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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended December 31, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File Number: 333-169979
 Zayo Group, LLC
  DELAWARE
    
    26-2012549(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 400 Centennial Parkway, Suite 200,
Louisville, CO 80207
(Address of Principal Executive Offices)
 (303) 381-4683
(Registrants Telephone Number, Including Area Code)
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a small reporting company)
 o þ




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##### 



ZAYO GROUP, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 INDEX
 PagePart I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements (unaudited)1Condensed Consolidated Balance Sheets
As of December 31, 2010 and June 30, 2010
    
    
    1Condensed Consolidated Statements of Operations
Three and six month periods ended December 31, 2010 and 2009
    
    
    2Condensed Consolidated Statement of Members Equity
Six month period ended December 31, 2010
    
    
    3Condensed Consolidated Statements of Cash Flows
Six month periods ended December 31, 2010 and 2009
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    28Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    48Item 4. Controls and Procedures
    
    
    49Part II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    50Item 1A. Risk Factors
    
    
    50Item 6. Exhibits
    
    
    58Signatures
    
    
    59Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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##### Table of Contents



ZAYO GROUP, LLC AND SUBSIDIARIES
 
 PART I. FINANCIAL INFORMATION
 
 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)
 (in thousands)
 December 31,
    
    
    June 30,2010
    
    
    2010AssetsCurrent assetsCash and cash equivalents
    
    $
    19,865
    
    
    $
    89,161Restricted cash, current
    
    
    551
    
    
    
    809Trade receivables, net of allowance of $1,425
and $1,093 as of December 31, 2010 and June
30, 2010, respectively
    
    
    17,634
    
    
    
    12,721Due from related parties
    
    
    
    
    
    
    871Other receivables
    
    
    1,164
    
    
    
    348Prepaid expenses
    
    
    6,392
    
    
    
    5,144Deferred income taxes
    
    
    1,938
    
    
    
    4,060Total current assets
    
    
    47,544
    
    
    
    113,114Property and equipment, net of accumulated
depreciation of $79,805 and $57,425 as of
December 31, 2010 and June 30, 2010,
respectively
    
    
    490,240
    
    
    
    301,911Intangible assets, net of accumulated
amortization of $34,735 and $28,222 as of
December 31, 2010 and June 30, 2010,
respectively
    
    
    113,853
    
    
    
    59,851Goodwill
    
    
    83,010
    
    
    
    68,751Deferred income taxes
    
    
    2,244
    
    
    
    7,050Debt issuance costs, net
    
    
    12,553
    
    
    
    9,560Investment in US Carrier
    
    
    15,075
    
    
    
    Other assets
    
    
    4,510
    
    
    
    4,144Total assets
    
    $
    769,029
    
    
    $
    564,381Liabilities and members equityCurrent liabilitiesAccounts payable
    
    $
    10,910
    
    
    $
    12,144Accrued liabilities
    
    
    18,951
    
    
    
    18,349Accrued interest
    
    
    10,594
    
    
    
    7,794Capital lease obligations, current portion
    
    
    1,165
    
    
    
    1,673Due to related parties
    
    
    151
    
    
    
    Deferred revenue, current portion
    
    
    13,909
    
    
    
    8,146Customer deposits
    
    
    3,574
    
    
    
    755Total current liabilities
    
    
    59,254
    
    
    
    48,861Capital lease obligations, net of current portion
    
    
    10,708
    
    
    
    11,033Long-term debt
    
    
    354,342
    
    
    
    247,080Deferred revenue, net of current portion
    
    
    63,380
    
    
    
    22,648Stock-based compensation liability
    
    
    28,231
    
    
    
    21,623Other long term liabilities
    
    
    2,684
    
    
    
    Total liabilities
    
    
    518,599
    
    
    
    351,245Members equityMembers interest
    
    
    252,814
    
    
    
    217,129Accumulated deficit
    
    
    (2,384
    )
    
    
    (3,993
    )Total members equity
    
    
    250,430
    
    
    
    213,136Total liabilities and members equity
    
    $
    769,029
    
    
    $
    564,381
   1




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ZAYO GROUP, LLC AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)
 (in thousands)
 Three months ended
    
    
    Six months endedDecember 31,
    
    
    December 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenue
    
    $
    77,885
    
    
    $
    58,227
    
    
    $
    146,463
    
    
    $
    103,729Operating costs and expensesOperating costs, excluding depreciation and amortization
    
    
    20,721
    
    
    
    19,777
    
    
    
    40,581
    
    
    
    34,203Selling, general and administrative expenses
    
    
    25,600
    
    
    
    18,920
    
    
    
    47,565
    
    
    
    35,770Stock-based compensation
    
    
    1,874
    
    
    
    592
    
    
    
    7,027
    
    
    
    1,444Depreciation and amortization
    
    
    16,443
    
    
    
    10,565
    
    
    
    28,899
    
    
    
    19,627Total operating costs and expenses
    
    
    64,638
    
    
    
    49,854
    
    
    
    124,072
    
    
    
    91,044Operating income
    
    
    13,247
    
    
    
    8,373
    
    
    
    22,391
    
    
    
    12,685Other income/(expense)Interest expense
    
    
    (9,032
    )
    
    
    (3,241
    )
    
    
    (15,289
    )
    
    
    (6,811
    )Other (expense)/income, net
    
    
    (16
    )
    
    
    
    
    
    
    (177
    )
    
    
    5Total other expense, net
    
    
    (9,048
    )
    
    
    (3,241
    )
    
    
    (15,466
    )
    
    
    (6,806
    )Earnings from continuing operations before provision for income taxes
    
    
    4,199
    
    
    
    5,132
    
    
    
    6,925
    
    
    
    5,879Provision for income taxes
    
    
    2,319
    
    
    
    2,242
    
    
    
    5,316
    
    
    
    2,893Earnings from continuing operations
    
    
    1,880
    
    
    
    2,890
    
    
    
    1,609
    
    
    
    2,986Earnings from discontinued operations, net of income taxes
    
    
    
    
    
    
    1,165
    
    
    
    
    
    
    
    2,667Net earnings
    
    $
    1,880
    
    
    $
    4,055
    
    
    $
    1,609
    
    
    $
    5,653
   2




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ZAYO GROUP, LLC AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENT OF MEMBERS EQUITY

(UNAUDITED)
 (in thousands)
 RetainedEarnings/Members
    
    
    (Accumulated
    
    
    Total Membersinterest
    
    
    Deficit)
    
    
    equityBalance at July 1, 2010
    
    $
    217,129
    
    
    $
    (3,993
    )
    
    $
    213,136Capital contributed (cash)
    
    
    35,500
    
    
    
    
    
    
    
    35,500Non-cash settlements with Parent, net
    
    
    (234
    )
    
    
    
    
    
    
    (234
    )Stock-based compensation
    
    
    419
    
    
    
    
    
    
    
    419Net earnings
    
    
    
    
    
    
    1,609
    
    
    
    1,609Balance at December 31, 2010
    
    $
    252,814
    
    
    $
    (2,384
    )
    
    $
    250,430
   3




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ZAYO GROUP, LLC AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)
 (in thousands)
 Six months endedDecember 31,2010
    
    
    2009Cash flows from operating activitiesNet earnings
    
    $
    1,609
    
    
    $
    5,653Earnings from discontinued operations
    
    
    
    
    
    
    2,667Earnings from continuing operations
    
    
    1,609
    
    
    
    2,986Adjustments to reconcile net earnings to net cash provided by operating activitiesDepreciation and amortization
    
    
    28,899
    
    
    
    19,627Bad debt expense
    
    
    504
    
    
    
    431Amortization of deferred financing costs and discount on debt
    
    
    1,309
    
    
    
    821Accretion of premium on debt
    
    
    (137
    )
    
    
    Stock-based compensation
    
    
    7,027
    
    
    
    1,444Unrealized loss on interest rate swap
    
    
    
    
    
    
    226Deferred income taxes
    
    
    4,661
    
    
    
    2,635Changes in operating assets and liabilities, net of acquisitionsReceivables
    
    
    (71
    )
    
    
    (5,573
    )Prepaid expenses
    
    
    (308
    )
    
    
    79Other assets
    
    
    979
    
    
    
    (1,161
    )Accounts payable and accrued liabilities
    
    
    (4,494
    )
    
    
    (5,024
    )Payables to related parties
    
    
    357
    
    
    
    Deferred revenue
    
    
    (3,342
    )
    
    
    1,811Other liabilities
    
    
    2,062
    
    
    
    (1,610
    )Net cash provided by continuing operating activities
    
    
    39,055
    
    
    
    16,692Cash flows from investing activitiesPurchases of property and equipment
    
    
    (59,380
    )
    
    
    (21,534
    )Broadband stimulus grants received
    
    
    485
    
    
    
    Acquisition of American Fiber Systems Holdings Corporation, net of cash acquired
    
    
    (110,000
    )
    
    
    Acquisition of AGL Networks, LLC, net of cash acquired
    
    
    (73,666
    )
    
    
    Acquisition of FiberNet Telecom Group, Inc., net of cash acquired
    
    
    
    
    
    
    (96,571
    )Net cash used in investing activities
    
    
    (242,561
    )
    
    
    (118,105
    )Cash flows from financing activitiesEquity contributions
    
    
    35,500
    
    
    
    37,000Advance from Communications Infrastructure Investments, LLC
    
    
    13,026
    
    
    
    Return of advance from Communications Infrastructure Investments, LLC
    
    
    (13,026
    )
    
    
    Proceeds from borrowings, long-term
    
    
    103,000
    
    
    
    42,000Principal repayments on debt obligations
    
    
    
    
    
    
    (825
    )Changes in restricted cash
    
    
    788
    
    
    
    (5,487
    )Principal repayments on capital lease obligations
    
    
    (1,034
    )
    
    
    (1,008
    )Deferred financing costs
    
    
    (4,044
    )
    
    
    (2,277
    )Net cash provided by financing activities
    
    
    134,210
    
    
    
    69,403Cash flows from discontinued operationsOperating activities
    
    
    
    
    
    
    6,935Investing activities
    
    
    
    
    
    
    (611
    )Net cash provided by discontinued operations
    
    
    
    
    
    
    6,324Net decrease in cash and cash equivalents
    
    
    (69,296
    )
    
    
    (25,686
    )Cash and cash equivalents, beginning of period
    
    
    89,161
    
    
    
    38,781(Increase) in cash and cash equivalents of discontinued operations
    
    
    
    
    
    
    (187
    )Cash and cash equivalents, end of period
    
    $
    19,865
    
    
    $
    12,908
  (Continued)
  4




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ZAYO GROUP, LLC AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 Supplemental disclosure of non-cash, investing and financing activities:
  Acquisitions Spin-off of Onvoy Voice Services
Segment
 Equity
   5




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ZAYO GROUP, LLC AND SUBSIDIARIES
 
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 (1) ORGANIZATION AND DESCRIPTION OF BUSINESS
  
    
    Bandwidth infrastructure services on metro and regional fiber networks.
 
    
    Colocation and interconnection services.
 
    
    Converged and data services.
  (2) BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 a.
    
    Basis of Presentation
   b.
    
    Spin-off of Operating Segment
 Discontinued Operations
  6




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c.
    
    Use of Estimates
  d.
    
    Cash and Cash Equivalents and Restricted Cash
  e.
    
    Investments
  f.
    
    Trade Receivables
  g.
    
    Property and Equipment
     7




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h.
    
    Goodwill and Purchased Intangibles
 .
  i.
    
    Derivative Financial Instruments
 Long-term Debt Fair Market Measurements
 j.
    
    Revenue Recognition
    8




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
    
    the sale has been consummated;
    
    the customers initial and continuing investments is adequate to
demonstrate a commitment to pay for the property;
    
    the Companys receivable is not subject to future subordination; and
    
    the Company has transferred to the buyer the usual risks and rewards of
ownership in a transaction that is in substance a sale and does not have a
substantial continuing involvement with the property.
  k.
    
    Operating Costs and Accrued Liabilities
    l.
    
    Stock-Based Compensation
    m.
    
    Government Grants
   9




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##### Table of Contents



n.
    
    Income Taxes
    o.
    
    Fair Value of Financial Instruments
 Fair Value Measurements
 Fair Value Hierarchy
  Level 1
  Level 2
  
    
    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.
  Level 3
   10




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##### Table of Contents



p.
    
    Concentration of Credit Risk
  q.
    
    Recently Issued Accounting Standards
  Consolidations
 Revenue Recognition (ASC 605)
Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force
 Disclosure of Supplementary Pro
Forma Information for Business Combinations.
 When to Perform Step 2 of the
Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (Topic
350)IntangiblesGoodwill and Other
 (3) ACQUISITIONS
   11




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Acquisition during the six months ended December 31, 2010
 American Fiber Systems Holding Corporation (AFS)
    AFSAcquisition date
    
    October 1, 2010Current assets
    
    $
    3,799Property and equipment
    
    
    56,481Intangibles  customer relationships
    
    
    57,082Goodwill
    
    
    14,050Investment in US Carrier
    
    
    15,075Other assets
    
    
    336Total assets acquired
    
    
    146,823Current liabilities
    
    
    3,404Deferred revenue
    
    
    23,905Deferred tax liability
    
    
    2,246Other liabilities
    
    
    3,127Total liabilities assumed
    
    
    32,682Net assets
    
    
    114,141Seller Note payable to former AFS Holdings owners
    
    
    (4,141
    )Net cash paid
    
    $
    110,000
    12




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##### Table of Contents



AGL Networks, LLC (AGL Networks)
   AGL NetworksAcquisition date
    
    July 1, 2010Current assets
    
    $
    3,713Property and equipment
    
    
    93,171Intangibles  customer relationships
    
    
    3,433Goodwill
    
    
    209Other assets
    
    
    680Total assets acquired
    
    
    101,206Current liabilities
    
    
    1,029Deferred revenue
    
    
    26,511Total liabilities assumed
    
    
    27,540Net assets
    
    
    73,666Purchase consideration/Net cash paid
    
    $
    73,666
      13




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Acquisition during the three and six month periods ended December 31, 2009
 FiberNet Networks Telecom Group, Inc. (FiberNet)
    FiberNetAcquisition date
    
    September 9, 2009Current assets
    
    $
    16,824Property and equipment
    
    
    50,734Intangibles
    
    
    43,900Deferred income taxes
    
    
    19,659Other assets
    
    
    838Total assets acquired
    
    
    131,955Current liabilities
    
    
    11,534Deferred revenue
    
    
    7,257Total liabilities assumed
    
    
    18,791Net assets
    
    
    113,164Excess of net assets over purchase consideration (bargain purchase)
    
    
    9,081Purchase consideration
    
    
    104,083Less cash acquired
    
    
    (7,512
    )Net cash paid
    
    $
    96,571
     14




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Pro-forma Financial Information
  Three months ended
    
    
    Six months endedDecember 31,
    
    
    December 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenue
    
    $
    77,885
    
    
    $
    73,678
    
    
    $
    154,335
    
    
    $
    143,625Earnings/ (loss) from continuing operations
    
    
    2,266
    
    
    $
    3,550
    
    
    
    851
    
    
    $
    (1,051)
 (4) SPIN-OFF OF ONVOY VOICE SERVICES SEGMENT
  Discontinued
Operations
  Three months ended
    
    
    Six months endedDecember 31, 2009
    
    
    December 31, 2009Revenue
    
    $
    10,920
    
    
    $
    21,077Earnings before income taxes
    
    
    2,022
    
    
    
    4,523Income tax expense
    
    
    (857
    )
    
    
    (1,856
    )Earnings from discontinued operations, net of income taxes
    
    $
    1,165
    
    
    $
    2,667
   15




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(5) INVESTMENT
   (6) PROPERTY AND EQUIPMENT
  Estimated
    
    As ofuseful lives (in
    
    December 31,
    
    
    June 30,years)
    
    2010
    
    
    2010Land
    
    N/A
    
    $
    228
    
    
    $
    209Buildings improvements and site improvements
    
    8 to 15
    
    
    10,054
    
    
    
    9,003Furniture, fixtures and office equipment
    
    3 to 7
    
    
    1,379
    
    
    
    1,219Computer hardware
    
    2 to 5
    
    
    4,518
    
    
    
    3,292Software
    
    2 to 3
    
    
    5,017
    
    
    
    4,066Machinery and equipment
    
    3 to 7
    
    
    4,799
    
    
    
    3,568Fiber optic equipment
    
    4 to 8
    
    
    279,961
    
    
    
    127,379Circuit switch equipment
    
    10
    
    
    7,523
    
    
    
    7,225Packet switch equipment
    
    3 to 5
    
    
    23,269
    
    
    
    21,761Fiber optic network
    
    8 to 20
    
    
    176,741
    
    
    
    141,171Construction in progress
    
    N/A
    
    
    56,556
    
    
    
    40,443Total
    
    
    
    
    570,045
    
    
    
    359,336Less accumulated depreciation
    
    
    
    
    (79,805
    )
    
    
    (57,425
    )Property and equipment, net
    
    
    
    $
    490,240
    
    
    $
    301,911
  Commitments and Contingencies Other Commitments.
  16




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(7) GOODWILL
  As of June 30,
    
    
    
    
    
    
    
    
    
    
    As of December 31,2010
    
    
    Transfers
    
    
    Additions
    
    
    2010Zayo Bandwidth
    
    $
    66,548
    
    
    $
    (4,170
    )
    
    $
    7,496
    
    
    $
    69,874Zayo Enterprise Networks
    
    
    2,203
    
    
    
    
    
    
    
    
    
    
    
    2,203Zayo Fiber Solutions
    
    
    
    
    
    
    4,170
    
    
    
    6,763
    
    
    
    10,933Total
    
    $
    68,751
    
    
    $
    
    
    
    $
    14,259
    
    
    $
    83,010
 Segment Reporting
 (8) INTANGIBLE ASSETS
  GrossCarrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    NetDecember 31, 2010Customer relationships
    
    $
    139,253
    
    
    $
    (25,400
    )
    
    $
    113,853Non-compete agreements
    
    
    8,835
    
    
    
    (8,835
    )
    
    
    Tradenames
    
    
    500
    
    
    
    (500
    )
    
    
    Total
    
    $
    148,588
    
    
    $
    (34,735
    )
    
    $
    113,853June 30, 2010Customer relationships
    
    $
    78,738
    
    
    $
    (19,182
    )
    
    $
    59,556Non-compete agreements
    
    
    8,835
    
    
    
    (8,623
    )
    
    
    212Tradenames
    
    
    500
    
    
    
    (417
    )
    
    
    83Total
    
    $
    88,073
    
    
    $
    (28,222
    )
    
    $
    59,851
  Year ending June 30,2011 (remaining 6 months)
    
    $
    7,1532012
    
    
    14,3062013
    
    
    14,3062014
    
    
    11,2752015
    
    
    8,521Thereafter
    
    
    58,292Total
    
    $
    113,853
  17




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##### Table of Contents



(9) LONG-TERM DEBT
  Acquisitions
      Applicable Margin for
    
    
    Applicable Margin forLevel
    
    
    Leverage Ratio
    
    LIBOR Advances
    
    
    Base Rate AdvancesI
    
    Greater than or equal to 3.25 to 1.00
    
    
    4.50
    %
    
    
    3.50
    %II
    
    Greater than or equal to 2.50 to 1.00 but less than 3.25 to 1.00
    
    
    4.00
    %
    
    
    3.00
    %III
    
    Greater than or equal to 1.75 to 1.00 but less than 2.50 to 1.00
    
    
    3.75
    %
    
    
    2.75
    %IV
    
    Less than 1.75 to 1.00
    
    
    3.50
    %
    
    
    2.50
    %
   Guarantees
   18




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Debt issuance costs
  Debt covenants
  Leverage ratio:
 Fixed charge coverage ratio:
  Leverage Ratio
    
    Maximum Annual Dividend Payment3 3.5x
    
    $
    < 3.5x but 3 2.5x
    
    $
    25,000<,2.5x but 3 1.5x
    
    $
    35,000<1.5x
    
    $
    45,000
    Redemption Rights
   19




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##### Table of Contents



Year
    
    Redemption Price2013
    
    
    105.125
    %2014
    
    
    102.563
    %2015 and thereafter
    
    
    100.000
    %
   Interest rate derivatives
      20




---



##### Table of Contents



(10) INCOME TAXES
   For the three months ended
    
    
    For the six months endedDecember 31,
    
    
    December 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Federal income taxes  current
    
    $
    76
    
    
    $
    
    
    
    $
    224
    
    
    $
    Federal income taxes  deferred
    
    
    1,878
    
    
    
    1,904
    
    
    
    4,157
    
    
    
    2,439Provision for federal income taxes
    
    
    1,954
    
    
    
    1,904
    
    
    
    4,381
    
    
    
    2,439State income taxes  current
    
    
    62
    
    
    
    169
    
    
    
    431
    
    
    
    258State income taxes  deferred
    
    
    303
    
    
    
    169
    
    
    
    504
    
    
    
    196Provision for state income taxes
    
    
    365
    
    
    
    338
    
    
    
    935
    
    
    
    454Total provision for income taxes
    
    $
    2,319
    
    
    $
    2,242
    
    
    $
    5,316
    
    
    $
    2,893
    For the three months ended
    
    
    For the six months endedDecember 31,
    
    
    December 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Expected provision at statutory rate of 34%
    
    $
    1,428
    
    
    $
    1,745
    
    
    $
    2,354
    
    
    $
    1,999Increase due to:Non-deductible stock-based compensation
    
    
    576
    
    
    
    201
    
    
    
    2,328
    
    
    
    491State income taxes, net of federal benefit
    
    
    35
    
    
    
    112
    
    
    
    287
    
    
    
    131Transactions costs not deductible
    
    
    235
    
    
    
    32
    
    
    
    289
    
    
    
    237Other, net
    
    
    45
    
    
    
    152
    
    
    
    58
    
    
    
    35Provision for income taxes
    
    $
    2,319
    
    
    $
    2,242
    
    
    $
    5,316
    
    
    $
    2,893
     21




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##### Table of Contents



(11) EQUITY
         Spin-Off of Onvoy Voice Services Segment
  22




---



##### Table of Contents



(12) STOCK COMPENSATION
  Compensation  Stock
Compensation
     (13) FAIR VALUE MEASUREMENTS
   23




---



##### Table of Contents



Level
    
    December 31, 2010
    
    
    June 30, 2010Liabilities Recorded at Fair Value in the Financial Statements:Interest rate swap liabilities
    
    Level 2
    
    $
    
    
    
    $
    566Stock-based compensation liability
    
    Level 3
    
    
    28,231
    
    
    
    21,623Total liabilities recorded at fair value in the consolidated financial statements
    
    
    
    $
    28,231
    
    
    $
    22,189Liabilities not Recorded at Fair Value in the Financial Statements:Long-term debt
    
    
    
    $
    354,342
    
    
    $
    247,080
    (14) COMMITMENTS AND CONTINGENCIES
 Purchase Commitments
  Outstanding letters of credit
  Other Commitments
    24




---



##### Table of Contents



Contingencies
  (15) RELATED PARTY TRANSACTIONS
 Spin-Off of Onvoy Voice Services Segment,
   (16) SEGMENT REPORTING
  
    
    It engages in business activities from which it may earn revenues and incur
expenses.
    
    Its operating results are regularly reviewed by the public entitys chief operating
decision maker to make decisions about resources to be allocated to the segment and
assess its performance.
    
    Its discrete financial information is available.
  Acquisitions
   25




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##### Table of Contents



As of and for the three months ended December 31, 2010Corporate/ZB
    
    
    ZEN
    
    
    zColo
    
    
    ZFS
    
    
    eliminations
    
    
    TotalRevenue
    
    $
    52,833
    
    
    $
    8,088
    
    
    $
    7,386
    
    
    $
    11,136
    
    
    $
    
    
    
    $
    79,443Intersegment revenue
    
    
    (722
    )
    
    
    (228
    )
    
    
    (608
    )
    
    
    
    
    
    
    
    
    
    
    (1,558
    )Revenue from external customers
    
    
    52,111
    
    
    
    7,860
    
    
    
    6,778
    
    
    
    11,136
    
    
    
    
    
    
    
    77,885Gross profit (revenue less
operating costs excluding
depreciation and amortization)
    
    
    38,781
    
    
    
    4,179
    
    
    
    3,888
    
    
    
    10,970
    
    
    
    (654
    )
    
    
    57,164Depreciation and amortization
    
    
    10,397
    
    
    
    928
    
    
    
    1,326
    
    
    
    3,792
    
    
    
    
    
    
    
    16,443Operating income/(loss)
    
    
    10,359
    
    
    
    (157
    )
    
    
    1,094
    
    
    
    2,992
    
    
    
    (1,041
    )
    
    
    13,247Interest expense
    
    
    259
    
    
    
    
    
    
    
    56
    
    
    
    2
    
    
    
    8,715
    
    
    
    9,032Other expense/(income), net
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (1
    )
    
    
    16Total assets
    
    
    450,796
    
    
    
    25,338
    
    
    
    56,269
    
    
    
    212,307
    
    
    
    24,319
    
    
    
    769,029Capital expenditures, net of stimulus grant reimbursements
    
    
    32,415
    
    
    
    1,251
    
    
    
    562
    
    
    
    3,266
    
    
    
    
    
    
    
    37,494
 As of and for the six months ended December 31, 2010Corporate/ZB
    
    
    ZEN
    
    
    zColo
    
    
    ZFS
    
    
    eliminations
    
    
    TotalRevenue
    
    $
    100,038
    
    
    $
    16,254
    
    
    $
    14,580
    
    
    $
    18,633
    
    
    $
    
    
    
    $
    149,505Intersegment revenue
    
    
    (1,422
    )
    
    
    (450
    )
    
    
    (1,170
    )
    
    
    
    
    
    
    
    
    
    
    (3,042
    )Revenue from external customers
    
    
    98,616
    
    
    
    15,804
    
    
    
    13,410
    
    
    
    18,633
    
    
    
    
    
    
    
    146,463Gross profit (revenue less operating costs
excluding depreciation and amortization)
    
    
    72,840
    
    
    
    8,492
    
    
    
    7,496
    
    
    
    18,335
    
    
    
    (1,281
    )
    
    
    105,882Depreciation and amortization
    
    
    18,598
    
    
    
    1,937
    
    
    
    2,674
    
    
    
    5,690
    
    
    
    
    
    
    
    28,899Operating income/(loss)
    
    
    19,172
    
    
    
    (138
    )
    
    
    2,090
    
    
    
    4,955
    
    
    
    (3,688
    )
    
    
    22,391Interest expense
    
    
    521
    
    
    
    
    
    
    
    115
    
    
    
    5
    
    
    
    14,648
    
    
    
    15,289Other expense/(income), net
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    163
    
    
    
    177Capital expenditures, net of stimulus grant reimbursements
    
    
    50,356
    
    
    
    2,810
    
    
    
    990
    
    
    
    4,739
    
    
    
    
    
    
    
    58,895
 As of and for the three months ended December 31, 2009Corporate/ZB
    
    
    ZEN
    
    
    Zcolo
    
    
    ZFS
    
    
    eliminations
    
    
    TotalRevenue
    
    $
    44,956
    
    
    $
    8,803
    
    
    $
    7,018
    
    
    $
    
    
    
    $
    
    
    
    $
    60,777Intersegment revenue
    
    
    (1,866
    )
    
    
    (170
    )
    
    
    (514
    )
    
    
    
    
    
    
    
    
    
    
    (2,550
    )Revenue from external customers
    
    
    43,090
    
    
    
    8,633
    
    
    
    6,504
    
    
    
    
    
    
    
    
    
    
    
    58,227Gross profit (revenue less operating costs
excluding depreciation and amortization)
    
    
    31,285
    
    
    
    4,628
    
    
    
    3,658
    
    
    
    
    
    
    
    (1,121
    )
    
    
    38,450Depreciation and amortization
    
    
    8,439
    
    
    
    762
    
    
    
    1,364
    
    
    
    
    
    
    
    
    
    
    
    10,565Operating income/(loss)
    
    
    7,820
    
    
    
    803
    
    
    
    1,061
    
    
    
    
    
    
    
    (1,311
    )
    
    
    8,373Interest expense
    
    
    288
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,953
    
    
    
    3,241Other expense/(income), net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital expenditures
    
    
    9,389
    
    
    
    424
    
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    9,836
  26




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##### Table of Contents



As of and for the six months ended December 31, 2009Corporate/ZB
    
    
    ZEN
    
    
    zColo
    
    
    ZFS
    
    
    eliminations
    
    
    TotalRevenue
    
    $
    83,268
    
    
    $
    15,832
    
    
    $
    8,815
    
    
    $
    
    
    
    $
    
    
    
    $
    107,915Intersegment revenue
    
    
    (3,129
    )
    
    
    (336
    )
    
    
    (721
    )
    
    
    
    
    
    
    
    
    
    
    (4,186
    )Revenue from external customers
    
    
    80,139
    
    
    
    15,496
    
    
    
    8,094
    
    
    
    
    
    
    
    
    
    
    
    103,729Gross profit (revenue less
operating costs excluding
depreciation and amortization)
    
    
    59,832
    
    
    
    7,795
    
    
    
    4,566
    
    
    
    
    
    
    
    (2,667
    )
    
    
    69,526Depreciation and amortization
    
    
    16,046
    
    
    
    1,762
    
    
    
    1,819
    
    
    
    
    
    
    
    
    
    
    
    19,627Operating income/(loss)
    
    
    14,552
    
    
    
    96
    
    
    
    1,099
    
    
    
    
    
    
    
    (3,062
    )
    
    
    12,685Interest expense
    
    
    562
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,249
    
    
    
    6,811Other expense/(income), net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    (5
    )Capital expenditures
    
    
    20,938
    
    
    
    569
    
    
    
    27
    
    
    
    
    
    
    
    
    
    
    
    21,534
   27




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
 Certain Factors That May Affect future Results
   Overview
 Introduction
      28




---



##### Table of Contents



Our Business segments
  Zayo Bandwidth.
 zColo.
 Zayo Enterprise Networks.
 Zayo Fiber Solutions.
  Recent Developments
 Acquisition of AGL Networks
   29




---



##### Table of Contents



Merger with American Fiber Systems Holding Corporation (AFS)
  Acquisition of Dolphini Assets
  Broadband Stimulus Awards
  
    
    In February 2010, Zayo Bandwidth, as the direct recipient, was awarded $25.1
million in funding to construct 626 miles of fiber network connecting 21 community
colleges in Indiana.
    
    In July 2010, Zayo Bandwidth, as the direct recipient, was awarded a $13.4
million grant to construct 286 miles of fiber network in Anoka County, Minnesota,
outside of Minneapolis.
  Restructuring of Operating Segments
   30




---



##### Table of Contents



Factors Affecting Our Results of Operations
 Business Acquisitions
    Recent Developments
 Onvoy Spin-Off
 Discontinued Operations
 Substantial Capital Expenditures
    31




---



##### Table of Contents



Substantial Indebtedness
  Critical Accounting Policies and Estimates
   Revenue and receivables
   Property Plant and Equipment: Real Estate Sales
     32




---



##### Table of Contents



Network Expenses and Accrued Liabilities
    Stock-Based Compensation
 Compensation: Stock Compensation
   Market Approaches
  Income Approach
   33




---



##### Table of Contents



Property and Equipment
 Critical Account Policies and Estimates: Acquisitions  Purchase
Price Allocation,
  Land
    
    
    N/ABuildings improvements and site improvements
    
    
    8 to 15Furniture, fixtures and office equipment
    
    
    3 to 7Computer hardware
    
    
    2 to 5Software
    
    
    2 to 3Machinery and equipment
    
    
    3 to 7Fiber optic equipment
    
    
    4 to 8Circuit switch equipment
    
    
    10Packet switch equipment
    
    
    3 to 5Fiber optic network
    
    
    8 to 20Construction in progress
    
    
    N/A
   34




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##### Table of Contents



Deferred Tax Accounting
   Our ability to use net operating loss
carryforwards to reduce future tax payments could be negatively impacted if there is an ownership
change as defined under Section 382 of the Internal Revenue Code
 Net Operating Loss Carryovers
Following Changes in Ownership
   35




---



##### Table of Contents



Goodwill and Purchased Intangibles
 Segment Reporting
    
    
    the development of projected free cash flows;
    
    the estimation of an appropriate risk adjusted present value discount rate;
    
    the calculation of the present value of projected free cash flow; and
    
    the calculation of a terminal value.
   36




---



##### Table of Contents




    
    identification and selection of a group of acceptable and relevant guideline
companies;
    
    selection of financial ratios and time period most appropriate for the
analysis;
    
    financial adjustments made to both or either of the guideline and/or subject
companies to make the underlying financial figures comparable. Examples of adjustments
include add-backs for non-recurring expenses and calculations to make the figure
related to the same time period.
    
    subjective discounts or premiums to implied ratios to account for
observations relating to substantial difference that would be perceived as having an
impact on value between the collective guideline companies and us; and
    
    selection of a statistical midpoint or range within the dataset most
appropriate for the analysis.
   Acquisitions  Purchase Price Allocation
     37




---



##### Table of Contents



Background for Review of Our Results of Operations
 Operating Costs
   Selling, General and Administrative Expenses
   Stock-Based Compensation
     38




---



##### Table of Contents



Results of Operations
 Three months ended December 31,
    
    
    Six months ended December 31,Statement of Operations Data
    
    2010
    
    
    2009
    
    
    2010
    
    2009(in thousands)Revenue:Zayo Bandwidth
    
    $
    52,111
    
    
    
    67
    %
    
    $
    43,090
    
    
    
    74
    %
    
    $
    98,616
    
    
    
    67
    %
    
    $
    80,139
    
    
    
    77
    %Zayo Fiber Solutions
    
    
    11,136
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    18,633
    
    
    
    13
    
    
    
    Zayo Enterprise Networks
    
    
    7,860
    
    
    
    10
    
    
    
    8,633
    
    
    
    15
    
    
    
    15,804
    
    
    
    11
    
    
    
    15,496
    
    
    
    15zColo
    
    
    6,778
    
    
    
    9
    
    
    
    6,504
    
    
    
    11
    
    
    
    13,410
    
    
    
    9
    
    
    
    8,094
    
    
    
    8Total Revenue
    
    
    77,885
    
    
    
    100
    %
    
    
    58,227
    
    
    
    100
    %
    
    
    146,463
    
    
    
    100
    %
    
    
    103,729
    
    
    
    100
    %Costs and expensesOperating costs, excluding depreciation
and amortization
    
    
    20,721
    
    
    
    27
    
    
    
    19,777
    
    
    
    34
    
    
    
    40,581
    
    
    
    28
    
    
    
    34,203
    
    
    
    33Selling, general and administrative
expenses
    
    
    25,600
    
    
    
    33
    
    
    
    18,920
    
    
    
    32
    
    
    
    47,565
    
    
    
    32
    
    
    
    35,770
    
    
    
    34Stock based compensation
    
    
    1,874
    
    
    
    2
    
    
    
    592
    
    
    
    1
    
    
    
    7,027
    
    
    
    5
    
    
    
    1,444
    
    
    
    1Depreciation and amortization
    
    
    16,443
    
    
    
    21
    
    
    
    10,565
    
    
    
    18
    
    
    
    28,899
    
    
    
    20
    
    
    
    19,627
    
    
    
    19Total operating costs and expenses
    
    
    64,638
    
    
    
    83
    
    
    
    49,854
    
    
    
    86
    
    
    
    124,072
    
    
    
    85
    
    
    
    91,044
    
    
    
    88Operating income
    
    
    13,247
    
    
    
    17
    
    
    
    8,373
    
    
    
    14
    
    
    
    22,391
    
    
    
    15
    
    
    
    12,685
    
    
    
    12Interest expense
    
    
    (9,032
    )
    
    
    12
    
    
    
    (3,241
    )
    
    
    6
    
    
    
    (15,289
    )
    
    
    10
    
    
    
    (6,811
    )
    
    
    7Other income/(expense)
    
    
    (16
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (177
    )
    
    
    
    
    
    
    5
    
    
    
    Earnings from continuing operations
before income taxes
    
    
    4,199
    
    
    
    5
    
    
    
    5,132
    
    
    
    9
    
    
    
    6,925
    
    
    
    5
    
    
    
    5,879
    
    
    
    6Provision for income taxes
    
    
    2,319
    
    
    
    3
    
    
    
    2,242
    
    
    
    4
    
    
    
    5,316
    
    
    
    4
    
    
    
    2,893
    
    
    
    3Earnings from continuing operations
    
    $
    1,880
    
    
    
    2
    %
    
    $
    2,890
    
    
    
    5
    %
    
    $
    1,609
    
    
    
    1
    %
    
    $
    2,986
    
    
    
    3
    %EBITDA (add backs)Interest expense
    
    
    9,032
    
    
    
    
    
    
    
    3,241
    
    
    
    
    
    
    
    15,289
    
    
    
    
    
    
    
    6,811Income taxes
    
    
    2,319
    
    
    
    
    
    
    
    2,242
    
    
    
    
    
    
    
    5,316
    
    
    
    
    
    
    
    2,893Depreciation and amortization
    
    
    16,443
    
    
    
    
    
    
    
    10,565
    
    
    
    
    
    
    
    28,899
    
    
    
    
    
    
    
    19,627EBITDA
    
    $
    29,674
    
    
    
    38
    
    
    $
    18,938
    
    
    
    33
    
    
    $
    51,113
    
    
    
    35
    
    
    $
    32,317
    
    
    
    31Adjusted EBITDA (add backs)Stock-based compensation
    
    
    1,874
    
    
    
    
    
    
    
    592
    
    
    
    
    
    
    
    7,027
    
    
    
    
    
    
    
    1,444Transaction costs
    
    
    691
    
    
    
    
    
    
    
    94
    
    
    
    
    
    
    
    850
    
    
    
    
    
    
    
    698Adjusted EBITDA
    
    $
    32,239
    
    
    
    41
    %
    
    $
    19,624
    
    
    
    34
    %
    
    $
    58,990
    
    
    
    40
    %
    
    $
    34,459
    
    
    
    33
    %
 Three Months Ended December 31, 2010 Compared to the Three Months Ended December 31, 2009
 Revenue
   39




---



##### Table of Contents



Three months endedDecember 31,2010
    
    
    2009(in thousands)Usage and Monthly Recurring Revenue (MRR)
    
    $
    75,173
    
    
    
    97
    %
    
    $
    57,229
    
    
    
    98
    %Monthly Amortized Revenue (MAR)
    
    
    2,385
    
    
    
    3
    
    
    
    852
    
    
    
    2Other Revenue
    
    
    327
    
    
    
    
    
    
    
    146
    
    
    
    Total
    
    $
    77,885
    
    
    
    100
    %
    
    $
    58,227
    
    
    
    100
    %
 Zayo Bandwidth.
 Zayo Enterprise Networks.
 zColo.
 Zayo Fiber Solutions
 Operating Costs and Expenses
 Operating Costs, Excluding Depreciation and Amortization.
  40




---



##### Table of Contents



SG&A Expense.
 Three months endedDecember 31,2010
    
    
    2009(In thousands)Compensation and benefits expenses
    
    $
    11,353
    
    
    $
    9,378Network operating expenses
    
    
    7,468
    
    
    
    5,253Other SG&A expenses
    
    
    6,088
    
    
    
    4,195Transaction costs
    
    
    691
    
    
    
    94Total SG&A expenses
    
    $
    25,600
    
    
    $
    18,920
 Compensation and Benefits Expenses.
 Network Operations Expenses.
 Other SG&A.
 Transaction Costs.
 Stock-Based Compensation Expenses.
 Depreciation and Amortization Expense.
 Interest Expense.
  41




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Provision for Income Taxes
 Factors Affecting Our Results of Operations  Net Operating Losses
 For the three months endedDecember 31,2010
    
    
    2009(in thousands)Expected provision at statutory rate of 34%
    
    $
    1,428
    
    
    $
    1,745Increase due to:Non-deductible stock-based compensation
    
    
    576
    
    
    
    201State income taxes, net of federal benefit
    
    
    35
    
    
    
    112Transactions costs not deductible
    
    
    235
    
    
    
    32Other, net
    
    
    45
    
    
    
    152Provision for income taxes
    
    $
    2,319
    
    
    $
    2,242
 Six Months Ended December 31, 2010 Compared to the Six Months Ended December 31, 2009
 Revenue
   Six months endedDecember 31,2010
    
    
    2009(in thousands)Usage and Monthly Recurring Revenue (MRR)
    
    $
    141,296
    
    
    
    96
    %
    
    $
    101,602
    
    
    
    98
    %Monthly Amortized Revenue (MAR)
    
    
    4,145
    
    
    
    3
    
    
    
    1,524
    
    
    
    2Other Revenue
    
    
    1,022
    
    
    
    1
    
    
    
    603
    
    
    
    Total
    
    $
    146,463
    
    
    
    100
    %
    
    $
    103,729
    
    
    
    100
    %
 Zayo Bandwidth.
 Zayo Enterprise Networks.
 zColo.
  42




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##### Table of Contents



Zayo Fiber Solutions
 Operating Costs and Expenses
 Operating Costs, Excluding Depreciation and Amortization.
 SG&A Expense.
 Six months endedDecember 31,2010
    
    
    2009(In thousands)Compensation and benefits expenses
    
    $
    21,781
    
    
    $
    17,587Network operating expenses
    
    
    13,560
    
    
    
    9,952Other SG&A expenses
    
    
    11,374
    
    
    
    7,533Transaction costs
    
    
    850
    
    
    
    698Total SG&A expenses
    
    $
    47,565
    
    
    $
    35,770
 Compensation and Benefits Expenses.
 Network Operations Expenses.
 Other SG&A.
 Transaction Costs.
  43




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##### Table of Contents



Stock-Based Compensation Expenses.
 Depreciation and Amortization Expense.
 Interest Expense.
 Provision for Income Taxes
 Factors Affecting Our Results of Operations  Net Operating
Losses
 For the six months endedDecember 31,2010
    
    
    2009(in thousands)Expected provision at statutory rate of 34%
    
    $
    2,354
    
    
    $
    1,999Increase due to:Non-deductible stock-based compensation
    
    
    2,328
    
    
    
    491State income taxes, net of federal benefit
    
    
    287
    
    
    
    131Transactions costs not deductible
    
    
    289
    
    
    
    237Other, net
    
    
    58
    
    
    
    35Provision for income taxes
    
    $
    5,316
    
    
    $
    2,893
 Adjusted EBITDA
    44




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##### Table of Contents




    
    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.
  Three months ended December 31, 2010ZayoZayo
    
    
    Enterprise($ in millions)
    
    Bandwidth
    
    
    Networks
    
    
    zColo
    
    
    ZFS
    
    
    Corporate
    
    
    Zayo GroupEarnings/(loss) from continuing operations
    
    $
    10.1
    
    
    $
    (0.2
    )
    
    $
    1.0
    
    
    $
    3.0
    
    
    $
    (12.0
    )
    
    $
    1.9Interest expense
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8.7
    
    
    
    9.0Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.3
    
    
    
    2.3Depreciation and amortization expense
    
    
    10.3
    
    
    
    1.0
    
    
    
    1.3
    
    
    
    3.8
    
    
    
    
    
    
    
    16.4EBITDA
    
    
    20.7
    
    
    
    0.8
    
    
    
    2.3
    
    
    
    6.8
    
    
    
    (1.0
    )
    
    
    29.6Transaction costs
    
    
    0.6
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    0.7Stock-based compensation
    
    
    0.6
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    1.0
    
    
    
    1.9Adjusted EBITDA
    
    $
    21.9
    
    
    $
    0.9
    
    
    $
    2.4
    
    
    $
    7.0
    
    
    $
    
    
    
    $
    32.2
 Three months ended December 31, 2009ZayoZayo
    
    
    Enterprise($ in millions)
    
    Bandwidth
    
    
    Networks
    
    
    zColo
    
    
    ZFS
    
    
    Corporate
    
    
    Zayo GroupEarnings/(loss) from continuing operations
    
    $
    7.5
    
    
    $
    0.8
    
    
    $
    1.0
    
    
    $
    
    
    
    $
    (6.4
    )
    
    $
    2.9Interest expense
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.9
    
    
    
    3.2Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.2
    
    
    
    2.2Depreciation and amortization expense
    
    
    8.4
    
    
    
    0.8
    
    
    
    1.4
    
    
    
    
    
    
    
    
    
    
    
    10.6EBITDA
    
    
    16.2
    
    
    
    1.6
    
    
    
    2.4
    
    
    
    
    
    
    
    (1.3
    )
    
    
    18.9Transaction costs
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1Stock-based compensation
    
    
    (0.2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.8
    
    
    
    0.6Adjusted EBITDA
    
    $
    16.1
    
    
    $
    1.6
    
    
    $
    2.4
    
    
    $
    
    
    
    $
    (0.5
    )
    
    $
    19.6
 Six months ended December 31, 2010ZayoZayo
    
    
    Enterprise($ in millions)
    
    Bandwidth
    
    
    Networks
    
    
    zColo
    
    
    ZFS
    
    
    Corporate
    
    
    Zayo GroupEarnings/(loss) from continuing operations
    
    $
    18.6
    
    
    $
    (0.1
    )
    
    $
    2.0
    
    
    $
    4.9
    
    
    $
    (23.8
    )
    
    $
    1.6Interest expense
    
    
    0.6
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    14.6
    
    
    
    15.3Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.3
    
    
    
    5.3Depreciation and amortization expense
    
    
    18.6
    
    
    
    1.9
    
    
    
    2.7
    
    
    
    5.7
    
    
    
    
    
    
    
    28.9EBITDA
    
    
    37.8
    
    
    
    1.8
    
    
    
    4.8
    
    
    
    10.6
    
    
    
    (3.9
    )
    
    
    51.1Transaction costs
    
    
    0.6
    
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.9Stock-based compensation
    
    
    2.5
    
    
    
    0.3
    
    
    
    
    
    
    
    0.5
    
    
    
    3.7
    
    
    
    7.0Adjusted EBITDA
    
    $
    40.9
    
    
    $
    2.1
    
    
    $
    4.8
    
    
    $
    11.3
    
    
    $
    (0.1
    )
    
    $
    59.0
  45




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Six months ended December 31, 2009ZayoZayo
    
    
    Enterprise($ in millions)
    
    Bandwidth
    
    
    Networks
    
    
    zColo
    
    
    ZFS
    
    
    Corporate
    
    
    Zayo GroupEarnings/(loss) from continuing operations
    
    $
    14.0
    
    
    $
    0.1
    
    
    $
    1.1
    
    
    $
    
    
    
    $
    (12.2
    )
    
    $
    3.0Interest expense
    
    
    0.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.2
    
    
    
    6.8Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.9
    
    
    
    2.9Depreciation and amortization expense
    
    
    16.0
    
    
    
    1.8
    
    
    
    1.8
    
    
    
    
    
    
    
    
    
    
    
    19.6EBITDA
    
    
    30.6
    
    
    
    1.9
    
    
    
    2.9
    
    
    
    
    
    
    
    (3.1
    )
    
    
    32.3Transaction costs
    
    
    0.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.7Stock-based compensation
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    1.3
    
    
    
    1.4Adjusted EBITDA
    
    $
    31.3
    
    
    $
    2.0
    
    
    $
    2.9
    
    
    $
    
    
    
    $
    (1.8
    )
    
    $
    34.4
 Liquidity and Capital Resources
 Cash flows
     Cash Flows
   46




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Six months endedDecember 31,2010
    
    
    2009(In thousands)Net cash provided by operating activities
    
    $
    39,055
    
    
    $
    16,692Net cash used in investing activities
    
    
    (242,561
    )
    
    
    (118,105
    )Net cash provided by financing activities
    
    
    134,210
    
    
    
    69,403
 Net Cash Flows from Operating Activities
   Cash Flows Used for Investing Activities
  Cash Flows from Financing Activities
  Off-Balance Sheet Arrangements
  New Accounting Pronouncements
   47




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
       48




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ITEM 4. CONTROLS AND PROCEDURES
    49




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PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  We have a Limited Operating History as a Consolidated Entity.
   Future Acquisitions are a Component of Our Strategic Plan, and will Include Integration and Other
Risks That could Harm Our Business.
   
    
    increased demand on our existing employees and management related to the increase in the
size of the business and the possible distraction from our existing business due to the
acquisition, particularly with respect to businesses acquired by our sister companies or
parent;
 
    
    loss of key employees and sales people of the acquired business;
 
    
    liabilities of the acquired business, both unknown and known at the time of the
consummation of the acquisition;
 
    
    we may agree to buy a business before we have obtained its audited financial statements
and subsequently discover that the unaudited financial statements we relied on 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;
 
    
    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
 
    
    that the internal controls of the acquired business are inadequate.
  50




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Our Debt Level could Negatively Impact Our Financial Condition, Results of Operations and
Business Prospects and Prevent us From Fulfilling Our Debt Obligations. In the Future, We may
Incur Substantially More Indebtedness, Which could Further Increase the Risks Associated With Our
Leverage.
   
    
    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 us
upon the occurrence of certain changes of control, which would constitute a default under
the indenture governing our notes.
 We may not be Able to Generate Enough Cash Flow to Meet Our Debt Obligations.
    51




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##### Table of Contents




    
    reducing or delaying capital investments;
    
    raising additional capital;
    
    refinancing or restructuring our debt; and
    
    selling assets.
   Since Our Inception We have Used More Cash Than We have Generated From Operations and We Expect
to Continue to do so in the Next Several Quarters.
   We Incurred Net Losses in Prior Periods and We Cannot Guarantee That We will Generate Net
Income in the Future.
  We are Experiencing Rapid Growth of Our Business and Operations and We may not be Able to
Efficiently Manage Our Growth.
  
    
    expand, develop and retain an effective sales force and other qualified personnel;
 
    
    maintain the quality of our operations and our service offerings;
 
    
    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.
   52




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Our Back Office Infrastructure, Including the Operational Support Systems, Processes and People,
is a Key Component to Providing a Good Experience to Our Customers, the Failure of Which could
Impair Our Ability to Retain Customers or Attract New Customers.
  Our Ability to Provide Services would be Hindered if Any of Our Franchises, Licenses, Permits,
Rights-of-Way, Conduit Leases, Fiber Agreements, or Property Leases are Canceled or Not Renewed.
  
    
    increased costs as a result of renewing the IRU under less favorable terms;
 
    
    significant capital expenditures in order to build replacement fiber;
 
    
    increased costs as a result of entering into short-term leases for lit services; and
 
    
    lost revenue resulting from our inability to provide certain services.
   If Our Contracts With Our Customers are Not Renewed or are Terminated, Our Business could be
Substantially Harmed.
   Our Revenue is Relatively Concentrated Among a Small Number of Customers and the Loss of any of
These Customers could Significantly Harm Our Business, Financial Condition and Results of
Operations.
   53




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##### Table of Contents



Our ability to use net operating loss (NOL) carryforwards to reduce future tax payments could
be negatively impacted if there is an ownership change as defined under Section 382 of the
Internal Revenue Code.
  Service Level Agreements in Our Customer Agreements could Subject us to Liability or the Loss of
Revenue.
  We are Required to Maintain, Repair, Upgrade and Replace Our Network and Our Facilities, and Our
Failure to do so could Harm Our Business.
  Any Failure of Our Physical Infrastructure or Services could Lead to Significant Costs and
Disruptions That could Reduce Our Revenues, Harm Our Business Reputation, and have a Material
Adverse Effect on Our Financial Results.
  
    
    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.
  54




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##### Table of Contents



We do not Own the Buildings in Which Our Data Centers are Located. Instead, We Lease Our Data
Center Space, and the non-Renewal of Leases could be a Significant Risk to Our Ongoing
Operations.
  We may be Unable to Expand Our Existing Data Centers or Locate and Secure Suitable Sites for
Additional Data Centers.
  We may not be Able to Obtain or Construct Additional Laterals to Connect New Buildings to Our
Network.
  Our Services have a Long Sales Cycle, Which May Have a Material Adverse Effect on Our Business,
Financial Condition, and Results of Operations.
  We are Highly Dependent on Our Management Team and Other Key Employees.
   55




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##### Table of Contents



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.
  Risks Relating to Our Industry
 The Telecommunications Industry is Highly Competitive, and Contains Competitors That have
Significantly Greater Resources and a More Diversified Base of Existing Customers Than We do.
   
    
    a competitor building new fiber networks;
 
    
    consolidation in the industry, leading to larger competitors with more expansive
networks;
 
    
    the creation of new competitive technology for transport services;
 
    
    further technological advances; and
 
    
    further deregulation and other regulatory initiatives.
  If We do not Adapt to Swift Changes in the Telecommunications Industry, We could Lose Customers
or Market Share.
    56




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##### Table of Contents



We are Subject to Significant Regulation that could Change or Otherwise Impact us in an Adverse
Manner.
  Unfavorable General Economic Conditions in the United States could Negatively Impact Our
Operating Results and Financial Condition.
  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).
  Terrorism and Natural Disasters could Adversely Impact Our Business.
  Changes in Regulations Affecting Commercial Power Providers may Increase Our Costs.
   57




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ITEM 6. EXHIBITS 
 Exhibit No.

    
    Description of Exhibit3.1
    
    
    Certificate of Formation of Zayo Group, LLC (incorporated
by reference to Exhibit 3.1 of our Registration Statement
on Form S-4 filed with the SEC on October 18, 2010).3.2
    
    
    Operating Agreement of Zayo Group, LLC (incorporated by
reference to Exhibit 3.2 of our Registration Statement on
Form S-4 filed with the SEC on October 18, 2010).10.1
    
    
    Vesting Agreement between Communications Infrastructure
Investments, LLC; Daniel P. Caruso; and Bear Equity, LLC
dated December 29, 2010 (incorporated by reference to
Exhibit 10.1 of our Current Report on Form 8-k filed with
the SEC on January 13, 2011).10.2
    
    
    Vesting Agreement between Communications Infrastructure
Investments, LLC; Daniel P. Caruso; and Bear Equity, LLC
dated January 5, 2011 (incorporated by reference to
Exhibit 10.1 of our Current Report on Form 8-k filed with
the SEC on January 13, 2011).31.1
    
    
    Certification of Chief Executive Officer of the
Registrant, pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934.31.2
    
    
    Certification of Chief Financial Officer of the
Registrant, pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934.32.1
    
    
    Certification of Chief Executive Officer of the
Registrant, pursuant to 18 U.S.C. Section 1350, as
adopted, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.32.2
    
    
    Certification of Chief Financial Officer of the
Registrant, pursuant to 18 U.S.C. Section 1350, as
adopted, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
  58




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SIGNATURES
  ZAYO GROUP, LLCDate: February 11, 2011
    By:
    /s/ Dan CarusoDan CarusoChief Executive OfficerDate: February 11, 2011
    By:
    /s/ Ken desGarennesKen desGarennesChief Financial Officer  59