##### Table of Contents



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 September 30, 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
(State or other jurisdiction of 
incorporation or organization)
    
    26-2012549
(I.R.S. Employer Identification No.)
 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)Condensed Consolidated Balance Sheets 
As of September 30, 2010 and June 30, 2010
    
    
    1Condensed Consolidated Statements of Operations 
Three month periods ended September 30, 2010 and 2009
    
    
    2Condensed Consolidated Statement of Members Equity 
Three month period ended September 30, 2010
    
    
    3Condensed Consolidated Statements of Cash Flows 
Three month periods ended September 30, 2010 and 2009
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    29Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    45Item 4. Controls and Procedures
    
    
    46Part II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    47Item 1A. Risk Factors
    
    
    47Item 6. Exhibits
    
    
    57Signatures
    
    
    58Exhibit 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 (UNAUDITED)
 
 CONDENSED CONSOLIDATED BALANCE SHEETS 
(UNAUDITED)
 (in thousands)
 September 30,
    
    
    June 30,2010
    
    
    2010AssetsCurrent assetsCash and cash equivalents
    
    $
    154,222
    
    
    $
    89,161Restricted cash, current
    
    
    549
    
    
    
    809Trade
receivables, net of allowance of $1,033 and $1,093 as of
September
30, 2010 and June 30, 2010, respectively
    
    
    17,004
    
    
    
    12,721Due from related parties
    
    
    
    
    
    
    871Other receivables
    
    
    250
    
    
    
    348Prepaid expenses
    
    
    6,500
    
    
    
    5,144Deferred income taxes
    
    
    3,621
    
    
    
    4,060Total current assets
    
    
    182,146
    
    
    
    113,114Property and equipment, net of accumulated depreciation of $66,943 and
$57,425 as of September 30, 2010 and June 30, 2010, respectively
    
    
    410,204
    
    
    
    301,911Intangible assets, net of accumulated amortization of $31,157 and
$28,222
as of September 30, 2010 and June 30, 2010, respectively
    
    
    60,349
    
    
    
    59,851Goodwill
    
    
    68,818
    
    
    
    68,751Deferred income taxes
    
    
    6,333
    
    
    
    7,050Debt issuance costs, net
    
    
    12,430
    
    
    
    9,560Other assets
    
    
    4,380
    
    
    
    4,144Total assets
    
    $
    744,660
    
    
    $
    564,381Liabilities and members equityCurrent liabilitiesAccounts payable
    
    $
    15,825
    
    
    $
    10,502Accrued liabilities
    
    
    16,578
    
    
    
    18,349Accrued interest
    
    
    1,625
    
    
    
    7,794Capital lease obligations, current portion
    
    
    1,340
    
    
    
    1,673Due to related parties
    
    
    13,544
    
    
    
    Deferred revenue, current portion
    
    
    11,439
    
    
    
    8,146Total current liabilities
    
    
    60,351
    
    
    
    46,464Capital lease obligations, net of current portion
    
    
    10,881
    
    
    
    11,033Senior secured notes
    
    
    350,166
    
    
    
    247,080Deferred revenue, net of current portion
    
    
    45,540
    
    
    
    22,648Stock-based compensation liability
    
    
    26,510
    
    
    
    21,623Other long term liabilities
    
    
    2,216
    
    
    
    2,397Total liabilities
    
    
    495,664
    
    
    
    351,245Members equityMembers interest
    
    
    253,261
    
    
    
    217,129Accumulated deficit
    
    
    (4,265
    )
    
    
    (3,993
    )Total members equity
    
    
    248,996
    
    
    
    213,136Total liabilities and members equity
    
    $
    744,660
    
    
    $
    564,381
   1




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##### Table of Contents



ZAYO GROUP, LLC AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 
(UNAUDITED)
 (in thousands)
 Three months ended September 30,2010
    
    
    2009Revenue
    
    $
    68,578
    
    
    $
    45,502Operating costs and expensesOperating costs, excluding depreciation and
amortization
    
    
    19,861
    
    
    
    14,426Selling, general and administrative expenses
    
    
    21,965
    
    
    
    16,850Stock-based compensation
    
    
    5,153
    
    
    
    852Depreciation and amortization
    
    
    12,455
    
    
    
    9,061Total operating costs and expenses
    
    
    59,434
    
    
    
    41,189Operating income
    
    
    9,144
    
    
    
    4,313Other income/(expense)Interest expense
    
    
    (6,257
    )
    
    
    (3,570
    )Other (expense)/income, net
    
    
    (161
    )
    
    
    5Total other expense, net
    
    
    (6,418
    )
    
    
    (3,565
    )Earnings from continuing operations before income taxes
    
    
    2,726
    
    
    
    748Provision for income taxes
    
    
    2,998
    
    
    
    651(Loss)/earnings from continuing operations
    
    
    (272
    )
    
    
    97Earnings from discontinued operations, net of income
taxes
    
    
    
    
    
    
    1,501Net (loss)/earnings
    
    $
    (272
    )
    
    $
    1,598
   2




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##### Table of Contents



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
    
    
    
    
    
    
    
    35,500Capital contributed (non-cash)
    
    
    366
    
    
    
    
    
    
    
    366Stock-based compensation
    
    
    266
    
    
    
    
    
    
    
    266Net loss
    
    
    
    
    
    
    (272
    )
    
    
    (272
    )Balance at September 30, 2010
    
    $
    253,261
    
    
    $
    (4,265
    )
    
    $
    248,996
   3




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##### Table of Contents



ZAYO GROUP, LLC AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 
(UNAUDITED)
 (in thousands)
 Three months ended September 30,2010
    
    
    2009Cash flows from operating activitiesNet (loss)/earnings
    
    $
    (272
    )
    
    $
    1,598Earnings from discontinued operations
    
    
    
    
    
    
    1,501Net (loss)/earnings from continuing operations
    
    
    (272
    )
    
    
    97Adjustments to reconcile net (loss)/earnings to net cash provided by
operating activitiesDepreciation and amortization
    
    
    12,455
    
    
    
    9,061Bad debt expense
    
    
    146
    
    
    
    138Amortization of deferred financing costs and discount on debt
    
    
    558
    
    
    
    351Accretion of premium on debt
    
    
    (23
    )
    
    
    Stock-based compensation
    
    
    5,153
    
    
    
    852Unrealized loss on interest rate swap
    
    
    
    
    
    
    490Deferred income taxes
    
    
    2,481
    
    
    
    562Changes in operating assets and liabilities, net of
acquisitionsReceivables
    
    
    (2,126
    )
    
    
    (1,411
    )Prepaid expenses
    
    
    (751
    )
    
    
    1,134Other assets
    
    
    815
    
    
    
    (912
    )Accounts payable and accrued liabilities
    
    
    (6,760
    )
    
    
    (2,480
    )Payables to related parties
    
    
    430
    
    
    
    Deferred revenues
    
    
    396
    
    
    
    774Other liabilities
    
    
    (761
    )
    
    
    (1,627
    )Net cash provided by operating activities
    
    
    11,741
    
    
    
    7,029Cash flows from investing activitiesPurchases of property and equipment
    
    
    (21,651
    )
    
    
    (11,701
    )Broadband stimulus grants received
    
    
    250
    
    
    
    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
    
    
    (95,067
    )
    
    
    (108,272
    )Cash flows from financing activitiesEquity contributions
    
    
    35,500
    
    
    
    37,000Advance from Communications Infrastructure Investments, LLC
    
    
    13,026
    
    
    
    Proceeds from borrowings
    
    
    103,000
    
    
    
    42,000Principal repayments on debt obligations
    
    
    
    
    
    
    (412
    )Changes in restricted cash
    
    
    790
    
    
    
    (5,487
    )Principal repayments on capital lease obligations
    
    
    (610
    )
    
    
    (480
    )Deferred financing costs
    
    
    (3,319
    )
    
    
    (2,168
    )Net cash provided by financing activities
    
    
    148,387
    
    
    
    70,453Cash flows from discontinued operations:Operating activities
    
    
    
    
    
    
    3,871Investing activities
    
    
    
    
    
    
    (57
    )Net cash provided by discontinued operations
    
    
    
    
    
    
    3,814Net increase/(decrease) in cash and cash equivalents
    
    
    65,061
    
    
    
    (26,976
    )Cash and cash equivalents, beginning of period
    
    
    89,161
    
    
    
    38,781(Increase) in cash and cash equivalents of discontinued operations
    
    
    
    
    
    
    (120
    )Cash and cash equivalents, end of period
    
    $
    154,222
    
    
    $
    11,685
  (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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ZAYO GROUP, LLC AND SUBSIDIARIES
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  c.
    
    Use of Estimates
  d.
    
    Cash and Cash Equivalents and Restricted Cash
  e.
    
    Trade Receivables
   7




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ZAYO GROUP, LLC AND SUBSIDIARIES
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 f.
    
    Property and Equipment
      g.
    
    Goodwill and Purchased Intangibles
 .
   8




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ZAYO GROUP, LLC AND SUBSIDIARIES
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 h.
    
    Derivative Financial Instruments
 Long-term Debt Fair Market Measurements
 i.
    
    Revenue Recognition
    
    
    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.
  9




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ZAYO GROUP, LLC AND SUBSIDIARIES
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 j.
    
    Operating Costs and Accrued Liabilities
    k.
    
    Stock-based Compensation
  l.
    
    Government Grants
  m.
    
    Income Taxes
    10




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ZAYO GROUP, LLC AND SUBSIDIARIES
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 n.
    
    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;
 
    
    Inputs that are derived principally from or corroborated by observable market
data by correlation or other means.
   11




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ZAYO GROUP, LLC AND SUBSIDIARIES
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Level 3
   o.
    
    Concentration of Credit Risk
  p.
    
    Recently Issued Accounting Standards
 Consolidations
 Revenue
Recognition (ASC 605) Multiple-Deliverable Revenue Arrangements a consensus of the FASB
Emerging Issues Task Force
 (3) ACQUISITIONS
    12




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ZAYO GROUP, LLC AND SUBSIDIARIES
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Acquisition during the three months ended September 30, 2010
 AGL Networks, LLC (AGL Networks)
   AGL NetworksAcquisition date
    
    July 1, 2010Current assets
    
    $
    3,713Property and equipment
    
    
    93,171Intangibles
    
    
    3,433Goodwill
    
    
    67Other assets
    
    
    680Total assets acquired
    
    
    101,064Current liabilities
    
    
    1,029Deferred revenue
    
    
    26,369Total liabilities assumed
    
    
    27,398Net assets
    
    $
    73,666Purchase consideration/Net cash paid
    
    $
    73,666
    13




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ZAYO GROUP, LLC AND SUBSIDIARIES
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Acquisition during the three months ended September 30, 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
    
    
    104,083Cash acquired
    
    
    7,512Net cash paid
    
    $
    96,571
    14




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ZAYO GROUP, LLC AND SUBSIDIARIES
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Subsequent Events
 (4) SPIN-OFF OF ONVOY VOICE SERVICES SEGMENT
  Discontinued
Operations
  Three months endedSeptember 30, 2009Revenue
    
    $
    10,157Earnings before income taxes
    
    
    2,500Income tax expense
    
    
    (999
    )Earnings from discontinued operations, net of tax
    
    $
    1,501
  Three months endedZayo Group, LLC
    
    September 30, 2009Revenue from Onvoy Voice Services
    
    $
    427Operating costs from Onvoy Voice Services
    
    
    599Selling, general and administrative expenses from Onvoy Voice Services
    
    
    (16
    )
  15




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ZAYO GROUP, LLC AND SUBSIDIARIES
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 (5) PROPERTY AND EQUIPMENT
  Estimated
    
    
    As ofuseful lives (in
    
    
    September 30,
    
    
    June 30,years)
    
    
    2010
    
    
    2010Land
    
    
    N/A
    
    
    $
    213
    
    
    $
    209Buildings improvements and site
improvements
    
    
    15
    
    
    
    9,218
    
    
    
    9,003Furniture, fixtures and office equipment
    
    
    7
    
    
    
    1,235
    
    
    
    1,219Computer hardware
    
    
    3 to 5
    
    
    
    3,707
    
    
    
    3,292Software
    
    
    3
    
    
    
    4,613
    
    
    
    4,066Machinery and equipment
    
    
    4 to 7
    
    
    
    4,326
    
    
    
    3,568Fiber optic equipment
    
    
    8
    
    
    
    223,907
    
    
    
    127,379Circuit switch equipment
    
    
    10
    
    
    
    7,246
    
    
    
    7,225Packet switch equipment
    
    
    5
    
    
    
    22,657
    
    
    
    21,761Fiber optic network
    
    
    20
    
    
    
    161,673
    
    
    
    141,171Construction in progress
    
    
    N/A
    
    
    
    38,352
    
    
    
    40,443Total
    
    
    
    
    
    
    477,147
    
    
    
    359,336Less accumulated depreciation
    
    
    
    
    
    
    (66,943
    )
    
    
    (57,425
    )Property and equipment, net
    
    
    
    
    
    $
    410,204
    
    
    $
    301,911
     16




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ZAYO GROUP, LLC AND SUBSIDIARIES
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 (6) GOODWILL
  As of June 30,
    
    
    
    
    
    
    
    
    
    
    As of September 30,2010
    
    
    Transfers
    
    
    Additions
    
    
    2010Zayo Bandwidth
    
    $
    66,548
    
    
    $
    (4,170
    )
    
    $
    
    
    
    $
    62,378Zayo Enterprise Networks
    
    
    2,203
    
    
    
    
    
    
    
    
    
    
    
    2,203Zayo Fiber Solutions
    
    
    
    
    
    
    4,170
    
    
    
    67
    
    
    
    4,237Total
    
    $
    68,751
    
    
    $
    
    
    
    $
    67
    
    
    $
    68,818
 Segment Reporting
 (7) INTANGIBLE ASSETS
  GrossCarrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    NetSeptember 30, 2010Customer relationships
    
    $
    82,171
    
    
    $
    (21,822
    )
    
    $
    60,349Non-compete agreements
    
    
    8,835
    
    
    
    (8,835
    )
    
    
    Tradenames
    
    
    500
    
    
    
    (500
    )
    
    
    Total
    
    $
    91,506
    
    
    $
    (31,157
    )
    
    $
    60,349June 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
  17




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ZAYO GROUP, LLC AND SUBSIDIARIES
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  Year ending June 30,2011 (remaining 9 months)
    
    $
    7,7952012
    
    
    10,3942013
    
    
    10,3942014
    
    
    7,3632015
    
    
    4,609Thereafter
    
    
    19,794$
    60,349
 (8) LONG-TERM DEBT
  Subsequent Events
    18




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ZAYO GROUP, LLC AND SUBSIDIARIES
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  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
 Subsequent Events
 Debt issuance costs
   19




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ZAYO GROUP, LLC AND SUBSIDIARIES
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Debt covenants
  Leverage ratio:
 Fixed charge coverage ratio:
  Leverage Ratio
    
    Maximum Annual Dividend Payment> 3.5x
    
    $
    < 3.5x but > 2.5x
    
    $
    25,000<,2.5x but > 1.5x
    
    $
    35,000<1.5x
    
    $
    45,000
    Interest rate derivatives
     20




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ZAYO GROUP, LLC AND SUBSIDIARIES
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  (9) INCOME TAXES
   For the three months endedSeptember 30,2010
    
    
    2009Federal income taxes  current
    
    $
    148
    
    
    $
    Federal income taxes  deferred
    
    
    2,135
    
    
    
    512Provision for federal income taxes
    
    
    2,283
    
    
    
    512State income taxes  current
    
    
    369
    
    
    
    89State income taxes  deferred
    
    
    346
    
    
    
    50Provision for state income taxes
    
    
    715
    
    
    
    139Total provision for income taxes
    
    $
    2,998
    
    
    $
    651
   For the three months endedSeptember 30,2010
    
    
    2009Expected provision at statutory rate of 34%
    
    $
    927
    
    
    $
    254Increase due to:Non-deductible stock-based compensation
    
    
    1,752
    
    
    
    290State income taxes, net of federal benefit
    
    
    253
    
    
    
    90Transactions costs not deductible
    
    
    54
    
    
    
    Other, net
    
    
    12
    
    
    
    17Provision for income taxes
    
    $
    2,998
    
    
    $
    651
  21




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ZAYO GROUP, LLC AND SUBSIDIARIES
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
     (10) EQUITY
       22




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ZAYO GROUP, LLC AND SUBSIDIARIES
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
   (12) STOCK COMPENSATION
  Compensation  Stock
Compensation
      23




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##### Table of Contents



ZAYO GROUP, LLC AND SUBSIDIARIES
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 (13) FAIR VALUE MEASUREMENTS
    Level
    
    
    September 30, 2010
    
    
    June 30, 2010Liabilities Recorded at Fair
Value in the Financial
Statements:Interest rate swap liabilities
    
    Level 2
    
    $
    
    
    
    $
    566Stock-based compensation liability
    
    Level 3
    
    
    26,510
    
    
    
    21,623Total liabilities recorded at
fair value in the consolidated
financial statements
    
    
    
    
    
    $
    26,510
    
    
    $
    22,189Liabilities not Recorded at Fair
Value in the Financial
Statements:Senior Secured Notes
    
    
    
    
    
    $
    350,166
    
    
    $
    247,080
      24




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##### Table of Contents



ZAYO GROUP, LLC AND SUBSIDIARIES
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 (14) COMMITMENTS AND CONTINGENCIES
 Purchase Commitments
  Outstanding letters of credit
  Other Commitments
   Contingencies
  (15) RELATED PARTY TRANSACTIONS
 Spin-Off of Onvoy Voice Services
Segment
  25




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ZAYO GROUP, LLC AND SUBSIDIARIES
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
   (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
   26




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ZAYO GROUP, LLC AND SUBSIDIARIES
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  As of and for the three months ended September 30, 2010Corporate/BW
    
    
    ZEN
    
    
    Zcolo
    
    
    ZFS
    
    
    eliminations
    
    
    TotalRevenue
    
    $
    47,206
    
    
    $
    8,166
    
    
    $
    7,194
    
    
    $
    7,498
    
    
    $
    
    
    
    $
    70,064Intersegment revenue
    
    
    (702
    )
    
    
    (222
    )
    
    
    (562
    )
    
    
    
    
    
    
    
    
    
    
    (1,486
    )Revenue from external customers
    
    
    46,504
    
    
    
    7,944
    
    
    
    6,632
    
    
    
    7,498
    
    
    
    
    
    
    
    68,578Gross profit (revenue less operating costs excluding depreciation and amortization)
    
    
    34,059
    
    
    
    4,313
    
    
    
    3,607
    
    
    
    7,366
    
    
    
    (628
    )
    
    
    48,717Depreciation and amortization
    
    
    8,200
    
    
    
    1,009
    
    
    
    1,348
    
    
    
    1,898
    
    
    
    
    
    
    
    12,455Operating income/(loss)
    
    
    8,813
    
    
    
    20
    
    
    
    995
    
    
    
    1,963
    
    
    
    (2,647
    )
    
    
    9,144Interest expense
    
    
    262
    
    
    
    
    
    
    
    59
    
    
    
    2
    
    
    
    5,934
    
    
    
    6,257Other expense/(income), net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    163
    
    
    
    161Total assets
    
    
    359,378
    
    
    
    26,400
    
    
    
    57,790
    
    
    
    138,093
    
    
    
    162,999
    
    
    
    744,660Capital Expenditures, net of stimulus
grant reimbursements
    
    
    17,941
    
    
    
    1,558
    
    
    
    429
    
    
    
    1,473
    
    
    
    
    
    
    
    21,401
 As of and for the three months ended September 30, 2009Corporate/BW
    
    
    ZEN
    
    
    Zcolo
    
    
    ZFS
    
    
    eliminations
    
    
    TotalRevenue
    
    $
    38,313
    
    
    $
    7,029
    
    
    $
    1,796
    
    
    $
    
    
    
    $
    
    
    
    $
    47,138Intersegment revenue
    
    
    (1,263
    )
    
    
    (166
    )
    
    
    (207
    )
    
    
    
    
    
    
    
    
    
    
    (1,636
    )Revenue from external customers
    
    
    37,050
    
    
    
    6,863
    
    
    
    1,589
    
    
    
    
    
    
    
    
    
    
    
    45,502Gross profit (revenue less operating costs excluding depreciation and amortization)
    
    
    28,548
    
    
    
    3,167
    
    
    
    908
    
    
    
    
    
    
    
    (1,547
    )
    
    
    31,076Depreciation and amortization
    
    
    7,606
    
    
    
    1,000
    
    
    
    455
    
    
    
    
    
    
    
    
    
    
    
    9,061Operating income/(loss)
    
    
    6,732
    
    
    
    (707
    )
    
    
    38
    
    
    
    
    
    
    
    (1,750
    )
    
    
    4,313Interest expense
    
    
    274
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,296
    
    
    
    3,570Other expense/(income), net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    (5
    )Capital Expenditures
    
    
    11,552
    
    
    
    145
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    11,701
  27




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ZAYO GROUP, LLC AND SUBSIDIARIES
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 (17) SUBSEQUENT EVENTS
  Three months ended September 30,2010
    
    
    2009Revenue
    
    $
    76,326
    
    
    $
    69,545Loss from continuing operations
    
    
    (3,828
    )
    
    
    (3,598
    )
   28




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
 Certain Factors That May Affect future Results
 
  Overview
 Introduction
     Our Business Units
   29




---



##### Table of Contents



Zayo Bandwidth.
 zColo.
 Zayo Enterprise Networks.
 Zayo Fiber Solutions.
   30




---



##### Table of Contents



Recent Developments
 Acquisition of AGL Networks
    Acquisition of American Fiber Systems
  Acquisition of Dolphini Assets
   31




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##### Table of Contents



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
  Factors Affecting Our Results of Operations
 Business Acquisitions
    Recent Developments
  32




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##### Table of Contents



Onvoy Spin-Off
  Substantial Capital Expenditures
   Substantial Indebtedness
  Critical Accounting Policies and Estimates
    33




---



##### Table of Contents



Revenue
   Network Expenses and Accrued Liabilities
    Goodwill and Purchased Intangibles
 Segment Reporting
  34




---



##### Table of Contents




    
    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.
   
    
    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.
  35




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##### Table of Contents



Background for Review of Our Results of Operations
 Revenue and Billing
 Zayo Bandwidth.
 zColo.
 Zayo Enterprise Networks.
 Zayo Fiber Solutions.
  36




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##### Table of Contents



Operating Costs
   Selling, General and Administrative Expenses
   Stock-Based Compensation
    Results of Operations
 Three Months Ended September 30, 2010 Compared to the Three Months Ended September 30, 2009
 Revenue
   37




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##### Table of Contents



Three months endedSeptember 30,2010
    
    
    2009(In thousands)Zayo Bandwidth
    
    $
    46,504
    
    
    $
    37,050zColo
    
    
    6,632
    
    
    
    1,589Zayo Enterprise Networks
    
    
    7,944
    
    
    
    6,863Zayo Fiber Solutions
    
    
    7,498
    
    
    
    Total revenue
    
    $
    68,578
    
    
    $
    45,502
 Zayo Bandwidth.
 zColo.
 Zayo Enterprise Networks.
 Operating Costs and Expenses
 Operating Costs, Excluding Depreciation and Amortization.
  38




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SG&A Expense.
 Three months ended September 30,2010
    
    
    2009(In thousands)Compensation and benefits expenses
    
    $
    10,428
    
    
    $
    8,209Network operating expenses
    
    
    6,092
    
    
    
    4,699Other SG&A expenses
    
    
    5,286
    
    
    
    3,338Transaction costs
    
    
    159
    
    
    
    604Total SG&A expenses
    
    $
    21,965
    
    
    $
    16,850
 Compensation and Benefits Expenses.
 Network Operations Expenses.
 Other SG&A.
 Transaction Costs.
 Stock-Based Compensation Expenses.
 Depreciation and Amortization Expense.
  39




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Total Other Expense, Net
  Three months endedSeptember 30,2010
    
    
    2009(In thousands)Interest expense
    
    $
    (6,257
    )
    
    $
    (3,570
    )Interest income
    
    
    76
    
    
    
    5Other income/(expense), net
    
    
    (237
    )
    
    
    Total other expenses, net
    
    $
    (6,418
    )
    
    $
    (3,565
    )
 Interest Expense.
 Provision for Income Taxes
   40




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##### Table of Contents



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.
  Three months ended September 30, 2010ZayoZayo
    
    
    Enterprise($ in millions)
    
    Bandwidth
    
    
    Networks
    
    
    zColo
    
    
    ZFS
    
    
    Corporate
    
    
    Zayo GroupEarnings/(loss) from continuing operations
    
    $
    8.5
    
    
    $
    
    
    
    $
    0.9
    
    
    $
    2.0
    
    
    $
    (11.7
    )
    
    $
    (0.3
    )Interest expense
    
    
    0.3
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    5.9
    
    
    
    6.3Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.0
    
    
    
    3.0Depreciation and amortization expense
    
    
    8.2
    
    
    
    1.0
    
    
    
    1.3
    
    
    
    1.9
    
    
    
    
    
    
    
    12.4EBITDA
    
    
    17.0
    
    
    
    1.0
    
    
    
    2.3
    
    
    
    3.9
    
    
    
    (2.8
    )
    
    
    21.4Transaction costs
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    0.2Stock-based compensation
    
    
    2.0
    
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.3
    
    
    
    2.6
    
    
    
    5.2Adjusted EBITDA
    
    $
    19.1
    
    
    $
    1.2
    
    
    $
    2.4
    
    
    $
    4.3
    
    
    $
    (0.2
    )
    
    $
    26.8
 Three months ended September 30, 2009ZayoZayo
    
    
    Enterprise($ in millions)
    
    Bandwidth
    
    
    Networks
    
    
    zColo
    
    
    ZFS
    
    
    Corporate
    
    
    Zayo GroupEarnings/(loss) from continuing operations
    
    $
    6.5
    
    
    $
    (0.7
    )
    
    $
    
    
    
    $
    
    
    
    $
    (5.7
    )
    
    $
    0.1Interest expense
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    3.3
    
    
    
    3.6Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.6
    
    
    
    0.6Depreciation and amortization expense
    
    
    7.6
    
    
    
    1.0
    
    
    
    0.5
    
    
    
    
    
    
    
    
    
    
    
    9.1EBITDA
    
    
    14.4
    
    
    
    0.3
    
    
    
    0.5
    
    
    
    
    
    
    
    (1.8
    )
    
    
    13.4Transaction costs
    
    
    
    
    
    
    0.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.6Stock-based compensation
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    0.6
    
    
    
    0.8Adjusted EBITDA
    
    $
    15.2
    
    
    $
    0.4
    
    
    $
    0.5
    
    
    $
    
    
    
    $
    (1.2
    )
    
    $
    14.8
  41




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Liquidity and Capital Resources
      Cash Flows
    42




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Three months endedSeptember 30,2010
    
    
    2009(In thousands)Net cash provided by operating activities
    
    $
    11,741
    
    
    $
    7,029Net cash used in investing activities
    
    
    (95,067
    )
    
    
    (108,272
    )Net cash provided by financing activities
    
    
    148,387
    
    
    
    70,453
 Net Cash Flows from Operating Activities
   Cash Flows Used for Investing Activities
  Cash Flows from Financing Activities
   43




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Off-Balance Sheet Arrangements
  New Accounting Pronouncements
   44




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
      45




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ITEM 4. CONTROLS AND PROCEDURES
    46




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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;
  47




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
    
    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.
 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.
  48




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##### Table of Contents



We may not be Able to Generate Enough Cash Flow to Meet Our Debt Obligations.
    
    
    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.
   49




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##### Table of Contents



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.
  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.
   50




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##### Table of Contents



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.
    51




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##### Table of Contents



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.
  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;
  52




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##### Table of Contents




    
    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.
  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.
   53




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##### Table of Contents



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.
  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.
   54




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##### Table of Contents




    
    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.
   We are Subject to Significant Regulation that could Change or Otherwise Impact us in an Adverse
Manner.
   55




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##### Table of Contents



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.
   56




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ITEM 6. EXHIBITS
 Exhibit No.
    
    Description of Exhibit3.1
    
    
    Certificate of Formation of Zayo Group, LLC.*3.2
    
    
    Operating Agreement of Zayo Group, LLC.*4.1
    
    
    First Supplemental Indenture, dated as of September 13, 2010 between
Zayo Fiber Solutions, LLC and the Bank of New York Mellon Trust Company, N.A., as Trustee.*4.2
    
    
    Second Supplemental Indenture, dated as of September 20, 2010, among Zayo Group, LLC, Zayo Capital, Inc.,
the Guarantors party thereto and the Bank of New York Mellon Trust Company, N.A., as Trustee.*4.3
    
    
    Registrations Rights Agreement, dated as of September 20, 2010, between Zayo Group, LLC,
Zayo Capital, Inc., the subsidiary guarantors party thereto and Morgan Stanley & Company Incorporated, as representatives of the several initial
purchasers set forth in Schedule I to the Purchase Agreement.*10.1
    
    

Guaranty
Supplement to the March  12, 2010 Credit Agreement, dated as of
August  16, 2010, by
 Zayo Fiber Solutions, LLC, in favor of SunTrust Bank, in its capacity as Administrative Agent.*10.2
    
    

Security
Agreement Supplement No. 1 to the March 12, 2010 Security Agreement, dated as of
 August  16, 2010, between Zayo Fiber Solutions, LLC and SunTrust Bank, in its capacity as Collateral Agent for the secured parties.*10.3
    
    

Joinder
and Amendment Agreement to the March 12, 2010
Collateral Agency and Inter-creditor Agreement, dated as of
September  20, 2010, among Zayo Group, LLC, Zayo Capital, Inc.,
and the other Grantors referred to therein, SunTrust Bank, as Joint Collateral Agent and Revolving Loan Agent for the lender
 under the credit agreement, and The Bank of New York Mellon Trust Company, N.A., as the Initial Notes Authorized Representative
 and the Additional Notes Authorized Representative.*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.
 *
    
    Incorporated by reference to
our Registration Statement on Form S-4 filed with the SEC on
October 18, 2010.
  57




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##### Table of Contents



SIGNATURES
  ZAYO GROUP, LLCDate:  November 12, 2010
    By:
    /s/ Dan CarusoDan CarusoChief Executive OfficerDate:  November 12, 2010
    By:
    /s/ Ken desGarennesKen desGarennesChief Financial Officer  58