recognizes any decrease in
an asset or increase in a liability as a result of the above in the statement of operations during the period in which they occur. The
Company recognizes payments to the defined contribution plans as an expense in the period the employee service is incurred.
r. Condensed Financial Information of the Registrant
The restricted net assets of Zayo Group Holdings exceeds 25% of its consolidated net assets due to restrictions under the
Credit Agreement and Notes (as defined in Note 7 – Long-term debt ). Zayo Group Holdings is a holding company with no assets
or liabilities of its own or operations other than those of its subsidiary ZGL. Accordingly, the financial position, results of
operations, comprehensive loss and cash flows of Zayo Group Holdings and ZGL are the same, except that at June 30, 2017, Zayo
Group Holdings had cash of $0.7 million. As such, the condensed financial information of Zayo Group Holdings is not presented
as it is not meaningful.
F-15
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ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
s. Recently Issued Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-04, Simplifying the Accounting
for Goodwill Impairment , which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from
the goodwill impairment test. Step 2 measures goodwill impairment loss by comparing the implied fair value of a reporting unit’s
goodwill with the carrying amount of that goodwill. Under the amendments in ASU 2017-04, an entity should recognize an
impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value; however, the loss
recognized should not exceed the total amount of goodwill allocated to that reporting unit. The updated guidance required a
prospective adoption. Early adoption was permitted for goodwill impairment test performed on testing dates after January 1,
2017. The Company early adopted the standard during the quarter ended March 31, 2017. No impairments of goodwill were
identified.
In January 2017, the FASB issued ASU 2017-01, “ Business Combinations (Topic 805): Clarifying the Definition of a
Business .” The new standard provides guidance for evaluating whether transactions should be accounted for as acquisitions of
assets or businesses. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2017, with early adoption permitted for transactions for which the acquisition date occurs before the issuance date
or effective date, only when the transaction has not been reported in financial statements that have been issued or made available
for issuance. The Company early adopted the standard as of January 1, 2017 and has applied the provisions of this standard for
acquisitions consummated subsequent to that date. The adoption of this standard did not have a material impact on the
determination of whether the transactions closed during the current year would be accounted for as an acquisition of assets or a
business.
In August 2016, the FASB issued ASU 2016-15, " Statement of Cash Flows (Topic 230): Classifications of Certain Cash
Receipts and Cash Payments. " The new standard provides guidance for eight changes with respect to how cash receipts and cash
payments are classified in the statement of cash flows, with the objective of reducing diversity in practice. The standard is
effective for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2017 , with early adoption
permitted. The Company does not plan to early adopt, nor does it expect the adoption of this new standard to have a material
impact on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases . The new guidance supersedes existing guidance on accounting
for leases in Topic 840 and is intended to increase the transparency and comparability of accounting for lease transactions. ASU
2016-02 requires most leases to be recognized on the balance sheet. Lessees will need to recognize a right-of-use asset and a lease
liability for virtually all leases. The liability will be equal to the present value of lease payments. The asset will be based on the
liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model,
requiring leases to be classified as either operating or finance. Lessor accounting remains similar to the current model, but
updated to align with certain changes to the lessee model and the new revenue recognition standard (ASU 2014-09). The ASU
will require both quantitative and qualitative disclosures regarding key information about leasing arrangements. The standard is
effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is
permitted. The standard must be adopted using a modified retrospective transition, and provides for certain practical expedients.
Transition will require application of the new guidance at the beginning of the earliest comparative period presented. The
Company established a project team and commenced an initial impact assessment process. To date, the Company has reviewed a
sample of lessee and lessor arrangements and made preliminary assessments of the impact this standard will have on the
consolidated financial statements. Although it is still assessing the impact of this standard, the Company expects the new
guidance to significantly increase the reported assets and liabilities on the consolidated balance sheets. There are currently no
plans to early adopt this ASU.
On March 30, 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting , which
is intended to improve the accounting for share-based payment transactions as part of the FASB’s simplification initiative. The
ASU changes five aspects of the accounting for share-based payment award transactions that will affect public companies,
including: (1) accounting for income taxes; (2) classification of excess tax benefits on
F-16
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ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; and (5) classification of
employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. The
Company early-adopted ASU 2016-09 effective July 1, 2016. Excess tax benefits for share-based payments are now recognized
against income tax expense rather than additional paid-in capital and are included in operating cash flows rather than financing
cash flows. The recognition of excess tax benefits have been applied prospectively and prior periods have not been adjusted. The
Company had $15.6 million of excess tax benefits for the year ended June 30, 2017. In addition, the Company elected to change
its accounting policy to account for forfeitures as they occur. The change was applied on a modified retrospective basis with a
cumulative effect adjustment to accumulated deficit of $1.7 million as of July 1, 2016. Amendments related to minimum statutory
tax withholding requirements and the classification of employee taxes paid on the statement of cash flows when an employer
withholds shares for tax-withholding purposes have been adopted prospectively and did not have a material impact on the
consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers , which requires an entity to
recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.
The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. In July 2015, the FASB
deferred the effective date to annual reporting periods and interim reporting periods within annual reporting periods beginning
after December 15, 2017 . Early adoption is permitted as of the original effective date or annual reporting periods and interim
reporting periods within annual reporting periods beginning after December 15, 2016. The standard permits the use of either the
retrospective or cumulative effect transition method .
In Fiscal 2017, the Company established a project team and commenced an initial impact assessment process based on a
review of a sample of contracts with its customers. Lease revenue is not included in the scope of ASU 2014-09 and as a result the
revenue to which the Company must apply the new guidance is generally limited to service revenue, certain maintenance revenue
not covered by lease arrangements and other fees charged to customers. Although the Company is still assessing the impact of
this standard on its consolidated financial statements, it has preliminarily determined that due to changes in the timing of
recognition of certain installation services, discounts and promotional credits given to customers, there may be additional contract
assets and liabilities recorded in the consolidated balance sheets upon adoption. Additionally, the requirement to defer
incremental costs incurred to acquire a contract including sales commissions, and recognize such costs over the contract period or
expected customer life may result in additional deferred charges recognized in the consolidated balance sheets and could have the
impact of deferring operating expenses. The assessment of the impact of this standard on the Company’s consolidated financial
statements also includes developing new accounting policies, internal controls and procedures and possible changes to our
systems to facilitate the adoption of this accounting policy. The Company plans to adopt this new standard as of July 1, 2018 and
based on its initial assessment expects to apply the modified retrospective method, which may result in a cumulative effect
adjustment as of the date of adoption. The Company' initial assessment of changes to the reporting of its revenue and expenses
and anticipated adoption method may change depending on the results of the Company’s ongoing and final assessment of this
ASU. Until the Company is further along in its assessment, it does not anticipate being able to provide reasonably accurate
estimates of the impact of ASU 2014-09.
(3) ACQUISITIONS
Since inception, the Company has consummated 41 transactions accounted for as business combinations. The acquisitions
were executed as part of the Company’s business strategy of expanding through acquisitions. The acquisitions of these businesses
have allowed the Company to increase the scale at which it operates, which in turn affords the Company the ability to increase its
operating leverage, extend its network reach, and broaden its customer base.
The accompanying consolidated financial statements include the operations of the acquired entities from their respective
acquisition dates.
F-17
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ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
Acquisitions Completed During Fiscal 2017
KIO Networks US Data Centers
On May 1, 2017, the Company completed the $11.9 million cash acquisition of Castle Access, Inc.’s (d/b/a “KIO Networks US”)
San Diego data centers. The two data centers, located at 12270 World Trade Drive and 9606 Aero Drive, total more than
100,000 square feet of space and 2 megawatts of critical, IT power, with additional power available. As of June 30, 2017, $1.2
million of the purchase consideration is held in escrow pending the expiration of the indemnification adjustment period. The
acquisition was funded with cash on hand and was considered a stock purchase for tax purposes.
Electric Lightwave Parent, Inc.
On March 1, 2017, the Company acquired Electric Lightwave Parent, Inc. (“Electric Lightwave”) , an infrastructure and
telecom services provider serving 35 markets in the western U.S., for net purchase consideration of $1,426.6 million, net of cash
acquired, subject to certain post-closing adjustments. As of June 30, 2017, $7.0 million of the purchase consideration is held in
escrow pending the expiration of the indemnification adjustment period. The acquisition was funded through debt (see Note 7 –
Long-Term Debt ) and cash on hand. As of June 30, 2017, $2.2 million of the net purchase consideration remains payable by the
Company. The acquisition was considered a stock purchase for tax purposes.
The acquisition added 8,100 route miles of long haul fiber and 4,000 miles of dense metro fiber across Denver,
Minneapolis, Phoenix, Portland, Seattle, Sacramento, San Francisco, San Jose, Salt Lake City, Spokane and Boise, with on-net
connectivity to more than 3,100 enterprise buildings and 100 data centers.
Santa Clara Data Center Acquisition
On October 3, 2016, the Company acquired a data center in Santa Clara, California (the “Santa Clara Data Center”), for net
purchase consideration of $11.3 million. The net purchase consideration represents the net present value of ten quarterly
payments of approximately $1.3 million beginning in the December 2016 quarter. As of June 30, 2017, the remaining cash
consideration to be paid was $8.9 million. The acquisition was considered an asset purchase for tax purposes. Payments made to
the previous owners of the Santa Clara Data Center during the year ended June 30, 2017 of $3.7 million, representing the
principal portion of the financing arrangement, are included in the consolidated statement of cash flows within financing activities
.
The Santa Clara Data Center, located at 5101 Lafayette Street, includes 26,900 total square feet and three MW of critical
power. The facility also includes high-efficiency power and cooling infrastructure, seismic reinforcement and proximity to Zayo’s
long haul dark fiber routes between San Francisco and Los Angeles.
Acquisitions Completed During Fiscal 2016
Clearview
On April 1, 2016, the Company acquired 100% of the equity interest in Clearview International, LLC (“Clearview”), a
Texas based colocation and cloud infrastructure services provider for cash consideration of $18.3 million, subject to certain post-
closing adjustments. The acquisition was funded with cash on hand and was considered an asset purchase for tax purposes.
The acquisition consisted of two Texas data centers. The data centers, located at 6606 LBJ Freeway in Dallas, Texas and
700 Austin Avenue in Waco, Texas, added approximately 30,000 square feet of colocation space, as well as a set of hybrid cloud
infrastructure services that complement the Company’s global cloud capabilities.
F-18
Table of Contents
Allstream
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
On January 15, 2016, the Company acquired 100% of the equity interest in Allstream, Inc. and Allstream Fiber U.S. Inc.
(together “Allstream”) from Manitoba Telecom Services Inc. (“MTS”) for cash consideration of CAD $422.9 million (or $297.6
million), net of cash acquired, subject to certain post-closing adjustments. The consideration paid is net of $29.6 million of
working capital and other liabilities assumed by the Company in the acquisition. The acquisition was funded with Incremental
Term Loan proceeds (as defined in Note 7 – Long-Term Debt ). The acquisition was considered a stock purchase for tax
purposes.
The acquisition added more than 18,000 route miles to the Company’s fiber network, including 12,500 miles of long-haul
fiber connecting all major Canadian markets and 5,500 route miles of metro fiber network connecting approximately 3,300 on-net
buildings concentrated in Canada’s top five metropolitan markets.
As part of the Allstream acquisition, MTS agreed to retain Allstream’s former defined benefit pension obligations, and
related pension plan assets, of retirees and other former employees of Allstream and also agreed to reimburse Allstream for
certain solvency funding payments related to the pension obligations of active Allstream employees as of January 15, 2016. MTS
will transfer assets from Allstream’s former defined benefit pension plans related to pre-closing service obligations for active
employees to new Allstream defined benefit pension plans created by the Company, subject to regulatory approval. In addition, if
the pre-closing benefit obligation for the January 15, 2016 active employees exceeds the fair value of assets transferred to the new
Allstream pension plans, MTS agreed to fund the funding deficiency at the later of the asset transfer date or the date at which it is
determined that no further solvency deficit exists. Any required funding of the pension benefit obligation subsequent to January
15, 2016, will be the responsibility of the Company. The amount of the funding deficiency was not material to the financial
statements as of June 30, 2017.
Also as part of the Allstream acquisition, the Company assumed the liabilities related to Allstream’s other non-pension
unfunded post-retirement benefits plans. The liability assumed on January 15, 2016 was approximately $8.3 million. The balance
of this liability as of June 30, 2017 was approximately $9.9 million. This liability is currently included in “Other long-term
liabilities” on the consolidated balance sheet.
Viatel
On December 31, 2015, the Company completed the acquisition of a 100% interest in Viatel Infrastructure Europe Ltd.,
Viatel (UK) Limited, Viatel France SAS, Viatel Deutschland GmbH and Viatel Nederland BV (collectively, “Viatel”) for cash
consideration of €92.9 million (or $101.2 million), net of cash acquired. The acquisition was funded with cash on hand. The
acquisition was considered a stock purchase for tax purposes. During the year ended June 30, 2017, the Company received a
refund of the purchase price from escrow of $1.5 million. The refund is reflected as a cash inflow from investing activities on the
consolidated statement of cash flows for the year ended June 30, 2017 within “Cash paid for acquisitions, net of cash acquired”
caption.
Dallas Data Center Acquisition (“Dallas Data Center”)
On December 31, 2015, the Company acquired a 36,000 square foot data center located in Dallas, Texas for cash
consideration of $16.6 million. The acquisition was funded with cash on hand and was considered an asset purchase for tax
purposes.
Acquisitions Completed During Fiscal 2015
Neo Telecoms (“Neo”)
On July 1, 2014, the Company acquired a 96% equity interest in Neo, a Paris-based bandwidth infrastructure company. The
purchase agreement also includes a call option to acquire the remaining equity interest on or after December 31, 2015. The
purchase consideration of €54.1 million (or $73.9 million), net of cash acquired, was in consideration of acquiring 96% equity
ownership in Neo and a call option to purchase the remaining 4% equity interest in Neo. The fair value of the 4% non-controlling
interest in Neo as of the acquisition date was $2.9 million and recorded in Other long-term liabilities. The consideration consisted
of cash and was paid with cash on hand from the proceeds of
F-19
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ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
the Company’s Term Loan Facility (as defined in Note 7 – Long-Term Debt ). €8.7 million (or $11.9 million) of the purchase
consideration is currently held in escrow pending the expiration of the indemnification adjustment period. The acquisition was
considered a stock purchase for tax purposes.
In April 2016, the Company exercised its call option to acquire the remaining 4% equity interest in Neo. The remaining
equity interest was purchased for €2.0 million (or $2.3 million).
Colo Facilities Atlanta (“AtlantaNAP”)
On July 1, 2014, the Company acquired 100% of the equity interest in AtlantaNAP, a data center and managed services
provider in Atlanta, for cash consideration of $51.9 million. The acquisition was considered an asset purchase for tax purposes.
IdeaTek Systems, Inc. (“IdeaTek”)
Effective January 1, 2015, the Company acquired all of the equity interest in IdeaTek. The purchase price, subject to certain
post-closing adjustments, was $52.7 million and was paid with cash on hand. The acquisition was considered a stock purchase for
tax purposes.
The IdeaTek acquisition added 1,800 route miles to the Company’s network in Kansas, and includes a dense metro footprint
in Wichita, Kansas. The network spans across Kansas and connects to approximately 600 cellular towers and over 100 additional
buildings.
Latisys Holdings, LLC (“Latisys”)
On February 23, 2015, the Company acquired the operating units of Latisys, a colocation and infrastructure as a service
(“Iaas”) provider for a price of $677.8 million, net of cash acquired. The Latisys acquisition was funded with the proceeds of the
January 2015 Notes Offering (as defined in Note 7 – Long-Term Debt ). The acquisition was considered a stock purchase for tax
purposes.
The Latisys acquisition added colocation and IaaS services through eight data centers across five markets in Northern
Virginia, Chicago, Denver, Orange County and London. The acquired data centers currently total over 185,000 square feet of
billable space and 33 MW of critical power.
Acquisition Method Accounting Estimates
The Company initially recognizes the assets and liabilities acquired from the aforementioned acquisitions based on its
preliminary estimates of their acquisition date fair values. As additional information becomes known concerning the acquired
assets and assumed liabilities, management may make adjustments to the opening balance sheet of the acquired company up to
the end of the measurement period, which is no longer than a one year period following the acquisition date. The determination of
the fair values of the acquired assets and liabilities assumed (and the related determination of estimated lives of depreciable
tangible and identifiable intangible assets) requires significant judgment. As of June 30, 2017, for the KIO Networks US Data
Centers and Electric Lightwave acquisitions, the Company has not completed its fair value analysis and calculations in sufficient
detail necessary to arrive at the final estimates of the fair value of certain working capital and non-working capital acquired assets
and assumed liabilities, including the allocations to goodwill and intangible assets, property and equipment, deferred revenue and
resulting deferred taxes. All information presented with respect to certain working capital and non-working capital acquired assets
and liabilities assumed as it relates to these acquisitions is preliminary and subject to revision pending the final fair value analysis.
F-20
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ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
The table below reflects the Company's estimates of the acquisition date fair values of the assets and liabilities assumed
from its Fiscal 2017 acquisitions:
Acquisition date
Cash
Other current assets
Property and equipment
Deferred tax assets, net
Intangibles
Goodwill
Other assets
Total assets acquired
Current liabilities
Deferred tax liabilities, net
Capital lease obligations
Deferred revenue
Other liabilities
Total liabilities assumed
Net assets acquired
Less cash acquired
Total consideration paid/payable
KIO Networks
US Data
Centers
Electric
Lightwave
Santa Clara
Data
Center
May 1, 2017
March 1, 2017 October 3, 2016
(in millions)
$
$
0.1 $
0.1
2.4
—
6.4
6.0
0.5
15.5
1.7
1.3
—
0.5
—
3.5
12.0
(0.1)
11.9 $
12.6 $
55.4
520.6
46.7
312.2
629.3
1.7
1,578.5
58.1
—
—
80.0
1.2
139.3
1,439.2
(12.6)
1,426.6 $
—
—
31.9
—
6.0
—
—
37.9
—
—
26.6
—
—
26.6
11.3
—
11.3
F-21
Table of Contents
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
The table below reflects the Company's estimates of the acquisition date fair values of the assets and liabilities assumed
from its Fiscal 2016 acquisitions:
Acquisition date
Cash
Other current assets
Property and equipment
Deferred tax assets, net
Intangibles
Goodwill
Other assets
Total assets acquired
Current liabilities
Deferred revenue
Deferred tax liability, net
Other liabilities
Total liabilities assumed
Net assets acquired
Less cash acquired
Net consideration paid
Clearview
April 1, 2016 January 15, 2016 December 31, 2015 December 31, 2015
Allstream
Viatel
Dallas Data
Center
$
$
— $
0.6
17.1
0.2
9.8
2.1
0.3
30.1
1.1
0.4
—
10.3
11.8
18.3
—
18.3 $
(in millions)
2.9 $
95.6
266.3
3.8
64.5
—
4.5
437.6
63.2
46.9
—
27.0
137.1
300.5
(2.9)
297.6 $
3.5 $
7.3
174.0
—
—
9.5
2.0
196.3
18.8
58.5
8.6
5.7
91.6
104.7
(3.5)
101.2 $
—
—
12.2
—
4.4
—
—
16.6
—
—
—
—
—
16.6
—
16.6
The table below reflects the Company's estimates of the acquisition date fair values of the assets and liabilities assumed
from its Fiscal 2015 acquisitions:
Acquisition date
Cash
Other current assets
Property and equipment
Deferred tax assets, net
Intangibles
Goodwill
Other assets
Total assets acquired
Current liabilities
Deferred revenue
Deferred tax liability, net
Other liabilities
Total liabilities assumed
Net assets acquired
Less cash acquired
Net consideration paid
AtlantaNAP
July 1, 2014 July 1, 2014 January 1, 2015 February 23, 2015
IdeaTek
Latisys
Neo
(in millions)
— $
0.2
7.0
—
21.0
25.2
—
53.4
1.5
—
—
—
1.5
51.9
—
51.9 $
4.2 $
9.5
31.3
—
26.4
32.5
2.3
106.2
13.5
3.7
7.6
3.3
28.1
78.1
(4.2)
73.9 $
— $
0.8
32.3
3.1
7.6
39.0
—
82.8
4.4
25.7
—
—
30.1
52.7
—
52.7
$
9.4
17.4
222.9
0.4
250.2
274.1
5.0
779.4
9.9
3.2
79.1
—
92.2
687.2
(9.4)
677.8
$
$
F-22
Table of Contents
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
The goodwill arising from the Company’s acquisitions results from synergies, anticipated incremental sales to the acquired
company customer base and economies-of-scale expected from the acquisitions. The Company has allocated the goodwill to the
reporting units (in existence on the respective acquisition dates) that were expected to benefit from the acquired goodwill. The
allocation was determined based on the excess of the estimated fair value of the reporting unit over the estimated fair value of the
individual assets acquired and liabilities assumed that were assigned to the reporting units. Effective January 1, 2017, the
Company implemented organizational changes which had an impact on the composition of the Company’s strategic product
groups ("SPG" or "SPGs") (see Note 15 – Segment Reporting) . In connection with the organizational change, goodwill was re-
allocated to the Company’s SPGs on a relative fair value basis. The Company completed an assessment immediately prior to and
after the organization change at the SPG level and determined that it is more likely than not that the fair value of the Company’s
reporting units is greater than their carrying amounts. Note 5 – Goodwill displays the allocation of the Company's acquired
goodwill to each of its reporting units.
In the Company’s acquisitions, the Company acquired certain customer relationships. These relationships represent a
valuable intangible asset, as the Company anticipates continued business from the acquired customer bases. The Company’s
estimate of the fair value of the acquired customer relationships is based on a multi-period excess earnings valuation technique
that utilizes Level 3 inputs.
Transaction Costs
Transaction costs include expenses associated with professional services (i.e., legal, accounting, regulatory, etc.) rendered
in connection with signed and/or closed acquisitions or disposals, travel expense, severance expense incurred on the date of
acquisition or disposal, and other direct expenses incurred that are associated with signed and/or closed acquisitions or disposals
and unsuccessful acquisitions. The Company incurred transaction costs of $20.5 million, $21.5 million, and $6.2 million during
the years ended June 30, 2017, 2016 and 2015, respectively. Transaction costs have been included in selling, general and
administrative expenses in the consolidated statements of operations and in cash flows from operating activities in the
consolidated statements of cash flows during these periods.
Pro-forma Financial Information (Unaudited)
The pro forma results presented below include the effects of the Company’s Fiscal 2017 and 2016 acquisitions as if the
acquisitions occurred on July 1, 2015. The pro forma net loss for the periods ended June 30, 2017 and 2016 includes the
additional depreciation and amortization resulting from the adjustments to the value of property and equipment and intangible
assets resulting from purchase accounting and adjustment to amortized revenue during Fiscal 2017 and 2016 as a result of the
acquisition date valuation of assumed deferred revenue. The pro forma results also include interest expense associated with debt
used to fund the acquisitions. The pro forma results do not include any anticipated synergies or other expected benefits of the
acquisitions. The unaudited pro forma financial information is not necessarily indicative of either future results of operations or
results that might have been achieved had the acquisitions been consummated as of July 1, 2015.
Revenue
Net income/(loss)
Net income/(loss) per share:
Basic and diluted
Year Ended June 30,
2017
2016
(in millions)
2,566.7
35.9
0.15
$
$
$
2,574.4
(147.3)
(0.61)
$
$
$
The Company is unable to determine the amount of revenue associated with each acquisition recognized in the post-
acquisition period as a result of integration activities with the exception of Electric Lightwave, which we recognized $169.6
million in revenue during Fiscal 2017.
F-23
Table of Contents
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
(4) PROPERTY AND EQUIPMENT
Property and equipment, including assets held under capital leases, was comprised of the following:
Land
Buildings - leasehold and site improvements
Furniture, fixtures and office equipment
Computer hardware
Software
Machinery and equipment
Fiber optic equipment
Circuit switch equipment
Packet switch equipment
Fiber optic network
Construction in progress
Total
Less accumulated depreciation
Property and equipment, net
Estimated useful lives
(in years)
As of June 30,
2017
2016
(in millions)
N/A
15 to 39
3 to 7
3 to 5
3
5 to 7
8
10
5
15 to 20
N/A
$
$
28.9
277.1
27.3
33.1
56.5
483.4
826.6
337.6
130.2
4,110.3
651.5
6,962.5
(1,946.5)
5,016.0
$
$
16.7
187.3
6.8
24.5
37.2
326.6
732.5
20.3
97.9
3,393.0
656.8
5,499.6
(1,420.1)
4,079.5
Total depreciation expense, including depreciation of assets held under capital leases, for the years ended June 30, 2017,
2016 and 2015 was $526.9 million, $440.5 million and $351.4 million, respectively.
During the years ended June 30, 2017, 2016 and 2015, the Company capitalized interest in the amounts of $18.8 million,
$13.8 million and $12.5 million, respectively. The Company capitalized $79.9 million, $64.5 million, and $58.3 million of direct
labor costs to property and equipment accounts during the years ended June 30, 2017, 2016 and 2015, respectively.
(5) GOODWILL
The Company’s goodwill balance was $1,840.2 million and $1,214.5 million as of June 30, 2017 and 2016, respectively.
The Company’s reporting units are comprised of SPGs. Effective January 1, 2017, the Company implemented
organizational changes which had an impact on the composition of the Company’s SPGs. The change in structure had the impact
of consolidating and/or regrouping existing SPGs, disaggregating the legacy Zayo Canada SPG among the existing SPGs and a
creating a new Allstream and IP Transit SPG (See Note 15 – Segment Reporting ). In connection with the organizational change,
goodwill was re-allocated to the Company’s SPGs on a relative fair value basis. The Company completed an assessment
immediately prior to and after the organization change at the SPG level and determined that it is more likely than not that the fair
value of the Company’s reporting units is greater than their carrying amounts.
As of June 30, 2017, the Company’s SPGs were comprised of the following: Fiber Solutions, Zayo Wavelength Services
(“Waves”), Zayo IP Transit Services (“IP Transit”), Zayo SONET Services (“SONET”), Zayo Ethernet Services (“Ethernet”),
Enterprise Private and Connectivity (“EPIC”), Zayo Cloud Services (“Cloud”), Zayo Colocation (“zColo"), Allstream and Other
(primarily ZPS).
F-24
Table of Contents
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
The following reflects the changes in the carrying amount of goodwill during Fiscal 2017:
Product Group As of June 30, 2016
Reallocation
among
reporting
units
Adjustments to
Fiscal 2016
Acquisitions
Fiscal 2017
Acquisitions
Foreign Currency
Translation and
Other
As of June 30, 2017
Dark Fiber
Fiber
Solutions
Waves
Sonet
Ethernet
IP
MIG
EPIC
zColo
Cloud
Allstream
Other
Total
$
295.1 $
(295.1) $
— $
— $
(in millions)
—
258.3
51.3
104.3
87.5
73.6
—
268.8
60.0
—
15.6
1,214.5 $
544.8
(104.0)
0.7
(59.8)
(87.5)
(73.6)
89.5
(15.0)
—
—
—
— $
1.7
(2.7)
—
(0.5)
—
—
—
(3.7)
(0.1)
—
—
(5.3) $
92.9
96.5
—
315.3
—
—
—
4.7
9.4
116.5
—
635.3 $
$
— $
(5.5)
(0.7)
—
0.2
—
—
—
1.5
0.2
—
—
(4.3) $
—
633.9
247.4
52.0
359.5
—
—
89.5
256.3
69.5
116.5
15.6
1,840.2
The following reflects the changes in the carrying amount of goodwill during Fiscal 2016:
Product Group
As of July 1, 2015
Fiscal 2016
Acquisitions
Adjustments to
Fiscal 2015
Acquisitions
(in millions)
Foreign Currency
Translation and
Other
As of July 1, 2016
Dark Fiber
Waves
Sonet
Ethernet
IP
MIG
zColo
Cloud
Other
Total
$
$
299.1
265.6
50.3
104.2
86.3
73.4
273.2
57.0
15.3
1,224.4
$
$
10.2
—
1.0
—
1.4
—
1.3
3.0
—
16.9
$
$
F-25
— $
—
—
—
—
0.2
(5.7)
—
—
(5.5) $
(14.2)
(7.3)
-
0.1
(0.2)
-
-
-
0.3
(21.3)
$
$
295.1
258.3
51.3
104.3
87.5
73.6
268.8
60.0
15.6
1,214.5
Table of Contents
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
(6) INTANGIBLE ASSETS
Identifiable intangible assets as of June 30, 2017 and 2016 were as follows:
June 30, 2017
Finite-Lived Intangible Assets
Customer relationships
Underlying rights
Total
Indefinite-Lived Intangible Assets
Certifications
Underlying Rights
Total
June 30, 2016
Finite-Lived Intangible Assets
Customer relationships
Trade names
Underlying rights
Total
Indefinite-Lived Intangible Assets
Certifications
Underlying Rights
Total
Gross
Carrying
Amount
Accumulated
Amortization
(in millions)
Net
$
$
$
$
1,477.7
1.6
1,479.3
3.5
14.8
1,497.6
1,143.6
0.2
1.6
1,145.4
3.5
15.3
1,164.2
$
$
$
$
$
(308.6)
(0.4)
(309.0)
—
—
$
(309.0)
$
(228.8)
(0.2)
(0.3)
(229.3)
—
—
$
(229.3)
1,169.1
1.2
1,170.3
3.5
14.8
1,188.6
914.8
—
1.3
916.1
3.5
15.3
934.9
The weighted average remaining amortization period for the Company’s customer relationships asset is 15.4 years. The
Company has determined that certain underlying rights (including easements) and the certifications have indefinite lives. The
amortization period for underlying rights (including easements) is 20 years. The amortization of intangible assets for the years
ended June 30, 2017, 2016 and 2015 was $80.0 million, $75.8 million, and $54.8 million, respectively.
During the years ended June 30, 2017 and 2016, the Company wrote off $0.3 million and $1.8 million in fully amortized
intangible assets, respectively. Estimated future amortization of finite-lived intangible assets is as follows:
June 30,
2018
2019
2020
2021
2022
Thereafter
Total
(in millions)
89.5
88.2
83.2
81.1
79.3
749.0
1,170.3
$
$
F-26
Table of Contents
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
(7) LONG-TERM DEBT
As of June 30, 2017 and 2016, long-term debt was as follows:
Term Loan Facility due 2021
Term Loan Facility due 2024
6.00% Senior Unsecured Notes due 2023
6.375% Senior Unsecured Notes due 2025
5.75% Senior Unsecured Notes due 2027
Total debt obligations
Unamortized discount on Term Loan Facility
Unamortized premium on 6.00% Senior Unsecured Notes due 2023
Unamortized discount on 6.375% Senior Unsecured Notes due 2025
Unamortized premium on 5.75% Senior Unsecured Notes due 2027
Unamortized debt issuance costs
Carrying value of debt
Less current portion
Long-term debt, less current portion
Term Loan Facility and Revolving Credit Facility
2017
2016
$
(in millions)
498.8 $
1,429.9
1,430.0
900.0
1,350.0
5,608.7
(16.0)
5.5
(14.3)
21.6
(67.8)
5,537.7
(5.0)
5,532.7
$
$
1,837.4
—
1,430.0
900.0
—
4,167.4
(19.0)
6.3
(15.6)
—
(53.8)
4,085.3
—
4,085.3
On May 6, 2015, ZGL and Zayo Capital, Inc. (“Zayo Capital”) entered into an Amendment and Restatement Agreement
whereby the Credit Agreement (the “Credit Agreement”) governing their senior secured term loan facility (the “Term Loan
Facility”) and $450.0 million senior secured revolving credit facility (the “Revolver”) was amended and restated in its entirety.
The amended and restated Credit Agreement extended the maturity date of a portion of the outstanding term loans under the Term
Loan Facility from July 2, 2019 to May 6, 2021. The interest rate margins applicable to the portion of the Term Loan Facility due
in 2021 were decreased by 25 basis points to LIBOR plus 2.75% with a minimum LIBOR of 1.0%. In addition, the amended and
restated Credit Agreement removed the fixed charge coverage ratio covenant and replaced such covenant with a springing senior
secured leverage ratio maintenance requirement applicable only to the Revolver, increased certain lien and debt baskets, and
removed certain covenants related to collateral. The terms of the Term Loan Facility required the Company to make quarterly
principal payments of $5.1 million plus an annual payment of up to 50% of excess cash flow, as determined in accordance with
the Credit Agreement (no such payment was required during Fiscal 2017 or Fiscal 2016).
Under the amended and restated Credit Agreement, the Revolver matures at the earliest of (i) April 17, 2020, and (ii) six
months prior to the earliest maturity date of the Term Loan Facility, subject to amendment thereof. The Credit Agreement also
allows for letter of credit commitments of up to $50.0 million. The Revolver is subject to a fee per annum of 0.25% to 0.375%
(based on ZGL’s current leverage ratio) of the weighted-average unused capacity, and the undrawn amount of outstanding letters
of credit backed by the Revolver are subject to a 0.25% fee per annum. Outstanding letters of credit backed by the Revolver
accrue interest at a rate ranging from LIBOR plus 2.0% to LIBOR plus 3.0% per annum based upon ZGL’s leverage ratio.
On January 15, 2016, ZGL and Zayo Capital entered into an Incremental Amendment (the “Amendment”) to the Credit
Agreement. Under the terms of the Amendment, the portion of the Term Loan Facility due 2021 was increased by $400.0 million
(the “Incremental Term Loan”). The additional amounts borrowed bear interest at LIBOR plus 3.5% with a minimum LIBOR rate
of 1.0%. The $400.0 million add-on was priced at 99.0%. The issue discount of $4.8 million on the Amendment is accreted to
interest expense over the term of the Term Loan Facility under the effective interest
F-27
Table of Contents
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
method. No other terms of the Credit Agreement were amended. The Incremental Term Loan proceeds were used to fund the
Allstream acquisition (see Note 3 – Acquisitions) and for general corporate purposes.
On July 22, 2016, ZGL and Zayo Capital entered into a Repricing Amendment (the “Repricing Amendment”) to the Credit
Agreement. Per the terms of the Repricing Amendment, the Incremental Term Loan was repriced at par and will bear interest at a
rate of LIBOR plus 2.75%, with a minimum LIBOR rate of 1.0%, which represented a downward adjustment of 75 basis points.
No other terms of the Credit Agreement were amended.
On January 19, 2017, ZGL and Zayo Capital entered into an Incremental Amendment No. 2 (the “Incremental
Amendment”) to the Company’s Credit Agreement. Per the terms of the Incremental Amendment, the existing $1.85 billion of
term loans under the Credit Agreement were repriced at 99.75% with one $500.0 million tranche that bears interest at a rate of
LIBOR plus 2.0%, with a minimum LIBOR rate of 0.0% and a maturity date of four years from incurrence, which represents a
downward adjustment of 75 basis points along with the lowering of the previous LIBOR floor, and a second $1.35 billion tranche
(the “B-2 Term Loan” and along with the $500.0 million tranche, the “Refinancing Term Loans”) that bears interest at a rate of
LIBOR plus 2.5%, with a minimum LIBOR rate of 1.0% and a maturity of seven years from incurrence, which represents a
downward adjustment of 25 basis points. In addition, per the terms of the Incremental Amendment, ZGL and Zayo Capital added
a new $650.0 million term loan tranche under the Credit Agreement (the “Electric Lightwave Incremental Term Loan”) that bears
interest at LIBOR plus 2.5%, with a minimum LIBOR rate of 1.0%, with a maturity of seven years from the closing date of the
Incremental Amendment. In connection with the Incremental Amendment the full $2,500.0 million Term Loan Facility including
the Refinancing Term Loans and the Electric Lightwave Incremental Term Loan, was re-issued at a price of 99.75%. Per the
terms of the Incremental Amendment, the Revolver matures on April 17, 2020. No other material terms of the Credit Agreement
were amended. On April 10, 2017, $570.1 million of the B-2 Term Loan and the Electric Lightwave Incremental Term Loan was
repaid from proceeds of issuance of senior unsecured notes as further discussed below. As of June 30, 2017, $1,928.7 million of
aggregate principal amount was outstanding under the Term Loan Facility.
In connection with the Incremental Amendment in January 2017 and early repayment of a portion of the term loan, the
Company recognized an expense of $18.2 million during Fiscal 2017 associated with debt extinguishment costs. The Company
completed an assessment at an individual creditor level in order to determine if the Incremental Amendment resulted in an
extinguishment or modification of the Term Loan Facility and the subsequent amendments thereto (the “Previous Term Loan
Indebtedness”). Based on this analysis, a portion of the Previous Term Loan Indebtedness was deemed to have been extinguished
as a result of the Incremental Amendment. The $18.2 million loss on extinguishment of debt primarily represents non-cash
expenses associated with the write-off of unamortized debt issuance costs and the issuance discounts on the portion of the Credit
Agreement, as further amended, which was deemed to have been extinguished as well as the portion extinguished through early
prepayment. The loss on extinguishment of debt also includes certain fees paid to third parties involved in the Incremental
Amendment.
The weighted average interest rates (including margins) on the Term Loan Facility were approximately 3.4% and 3.9% at
June 30, 2017 and 2016, respectively. Interest rates on the Revolver as of June 30, 2017 and 2016 were approximately 3.8% and
3.4%, respectively.
As of June 30, 2017, no amounts were outstanding under the Revolver. Standby letters of credit were outstanding in the
amount of $7.8 million as of June 30, 2017, leaving $442.2 million available under the Revolver.
Senior Unsecured Notes
On January 23, 2015, ZGL and Zayo Capital (together “the Issuers”) completed a private offering (the “January 2015 Notes
Offering”) of $700.0 million aggregate principal amount of 6.00% senior unsecured notes due in 2023 (the “2023 Unsecured
Notes”). On March 9, 2015, the Issuers completed a private offering of an additional $730.0 million aggregate principal amount
of 2023 Unsecured Notes at a premium of 1% (the “March 2015 Notes Offering”, and together with the January 2015 Notes
Offering, the “2023 Notes Offerings”) resulting in aggregate gross proceeds for the 2023 Unsecured Notes of $1,437.3
million. The issue premium of $7.3 million on the March 2015 Notes Offering is accreted against interest expense over the term
of the notes under the effective interest method. The 2023 Unsecured
F-28
Table of Contents
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
Notes bear interest at the rate of 6.00% per year, which is payable on April 1 and October 1 of each year, beginning on October 1,
2015. The 2023 Unsecured Notes will mature on April 1, 2023. The net proceeds from the January 2015 Notes Offering were
used to fund the Latisys acquisition. The net proceeds from the March 2015 Notes Offering were used to redeem the Company’s
remaining $675.0 million 2020 Secured Notes (the “Second Notes Redemption”) at a price of 105.75%. As part of the Second
Notes Redemption, we recorded an early redemption call premium of $38.8 million. The call premium was recorded as a loss on
extinguishment of debt on the consolidated statements of operations for the year ended June 30, 2015.
On April 14, 2016, ZGL and Zayo Capital completed a private offering of $550.0 million aggregate principal amount of
additional 2025 Unsecured Notes (the “Incremental 2025 Notes”). The Incremental 2025 Notes were an additional issuance of the
existing 6.375% senior unsecured notes due in 2025 (the “2025 Notes” and together with the Incremental 2025 Notes, the “2025
Unsecured Notes”) and were priced at 97.76%. The issue discount of $15.9 million of the Incremental 2025 Notes is accreted to
interest expense over the term of the Incremental 2025 Notes using the effective interest method. The net proceeds from the
offering plus cash on hand were used to (i) redeem the then outstanding $325.6 million 10.125% senior unsecured notes due 2020
(the “2020 Unsecured Notes”), including the required $20.3 million make-whole premium and accrued interest, and (ii) repay
$196.0 million of borrowings under the then outstanding secured Term Loan Facility. The Company recorded a $2.1 million loss
on extinguishment of debt associated with the write-off of unamortized debt discount on the Term Loan Facility accounted for as
an extinguishment during the fourth quarter of Fiscal 2016. Following the offering of the Incremental 2025 Notes, $900.0 million
aggregate principal amount of the 2025 Unsecured Notes is outstanding.
On January 27, 2017, ZGL and Zayo Capital completed a private offering of $800.0 million aggregate principal amount of
5.75% senior unsecured notes due 2027, which were issued at par. T he net proceeds from the offering, along with the Electric
Lightwave Incremental Term Loan discussed above, were used to fund the Electric Lightwave acquisition (see Note 3 –
Acquisitions ), which closed on March 1, 2017.
On April 10, 2017, the Company completed a private offering of $550.0 million aggregate principal amount of 5.75%
senior unsecured notes due 2027 (the “Incremental 2027 Notes”). The Incremental 2027 Notes were an additional issuance of the
existing 5.75% senior unsecured notes due in 2027 (the “2027 Notes” and together with the Incremental 2027 Notes, the “2027
Unsecured Notes”) and were priced at 104.0%. The issue premium of $22.0 million of the Incremental 2027 Notes is being
accreted to interest expense over the term of the 2027 Unsecured Notes using the effective interest method. The net proceeds
from the Incremental 2027 Notes were used to repay certain outstanding balances on the Company’s Term Loan Facility that
mature on January 19, 2024. Following the offering of the Incremental 2027 Notes, $1.35 billion aggregate principal amount of
the 2027 Unsecured Notes is outstanding as of June 30, 2017.
Deb t covenants
The indentures (the “Indentures”) governing the 2023 Unsecured Notes, the 2025 Unsecured Notes and the 2027 Unsecured
Notes (collectively the “Notes”) contain covenants that, among other things, restrict the ability of ZGL and its subsidiaries to
incur additional indebtedness and issue preferred stock; pay dividends or make other distributions with respect to any equity
interests, make certain investments or other restricted payments, create liens, sell assets, incur restrictions on the ability of ZGL’s
restricted subsidiaries to pay dividends or make other payments to ZGL, consolidate or merge with or into other companies or
transfer all or substantially all of their assets, engage in transactions with affiliates, and enter into sale and leaseback
transactions. The terms of the Indentures include customary events of default.
The Credit Agreement contains customary events of default, including among others, non-payment of principal, interest, or
other amounts when due, inaccuracy of representations and warranties, breach of covenants, cross default to certain other
indebtedness, insolvency or inability to pay debts, bankruptcy, or a change of control. The Credit Agreement also contains a
covenant, applicable only to the Revolver, that ZGL maintain a senior secured leverage ratio below 5.25:1.00 at any time when
the aggregate principal amount of loans outstanding under the Revolver is greater than 35% of the commitments under the
Revolver. The Credit Agreement also requires ZGL and its subsidiaries to comply with customary affirmative and negative
covenants, including covenants restricting the ability of ZGL and its
F-29
Table of Contents
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
subsidiaries, subject to specified exceptions, to incur additional indebtedness, make additional guaranties, incur additional liens
on assets, or dispose of assets, pay dividends, or make other distributions, voluntarily prepay certain other indebtedness, enter into
transactions with affiliated persons, make investments and amend the terms of certain other indebtedness.
The Indentures limit any increase in ZGL’s secured indebtedness (other than certain forms of secured indebtedness
expressly permitted under such indentures) to a pro forma secured debt ratio of 4.50 times ZGL’s previous quarter’s annualized
modified EBITDA (as defined in the indentures), and limit ZGL’s incurrence of additional indebtedness to a total indebtedness
ratio of 6.00 times the previous quarter’s annualized modified EBITDA.
The Company was in compliance with all financial covenants associated with its debt agreements as of June 30, 2017 and
2016.
Redemption rights
At any time prior to April 1, 2018 (for the 2023 Unsecured Notes), May 15, 2018 (for the 2025 Unsecured Notes), and
January 15, 2022 (for the 2027 Unsecured Notes), the Company may redeem all or part of the applicable Notes at a redemption
price equal to the sum of (i) 100% of the principal amount thereof, plus (ii) accrued interest and a “make-whole” premium, which
is a lump sum payment derived from a formula based on the net present value of future coupon payments that will not be paid
because of the early redemption.
On or after April 1, 2018 ( for the 2023 Unsecured Notes ), May 1, 2020 ( for the 2025 Unsecured Notes ), or January 15,
2022 (for the 2027 Unsecured Notes), the Company may redeem all or part of the applicable 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 of the years indicated below:
Year
2018
2019
2020
2021 and thereafter
Year
2020
2021
2022
2023 and thereafter
Redemption Price
(2023 Unsecured Notes)
104.500 %
103.000 %
101.500 %
100.000 %
Redemption Price
(2025 Unsecured Notes)
103.188 %
102.125 %
101.063 %
100.000 %
F-30
Table of Contents
Year
2022
2023
2024
2025 and thereafter
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
Redemption Price
(2027 Unsecured Notes)
102.875 %
101.917 %
100.958 %
100.000 %
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.
Aggregate future contractual maturities of long-term debt (excluding issue discounts and premiums) were as follows as of
June 30, 2017:
Year Ended June 30,
2018
2019
2020
2021
2022
Thereafter
Total
Guarantees
$
$
(in millions)
5.0
5.0
5.0
483.8
—
5,109.9
5,608.7
The Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all of ZGL’s
current and future domestic restricted subsidiaries. The Notes were co-issued with Zayo Capital, which does not have independent
assets or operations.
The Term Loan Facility and Revolver are fully and unconditionally guaranteed, jointly and severally, on a senior secured
basis by all of ZGL’s current and future domestic restricted subsidiaries.
Debt issuance costs
In connection with the Credit Agreement (and subsequent amendments thereto), and the various Notes offerings, the
Company incurred debt issuance costs of $112.9 million (net of extinguishments). These costs are being amortized to interest
expense over the respective terms of the underlying debt instruments using the effective interest method, unless extinguished
earlier, at which time the related unamortized costs are to be immediately expensed.
Unamortized debt issuance costs of $10.4 million, $11.4 million and $23.2 million associated with the Company’s previous
indebtedness were recorded as part of the loss on extinguishment of debt during the years ended June 30, 2017, 2016 and 2015,
respectively.
The balance of debt issuance costs as of June 30, 2017 and 2016 was $67.8 million and $53.8 million, net of accumulated
amortization of $45.1 million and $35.8 million, respectively. The amortization of debt issuance costs is included on the
consolidated statements of cash flows within the caption “Non-cash interest expense” along with the amortization or accretion of
the premium and discount on the Company’s indebtedness and changes in the fair value of the Company’s interest rate
derivatives. Interest expense associated with the amortization of debt issuance costs was $9.3 million, $10.0 million and $13.9
million for the years ended June 30, 2017, 2016 and 2015, respectively.
Debt issuance costs are presented in the consolidated balance sheets as a reduction to “Long-term debt, non-current”.
F-31
Table of Contents
Interest rate derivatives
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
On August 13, 2012, the Company entered into forward-starting interest rate swap agreements with an aggregate notional
value of $750.0 million, a maturity date of June 30, 2017, and a start date of June 30, 2013. There were no up-front fees for these
agreements. The contract states that the Company shall pay a 1.67% fixed rate of interest for the term of the agreement beginning
on the start date. The counter-party will pay to the Company the greater of actual LIBOR or 1.25%. The Company entered into
the forward-starting swap arrangements to reduce the risk of increased interest costs associated with potential changes in LIBOR
rates. As of June 30, 2017, the interest rate swap agreements have expired and were not replaced.
Changes in the fair value of interest rate swaps were recorded in interest expense in the consolidated statements of
operations for the applicable period. The fair value of the interest rate swaps of nil and $3.0 million are included in “Other long
term liabilities” in the Company’s consolidated balance sheet as of June 30, 2017 and 2016, respectively. During the years ended
June 30, 2017, 2016 and 2015, $(3.0) million, $(1.1) million and $2.1 million were recorded as a (decrease)/increase in interest
expense for change in the fair value of the interest rate swaps.
(8) INCOME TAXES
The Company’s provision/(benefit) for income taxes from operations are summarized as follows:
Current Income Taxes
Federal
State
Foreign
Total
Deferred Income Taxes
Federal
State
Foreign
Total
Total provision/(benefit) for income taxes
2017
June 30,
2016
(in millions)
2015
$
$
$
$
1.6 $
6.3
(2.1)
5.8 $
13.3 $
2.4
(3.1)
12.6
18.4 $
(1.3) $
8.7
3.9
11.3 $
7.3 $
(2.3)
(7.8)
(2.8)
8.5 $
1.7
4.4
(1.6)
4.5
(8.7)
(6.9)
2.3
(13.3)
(8.8)
The United States and foreign components of income/(loss) from operations before income taxes are as follows:
United States
Foreign
Total
2017
June 30,
2016
(in millions)
2015
$
$
66.6 $
37.5
104.1 $
(46.9) $
(20.8)
(67.7) $
(159.7)
(4.4)
(164.1)
The Company’s effective income tax rate differs from what would be expected if the federal statutory rate were applied to
earnings before income taxes primarily because of certain expenses that represent permanent differences between book and tax
expenses and deductions, such as stock-based compensation expense.
We file income tax returns in various federal, state, and local jurisdictions including, but not limited to, the United States,
Canada, United Kingdom and France. In the normal course of business, we are subject to examination by taxing
F-32
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ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
authorities throughout the world. With few exceptions, we are no longer subject to income tax examinations by tax authorities in
major tax jurisdictions for years before 2012.
A reconciliation of the actual income tax provision and the tax computed by applying the U.S. federal rate to the earnings
before income taxes during the years ended June 30, 2017, 2016 and 2015 are as follows:
Expected provision/(benefit) at the statutory rate
Increase/(decrease) due to:
Stock-based compensation
State income taxes, net of federal benefit
Transaction costs not deductible for tax purposes
Change in statutory tax rate
Change in valuation allowance
Foreign tax rate differential
Other, net
2017
$
36.4
June 30,
2016
(in millions)
(23.8)
$
2015
$
(57.4)
(11.7)
2.9
1.9
(1.4)
(10.2)
(3.9)
4.4
18.4
$
27.9
(2.1)
1.5
(3.6)
2.8
2.7
3.1
8.5
$
59.4
(7.4)
0.7
(2.2)
—
0.6
(2.5)
(8.8)
Provision/(benefit) for income taxes
$
As of June 30, 2017, the Company recorded a $0.2 million liability for uncertain tax positions and accrued interest related
to state taxing jurisdictions. We recognize interest and penalties related to uncertain tax positions in income tax
expense. Currently, the company is under audit by several US states for fiscal years 2013 to 2016.
Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes. The tax effect of temporary differences that give
rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
Deferred income tax assets
Net operating loss carry forwards
Tax credit carry forwards
Deferred revenue
Accrued expenses
Other liabilities
Reserves against accounts receivable
Deferred compensation
Total deferred income tax assets
Valuation allowance
Net deferred tax assets
Deferred income tax liabilities
Property and equipment
Intangible assets
Debt issuance costs
Total deferred income tax liabilities
Net deferred income tax liabilities
June 30,
2017
2016
(in millions)
$
715.2 $
22.6
405.9
40.0
17.4
18.2
20.3
1,239.6
(111.1)
1,128.5
712.2
412.4
5.8
1,130.4
$
(1.9) $
563.9
17.2
318.3
40.2
25.5
14.8
15.5
995.4
(135.3)
860.1
559.2
321.5
13.7
894.4
(34.3)
As of June 30, 2017, the Company had $1,662.5 million of U.S. federal net operating loss ("NOL") carry forwards. The
Company utilized approximately $88.6 million of U.S. federal NOL carry forwards during Fiscal 2017. The
F-33
Table of Contents
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
Company has completed several acquisitions in which it acquired net operating loss tax attributes as part of the purchase. These
acquisitions, however, were considered a "change in ownership” within the meaning of Section 382 of the Internal Revenue Code
and, as a result, such NOL carry forwards are subject to an annual limitation, reducing the amount available to offset income tax
liabilities absent the limitation. Currently available U.S. NOL carry forwards as of June 30, 2017 are approximately $952.0
million. An additional $167.0 million will become available for use during fiscal year ended June 30, 2018. The Company's
NOL carry forwards, if not utilized to reduce taxable income in future periods, will expire in various amounts beginning in 2019
and ending in 2036.
As of June 30, 2017, the Company had approximately $389.5 million of foreign jurisdiction net operating loss carry
forwards, primarily in Canada, the United Kingdom and France. The majority of these foreign NOLs have a valuation allowance
reducing the value of the corresponding deferred tax asset in the financial statements due to recent losses. It is reasonably
possible that the Company may reverse the valuation allowance recorded on certain foreign subsidiaries’ deferred tax assets in the
near future.
As of June 30, 2017, the Company had tax-effected state net operating loss carry forwards of approximately $42.1 million,
which are subject to limitations on their utilization and have various expiration dates 2017 through 2036. The Company believes
that only $39.3 million of this balance will be utilized.
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, with the exception of deferred tax assets related to certain foreign subsidiaries. The Company’s
evaluation encompassed (i) a review of its recent history of taxable income for the past three years and (ii) a review of internal
financial forecasts demonstrating its expected ability to fully utilize its deferred tax assets prior to expiration.
At June 30, 2017, the positive undistributed earnings of the Company's foreign subsidiaries amounted to $61.8 million.
Those earnings are considered to be indefinitely reinvested and, accordingly, no income taxes have been provided thereon. The
amount of income taxes that would have resulted had such earnings been repatriated is estimated to be $21.3 million.
(9) ACCRUED LIABILITIES
Accrued liabilities included in current liabilities consisted of the following:
Accrued compensation and benefits
Accrued property and equipment purchases
Network expense accruals
Other accrued taxes
Accrued professional fees
Other accruals
Total
(10) EQUITY
June 30,
2017
2016
(in millions)
$
$
38.5 $
81.8
132.1
20.1
3.9
49.0
325.4 $
27.9
46.7
94.8
9.1
2.3
44.9
225.7
As part of the Company’s IPO in October 2014, the Company sold 16,008,679 shares of its common stock at a price of $19.00 per
share for $304.2 million in gross proceeds. The Company incurred costs directly associated with the IPO of $22.2 million. In
March 2015, the Company completed a follow-on equity offering selling 4,000,000 shares of its common stock at a price of
$27.35 per share for $109.5 million in gross proceeds. The Company incurred costs directly associated with the follow-on
offering of $4.3 million. Proceeds from the IPO and the follow-on equity offering (net of
F-34
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ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
issuance costs) of $387.2 million are reflected on the Company’s consolidated statement of stockholders’ equity during the year
ended June 30, 2015.
During the year ended June 30, 2015, there was a deemed modification to the Company’s stock compensation arrangements
with employees and directors. The modification resulted in a reclassification of the previously recorded stock-based
compensation liability to additional paid-in capital.
On October 16, 2014, the Company entered into an agreement with CII which relieved CII of its obligation to repay the
Company the outstanding intercompany note receivable balance of $22.0 million. The cancelation of the intercompany note
receivable with CII is reflected on the consolidated statement of stockholders’ equity during the year ended June 30, 2015 as a
decrease to additional paid-in-capital of $22.0 million and an offsetting decrease to the note receivable from shareholder.
During the year ended June 30, 2016, the Company repurchased 3,474,120 shares of its outstanding common stock. This
amount includes 3,103,350 shares repurchased at an average price of $23.07 per share, or $71.7 million, excluding commissions,
under a $500 million, 6-month share repurchase program authorized by the Company’s Board of Directors on November 10,
2015. The 6-month share repurchase program expired in May 2016. The amounts included in the “Common stock repurchases”
line in the consolidated statements of cash flows represents both shares authorized by the Board of Directors for repurchase under
the publically announced authorization described above, as well as $9.4 million, or 370,770 shares, withheld from employees to
cover tax withholding obligations on certain restricted stock units that vested during Fiscal 2016.
During the years ended June 30, 2017 and June 30, 2016, the Company recorded increases of $104.7 million and $152.9
million respectively, in additional paid-in capital associated with stock-based compensation expense related to the Company’s
equity classified stock-based compensation awards.
(11) STOCK-BASED COMPENSATION
The following table summarizes the Company’s stock-based compensation expense for liability and equity classified
awards included in the consolidated statements of operations:
Included in:
Operating costs
Selling, general and administrative expenses
Total stock-based compensation expense
CII common and preferred units
Part A restricted stock units
Part B restricted stock units
Part C restricted stock units
Total stock-based compensation expense
CII Common and Preferred Units
2017
Year Ended June 30,
2016
(in millions)
2015
$
$
$
$
11.3
102.8
114.1
10.1
76.5
26.0
1.5
114.1
$
$
$
$
17.4
138.5
155.9
73.0
45.3
36.5
1.1
155.9
$
$
$
$
23.3
177.4
200.7
156.8
12.6
31.3
—
200.7
Prior to the Company’s IPO, the Company was given authorization by CII to award 625,000,000 of CII’s common units as
profits interests to employees, directors, and affiliates of the Company. The common units were historically considered to be
stock-based compensation with terms that required the awards to be classified as liabilities due to cash settlement features. The
vested portion of the awards was reported as a liability and the fair value was re-measured at
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Table of Contents
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
each reporting date until the date of settlement, with a corresponding charge (or credit) to stock-based compensation expense. In
connection with the Company’s IPO and the related amendment to the CII operating agreement, there was a deemed modification
to the stock compensation arrangements with the Company’s employees and directors. As a result, previously issued common
units which were historically accounted for as liability awards, became classified as equity awards. Prior to reclassifying the
common unit liability to equity, the Company re-measured the fair value of the CII common units factoring in the change in fair
value since September 30, 2014 and the change in fair value caused by the modification. The fair value of these previously vested
common units was estimated to be $490.2 million on the modification date and this amount is reflected in the Company’s
consolidated statement of stockholders’ equity as an increase to additional-paid-in-capital during the year ended June 30,
2015. During the three months ended December 31, 2016, the CII common units became fully vested and as such there is no
unrecognized compensation cost associated with CII common units as of June 30, 2017.
On October 9, 2014, the Company and CII’s board of managers approved a non-liquidating distribution by CII of shares of
the Company's common stock held by CII to holders of CII vested common units. Employees and independent directors of the
Company with vested CII common units received shares of the Company’s common stock equal in value to the underlying value
of their vested CII common units. The total number of shares of the Company’s common stock that were distributed to CII
common unit holders in connection with this non-liquidating distribution was 20,460,047 shares.
The valuation of the CII common units as of the IPO date was determined based on a Monte Carlo simulation. The Monte
Carlo valuation analysis attempts to approximate the probability of certain outcomes by running multiple trial runs, called
simulations, using random variables to generate potential future stock prices. This valuation technique was used to estimate the
fair value associated with future distributions of common stock to CII common unit holders. The Monte Carlo simulation first
projects the number of shares to be distributed by CII to the common unit holders at each subsequent measurement date based on
stock price projections under each simulation. Shares attributable to unvested CII common units are subject to the existing vesting
provisions of the CII common unit awards. The estimated future value of shares scheduled to be distributed by CII based on
vesting provisions are calculated under each independent simulation. The present value of the number of shares of common stock
to be distributed to common unit holders under each simulation is then computed, and the average of each simulation is the fair
value of the Company’s common shares to be distributed by CII to the common unit holders. This value was then adjusted for
prior non-liquidating distributions made by the Company to derive a value for CII common units by class and on per unit basis.
These values were used to calculate the fair value of outstanding CII common units as of the IPO date. Various inputs and
assumptions were utilized in the valuation method, including forfeiture behavior, vesting provisions, holding restrictions, peer
companies’ historical volatility, and an appropriate risk-free rate.
The value of the CII common units is derived from the value of CII’s investments in the Company and Onvoy, LLC and its
subsidiaries (“OVS”), a company that provided voice and managed services which the Company spun off during the year ended
June 30, 2014. As the value derived from each of these investments is separately determinable and there is a plan in place to
distribute the value associated with the investment in Company shares separate from the value derived from OVS, the two
components are accounted for separately. The OVS component of the CII awards is adjusted to fair value each reporting period.
On December 31, 2015, CII entered into an agreement to sell OVS to a third party. The sale was completed in May 2016. Based
on the sale price, the estimated fair value of OVS awards has been increased, resulting in an increase to stock based compensation
expense and corresponding increase to additional paid-in capital of $12.9 million for the year ended June 30, 2016. Proceeds from
the sale to be distributed to the Company’s employees will be paid by CII.
During the years ended June 30, 2017, 2016 and 2015 the Company recognized $10.1 million, $73.0 million and $156.8
million, respectively, of stock-based compensation expense related to vesting of CII common and preferred units. During the
three months ended December 31, 2016, the CII common units became fully vested and as such there is no unrecognized
compensation cost associated with CII common units as of June 30, 2017.
F-36
Table of Contents
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
Performance Compensation Incentive Program
During October 2014, the Company adopted the 2014 Performance Compensation Incentive Program (“PCIP”). The PCIP
includes incentive cash compensation and equity (in the form of restricted stock units or “RSUs”). Grants under the PCIP RSU
plans are made quarterly for all participants. The PCIP was effective on October 16, 2014 and will remain in effect for a period of
10 years (or through October 16, 2024) unless it is earlier terminated by the Company’s Board of Directors.
The PCIP has the following components:
Part A
Under Part A of the PCIP, all full-time employees, including the Company’s executives, are eligible to earn quarterly
awards of RSUs. Each participant in Part A of the PCIP will have a RSU annual award target value, which will be allocated to
each fiscal quarter. The final Part A value awarded to a participant for any fiscal quarter is determined by the Compensation
Committee subsequent to the end of the respective performance period taking into account the Company’s measured value
creation for the quarter, as well as such other subjective factors that it deems relevant (including group and individual level
performance factors). The number of Part A RSUs granted will be calculated based on the final award value determined by the
Compensation Committee divided by the average closing price of the Company’s common stock over the last ten trading days of
the respective performance period. Part A RSUs will vest assuming continuous employment fifteen months subsequent to the end
of the performance period. Upon vesting, the RSUs convert to an equal number of shares of the Company’s common stock.
Additionally, under Part A of the PCIP, awards may be granted to certain employees upon commencement of their employment
with the Company.
During the years ended June 2017, 2016 and 2015, the Company recognized $76.5 million, $45.3 million and $12.6 million
of compensation expense associated with Part A awards, respectively. The June 2017 and June 2016 quarterly awards were
recorded as liabilities totaling $5.5 million and $2.0 million as of June 30, 2017 and 2016, respectively, as the awards represent an
obligation denominated in a fixed dollar amount to be settled in a variable number of shares during the subsequent quarter. The
quarterly stock-based compensation liability is included in “Other long-term liabilities” in the accompanying consolidated balance
sheets. Upon the issuance of the RSUs, the liability is re-measured and then reclassified to additional paid-in capital, with a
corresponding charge (or credit) to stock based compensation expense. The value of the remaining unvested RSUs is expensed
ratably through the vesting date. At June 30, 2017, the remaining unrecognized compensation cost to be expensed over the
remaining vesting period for Part A awards is $36.6 million.
F-37
Table of Contents
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
The following table summarizes the Company’s Part A RSU activity for the years ended June 2017, 2016 and 2015:
Number of Part A
RSUs
Weighted average
grant-date fair
value per share
Weighted average
remaining contractual
term in months
Outstanding at July 1, 2014
Granted
Vested
Forfeited
Outstanding at July 1, 2015
Granted
Vested
Forfeited
Outstanding at July 1, 2016
Granted
Vested
Forfeited
Outstanding at June 30, 2017
Part B
— $
955,831
—
(22,614)
933,217 $
2,190,785
(852,853)
(101,248)
2,169,901 $
2,678,503
(2,080,685)
(403,333)
2,364,386 $
—
26.25
n/a
26.25
26.04
26.14
n/a
26.04
31.64
26.03
n/a
31.63
—
7.1
7.9
7.1
Under Part B of the PCIP, participants, including the Company’s executives, are awarded quarterly grants of RSUs. The
number of the RSUs earned by the participants is based on the Company’s stock price performance over a performance period of
one year with the starting price being the average closing price over the last ten trading days of the quarter immediately prior to
the grant and vest, assuming continuous employment through the end of the measurement period. The existence of a vesting
provision that is associated with the performance of the Company’s stock price is a market condition, which affects the
determination of the grant date fair value. Upon vesting, RSUs earned convert to an equal number of shares of the Company’s
common stock.
F-38
Table of Contents
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
The following table summarizes the Company’s Part B RSU activity for the years ended June 2017, 2016 and 2015:
Outstanding at July 1, 2014
Granted
Vested
Forfeited
Outstanding at July 1, 2015
Granted
Vested
Forfeited
Outstanding at July 1, 2016
Granted
Vested
Forfeited
Outstanding at June 30, 2017
Number of Part B
RSUs
Weighted average
grant-date fair
value per unit
Weighted average
remaining contractual
term in months
— $
1,251,671
—
(1,798)
1,249,873 $
1,152,176
(1,463,893)
(77,220)
860,936 $
715,564
(793,478)
(371,049)
411,973 $
—
42.90
n/a
42.90
26.80
38.70
n/a
29.50
45.56
32.58
n/a
42.86
—
5.5
6.2
6.1
The table below reflects the total Part B RSUs granted during each period presented, the maximum eligible shares of the
Company’s stock that the respective Part B RSU grant could be converted into shares of the Company’s common stock and the
grant date fair value per Part B RSU during the period indicated. The table below also reflects the units converted to the
Company’s common stock at a subsequent vesting date but for those RSUs granted during the period indicated:
Part B RSUs granted
Maximum eligible shares of the Company's common stock
Grant date fair value per Part B RSU
Units converted to Company's common stock at vesting date
June 30,
2017
152,808
550,109
During the three months ended
December 31,
2016
191,015
981,817
March 31,
2017
171,316
880,564
$
26.52 $
n/a
27.39 $
n/a
75.56 $
n/a
September 30,
2016
200,425
1,030,185
47.00
99,508
Part B RSUs granted
Maximum eligible shares of the Company's common stock
Grant date fair value per Part B RSU
Units converted to Company's common stock at vesting date
$
June 30,
2016
312,516
March 31,
2016
284,773
1,606,332 1,463,733
25.12 $
475,446
During the three months ended
December 31,
2015
282,074
1,449,860
25.26 $
40,182
37.03 $
1,078,812
September 30,
2015
272,813
1,426,812
17.83
—
During the years ended June 2017, 2016 and 2015, the Company recognized stock-based compensation expense of $26.0
million, $36.5 million and $31.3 million related to Part B awards, respectively.
The grant date fair value of Part B RSU grants is estimated utilizing a Monte Carlo simulation. This simulation estimates
the ten-day average closing stock price ending on the vesting date, the stock price performance over the performance period, and
the number of common shares to be issued at the vesting date. Various assumptions are utilized in the valuation method, including
the target stock price performance ranges and respective share payout percentages, the Company’s historical stock price
performance and volatility, peer companies’ historical volatility and an appropriate risk-free rate. The aggregate future value of
the grant under each simulation is calculated using the estimated per share
F-39
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ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
value of the common stock at the end of the vesting period multiplied by the number of common shares projected to be granted at
the vesting date. The present value of the aggregate grant is then calculated under each of the simulations, resulting in a
distribution of potential present values. The fair value of the grant is then calculated based on the average of the potential present
values. The remaining unrecognized compensation cost associated with Part B RSU grants is $8.0 million at June 30, 2017.
Part C
Under Part C of the PCIP, independent directors of the Company are eligible to receive quarterly awards of
RSUs. Independent directors electing to receive a portion of their annual director fees in the form of RSUs are granted a set
dollar amount of Part C RSUs each quarter. The quantity of Part C RSUs granted is based on the average closing price of the
Company’s common stock over the last ten trading days of the quarter ended immediately prior to the grant date and vest at the
end of each quarter for which the grant was made. During the year ended June 30, 2017 and June 30, 2016, the Company’s
independent directors were granted 47,420 and 41,793 Part C RSUs, respectively. During the year ended June 30, 2017 and June
30, 2016, the Company recognized $1.5 million and $1.1 million of compensation expense associated with the Part C RSUs,
respectively.
F-40
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ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
(12) FAIR VALUE MEASUREMENTS
The Company’s financial instruments consist of cash and cash equivalents, restricted cash, trade receivables, accounts
payable, interest rate swaps, long-term debt, certain post-employment plans and stock-based compensation liability. The carrying
values of cash and cash equivalents, restricted cash, trade receivables, and accounts payable approximated their fair values at June
30, 2017 and 2016, due to the short maturity of these instruments.
The carrying value of the Company’s Notes, excluding debt issuance costs, reflects the original amounts borrowed,
inclusive of net unamortized premium, and was $3,692.8 million and $2,320.7 million as of June 30, 2017 and 2016,
respectively. Based on market interest rates for debt of similar terms and average maturities, the fair value of the Company's
Notes as of June 30, 2017 and 2016 was estimated to be $3,895.7 million and $2,338.1 million, respectively. The Company’s fair
value estimates associated with its Note obligations were derived utilizing Level 2 inputs – quoted prices for similar instruments
in active markets.
The carrying value of the Company’s Term Loan Facility, excluding debt issuance costs, reflects the original amounts
borrowed, inclusive of the unamortized discounts, and was $1,912.7 million and $1,818.4 million as of June 30, 2017 and 2016,
respectively. The Company’s Term Loan Facility accrues interest at variable rates based upon the one month, three month or nine
month LIBOR plus i) a spread of 2.0% on the Company’s $500.0 million tranche (which has a LIBOR floor of 0.0%) and ii) a
spread of 2.50% on its B-2 Term Loan tranche (which has a LIBOR floor of 1.00%) . Since management does not believe that
the Company’s credit quality has changed significantly since the date when the Term Loan Facility was amended on January 19,
2017, its carrying amount approximates fair value. Excluding any offsetting effect of the Company’s interest rate swaps, a
hypothetical increase in the applicable interest rate on the Company’s Term Loan Facility of one percentage point above a 1.0%
LIBOR floor would increase the Company’s annual interest expense by approximately $19.3 million.
The Company’s interest rate swaps are valued using discounted cash flow techniques that use observable market inputs,
such as LIBOR-based yield curves, forward rates, and credit ratings. Changes in the fair value of the interest rate swaps of $(3.0)
million, $(1.1) million and $2.1 million were recorded as a (decrease)/increase to interest expense during the years ended June 30,
2017, 2016 and 2015, respectively. As of June 30, 2017, the interest rate swap agreements have expired and were not renewed.
As of June 30, 2017 and 2016, there was no balance outstanding under the Company's Revolver.
Financial instruments measured at fair value on a recurring basis are summarized below:
Liabilities Recorded at Fair Value in the Financial Statements:
Interest rate swap
Level
June 30, 2017
June 30, 2016
Level 2
$
(in millions)
— $
3.0
F-41
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ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
(13) COMMITMENTS AND CONTINGENCIES
Capital Leases
Future contractual payments under the terms of the Company’s capital lease obligations were as follows:
Year Ended June 30,
2018
2019
2020
2021
2022
Thereafter
Total minimum lease payments
Less amounts representing interest
Less current portion
Capital lease obligations, non-current
Operating Leases
(in millions)
9.8
8.6
7.7
8.0
8.5
74.4
117.0
(15.4)
(8.0)
93.6
$
$
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 $68.8 million, $53.1 million and $52.3. million for the
years ended June 30, 2017, 2016 and 2015, respectively. Additionally, the Company recognized expense related to right-of way,
pole attachment and other fees for access of $65.1 million, $48.9 million, and $42.0 million for the years ended June 30, 2017,
2016 and 2015, 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 lease
obligation on the consolidated balance sheets and amortizes the deferred rent over the terms of the respective leases.
Minimum contractual lease payments due under the Company’s long-term operating leases are as follows:
Year Ended June 30,
2018
2019
2020
2021
2022
Thereafter
Purchase Commitments
(in millions)
113.4
104.3
88.0
66.0
34.9
138.4
545.0
$
$
At June 30, 2017, the Company was contractually committed for $379.6 million of capital expenditures for construction
materials and purchases of property and equipment, as well as energy and network expenditures. 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 expenditures.
F-42
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Outstanding Letters of Credit
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
As of June 30, 2017, the Company had $7.8 million in outstanding letters of credit, which were primarily entered into in
connection with various lease agreements. Additionally, as of June 30, 2017, Zayo Canada, Inc., a subsidiary of the Company,
had CAD $3.4 million (or $2.6 million) in letters of credit, under a CAD $5.0 million (or $3.9 million) unsecured credit letter
agreement.
Contingencies
In the normal course of business, the Company is party to various outstanding legal proceedings, asserted and unasserted
claims, and carrier disputes. In the opinion of management, the ultimate disposition of these matters, both asserted and unasserted,
will not have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.
(14) RELATED-PARTY TRANSACTIONS
In May 2016, CII sold OVS and its subsidiaries to an entity that has a material ownership interest in the Company. The
Company continues to have ongoing contractual relationships with Inteliquent, Inc., successor by merger to OVS (“Inteliquent”),
whereby the Company provides Inteliquent and its subsidiaries with bandwidth capacity and Inteliquent provides the Company
and its subsidiaries with voice services. The contractual relationships are based on agreements that were entered into at estimated
market rates.
The following table represents the revenue and expense transactions the Company recorded with Inteliquent for the periods
presented:
Revenues
Operating costs
2017
Year Ended June 30,
2016
(in millions)
2015
$
$
7.5
2.0
$
$
6.6
2.1
$
$
6.9
1.0
As of June 30, 2017 and June 30, 2016, the Company had $0.5 million and $0.2 million, respectively, due from Inteliquent.
Dan Caruso, the Company’s Chief Executive Officer and Chairman of the Board is a party to an aircraft charter (or
membership) agreement through his affiliate, Bear Equity LLC, for business and personal travel. Under the terms of the charter
agreement, all fees for the use of the aircraft are effectively variable in nature. For his business travel on behalf of the Company,
Mr. Caruso is reimbursed for his use of the aircraft subject to an annual maximum reimbursement threshold approved by the
Company's Nominating and Governance Committee. During the years ended June 30, 2017, 2016 and 2015, respectively, the
Company reimbursed Mr. Caruso $0.8 million, $0.5 million and $0.7 million for his business use of the aircraft.
(15) SEGMENT REPORTING
The Company uses the management approach to determine the segment financial information that should be disaggregated
and presented separately in the Company's notes to its consolidated financial statements. The management approach is based on
the manner by which management has organized the segments within the Company for making operating decisions, allocating
resources, and assessing performance.
As the Company has increased in scope and scale, it has developed its management and reporting structure to support this
growth. The Company’s bandwidth infrastructure, colocation and connectivity services are comprised of
F-43
Table of Contents
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
various related product groups generally defined around the type of service the customer is buying, referred to as SPGs. Each
SPG is responsible for the revenue, costs and associated capital expenditures of its respective services. The SPGs enable sales,
make pricing and product decisions, engineer networks and deliver services to customers, and support customers for their specific
telecom and Internet infrastructure services.
In connection with the Company’s continued increase in scope and scale, effective January 1, 2017, and contemplation of
the Company’s acquisition of Electric Lightwave which was completed March 1, 2017, the Company's chief operating decision
maker ("CODM"), the Company's Chief Executive Officer, implemented certain organizational changes to the management and
operation of the business that directly impact how the CODM makes resource allocation decisions and manages the Company.
Under the new structure, the Company’s reportable segments include: Fiber Solutions, Transport, Enterprise Networks, Zayo
Colocation, Allstream and Other. The change in structure had the impact of consolidating and/or regrouping existing SPGs and
product offerings among the Company’s reportable segments and disaggregating the legacy Zayo Canada segment among the
existing SPGs and a new Allstream reportable segment. The change in structure also resulted in adjustments to intercompany
pricing which more closely align to third party pricing on the services which are provided between the Company’s SPGs.
The Company’s legacy SPGs included Dark Fiber and Mobile Infrastructure Group (“MIG”). Effective January 1, 2017,
the Dark Fiber and MIG SPGs were merged together and are now reported as part of the Fiber Solutions reporting segment.
Waves and Ethernet services that are provided on dedicated dark fiber strands and colocation facilities that support only dark fiber
customers which were historically reported as part of the Waves, Ethernet or zColo SPGs were transferred to the Fiber Solutions
reportable segment effective January 1, 2017 (the “Dedicated Services Transfers”).
The Company’s legacy Waves, IP and Sonet SPGs, after giving effect to the Dedicated Services Transfers, are now
reported under the Company’s Transport reportable segment.
The Company’s legacy Ethernet and Cloud SPGs, after giving effect to the Dedicated Services Transfers, are now reported
under the Company’s Enterprise Networks segment.
The Company’s legacy Zayo Canada reporting segment was disaggregated based upon the products offered by the legacy
Zayo Canada segment to the Company’s existing SPGs and two new SPGs were established: Voice and Small and Medium
Business (“SMB”).
The Company’s segments are further described below:
Fiber Solutions. Through the Fiber Solutions segment, the Company provides raw bandwidth infrastructure to
customers that require more control of their internal networks. These services include dark fiber, dedicated lit
networks and mobile infrastructure (fiber-to-the-tower and small cell). Dark fiber is a physically separate and secure,
private platform for dedicated bandwidth. The Company leases dark fiber pairs (usually 2 to 12 total fibers) to its
customers, who “light” the fiber using their own optronics. The Company’s mobile infrastructure services provide
direct fiber connections to cell towers, small cells, hub sites, and mobile switching centers. Fiber Solutions customers
include carriers and other communication service providers, Internet service providers, wireless service providers,
major media and content companies, large enterprises, and other companies that have the expertise to run their own
fiber optic networks or require interconnected technical space. The contract terms in the Fiber Solutions segment tend
to range from three to twenty years.
Transport. The Transport segment provides lit bandwidth infrastructure solutions over the Company’s metro,
regional, and long-haul fiber networks. The segment uses optronics to light the fiber, and the Company’s customers
pay for service based on the amount and type of bandwidth they purchase. The Company’s services within this
segment include wavelengths, wholesale IP services and SONET. The Company targets customers who require a
minimum of 10G of bandwidth across their networks. Transport customers include carriers, content providers,
financial services companies, healthcare, government entities, education institutions and other medium and large
enterprises. The contract terms in this segment tend to range from two to five years.
F-44
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ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
Enterprise Networks . The Enterprise Networks segment provides communication solutions to medium and large
enterprises. The Company’s services within this segment include Ethernet, enterprise private and connectivity
services, managed services and cloud based compute and storage products. Solutions range from point-to-point data
connections to multi-site managed networks to international outsourced IT infrastructure environments.
Zayo Colocation (zColo). The Colocation segment provides data center infrastructure solutions to a broad range of
enterprise, carrier, cloud, and content customers. The Company’s services within this segment include the provision
of colocation space, power and interconnection services in North America and Western Europe. Solutions range in
size from single cabinet solutions to 1MW+ data center infrastructure environments. The Company’s data centers
also support a large component of the Company’s networking equipment for the purpose of aggregating and
distributing data, voice, Internet, and video traffic. The contract terms in this segment tend to range from two to five
years.
Allstream. The Allstream segment provides Voice, SIP Trunking, Unified Communications and scalable data
services using a variety of technologies for businesses. Voice provides a full range of local voice services allowing
business customers to complete telephone calls in their local exchange, as well as make long distance, toll-free and
related calls. Unified Communications is the integration of real-time communication services such as telephony
(including Cloud-based IP telephony), instant messaging and video conferencing with non-real-time communication
services, such as integrated voicemail and e-mail. Unified Communications provides a set of products that give users
the ability to work and communicate across multiple devices, media types and geographies. Allstream also offers a
range of data services that help SMB customers implement the right data and networking solutions for their business.
Those scalable data services make use of technologies including Ethernet services, IP/MPLS VPN Solutions, and
wavelength services. Allstream provides services to approximately 70,000 customers in the SMB market while
leveraging its extensive network and product offerings. These include IP, internet, voice, IP Trunking, cloud private
branch exchange, collaboration services and unified communications.
Other. The Other segment is primarily comprised of ZPS. ZPS provides network and technical resources to
customers who wish to leverage our expertise in designing, acquiring and maintaining networks. Services are
typically provided for a term of one year for a fixed recurring monthly fee in the case of network and on an hourly
basis for technical resources (usage revenue). ZPS also generates revenue via telecommunication equipment sales.
Effective January 1, 2017, revenues for all of the Company’s products are included in one of the Company’s six segments.
This segment presentation has been recast for all periods presented for comparability. The results of operations for each segment
include an allocation of certain indirect costs and corporate related costs, including overhead and third party-financed debt. The
allocation is based on a percentage that represents management’s estimate of the relative burden each segment bears of indirect
and corporate costs. Management has evaluated the allocation methods utilized to allocate these costs and determined they are
systematic, rational and consistently applied. Identifiable assets for each reportable segment are reconciled to total consolidated
assets including unallocated corporate assets and intersegment eliminations. Unallocated corporate assets consist primarily of
cash and deferred taxes.
Segment Adjusted EBITDA
Segment Adjusted EBITDA is the primary measure used by the Company’s CODM to evaluate segment operating
performance.
The Company defines Segment Adjusted EBITDA as earnings/(loss) from operations before interest, income taxes,
depreciation and amortization (“EBITDA”) adjusted to exclude acquisition or disposal-related transaction costs, losses on
extinguishment of debt, stock-based compensation, unrealized foreign currency gains/(losses) on intercompany loans, and non-
cash income/(loss) on equity and cost method investments. The Company uses Segment Adjusted EBITDA to evaluate operating
performance, and this financial measure is among the primary measures used by
F-45
Table of Contents
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
management for planning and forecasting of future periods. The Company believes that the presentation of Segment Adjusted
EBITDA is relevant and useful for investors because it allows investors to view results in a manner similar to the method used by
management and facilitates comparison of the Company’s results with the results of other companies that have different financing
and capital structures.
Segment Adjusted EBITDA results, along with other quantitative and qualitative information, are also utilized by the
Company and its Compensation Committee for purposes of determining bonus payouts to employees.
Segment Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation from, or as a
substitute for, analysis of the Company’s results from operations and operating cash flows as reported under GAAP. For example,
Segment Adjusted EBITDA:
·
·
·
·
does not reflect capital expenditures, or future requirements for capital and major maintenance expenditures or
contractual commitments;
does not reflect changes in, or cash requirements for, working capital needs;
does not reflect the significant interest expense, or the cash requirements necessary to service the interest payments, on
the Company’s debt; and
does not reflect cash required to pay income taxes.
The Company’s computation of Segment Adjusted EBITDA may not be comparable to other similarly titled measures
computed by other companies because all companies do not calculate segment Adjusted EBITDA in the same fashion.
Fiber
Solutions Transport
Enterprise
Networks
zColo
Allstream Other
Corp/
Eliminations Total
For the year ended June 30, 2017
(in millions)
Revenue from external
customers
Segment Adjusted EBITDA
Total assets
Capital expenditures
$ 722.1
566.3
4,504.6
499.1
184.2
$ 440.4 $ 487.4
178.0
1,230.0 1,385.7
89.1
147.3
$
214.0 $
111.9
994.4
91.5
314.3 $
71.3
406.2
8.5
21.6 $
5.1
33.2
—
— $ 2,199.8
1,116.8
—
8,739.4
185.3
835.5
—
Fiber
Solutions Transport
Enterprise
Networks
zColo Allstream Other
Corp/
Eliminations Total
For the year ended June 30, 2016
(in millions)
Revenue from external customers $
Segment Adjusted EBITDA
Total assets
Capital expenditures
648.8 $ 391.4 $ 359.6
145.6
499.6 168.0
849.2
3,780.9 964.8
88.0
421.4 123.1
$ 195.4 $
100.9
884.3
66.3
106.2 $ 20.3 $
4.5
16.3
33.5
72.6
—
5.3
— $ 1,721.7
934.9
—
6,727.5
704.1
142.2
—
F-46
Table of Contents
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
Fiber
Solutions Transport
Enterprise
Networks
zColo Allstream Other
Corp/
Eliminations Total
For the year ended June 30, 2015
Revenue from external customers $ 575.6 $ 336.4 $ 285.0
172.8
Segment Adjusted EBITDA
62.8
Capital expenditures
400.7
303.5
139.3
110.6
(in millions)
$ 126.9 $
64.7
53.5
— $ 23.2 $
5.1
—
—
—
— $ 1,347.1
782.6
—
530.4
—
Reconciliation from Total Segment Adjusted EBITDA to income/(loss) from operations before income taxes
Total Segment Adjusted EBITDA
Interest expense
Depreciation and amortization
Transaction costs
Stock-based compensation
Loss on extinguishment of debt
Foreign currency loss on intercompany loans
Non-cash loss on investments
Income/(loss) from operations before income taxes
F-47
2017
For the year ended June 30,
2016
2015
$
$
1,116.8
(241.5)
(606.9)
(20.5)
(114.1)
(18.2)
(10.3)
(1.2)
104.1
$
$
934.9
(220.1)
(516.3)
(21.5)
(155.9)
(33.8)
(53.8)
(1.2)
(67.7)
$
$
782.6
(214.0)
(406.2)
(6.2)
(200.7)
(94.3)
(24.4)
(0.9)
(164.1)
Table of Contents
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
The following is a summary of geographical information:
Revenue from external customers:
United States
Europe
Canada
Other
Total Revenue
Long-lived assets:
United States
Europe
Canada
Other
Total Long-lived assets
2017
For the year ended June 30,
2016
2015
$
$
$
$
1,610.0
176.5
412.0
1.3
2,199.8
5,504.7
521.3
335.8
22.8
6,384.6
$
$
$
$
1,334.1
174.1
213.3
0.2
1,721.7
4,236.1
527.8
326.4
25.6
5,115.9
$
$
$
1,193.5
153.6
—
—
1,347.1
3,848.0
454.0
—
0.3
4,302.3
The Company includes all non-current assets, except for goodwill and assets of discontinued operations, in its long-lived
assets.
F-48
Table of Contents
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
(16) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents the unaudited quarterly results for the year ended June 30, 2017:
September 30 December 31
June 30 (2)
Total
2017 Quarter Ended
March 31 (1)
(2)
(in millions)
Revenue
Operating costs and expenses
$
504.9 $
506.7 $
550.2 $
638.0 $
2,199.8
Operating costs (excluding depreciation and
amortization and including stock-based compensation)
Selling, general and administrative expenses
(including stock-based compensation)
Depreciation and amortization
Total operating costs and expenses
Operating income
Other expenses
Interest expense
Loss on extinguishment of debt
Foreign currency income/(loss) on intercompany loans
Other (expense)/income, net
Total other expenses, net
Income from operations before income taxes
Provision for income taxes
Net income
$
173.8
179.9
195.0
234.2
782.9
105.6
138.5
417.9
87.0
(53.3)
—
(11.2)
(0.2)
(64.7)
22.3
6.6
15.7 $
104.7
131.4
416.0
90.7
(53.7)
—
(17.4)
0.4
(70.7)
20.0
0.2
19.8 $
108.8
155.7
459.5
90.7
(63.0)
(4.5)
3.9
0.5
(63.1)
27.6
0.6
27.0 $
117.1
181.3
532.6
105.4
(71.5)
(13.7)
14.4
(0.4)
(71.2)
34.2
11.0
23.2 $
436.2
606.9
1,826.0
373.8
(241.5)
(18.2)
(10.3)
0.3
(269.7)
104.1
18.4
85.7
(1) The Company realized an increase in revenue and operating expenses beginning March 1, 2017 as a result of the acquisition
of Electric Lightwave Parent, Inc.
(2) The Company recognized a loss on debt extinguishment associated with the write-off of unamortized debt issuance costs in
the third and fourth quarters. See Note 7 – Long Term Debt.
F-49
Table of Contents
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
The following table presents the unaudited quarterly results for the year ended June 30, 2016:
September 30 December 31
2016 Quarter Ended
March 31 (1)
(2)
(in millions)
June 30 (3)
(4)
Total
$
366.8 $
369.6 $
478.0 $
507.3 $
1,721.7
Revenue
Operating costs and expenses
Operating costs (excluding depreciation and
amortization and including stock-based
compensation)
Selling, general and administrative expenses
(including stock-based compensation)
Depreciation and amortization
Total operating costs and expenses
Operating (loss)/income
Other expenses
Interest expense
Loss on extinguishment of debt
Foreign currency (loss)/gain on intercompany loans
Other (expense)/income, net
Total other expenses, net
(Loss)/earnings from operations before income taxes
Provision/(benefit) for income taxes
Net loss
$
113.0
112.2
170.8
182.7
578.7
84.6
117.1
314.7
52.1
(53.8)
—
(10.7)
(0.1)
(64.6)
(12.5)
2.7
(15.2) $
85.0
113.7
310.9
58.7
(51.2)
—
(7.1)
(0.1)
(58.4)
0.3
11.1
(10.8) $
112.5
137.2
420.5
57.5
(57.7)
—
(11.1)
(0.2)
(69.0)
(11.5)
7.8
(19.3) $
104.3
148.3
435.3
72.0
(57.4)
(33.8)
(24.9)
0.1
(116.0)
(44.0)
(13.1)
(30.9) $
386.4
516.3
1,481.4
240.3
(220.1)
(33.8)
(53.8)
(0.3)
(308.0)
(67.7)
8.5
(76.2)
(1) The Company realized an increase in revenue and operating expenses beginning January 1, 2016 as a result of the
acquisitions of Viatel and Dallas Data Center.
(2) The Company realized an increase in revenue and operating expenses beginning January 15, 2016 as a result of the
acquisition of Allstream.
(3) The Company realized an increase in revenue and operating expenses beginning April 1, 2016 as a result of the acquisition
of Clearview.
(4) The Company completed debt refinancing transactions during April and May, resulting in a loss on debt extinguishment in
the fourth quarter. See Note 7 – Long Term Debt.
F-50
Table of Contents
ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED STATEMENTS (Continued)
(17) SUBSEQUENT EVENTS
On July 5, 2017, the Company closed a private offering of $300.0 million aggregate principal amount of 5.75% senior notes due
2027 (the “July Incremental 2027 Notes”) through an add-on to the Company’s 2027 Unsecured Notes priced at 104.25%. The net
proceeds from the offering were used to further repay certain outstanding balances on the Company’s Term Loan Facility that
mature on January 19, 2024 resulting in $1,618.1 million in aggregate principal amount outstanding under the Term Loan
Facility. Following the offering of the July Incremental 2027 Notes, $1,650.0 million aggregate principal amount of the 2027
Unsecured Notes are outstanding.
On July 20, 2017, ZGL and Zayo Capital entered into a repricing amendment under the Credit Agreement for the
outstanding balances under the B-2 Term Loan and Electric Lightwave Incremental Term Loan (the “Repricing Amendment No.
2”). Per the terms of the Repricing Amendment No. 2, the B-2 Term Loan and Electric Lightwave Incremental Term Loan was
repriced at par and bears interest at a rate of LIBOR plus 2.25%, with a minimum LIBOR rate of 1.0%. No other terms of the
Credit Agreement were amended.
F-51
Zayo Group Holdings, Inc. is publicly held and has no parent.
Subsidiaries of the Company †
Exhibit 21.1
Name of Subsidiary
Zayo Group Australia Pty. Ltd.
upstreamNet Communications GmbH*
Zayo Infrastructure Belgium NV
Allstream Business Inc.
Electric Lightwave Communications Inc.
Electric Lightwave Communications Holdings Inc.
Monarch Pathfinder Holdings Ltd.
Pathfinder Communications Partnership
Zayo Canada Inc.
Neocenter Est SARL*
Neocenter Ouest SAS*
NeoClyde SAS*
Resoptic SAS*
Serenisys SARL*
Zayo Enterprise France SASU
Zayo France SAS
Zayo Group France SAS
Zayo Infrastructure France SA*
Zayo Infrastructure Deutschland GmbH
Zayo Group (HK) Limited
Emerald Bridge Fibres Limited*
Zayo Infrastructure Europe Limited
Zayo Infrastructure Ireland Limited
MFN Japan KK
Zayo Infrastructure Nederland B.V.
Zayo Nederland B.V.
Zayo Singapore Pte. Ltd.
Zayo Infrastructure Switzerland AG
Ego Holdings Limited
FibreSpeed Limited
Geo Metro Limited
Geo Networks Limited
Zayo (UK) Limited
Zayo Group EU Limited
Zayo Group International Limited
Zayo Group UK Limited
Zayo Infrastructure (UK) Limited
Mountain Telecommunications of Arizona, Inc.
Castle Access, Inc.
Abovenet Communications, LLC
Advanced TelCom, Inc.
Electric Lightwave Parent, Inc.
Electric Lightwave, LLC
Eschelon Telecom, Inc.
Latisys Corp.
Latisys Holdings Corp.
Mountain Telecommunications, Inc.
Zayo Capital, Inc.
Zayo Group, LLC
Zayo Professional Services, LLC
State and/or Country of Incorporation or Organization
Australia
Austria
Belgium
Canada
Canada
Canada
Canada
Canada
Canada
France
France
France
France
France
France
France
France
France
Germany
Hong Kong
Ireland
Ireland
Ireland
Japan
Netherlands
Netherlands
Singapore
Switzerland
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United States, Arizona
United States, California
United States, Delaware
United States, Delaware
United States, Delaware
United States, Delaware
United States, Delaware
United States, Delaware
United States, Delaware
United States, Delaware
United States, Delaware
United States, Delaware
United States, Delaware
Eschelon Telecom of Arizona, Inc.
Eschelon Telecom of Colorado, Inc.
Eschelon Telecom of Minnesota, Inc.
Eschelon Telecom of Nevada, Inc.
Eschelon Telecom of Oregon, Inc.
Eschelon Telecom of Utah, Inc.
Eschelon Telecom of Washington, Inc.
Integra Telecom of Minnesota, Inc.
Scott-Rice Telephone Co.
OneEighty Communications, Inc.
OpticAccess LLC
X2 Telecom LLC
Allstream Business US, Inc.
Electric Lightwave Communications, Inc.
Integra Telecom of Idaho, Inc.
Integra Telecom of North Dakota, Inc.
Integra Telecom of Oregon, Inc.
Integra Telecom of Utah, Inc.
Integra Telecom of Washington, Inc.
Oregon Telecom Inc.
Shared Communications Services, Inc.
United Communications, Inc.
Clearview International, LLC
World Communications, Inc.
United States, Minnesota
United States, Minnesota
United States, Minnesota
United States, Minnesota
United States, Minnesota
United States, Minnesota
United States, Minnesota
United States, Minnesota
United States, Minnesota
United States, Montana
United States, Nevada
United States, Nevada
United States, Oregon
United States, Oregon
United States, Oregon
United States, Oregon
United States, Oregon
United States, Oregon
United States, Oregon
United States, Oregon
United States, Oregon
United States, Oregon
United States, Texas
United States, Washington
† As of June 30, 2017
* Indicates a company that is not wholly owned directly or indirectly by Zayo Group Holdings, Inc.
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
The Board of Directors
Zayo Group Holdings, Inc.:
We consent to the incorporation by reference in the registration statement (No. 333-199856) on Form S-8 of Zayo Group
Holdings, Inc. of our reports dated August 21, 2017, with respect to the consolidated balance sheets of Zayo Group Holdings,
Inc. and subsidiaries as of June 30, 2017 and 2016, and the related consolidated statements of operations, comprehensive
income/(loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended June 30, 2017, and the
effectiveness of internal control over financial reporting as of June 30, 2017, which reports appear in the June 30, 2017 annual
report on Form 10-K of Zayo Group Holdings, Inc. Our report dated August 21, 2017, on the effectiveness of internal control
over financial reporting as of June 30, 2017, contains an explanatory paragraph that states the Company acquired Electric
Lightwave during the year ended June 30, 2017, and management excluded from its assessment of the effectiveness of the
Company’s internal control over financial reporting as of June 30, 2017 Electric Lightwave’s internal control over financial
reporting associated with total assets of $562.0 million and total revenues of $169.6 million included in the consolidated
financial statements of the Company as of and for the year ended June 30, 2017. Our audit of internal control over financial
reporting of the Company also excluded an evaluation of the internal control over financial reporting of Electric Lightwave.
Denver, Colorado
August 21, 2017
/s/ KPMG LLP
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13A-14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
I, Dan Caruso, Chief Executive Officer of Zayo Group Holdings, Inc. certify that:
EXHIBIT 31.1
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Zayo Group Holdings, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: August 21, 2017
By:/s/ Dan Caruso
Dan Caruso
Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13A-14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
I, Ken desGarennes, Chief Financial Officer of Zayo Group Holdings, Inc. certify that:
EXHIBIT 31.2
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Zayo Group Holdings, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: August 21, 2017
By: /s/ Ken desGarennes
Ken desGarennes
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32
In connection with the Annual Report of Zayo Group Holdings, Inc. (the “Company”) on Form 10-K for the period ending
June 30, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned
officers of the Company, does hereby certify, to such each officer’s knowledge, pursuant to 18 U.S.C. § 1350, as adopted
pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company, as of and for the periods covered by the Report.
Date: August 21, 2017
Date: August 21, 2017
By:
By:
/s/ Dan Caruso
Dan Caruso
Chief Executive Officer
/s/ Ken desGarennes
Ken desGarennes
Chief Financial Officer