UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2018

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 333-169979

Zayo Group, LLC

(Exact Name of Registrant as Specified in Its Charter)

DELAWARE

26-2012549

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1821 30th Street, Unit A,

Boulder, CO 80301

(Address of Principal Executive Offices)

(303) 381-4683

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

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ZAYO GROUP, LLC AND SUBSIDIARIES

INDEX



		Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)		1
Condensed Consolidated Balance Sheets as of December 31, 2018 and June 30, 2018		1
Condensed Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2018 and 2017		2
Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended December 31, 2018 and 2017		3
Condensed Consolidated Statement of Member's Equity for the Six Months Ended December 31, 2018		4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2018 and 2017		5
Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		43
Item 3. Quantitative and Qualitative Disclosures about Market Risk		63
Item 4. Controls and Procedures		64
Part II. OTHER INFORMATION
Item 1. Legal Proceedings		64
Item 1A. Risk Factors		64
Item 6. Exhibits		66
Signatures		67

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ZAYO GROUP, LLC AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in millions)



	December 31, 2018		June 30, 2018
Assets
Current assets
Cash and cash equivalents	$	175.7	$	256.0
Trade receivables, net of allowance of $12.2 and $11.1 as of December 31, 2018 and June 30, 2018, respectively		202.8		235.6
Prepaid expenses		74.7		74.1
Other current assets		22.2		25.8
Assets held for sale		—		41.8
Total current assets		475.4		633.3
Property and equipment, net		5,582.3		5,427.6
Intangible assets, net		1,163.8		1,212.1
Goodwill		1,706.6		1,719.1
Deferred income taxes, net		33.3		37.6
Other assets		171.4		175.6
Total assets	$	9,132.8	$	9,205.3
Liabilities and member's equity
Current liabilities
Accounts payable	$	48.2	$	45.9
Accrued liabilities		256.0		315.1
Accrued interest		72.7		72.6
Current portion of long-term debt		5.0		5.0
Capital lease obligations, current		16.0		11.9
Deferred revenue, current		167.3		162.9
Liabilities associated with assets held for sale		—		6.1
Total current liabilities		565.2		619.5
Long-term debt, non-current		5,902.6		5,690.1
Capital lease obligation, non-current		165.9		121.6
Deferred revenue, non-current		1,101.8		1,076.3
Deferred income taxes, net		177.7		152.4
Other long-term liabilities		50.5		57.8
Total liabilities		7,963.7		7,717.7
Commitments and contingencies (Note 11)
Member's equity
Member's interest		1,525.7		1,876.6
Accumulated other comprehensive loss		(35.4)		(15.5)
Accumulated deficit		(321.2)		(373.5)
Total member's equity		1,169.1		1,487.6
Total liabilities and member's equity	$	9,132.8	$	9,205.3

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

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ZAYO GROUP, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in millions)


	Three Months Ended December 31,				Six Months Ended December 31,
	2018		2017		2018		2017
Revenue	$	639.1	$	653.1	$	1,280.2	$	1,296.2
Operating costs and expenses
Operating costs (excluding depreciation and amortization and including stock-based compensation—Note 9)		222.0		232.0		450.4		467.7
Selling, general and administrative expenses (including stock-based compensation—Note 9)		125.5		122.2		247.6		250.3
Depreciation and amortization		146.9		195.7		314.7		379.5
Total operating costs and expenses		494.4		549.9		1,012.7		1,097.5
Operating income		144.7		103.2		267.5		198.7
Other expenses
Interest expense		(84.0)		(73.1)		(166.2)		(146.7)
Loss on extinguishment of debt		—		—		—		(4.9)
Foreign currency (loss)/gain on intercompany loans		(8.3)		3.1		(12.9)		13.9
Other income, net		0.3		0.4		6.9		1.3
Total other expenses, net		(92.0)		(69.6)		(172.2)		(136.4)
Income from operations before income taxes		52.7		33.6		95.3		62.3
Provision for income taxes		22.5		20.4		43.0		25.8
Net income	$	30.2	$	13.2	$	52.3	$	36.5

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

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ZAYO GROUP, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in millions)


	Three Months Ended December 31,				Six Months Ended December 31,
	2018		2017		2018		2017
Net income	$	30.2	$	13.2	$	52.3	$	36.5
Foreign currency translation adjustments, net of tax		(30.6)		0.8		(22.4)		22.9
Defined benefit pension plan adjustments, net of tax		4.4		(5.0)		2.5		(5.0)
Comprehensive income	$	4.0	$	9.0	$	32.4	$	54.4

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

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ZAYO GROUP, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF MEMBER’S EQUITY (UNAUDITED)

SIX MONTHS ENDED DECEMBER 31, 2018

(in millions)


	Member's Interest		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Member's Equity
Balance at June 30, 2018	$	1,876.6	$	(15.5)	$	(373.5)	$	1,487.6
Stock-based compensation		51.6		—		—		51.6
Foreign currency translation adjustment		—		(22.4)		—		(22.4)
Capital distribution to parent		(402.5)		—				(402.5)
Defined benefit pension plan adjustments		—		2.5				2.5
Net income		—		—		52.3		52.3
Balance at December 31, 2018	$	1,525.7	$	(35.4)	$	(321.2)	$	1,169.1

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

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ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

ZAYO GROUP, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in millions)


	Six Months Ended December 31,
	2018		2017
Cash flows from operating activities
Net income	$	52.3	$	36.5
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		314.7		379.5
Loss on extinguishment of debt		—		4.9
Gain on sale of SRT		(5.5)		—
Non-cash interest expense		5.0		4.8
Stock-based compensation		52.9		51.3
Amortization of deferred revenue		(74.3)		(65.6)
Foreign currency loss / (gain) on intercompany loans		12.9		(13.9)
Deferred income taxes		32.4		17.2
Provision for bad debts		4.1		2.3
Non-cash loss on investments		0.6		0.3
Changes in operating assets and liabilities, net of acquisitions
Trade receivables		22.9		(41.5)
Accounts payable and accrued liabilities		(26.9)		29.2
Additions to deferred revenue		81.1		61.9
Other assets and liabilities		0.2		(10.2)
Net cash provided by operating activities		472.4		456.7
Cash flows from investing activities
Purchases of property and equipment		(384.7)		(386.8)
Proceeds from sale of SRT, net of cash held in escrow		39.0		—
Other		—		(0.2)
Net cash used in investing activities		(345.7)		(387.0)

Cash flows from financing activities
Proceeds from debt		250.0		312.8
Principal payments on long-term debt		(42.5)		(313.2)
Principal payments on capital lease obligations		(4.0)		(4.0)
Payment of debt issue costs		—		(3.4)
Payments to repurchase ZGH common stock		(402.5)		—
Cash paid for Santa Clara acquisition financing arrangement and other		(4.6)		(2.6)
Net cash used in financing activities		(203.6)		(10.4)
Net cash flows		(76.9)		59.3
Effect of changes in foreign exchange rates on cash		(6.8)		1.0
Net increase in cash, cash equivalents and restricted cash		(83.7)		60.3
Cash, cash equivalents and restricted cash, beginning of year		260.6		224.5
Cash, cash equivalents and restricted cash, end of period	$	176.9	$	284.8

Supplemental disclosure of non-cash investing and financing activities:
Cash paid for interest, net of capitalized interest	$	153.1	$	136.3
Cash paid for income taxes	$	2.7	$	3.1
Non-cash purchases of equipment through capital leasing	$	53.0	$	0.3
Non-cash purchases of equipment through nonmonetary exchange	$	31.1	$	10.7
Decrease in accounts payable and accrued expenses for purchases of property and equipment	$	(26.8)	$	(47.4)


Reconciliation of cash, cash equivalents, and restricted cash:		December 31, 2018		June 30, 2018		December 31, 2017		June 30, 2017
Cash and cash equivalents	$	175.7	$	256.0	$	280.1	$	220.0
Restricted cash included in other assets		1.2		4.6		4.7		4.5
Total cash, cash equivalents and restricted cash	$	176.9	$	260.6	$	284.8	$	224.5

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

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ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(1)

BUSINESS AND BASIS OF PRESENTATION

Business

Zayo Group, LLC, a Delaware limited liability company, was formed on May 4, 2007, and is the operating parent company of a number of subsidiaries engaged in providing access to bandwidth infrastructure. Zayo Group LLC and its subsidiaries are collectively referred to as “Zayo Group” or the “Company.” Headquartered in Boulder, Colorado, the Company provides communication infrastructure solutions, including fiber and bandwidth connectivity, colocation and cloud infrastructure, to businesses primarily in the United States (“U.S.”), Canada and Europe. The Company provides its products and offerings through six segments:

Fiber Solutions, including dark fiber and mobile infrastructure solutions.

Transport, including Ethernet, wavelength, wholesale IP, and SONET solutions.

Enterprise Networks, including private lines, dedicated Internet and cloud-based computing and storage products.

Colocation, including provision of colocation space and power and interconnection offerings.

Allstream, including Cloud VoIP and Data Solutions.

Other offerings, including Zayo Professional Services (“ZPS”).

On May 3, 2018, the Company announced that it completed the first phase of its investigation on the advisability and feasibility of a conversion of Zayo Group Holdings Inc. (“ZGH”) to a real estate investment trust for U.S. federal income tax purposes (a “REIT”). The Company has begun the next phase of its evaluation and preparation for a potential conversion of ZGH to a REIT. As part of these efforts, the Company has begun a direct dialogue with the U.S. Internal Revenue Service (“IRS”) in an effort to obtain clarity and support for its position, and ZGH is seeking a private letter ruling (“PLR”) from the IRS. The ability of ZGH to qualify for taxation as a REIT will depend upon its continuing compliance following REIT conversion with various requirements, including requirements related to the nature of its assets, the sources of its income and the distributions to its stockholders.

ZGH is requesting that the PLR address whether ZGH’s revenues from dark and lit fiber satisfy applicable REIT income tests, and ZGH’s ultimate decision to convert to a REIT may depend upon a favorable ruling from the IRS on this topic. ZGH submitted a PLR request to the IRS in July 2018, but the IRS may not provide a response until late 2019 or later or may not respond at all.

On November 7, 2018, ZGH announced plans to separate into two publicly traded companies- one to focus on providing communications infrastructure and another to leverage infrastructure to provide solutions for enterprise customers- with the core tenets of the plan being simplification of the business and a focus on a communications infrastructure business. ZGH is evaluating multiple options that will achieve the core tenets of the plan and maximize shareholder value.

Basis of Presentation

The accompanying condensed consolidated financial statements include all the accounts of the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. The accompanying condensed consolidated financial statements and related notes are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for quarterly reports on Form 10-Q, and do not include all of the note disclosures required by GAAP for complete financial statements. These condensed consolidated financial statements should, therefore, be read in conjunction with the consolidated financial statements and notes thereto for the year ended June 30, 2018 included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2018. In the opinion of management, all adjustments considered necessary for a fair

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ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

presentation of financial position, results of operations and cash flows of the Company have been included herein. The results of operations for the three and six months ended December 31, 2018 are not necessarily indicative of the operating results for any future interim period or the full year. Unless otherwise noted, dollar amounts and disclosures throughout the notes to the condensed consolidated financial statements are presented in millions of dollars.

The Company’s fiscal year ends June 30 each year, and we refer to the fiscal year ending June 30, 2020 as “Fiscal 2020”, the fiscal year ending June 30, 2019 as “Fiscal 2019” and the fiscal year ending June 30, 2018 as “Fiscal 2018”.

Use of Estimates

The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Estimates are used when establishing allowances for doubtful accounts and accruals for billing disputes, determining useful lives for depreciation and amortization and accruals for exit activities associated with real estate leases, assessing the need for impairment charges (including those related to intangible assets and goodwill), determining the fair values of assets acquired and liabilities assumed in business combinations, accounting for income taxes and related valuation allowances against deferred tax assets, determining the defined benefit costs and defined benefit obligations related to post-employment benefits, determining the fair value of plan assets related to post-employment benefits and estimating certain restricted stock unit grant fair values used to compute the stock-based compensation liability and expense. Management evaluates these estimates and judgments on an ongoing basis and makes estimates based on historical experience, current conditions, and various other assumptions that are believed to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions.

Significant Accounting Policies

On July 1, 2018, the Company adopted the requirements of Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“ASC 606”). See “Recently Adopted Accounting Pronouncements” below and Note 12 – Revenue and Contract Costs for additional disclosure on the Company’s adoption of ASC 606 and its impact on the condensed consolidated financial statements.

There have been no other changes to the Company’s significant accounting policies as described in its Annual Report on Form 10-K for the year ended June 30, 2018.

Recently Issued Accounting Pronouncements

In February 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows companies to reclassify the income tax effects resulting from tax bill H.R.1, from accumulated other comprehensive income to retained earnings. The standard also requires certain new disclosures regardless of the election. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 (Fiscal 2020 for the Company), with early adoption permitted. The Company does not expect ASU 2018-02 to have a material impact on the condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases. The new guidance supersedes existing guidance on accounting for leases in Topic 840 and is intended to increase the transparency and comparability of accounting for lease transactions. ASU 2016-02 requires most leases to be recognized on the balance sheet. Lessees will need to recognize a right-of-use asset and a lease liability for virtually all leases. The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Lessor accounting remains similar to the current model, but updated to align with certain changes to the lessee model and

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ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

the new revenue recognition standard (ASC 606). The ASU will require both quantitative and qualitative disclosures regarding key information about leasing arrangements. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 (Fiscal 2020 for the Company). Early adoption is permitted. The standard will require application of the new guidance at the beginning of the earliest comparative period presented using a modified retrospective transition, and provides for certain practical expedients. The Company established a project team and commenced an initial impact assessment process. To date, the Company has reviewed a sample of lessee and lessor arrangements and made preliminary assessments of the impact this standard will have on the consolidated financial statements. Although it is still assessing the impact of this standard, the Company expects the new guidance to significantly increase the reported assets and liabilities on the consolidated balance sheets. There are currently no plans to early adopt ASU 2016-02.

Recently Adopted Accounting Pronouncements

In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU requires an employer to report the service cost component of net periodic pension cost and net periodic postretirement cost in the same line item in the statement of operations as other compensation costs arising from services rendered by the related employees during the period. The other net cost components are required to be presented in the statement of operations separately from the service cost component and outside a subtotal of income from operations. Additionally, the line item used in the statement of operations to present the other net cost components must be disclosed in the notes to the financial statements. This ASU is effective for fiscal years beginning after December 15, 2017 (Fiscal 2019 for the Company), and interim periods within those fiscal years, and must be applied on a retrospective basis. The adoption did not result in a material impact to the condensed consolidated financial statements for either of the three and six months ended December 31, 2018 or 2017 and retrospective application was applied.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The new standard requires a statement of cash flows to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 (Fiscal 2019 for the Company). The retrospective adoption of this accounting standard did not have a material impact on its condensed consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classifications of Certain Cash Receipts and Cash Payments. The new standard provides guidance for eight changes with respect to how cash receipts and cash payments are classified in the statement of cash flows, with the objective of reducing diversity in practice. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2017 (Fiscal 2019 for the Company). The retrospective adoption of this accounting standard did not have a material impact on its condensed consolidated financial statements.

In May 2014, the FASB issued ASC 606, which replaces numerous requirements in U.S. GAAP, including industry-specific requirements, and provides companies with a single revenue recognition model for recognizing revenue from certain contracts with customers. The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers and addressed accounting for costs to acquire and fulfill contracts. The standard does not impact the manner in which the Company accounts for revenue arrangements accounted for as leases. Effective July 1, 2018, the Company adopted the requirements of ASC 606 and used the full retrospective transition method. The full retrospective transition method requires the Company to restate each prior reporting period presented. The Company has implemented internal controls and system functionality to enable the preparation of financial information in accordance with ASC 606.

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ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The adoption of ASC 606 has an impact on the manner in which the Company recognizes revenue associated with dark fiber sales that include the transfer of title to certain network assets, which prior to ASC 606 was considered a sale of real estate or integral equipment. Under previous GAAP, the Company deferred the recognition of revenue on the sale of network infrastructure assets that were considered to be integral equipment if the Company had a substantial continuing involvement in the transferred asset. The consideration received in this type of arrangement had historically been amortized to revenue ratably over the period in which the Company had a substantial continuing involvement in the transferred asset. Under ASC 606 the asset transferred in this type of arrangement is derecognized from the balance sheet and the amount of the transaction price attributable to the asset being sold is recognized upon customer acceptance. This change had an impact of (decreasing)/increasing the revenue previously reported by the Company during the years ended June 30, 2018 and 2017 by ($1.5) million and $20.5 million, respectively. The full retrospective adoption of ASC 606 also resulted in increasing the previously reported operating costs during the year ended June 30, 2017 by $18.8 million, which represents the net book value of assets transferred to customers in these types of arrangements during Fiscal 2017.

The assets transferred in these real estate sales had historically been included in property and equipment, net on the Company’s balance sheet. Upon the adoption of ASC 606, the net book value of these assets of $19.6 million was removed from the Company’s condensed consolidated balance sheet. The Company also derecognized from its June 30, 2018 balance sheet $1.5 million and $20.5 million in related deferred revenue, current and non-current, respectively, which represented the unamortized consideration received on these arrangements.

An additional impact from the adoption of ASC 606 is the accounting for the incremental costs of acquiring new service contracts, including certain compensation expense for internal sales representatives. Under ASC 606, the Company capitalizes these incremental costs of obtaining customer contracts and amortizes the expense over the relevant contract term. In addition, the Company will assess its deferred contract cost asset for impairment on a periodic basis. Prior to the adoption of ASC 606, compensation paid to internal sales representatives for obtaining new service contracts was expensed as incurred. The impact of the retrospective adoption of ASC 606 resulted in an increase to selling, general and administrative expenses as previously reported by the Company during the years ended June 30, 2018 and 2017 by $1.1 million and $0.2 million, respectively. Additionally, the Company recorded an increase to the previously reported other current assets and other assets on the consolidated balance sheet as of June 30, 2018 of $7.1 million and $5.6 million, respectively, to reflect the deferred cost of acquiring service contracts that will be recognized in future periods over the relevant contract term.

The table below presents the impact the full retrospective adoption of ASC 606 had on the Company’s condensed statement of operations for the years ended June 30, 2018 and 2017 and each of the quarters of Fiscal 2018:


	Fiscal Year ended				Quarter Ended (unaudited)
	June 30, 2018		June 30, 2017		September 30, 2017		December 31, 2017		March 31, 2018		June 30, 2018
	(in millions)
Revenue	$	(1.5)	$	20.5	$	(0.4)	$	(0.4)	$	(0.4)	$	(0.3)
Operating costs		—		18.8		—		—		—		—
Selling, general and administrative expenses		1.1		0.2		(0.2)		0.6		(0.3)		1.0
Depreciation and amortization		(0.9)		(0.7)		(0.3)		(0.3)		(0.2)		(0.1)
Provision for income taxes		(2.7)		0.8		—		(2.5)		—		(0.2)
Net income		1.0		1.4		0.1		1.8		0.1		(1.0)

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ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The table below presents the impact the full retrospective adoption of ASC 606 had on the Company’s consolidated balance sheet for the year ended June 30, 2018:


	As of June 30, 2018
	As Previously Reported		Effect of Adoption		As Adjusted
	(in millions)
Assets
Other current assets	$	18.7	$	7.1	$	25.8
Property and equipment, net	$	5,447.2	$	(19.6)	$	5,427.6
Other assets	$	170.0	$	5.6	$	175.6

Liabilities
Deferred revenue, current	$	164.4	$	(1.5)	$	162.9
Deferred revenue, non-current	$	1,096.8	$	(20.5)	$	1,076.3
Deferred income taxes, net	$	148.5	$	3.9	$	152.4

Stockholders' equity
Accumulated deficit	$	(384.7)	$	11.2	$	(373.5)

(2) ACQUISITIONS AND DISPOSITIONS

Since inception through December 31, 2018, the Company has consummated 45 transactions accounted for as business combinations. The acquisitions were executed as part of the Company’s business strategy of expanding through acquisitions. The acquisitions of these businesses have allowed the Company to increase the scale at which it operates, which in turn affords the Company the ability to increase its operating leverage, extend its network reach, and broaden its customer base.

The accompanying condensed consolidated financial statements include the operations of the acquired entities from their respective acquisition dates.

Acquisitions Completed During Fiscal 2018

Neutral Path Communications

On April 17, 2018, the Company acquired substantially all of the assets of Neutral Path Communications and Near North Partners (collectively, “Neutral Path”) for $33.3 million, which is net of cash acquired and also included an estimate for a contingent payment based on sales performance through June 30, 2018. The purchase price is subject to net working capital and certain post-closing adjustments. As of December 31, 2018, $4.0 million of the purchase consideration is being held in escrow pending the expiration of the indemnification adjustment period. The all-cash acquisition was funded with cash on hand and was considered an asset purchase for U.S. federal income tax purposes. Neutral Path is a long haul infrastructure provider, providing access to a fiber network section in the Midwest. The transaction added owned plus additional leased route miles to the Company’s extensive North American network, including a unique high-count fiber route from Minneapolis to Omaha.

McLean Data Center

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

On April 4, 2018, the Company acquired McLean Data Center, a privately owned data center, for an insignificant amount. The acquisition was considered an asset purchase for U.S. federal income tax purposes and a business combination for accounting purposes. The Company assumed an operating lease obligation and acquired certain assets, such as cash, structural components, equipment, and assumed customer contracts.

Spread Networks

On February 28, 2018, the Company acquired Spread Networks, LLC (“Spread Networks”), a privately owned telecommunications provider that owns and offers access to a high-fiber count long haul route connecting New York and Chicago, for net purchase consideration of $130.5 million, net of cash acquired, subject to certain post-closing adjustments. As of December 31, 2018, $0.6 million of the purchase consideration is being held in escrow pending the expiration of the indemnification adjustment period. The all-cash acquisition was funded with cash on hand and debt and was considered an asset purchase for U.S. federal income tax purposes. Additional connectivity of the route will be enabled by Zayo’s existing network.

Optic Zoo Networks

On January 18, 2018, the Company acquired Vancouver, BC Canada-based Optic Zoo Networks for net purchase consideration of CAD $30.9 million (or $24.8 million), net of cash acquired, subject to certain post-closing adjustments. Optic Zoo Networks owns and provides access to high-capacity fiber in Vancouver. As of December 31, 2018, CAD $3.1 million (or $2.3 million) of the purchase consideration is being held in escrow pending the expiration of the indemnification adjustment period. The acquisition was funded with cash on hand and was considered a stock purchase for U.S. federal income tax purposes.

Acquisition Method Accounting Estimates

The Company initially recognizes the assets and liabilities acquired from the aforementioned acquisitions based on its preliminary estimates of their acquisition date fair values. As additional information becomes known concerning the acquired assets and assumed liabilities, management may make adjustments to the opening balance sheet of the acquired company up to the end of the measurement period, which is no longer than a one year period following the acquisition date. The determination of the fair values of the acquired assets and liabilities assumed (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. As of December 31, 2018, for the Optic Zoo Networks and McLean Data Center acquisitions, the Company has completed its fair value analysis and calculations in sufficient detail necessary to arrive at the final estimates of the fair value of working capital and non-working capital acquired assets and assumed liabilities, including the allocations to goodwill and intangible assets, property and equipment and resulting deferred taxes. For the Spread Networks acquisition, the items with the highest likelihood of change are working capital related accounts and goodwill. For the Neutral Path acquisition, the Company has not completed its fair value analysis and related calculations, and the Company continues to refine its estimates of the fair value of working capital and non-working capital acquired assets and assumed liabilities and such estimates are subject to revision pending the final fair value determination. As a result of integrated reporting, it is impracticable to determine the amount of revenue and net income associated with each acquisition recognized in the post-acquisition period.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The table below reflects the Company's estimates of the acquisition date fair values of the assets acquired and liabilities assumed from its Fiscal 2018 acquisitions:


	Neutral Path		McLean Data Center		Spread Networks		Optic Zoo Networks
Acquisition date	April 17, 2018		April 4, 2018		February 28, 2018		January 18, 2018
	(in millions)
Cash	$	0.7	$	9.2	$	1.5	$	1.4
Other current assets		0.2		—		4.2		0.4
Property and equipment		15.2		0.6		143.7		13.1
Intangibles		6.9		—		9.3		3.8
Goodwill		15.9		—		14.4		10.4
Deferred tax assets		1.5		—		7.1		—
Other assets		—		—		1.4		0.2
Total assets acquired		40.4		9.8		181.6		29.3
Current liabilities		0.6		1.6		2.6		0.6
Deferred revenue		5.8		—		27.2		1.2
Deferred tax liability, net		—		—		—		1.3
Other liabilities		—		8.2		19.8		—
Total liabilities assumed		6.4		9.8		49.6		3.1
Net assets acquired		34.0		—		132.0		26.2
Less cash acquired		(0.7)		(9.2)		(1.5)		(1.4)
Net consideration paid	$	33.3	$	(9.2)	$	130.5	$	24.8

The goodwill arising from the Company’s acquisitions results from synergies, anticipated incremental sales to the acquired company customer base and economies-of-scale expected from the acquisitions. The Company has allocated the goodwill to the reporting units (in existence on the respective acquisition dates) that were expected to benefit from the acquired goodwill. The allocation was determined based on the excess of the estimated fair value of the reporting unit over the estimated fair value of the individual assets acquired and liabilities assumed that were assigned to the reporting units. See Note 3 – Goodwill for the allocation of the Company's acquired goodwill to each of its reporting units.

In the Company’s acquisitions, the Company acquired certain customer relationships. These relationships represent a valuable intangible asset, as the Company anticipates continued business from the acquired customer bases. The Company’s estimate of the fair value of the acquired customer relationships is generally based on a multi-period excess earnings valuation technique that utilizes Level 3 inputs.

Transaction Costs

Transaction costs include expenses associated with professional services (i.e., legal, accounting, regulatory, etc.) rendered in connection with signed and/or closed acquisitions or disposals, travel expense, severance expense incurred associated with acquisitions or disposals, and other direct expenses incurred that are associated with signed and/or closed acquisitions or disposals and unsuccessful acquisitions. The Company incurred transaction costs of $2.8 million and $3.5 million for the three and six months ended December 31, 2018, respectively, and $5.9 million and $14.2 million for the three and six months ended December 31, 2017, respectively. Included in the three months ended December 31, 2018 transaction costs are $0.9 million related to divestiture of assets costs. Transaction costs have been included in selling, general and administrative expenses in the condensed consolidated statements of operations and in cash flows from operating activities in the condensed consolidated statements of cash flows during these periods.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Scott-Rice Telephone Co.

On July 31, 2018, the Company completed the sale of Scott-Rice Telephone Co. (“SRT”), a Minnesota incumbent local exchange carrier, for $42.2 million to Nuvera Communications, Inc. (formerly New Ulm Telecom, Inc.). As of December 31, 2018, $3.2 million of purchase consideration was held in escrow. The Company recognized a pre-tax gain of $5.5 million on the sale, which is included in other income, net in the condensed consolidated statements of operations. The Company acquired SRT as part of its March 1, 2017 purchase of Electric Lightwave Parent, Inc. and it was included as part of the Allstream segment. SRT had a pre-tax net loss of $1.6 million for the year ended June 30, 2018 and pre-tax net income of $2.9 million from when it was acquired in March 1, 2017 through June 30, 2017.

SRT qualified as held-for-sale as of March 31, 2018 and was classified as held-for-sale in the Company’s June 30, 2018 balance sheet. The Company concluded that SRT was not a significant disposal group and did not represent a strategic shift, and therefore was not classified as discontinued operations. The following tables summarize the net assets and liabilities held for sale as of June 30, 2018:


	June 30, 2018
	(in millions)
Assets held for sale:
Property and equipment, net	$	35.7
Goodwill		5.2
Other assets		0.9
Total assets held for sale	$	41.8

Liabilities associated with assets held for sale:
Deferred tax liability, net	$	5.1
Other liabilities		1.0
Total liabilities associated with assets held for sale	$	6.1

(3) GOODWILL

The Company’s goodwill balance was $1,706.6 million and $1,719.1 million as of as of December 31, 2018 and June 30, 2018, respectively.

The Company’s reporting units are comprised of its strategic product groups (“SPG” or “SPGs”). Effective April 1, 2018, the Company implemented further organizational changes by creating two new reporting units: CloudLink Solutions (“CloudLink”) and Live Video Solutions (“Live Video”). In connection with the organizational change, goodwill was re-allocated to the Company’s SPGs on a relative fair value basis. The Company completed an assessment immediately prior to and after the organizational change at the SPG level and determined that it is more likely than not that the fair value of the Company’s reporting units is greater than their carrying amounts.

As of December 31, 2018, the Company’s SPGs were comprised of the following: Fiber Solutions, Zayo Wavelength Solutions (“Waves”), Zayo SONET Solutions (“SONET”), Zayo Ethernet Solutions (“Ethernet”), Live Video, Wide Area Networks (“WANs”, formerly Enterprise Private and Connectivity), Zayo Cloud Solutions (“Cloud”), Zayo Colocation (“zColo”), CloudLink, Allstream, and Other (primarily Zayo Professional Services).

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following reflects the changes in the carrying amount of goodwill during the six months ended December 31, 2018:


Product Group	As of June 30, 2018		Adjustments to Fiscal 2018 Acquisitions		Foreign Currency Translation and Other		As of December 31, 2018
	(in millions)
Fiber Solutions	$	756.4	$	(5.3)	$	(3.6)	$	747.5
Waves		194.8		(1.2)		(1.5)		192.1
Sonet		87.6		—		—		87.6
Ethernet		104.2		(0.2)		(0.1)		103.9
Live Video		3.3		—		—		3.3
WANs		179.3		—		(0.2)		179.1
zColo		260.1		—		(0.4)		259.7
Cloud		65.3		—		—		65.3
Cloudlink		13.5		—		—		13.5
Allstream		39.0		—		—		39.0
Other		15.6		—		—		15.6
Total	$	1,719.1	$	(6.7)	$	(5.8)	$	1,706.6

(4) INTANGIBLE ASSETS

Identifiable intangible assets as of December 31, 2018 and June 30, 2018 were as follows:


	Gross Carrying Amount		Accumulated Amortization		Net
	(in millions)
December 31, 2018
Finite-Lived Intangible Assets
Customer relationships	$	1,595.2	$	(451.7)	$	1,143.5
Underlying rights and other		3.4		(1.1)		2.3
Total		1,598.6		(452.8)		1,145.8
Indefinite-Lived Intangible Assets
Certifications		3.5		—		3.5
Underlying rights and other		14.5		—		14.5
Total	$	1,616.6	$	(452.8)	$	1,163.8
June 30, 2018
Finite-Lived Intangible Assets
Customer relationships	$	1,597.0	$	(405.6)	$	1,191.4
Underlying rights and other		2.7		(0.6)		2.1
Total		1,599.7		(406.2)		1,193.5
Indefinite-Lived Intangible Assets
Certifications		3.5		—		3.5
Underlying rights and other		15.1		—		15.1
Total	$	1,618.3	$	(406.2)	$	1,212.1

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(5) LONG-TERM DEBT

As of December 31, 2018 and June 30, 2018, long-term debt was as follows:


	Date of				Outstanding as of
	Issuance or most recent amendment	Maturity	Interest Payments	Interest Rate	December 31, 2018		June 30, 2018
					(in millions)
Term Loan Facility due 2021	Jan 2017	Jan 2021	Monthly	LIBOR +2.00%	$	491.3	$	493.8
B-2 Term Loan Facility	Feb 2018	Jan 2024	Monthly	LIBOR +2.25%		1,269.3		1,269.3
6.00% Senior Unsecured Notes	Jan & Mar 2015	Apr 2023	Apr/Oct	6.00%		1,430.0		1,430.0
6.375% Senior Unsecured Notes	May 2015 & Apr 2016	May 2025	May/Nov	6.375%		900.0		900.0
5.75% Senior Unsecured Notes	Jan, Apr & Jul 2017	Jan 2027	Jan/Jul	5.75%		1,650.0		1,650.0
Revolving Loan Facility	Dec 2018 (1)	Apr 2020	Monthly	LIBOR +1.75%		210.0		—
Total obligations						5,950.6		5,743.1
Unamortized premium, net						11.7		11.6
Unamortized debt issuance costs						(54.7)		(59.6)
Carrying value of debt						5,907.6		5,695.1
Less current portion						(5.0)		(5.0)
Total long-term debt, less current portion					$	5,902.6	$	5,690.1

(1) The most recent issuance on the Revolving Loan Facility was December 2018, the most recent amendment on the Revolving Loan Facility was in December 2017.

Term Loan Facility and Revolving Credit Facility

On May 6, 2015, the Company and Zayo Capital, Inc. (“Zayo Capital”) entered into an Amendment and Restatement Agreement whereby its Credit Agreement (the “Credit Agreement”) governing its senior secured term loan facility (the “Term Loan Facility”) and $450.0 million senior secured revolving credit facility (the “Revolver”) was amended and restated in its entirety. The amended and restated Credit Agreement extended the maturity date of a portion of the outstanding term loans under the Term Loan Facility from July 2, 2019 to May 6, 2021, which was subsequently revised to January 19, 2021 in Incremental Amendment No. 2 (as defined and discussed below). The terms of the Term Loan Facility require the Company to make quarterly principal payments of 25 basis points per quarter of the original loan amount (unless reduced by any prepayments) plus an annual payment of up to 50% of excess cash flow, as determined in accordance with the Credit Agreement (no such annual payment was required during Fiscal 2018).

On January 15, 2016, the Company and Zayo Capital entered into an Incremental Amendment (the “Amendment”) to its Credit Agreement. Under the terms of the Amendment, the portion of the Term Loan Facility due 2021 was increased by $400.0 million (the “Incremental Term Loan”). The additional amounts borrowed bear interest at LIBOR plus 3.5% with a minimum LIBOR rate of 1.0%. The $400.0 million add-on was priced at 99.0%. No other terms of the Credit Agreement were amended. The Incremental Term Loan proceeds were used to fund the acquisition of Allstream, Inc. and Allstream Fiber U.S. Inc. and for general corporate purposes.

On July 22, 2016, the Company and Zayo Capital entered into a Repricing Amendment (the “Repricing Amendment”) to the Credit Agreement. Per the terms of the Repricing Amendment, the Incremental Term Loan was repriced at par to bear interest at a rate of LIBOR plus 2.75%, with a minimum LIBOR rate of 1.0%, which represented a downward adjustment of 75 basis points. No other terms of the Credit Agreement were amended.

On January 19, 2017, the Company and Zayo Capital entered into an Incremental Amendment No. 2 (the “Incremental Amendment”) to the Company’s Credit Agreement. Per the terms of the Incremental Amendment, the existing $1.85 billion of term loans under the Credit Agreement were repriced at 99.75% with one $500.0 million tranche that bears interest at a rate of LIBOR plus 2.0%, with a minimum LIBOR rate of 0.0% and a maturity date of four years from incurrence (January 19, 2021), which represents a downward adjustment of 75 basis points along with the lowering of the previous LIBOR floor, and a second $1.35 billion tranche (the “B-2 Term Loan” and along with the $500.0 million tranche, the “Refinancing Term Loans”) that bears interest at a rate of LIBOR plus 2.5%, with a minimum

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LIBOR rate of 1.0% and a maturity of seven years from incurrence, which represents a downward adjustment of 25 basis points. In addition, per the terms of the Incremental Amendment, the Company and Zayo Capital added a new $650.0 million term loan tranche under the Credit Agreement (the “Electric Lightwave Incremental Term Loan”) that bears interest at LIBOR plus 2.5%, with a minimum LIBOR rate of 1.0%, with a maturity of seven years from the closing date of the Incremental Amendment. In connection with the Incremental Amendment, the full $2,500.0 million Term Loan Facility, including the Refinancing Term Loans and the Electric Lightwave Incremental Term Loan, was re-issued at a price of 99.75%. No other material terms of the Credit Agreement with respect to the Refinancing Term Loans and the Electric Lightwave Incremental Term Loan were amended. On April 10, 2017, $570.1 million of the B-2 Term Loan and the Electric Lightwave Incremental Term Loan was repaid from proceeds of issuance of senior unsecured notes as further discussed below. Additionally, in July 2017, $310.7 million of the B-2 Term Loan was repaid from the proceeds of issuance of senior unsecured notes as further discussed below.

On July 20, 2017, the Company and Zayo Capital entered into a second repricing (the “Repricing Amendment No. 2”) to the Credit Agreement. Per the terms of the Repricing Amendment No. 2, the outstanding balances of the B-2 Term Loan and Electric Lightwave Incremental Term Loan were repriced at par to bear interest at a rate of LIBOR plus 2.25%, with a minimum LIBOR rate of 1.0%, which represented a downward adjustment of 25 basis points. No other terms of the Credit Agreement were amended.

In connection with the Repricing Amendment No. 2, the Company recognized an expense of $4.9 million during the six months ended December 31, 2017 associated with debt extinguishment. The $4.9 million loss on extinguishment of debt primarily represents non-cash expenses associated with the write-off of unamortized debt issuance costs and the issuance discounts on the portion of the Credit Agreement, as further amended. The loss on extinguishment of debt also includes certain fees paid to third parties involved in the Repricing Amendment No. 2.

On December 22, 2017, ZGL and Zayo Capital entered into a third repricing amendment (the “Repricing Amendment No. 3”) to the Credit Agreement. Per the terms of the Repricing Amendment No. 3, the Revolver under the Credit Agreement was repriced to bear interest at a rate of LIBOR plus 1.00% to LIBOR plus 1.75% per annum based on the Company’s leverage ratio, which represented a downward adjustment of 100 basis points. No other terms of the Credit Agreement were amended. The Revolver matures on April 17, 2020. The Credit Agreement also allows for letter of credit commitments of up to $50.0 million. The Revolver is subject to a fee per annum of 0.25% to 0.375% (based on ZGL’s current leverage ratio) of the weighted-average unused capacity, and the undrawn amount of outstanding letters of credit backed by the Revolver are subject to a 0.25% fee per annum. Outstanding letters of credit backed by the Revolver are subject to a fee of 1.00% to 1.75% per annum based upon ZGL’s leverage ratio.

On February 26, 2018, ZGL and Zayo Capital entered into an amendment (the “Incremental Amendment No. 3”) to the Credit Agreement. Per the terms of the Incremental Amendment No. 3, the Company added a new $150 million term loan tranche under the Credit Agreement (the “Incremental $150 Million Term Loan”). The Incremental $150 Million Term Loan bears interest at LIBOR plus 2.25%, with a minimum LIBOR rate of 1.0%, with a maturity date of January 19, 2024, which is coterminous with the B-2 Term Loan. The Company used the proceeds of the Incremental $150 Million Term Loan for general corporate purposes, including the funding of acquisitions permitted under the Credit Agreement. No other terms of the Credit Agreement were amended.

The weighted average interest rates (including margin) on the Term Loan Facility were approximately 4.7% and 4.3% as of December 31, 2018 and June 30, 2018, respectively. The weighted average interest rate on the Revolver was approximately 4.3% as of December 31, 2018. The interest rate on the Revolver was approximately 3.8% as of June 30, 2018, and there were no borrowings outstanding under the Revolver as of such date.

The Company borrowed $250.0 million under the Revolver during the three and six months ended December 31, 2018. As of December 31, 2018, $210.0 million was outstanding under the Revolver and $1,760.6 million in aggregate principal amount was outstanding under the Term Loan Facility. Standby letters of credit were outstanding in the amount of $8.2 million as of December 31, 2018, leaving $231.8 million available under the Revolver. In January 2019, the Company borrowed $25.0 million under the Revolver and subsequently repaid $25.0 million, leaving $231.8 million available under the Revolver.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Senior Unsecured Notes

6.00% Senior Unsecured Notes due 2023

On January 23, 2015 and March 9, 2015, the Company and Zayo Capital completed private offerings of aggregate principal amounts of $700.0 million and $730.0 million, respectively, of 6.00% senior unsecured notes due in 2023 (the “2023 Unsecured Notes”).

6.375% Senior Unsecured Notes due 2025

On April 14, 2016, the Company and Zayo Capital completed a private offering of $550.0 million aggregate principal amount of 2025 Unsecured Notes (the “Incremental 2025 Notes”). The Incremental 2025 Notes were priced at 97.76% and were an additional issuance of the $350.0 million 6.375% senior unsecured notes due in 2025 that were originally issued on May 6, 2015 (the “2025 Notes” and together with the Incremental 2025 Notes, the “2025 Unsecured Notes”). The net proceeds from the Incremental 2025 Notes, plus cash on hand, were used to (i) redeem the then outstanding $325.6 million 10.125% senior unsecured notes due 2020, including the required $20.3 million make-whole premium and accrued interest, and (ii) repay $196.0 million of borrowings under the then outstanding secured Term Loan Facility.

5.75% Senior Unsecured Notes due 2027

On January 27, 2017, the Company and Zayo Capital completed a private offering of $800.0 million aggregate principal amount of 5.75% senior unsecured notes due 2027 (the “January 2027 Notes”), which were issued at par. The net proceeds from the offering, along with the Electric Lightwave Incremental Term Loan discussed above, were used to fund the Electric Lightwave acquisition.

On April 10, 2017, the Company completed a private offering of $550.0 million aggregate principal amount of 5.75% senior unsecured notes due 2027 (the “Incremental 2027 Notes”). The Incremental 2027 Notes were an additional issuance of the January 2027 Notes and were priced at 104.0%. The net proceeds from the Incremental 2027 Notes were used to repay certain outstanding balances on the Company’s B-2 Term Loan.

On July 5, 2017, the Company completed a private offering of $300.0 million aggregate principal amount of 5.75% senior notes due 2027 (the “July Incremental 2027 Notes” and together with the Incremental 2027 Notes and the January 2027 Notes, the “2027 Unsecured Notes”). The July Incremental 2027 Notes were an additional issuance of the January 2027 Notes and Incremental 2027 Notes and were priced at 104.25%. The net proceeds of $310.7 million from the offering were used to further repay certain outstanding balances on the Company’s B-2 Term Loan.

Debt covenants

The indentures (the “Indentures”) governing the 2023 Unsecured Notes, the 2025 Unsecured Notes and the 2027 Unsecured Notes (collectively the “Notes”) contain covenants that, among other things, restrict the ability of the Company and its subsidiaries to incur additional indebtedness and issue preferred stock, pay dividends or make other distributions with respect to any equity interests, make certain investments or other restricted payments, create liens, sell assets, incur restrictions on the ability of the Company’s restricted subsidiaries to pay dividends or make other payments to the Company, consolidate or merge with or into other companies or transfer all or substantially all of their assets, engage in transactions with affiliates, and enter into sale and leaseback transactions. The terms of the Indentures include customary events of default.

The Credit Agreement contains customary events of default, including among others, non-payment of principal, interest, or other amounts when due, inaccuracy of representations and warranties, breach of covenants, cross default to certain other indebtedness, insolvency or inability to pay debts, bankruptcy, or a change of control. The Credit Agreement also contains a covenant, applicable only to the Revolver, that the Company maintain a senior secured leverage ratio below or equal to 5.25:1.00 at any time when the aggregate principal amount of loans outstanding under

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

the Revolver is greater than 35% of the commitments under the Revolver. The Credit Agreement also requires the Company and its subsidiaries to comply with customary affirmative and negative covenants, including covenants restricting the ability of the Company and its subsidiaries, subject to specified exceptions, to incur additional indebtedness, make additional guaranties, incur additional liens on assets, or dispose of assets, pay dividends, or make other distributions, voluntarily prepay certain other indebtedness, enter into transactions with affiliated persons, make investments and amend the terms of certain other indebtedness.

The Indentures limit any increase in the Company’s secured indebtedness (other than certain forms of secured indebtedness expressly permitted under the Indentures) to a pro forma secured debt ratio of 4.50 times the Company’s previous quarter’s annualized modified EBITDA (as defined in the Indentures), and limit the Company’s incurrence of additional indebtedness to a total indebtedness ratio of 6.00 times the previous quarter’s annualized modified EBITDA.

The Company was in compliance with all covenants associated with its debt agreements as of December 31, 2018.

Guarantees

The Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all of the Company’s current and future domestic restricted subsidiaries. The Notes were co-issued with Zayo Capital, which does not have independent assets or operations.

The Term Loan Facility and Revolver are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by all of the Company’s current and future domestic restricted subsidiaries.

Debt issuance costs

In connection with the Credit Agreement (and subsequent amendments thereto), and the various Notes offerings, the Company incurred debt issuance costs of $114.1 million (net of extinguishments). These costs are being amortized to interest expense over the respective terms of the underlying debt instruments using the effective interest method, unless extinguished earlier, at which time the related unamortized costs are to be immediately expensed.

The balance of debt issuance costs as of December 31, 2018 and June 30, 2018 was $54.7 million and $59.6 million, net of accumulated amortization of $59.4 million and $54.5 million, respectively. The amortization of debt issuance costs is included on the condensed consolidated statements of cash flows within non-cash interest expense along with the amortization or accretion of the premium and discount on the Company’s indebtedness. Interest expense associated with the amortization of debt issuance costs was $2.4 million and $4.9 million for the three and six months ended December 31, 2018, respectively, and $2.3 million and $4.7 million for the three and six months ended December 31, 2017, respectively.

Debt issuance costs are presented in the condensed consolidated balance sheets as a reduction to long-term debt, non-current.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(6) INCOME TAXES

A reconciliation of the actual income tax provision and the tax computed by applying the U.S. federal rate to the earnings before income taxes during the three and six month periods ended December 31, 2018 and 2017, respectively, is as follows:


	Three months ended December 31,				Six months ended December 31,
	2018		2017		2018			2017
	(in millions)
Expected provision at the statutory rate	$	11.1	$	7.4	$	20.0	$	17.4
Increase/(decrease) due to:
Non-deductible stock-based compensation		2.5		1.0		3.6		2.5
State income taxes benefit, net of federal benefit		2.5		0.9		4.0		1.5
Transaction costs not deductible for tax purposes		0.1		0.1		0.4		0.2
Change in statutory tax rates outside U.S.		—		0.8		(0.1)		0.8
Changes in uncertain tax positions		6.4		—		6.4		—
Foreign tax rate differential		1.3		0.5		1.5		(1.7)
U.S. Tax Reform		(0.4)		44.1		7.2		44.1
Change in valuation allowance		(0.5)		(25.7)		(0.8)		(31.4)
Other, net		(0.5)		(8.7)		0.8		(7.6)
Provision for income taxes	$	22.5	$	20.4	$	43.0	$	25.8

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

ASC 740, Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment. The SEC staff issued SAB 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which will allow registrants to record provisional amounts during a measurement period. The measurement period is similar to the measurement period used when accounting for business combinations under ASC 805, Business Combinations. SAB 118 allows a registrant to recognize provisional amounts when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. Provisional amounts were recorded in prior quarters; however, the measurement period ended as of December 31, 2018 and final amounts are now recorded.

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Amounts recognized due to the U.S. Tax Reform for the three months ended December 31, 2018:


		Through September 30, 2018:	Tax Expense recognized for the three months ended December 31, 2018		Through December 31, 2018:
		(in millions)
Change in statutory tax rate, U.S. only	$	(10.1)	$	—	$	(10.1)
Changes to indefinite reinvestment assertion		0.8		(0.2)		0.6
Repatriation Tax		39.0		(0.2)		38.8
Net impacts of U.S. Tax Reform	$	29.7	$	(0.4)	$	29.3

Amounts recognized due to the U.S. Tax Reform for the six months ended December, 31, 2018:


		Through June 30, 2018:	Tax Expense recognized for the six months ended December 31, 2018		Through December 31, 2018:
		(in millions)
Change in statutory tax rate, U.S. only	$	(16.3)	$	6.2	$	(10.1)
Changes to indefinite reinvestment assertion		0.8		(0.2)		0.6
Repatriation Tax		37.6		1.2		38.8
Net impacts of U.S. Tax Reform	$	22.1	$	7.2	$	29.3

Provisional numbers were recorded as discrete adjustments to income tax expense in the period in which those adjustments become estimable and/or are finalized. Final amounts are recorded as discrete adjustments in the current period ended December 31, 2018.

As of December 31, 2017, the Company reversed its indefinite reinvestment assertion on all its foreign subsidiaries because the Company will be required to pay tax on all the accumulated undistributed earnings of its foreign subsidiaries. As of December 31, 2018, the Company has $0.6 million recorded as a deferred tax liability for additional tax due upon actual repatriation.

The Company files income tax returns in various federal, state, and local jurisdictions including the United States, Canada, United Kingdom and France. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world. With few exceptions, the Company is no longer subject to income tax examinations by tax authorities in major tax jurisdictions for years before 2013.

As of December 31, 2018 and June 30, 2018, the Company had gross unrecognized tax benefits of $10.3 million and $3.0 million, respectively. During Fiscal 2019, an additional $7.3 million ($6.4 million net of federal benefit) was recognized for prior year tax positions. These amounts include accrued interest and penalties of $1.7 million as of December 31, 2018 and $0.1 million as of June 30, 2018. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.

(7) EQUITY

During the three months ended December 31, 2018, the Company repurchased 12,967,663 shares of ZGH outstanding common stock at an average price of $31.02, or $402.3 million. During the six months ended December 31, 2018, the Company repurchased 12,973,892 shares of ZGH outstanding common stock at an average price of $31.03, or $402.5 million. The stock repurchase on behalf of ZGH is included on the consolidated statement of member’s equity as a Capital distribution to parent during the six months ended December 31, 2018.

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During the six months ended December 31, 2018, the Company recorded a $51.6 million increase in additional paid-in capital associated with stock-based compensation expense related to the Company’s equity classified stock-based compensation awards (See Note 8 –Stock-based Compensation).

(8) STOCK-BASED COMPENSATION

The following tables summarize the Company’s stock-based compensation expense for liability and equity classified awards included in the condensed consolidated statements of operations.


	Three Months Ended December 31,				Six Months Ended December 31,
	2018		2017		2018		2017
	(in millions)
Included in:
Operating costs	$	2.7	$	2.3	$	5.4	$	5.5
Selling, general and administrative expenses		23.5		21.2		47.5		45.8
Total stock-based compensation expense	$	26.2	$	23.5	$	52.9	$	51.3

Part A restricted stock units	$	22.4	$	19.4	$	45.7	$	41.6
Part B restricted stock units		3.3		3.6		6.2		8.7
Part C restricted stock units		0.5		0.5		1.0		1.0
Total stock-based compensation expense	$	26.2	$	23.5	$	52.9	$	51.3

Performance Compensation Incentive Program

During October 2014, ZGH adopted the 2014 Performance Compensation Incentive Program (“PCIP”). The PCIP includes incentive cash compensation and equity in the form of restricted stock units (“RSUs”). Grants under the PCIP RSU plans are made quarterly for all participants. The PCIP was effective on October 16, 2014 and will remain in effect for a period of 10 years (or through October 16, 2024) unless it is earlier terminated by ZGH’s Board of Directors.

The PCIP has the following components:

Part A

Under Part A of the PCIP, certain full-time employees, including the Company’s executives, are eligible to earn quarterly awards of RSUs. Each participant in Part A of the PCIP will have an RSU annual award target value, which will be allocated to each fiscal quarter. The final Part A value awarded to a participant for any fiscal quarter is determined by the Compensation Committee of the Board of Directors subsequent to the end of the respective performance period taking into account ZGH’s measured value creation for the quarter, as well as such other subjective factors that it deems relevant (including group and individual level performance factors). The number of Part A RSUs granted will be calculated based on the final award value determined by the Compensation Committee divided by the average closing price of ZGH’s common stock over the last ten trading days of the respective performance period. Part A RSUs will vest on the last day of the fifteen month period subsequent to the end of the performance period (for awards relating to quarterly periods through June 30, 2017) or the twelve month period subsequent to the end of the performance period (for awards relating to the quarterly period ended September 30, 2017 and subsequent quarters), subject to continuous employment through such date. Upon vesting, the RSUs convert to an equal number of ZGH’s common stock. Additionally, Part A RSUs may be granted to certain employees upon commencement of their employment with the Company.

During the three and six months ended December 31, 2018, the Company recognized $22.4 million and $45.7 million, respectively, of compensation expense associated with the vested portion of the Part A awards. During the three and six months ended December 31, 2017, the Company recognized $19.4 million and $41.6 million, respectively, of compensation expense associated with the vested portion of the Part A awards. The December 2018 and June 2018 quarterly awards were recorded as liabilities totaling $5.0 million and $5.7 million, as of December 31, 2018 and June 30, 2018, respectively, as the awards represent an obligation denominated in a fixed dollar amount to be settled in a

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variable number of shares during the subsequent quarter. The quarterly stock-based compensation liability is included in accrued liabilities in the accompanying condensed consolidated balance sheets. Upon the issuance of the RSUs, the liability is re-measured and then reclassified to additional paid-in capital, with a corresponding charge (or credit) to stock based compensation expense. The value of the remaining unvested RSUs is expensed ratably through the vesting date. At December 31, 2018, the remaining unrecognized compensation cost to be expensed over the remaining vesting period for Part A awards is $23.5 million.

The following table summarizes the Company’s Part A RSU activity for the six months ended December 31, 2018:


	Number of Part A RSUs	Weighted average grant-date fair value per share		Weighted average remaining contractual term in months
Outstanding at July 1, 2018	2,246,495	$	35.08	6.4
Granted	1,368,253		30.75
Vested	(1,356,961)		34.67
Forfeited	(284,496)		n/a
Outstanding at December 31, 2018	1,973,291	$	32.19	5.7

Part B

Under Part B of the PCIP, participants, including the Company’s executives, are awarded quarterly grants of RSUs. The number of the RSUs earned by the participants is based on ZGH’s stock price performance over a performance period of one year with the starting price being the average closing price over the last ten trading days of the quarter immediately prior to the grant and the ending price being the average closing price over the last ten trading days of the quarter immediately prior to vesting. The RSUs vest on the last day of the twelve month period after the beginning of the performance period (for awards vesting on or prior to June 30, 2018) or the fifteen month period after the beginning of the performance period (for awards vesting after June 30, 2018), subject to continued employment through such date. The existence of a vesting provision that is associated with the performance of ZGH’s stock price is a market condition, which affects the determination of the grant date fair value. Upon vesting, RSUs earned convert to an equal number of shares of ZGH’s common stock.

The Company’s Chief Executive Officer (“CEO”) is also awarded quarterly grants of RSUs under the same provisions as other Part B participants outlined above. However, beginning with the grant during the three months ended December 31, 2018, the CEO’s awards are subject to additional vesting criteria that are based on ZGH’s stock performance subsequent to the end of the measurement period. In order for the CEO to receive the maximum award ZGH’s stock price must remain at or above the ending measurement period price for the six months subsequent to the end of the performance period.

The following table summarizes the Company’s Part B RSU activity for the six months ended December 31, 2018:


	Number of Part B RSUs	Weighted average grant-date fair value per unit		Weighted average remaining contractual term in months
Outstanding at July 1, 2018	185,775	$	57.19	8.9
Granted	119,541		42.95
Vested	(64,836)		45.10
Forfeited	—		n/a
Outstanding at December 31, 2018	240,480	$	53.37	7.5

The table below reflects the total Part B RSUs granted during Fiscal 2019 and 2018, the maximum eligible shares of ZGH’s common stock that the respective Part B RSU grant could be converted into shares of ZGH’s common stock, and the grant date fair value per Part B RSU during the period indicated. The table below also reflects the units converted

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to the ZGH’s common stock at a vesting date that is subsequent to the period indicated for those RSUs granted during the period indicated:


	During the three months ended
	December 31, 2018		September 30, 2018
Part B RSUs granted		61,123		58,418
Maximum eligible shares of ZGH's common stock		513,433		403,084
Average grant date fair value per Part B RSU	$	22.43	$	64.41
Units converted to ZGH's common stock at vesting date		n/a		n/a


	During the three months ended
	June 30, 2018		March 31, 2018		December 31, 2017		September 30, 2017
Part B RSUs granted		78,123		77,218		82,556		163,960
Maximum eligible shares of ZGH's common stock		539,049		532,804		569,636		590,256
Average grant date fair value per Part B RSU	$	74.44	$	52.47	$	45.10	$	19.06
Units converted to ZGH’s common stock at vesting date

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ZAYO GROUP LLC 10-Q