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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 September 30, 2019

☐	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)

Securities registered pursuant to Section 12(b) of the Act:

		Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Not applicable	Not applicable	Not applicable

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 ⌧

Table of Contents

ZAYO GROUP, LLC AND SUBSIDIARIES

INDEX


		Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)		1
Condensed Consolidated Balance Sheets as of September 30, 2019 and June 30, 2019		1
Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2019 and 2018		2
Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended September 30, 2019 and 2018		3
Condensed Consolidated Statement of Member's Equity for the Three Months Ended September 30, 2019 and 2018		4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2019 and 2018		5
Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		35
Item 3. Quantitative and Qualitative Disclosures about Market Risk		49
Item 4. Controls and Procedures		50
Part II. OTHER INFORMATION
Item 1. Legal Proceedings		50
Item 1A. Risk Factors		51
Item 6. Exhibits		52
Signatures		53

Table of Contents

ZAYO GROUP, LLC AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in millions)



	September 30, 2019		June 30, 2019
Assets
Current assets
Cash and cash equivalents	$	253.9	$	185.4
Trade receivables, net of allowance of $16.9 and $17.6 as of September 30, 2019 and June 30, 2019, respectively		151.9		177.0
Prepaid expenses		68.1		65.3
Other current assets		57.0		56.8
Total current assets		530.9		484.5
Property and equipment, net		5,851.8		5,808.9
Intangible assets, net		1,092.8		1,118.8
Goodwill		1,701.1		1,706.6
Right-of-use operating lease assets		499.2		—
Deferred income taxes, net		21.3		24.8
Other assets		184.0		190.2
Total assets	$	9,881.1	$	9,333.8
Liabilities and member's equity
Current liabilities
Accounts payable	$	31.9	$	73.7
Accrued liabilities		323.6		314.8
Accrued interest		84.9		73.1
Current portion of long-term debt		130.0		5.0
Operating lease obligations, current		127.2		—
Finance lease obligations, current		9.5		10.0
Deferred revenue, current		172.9		174.9
Total current liabilities		880.0		651.5
Long-term debt, non-current		5,696.1		5,839.7
Operating lease liabilities, non-current		387.4		—
Finance lease obligation, non-current		176.0		172.2
Deferred revenue, non-current		1,205.4		1,148.1
Deferred income taxes, net		147.5		138.8
Other long-term liabilities		30.1		54.7
Total liabilities		8,522.5		8,005.0
Commitments and contingencies (Note 11)
Member's equity
Member's interest		1,602.5		1,576.2
Accumulated other comprehensive loss		(38.3)		(23.9)
Accumulated deficit		(205.6)		(223.5)
Total member's equity		1,358.6		1,328.8
Total liabilities and member's equity	$	9,881.1	$	9,333.8

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

Table of Contents

ZAYO GROUP, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in millions)


	Three Months Ended September 30,
	2019		2018
Revenue	$	638.6	$	641.1
Operating costs and expenses
Operating costs (excluding depreciation and amortization and including stock-based compensation—Note 8)		231.0		228.4
Selling, general and administrative expenses (including stock-based compensation—Note 8)		122.6		122.1
Depreciation and amortization		156.1		167.8
Total operating costs and expenses		509.7		518.3
Operating income		128.9		122.8
Other expenses
Interest expense		(84.7)		(82.2)
Foreign currency loss on intercompany loans		(12.9)		(4.6)
Other income, net		0.6		6.6
Total other expenses, net		(97.0)		(80.2)
Income from operations before income taxes		31.9		42.6
Provision for income taxes		14.0		20.5
Net income	$	17.9	$	22.1

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

Table of Contents

ZAYO GROUP, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in millions)


	Three Months Ended September 30,
	2019		2018
Net income	$	17.9	$	22.1
Foreign currency translation adjustments, net of tax		(14.8)		8.2
Defined benefit pension plan adjustments, net of tax		0.4		(1.9)
Comprehensive income	$	3.5	$	28.4

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)

(in millions)


	Member's Interest		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Member's Equity
Balance at June 30, 2019	$	1,576.2	$	(23.9)	$	(223.5)	$	1,328.8
Stock-based compensation		26.3		—		—		26.3
Foreign currency translation adjustment		—		(14.8)		—		(14.8)
Defined benefit pension plan adjustments		—		0.4		—		0.4
Net income		—		—		17.9		17.9
Balance at September 30, 2019	$	1,602.5	$	(38.3)	$	(205.6)	$	1,358.6


	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		26.3		—		—		26.3
Foreign currency translation adjustment		—		8.2		—		8.2
Capital distribution to parent		(0.2)		—		—		(0.2)
Defined benefit pension plan adjustments		—		(1.9)		—		(1.9)
Net income		—		—		22.1		22.1
Balance at September 30, 2018	$	1,902.7	$	(9.2)	$	(351.4)	$	1,542.1

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 CASH FLOWS (UNAUDITED)

(in millions)


	Three Months Ended September 30,
	2019		2018
Cash flows from operating activities
Net income	$	17.9	$	22.1
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		156.1		167.8
Gain on sale of SRT		—		(5.5)
Non-cash interest expense		2.7		2.5
Stock-based compensation		27.2		26.7
Amortization of deferred revenue		(40.3)		(37.0)
Foreign currency loss on intercompany loans		12.9		4.6
Deferred income taxes		11.8		15.9
Provision for bad debts		2.6		1.5
Non-cash loss on investments		—		0.3
Changes in operating assets and liabilities, net of acquisitions
Trade receivables		20.9		4.5
Accounts payable and accrued liabilities		27.3		9.0
Additions to deferred revenue		81.4		30.5
Other assets and liabilities		(8.7)		(1.1)
Net cash provided by operating activities		311.8		241.8
Cash flows from investing activities
Purchases of property and equipment		(217.1)		(182.5)
Proceeds from sale of SRT, net of cash held in escrow		—		39.0
Net cash used in investing activities		(217.1)		(143.5)

Cash flows from financing activities
Principal payments on long-term debt		(21.3)		(1.3)
Principal payments on finance lease obligations		(2.1)		(1.9)
Payments to repurchase ZGH common stock		—		(0.2)
Cash paid for Santa Clara acquisition financing arrangement and other		—		(3.3)
Net cash used in financing activities		(23.4)		(6.7)
Net cash flows		71.3		91.6
Effect of changes in foreign exchange rates on cash		(2.7)		2.2
Net increase in cash, cash equivalents and restricted cash		68.6		93.8
Cash, cash equivalents and restricted cash, beginning of period		186.6		260.6
Cash, cash equivalents and restricted cash, end of period	$	255.2	$	354.4

Supplemental disclosure of non-cash investing and financing activities:
Cash paid for interest, net of capitalized interest	$	67.2	$	63.4
Cash paid for income taxes	$	3.0	$	2.0
Non-cash purchases of equipment through finance leasing	$	5.7	$	21.9
Non-cash purchases of equipment through nonmonetary exchange	$	19.5	$	31.1
Decrease in accounts payable and accrued expenses for purchases of property and equipment	$	(39.9)	$	(2.4)


Reconciliation of cash, cash equivalents, and restricted cash:		September 30, 2019		June 30, 2019		September 30, 2018		June 30, 2018
Cash and cash equivalents	$	253.9	$	185.4	$	353.2	$	256.0
Restricted cash included in other assets		1.3		1.2		1.2		4.6
Total cash, cash equivalents and restricted cash	$	255.2	$	186.6	$	354.4	$	260.6

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 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.” The Company is a wholly-owned subsidiary of Zayo Group Holdings, Inc. (“ZGH”). 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 four segments:

●Zayo Networks, including dark fiber, mobile infrastructure solutions, ethernet, wavelength, wholesale IP, SONET solutions, private lines, and dedicated internet.

●

Zayo Colocation (“zColo”), including provision of colocation space and power and interconnection offerings, and cloud-based computing offerings.

●

Allstream, including Cloud VoIP and Data Solutions.

●

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

Significant Merger Development

On May 8, 2019, ZGH, Front Range TopCo, Inc. (“Parent”), a Delaware corporation and Front Range BidCo, Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) to be acquired by a consortium of private equity funds including affiliates of EQT Infrastructure IV, Digital Colony Partners, LP, DC Front Range Holdings I, LP and FMR LLC (the “Consortium”). Upon the close of the Merger (defined below), ZGH will operate as a privately-held company. Parent and Merger Sub were formed by the Consortium.

The Merger Agreement provides, among other things and upon the terms and subject to the conditions of the Merger Agreement, (i) Merger Sub will be merged with and into ZGH (the “Merger”), with ZGH surviving and continuing as the surviving corporation in the Merger and a wholly owned subsidiary of Parent, and (ii) at the effective time of the Merger, each outstanding share of common stock of ZGH, par value $0.001 per share (“Common Stock”) (other than Common Stock owned by Parent, Merger Sub or any wholly owned subsidiary of Parent or Merger Sub or held in the treasury of ZGH, all of which shall be cancelled without any consideration being exchanged therefore, shares of ZGH Common Stock held by holders who have made a valid demand for appraisal in accordance with Section 262 of the Delaware General Corporation Law) will be converted into the right to receive an amount equal to $35.00 per share in cash (the “Merger Consideration”).

The closing of the Merger is subject to customary closing conditions, including (i) the adoption of the Merger Agreement by the holders of not less than a majority of the outstanding shares of ZGH Common Stock, (ii) the receipt of specified required regulatory approvals, (iii) the absence of any law or order enjoining or prohibiting the Merger or making it illegal, (iv) the accuracy of the representations and warranties contained in the Merger Agreement (subject to “material adverse effect” and materiality qualifications) and (v) compliance with covenants in the Merger Agreement in all material respects.

ZGH’s board of directors and the board of directors of Parent have each unanimously approved the Merger and the Merger Agreement. On July 26, 2019, ZGH held a special meeting of stockholders where our stockholders approved the adoption of the Merger Agreement. On July 31, 2019, ZGH announced the early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, satisfying one of the conditions to the closing of the pending transaction. The closing of the deal continues to be subject to customary conditions, including regulatory clearances relating to review and clearance by the Committee on Foreign Investment in the United States and

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the receipt of certain foreign antitrust approvals, certain other foreign direct investment review approvals, and specified FCC and state public utility commission approvals. In addition, the Merger Agreement may be terminated under specified circumstances. The closing of the Merger is not subject to a financing condition. The Merger is expected to close in the first half of 2020. Until the closing, we will continue to operate as an independent company. The Company has incurred ongoing Merger-related costs of $2.0 million during the three months ended September 30, 2019, which are included in “Selling, general and administrative expenses” in the condensed consolidated statements of operations. The foregoing description of the Merger Agreement is qualified in its entirety by reference to the full text of the Merger Agreement, which has been filed as Exhibit 2.1 to ZGH’s Current Report on Form 8-K filed with the SEC on May 9, 2019.

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, 2019 included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019. In the opinion of management, all adjustments considered necessary for a fair presentation of financial position, results of operations and cash flows of the Company have been included herein. The results of operations for the three months ended September 30, 2019 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” and the fiscal year ended June 30, 2019 as “Fiscal 2019.”

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, selection of the discount rate used to value lease liabilities, determining the fair value of nonmonetary exchanges, 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, 2019, the Company adopted the requirements of Accounting Standards Update (“ASU”) 2016-02, Leases (ASC 842). See Recently Adopted Accounting Pronouncements below and Note 13 – Leases for additional disclosure on the Company’s adoption of ASC 842 and its impact on the condensed consolidated financial statements.

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There have been no other changes to the Company’s significant accounting policies described in its Annual Report on Form 10-K for the year ended June 30, 2019.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments." The primary impact of ASU 2016-13 for us is a change in the model for the recognition of credit losses related to our financial instruments from an incurred loss model, which recognized credit losses only if it was probable a loss had been incurred, to an expected loss model, which requires our management team to estimate the total credit losses expected on the portfolio of financial instruments. We are currently reviewing the requirements of the standard and evaluating the impact on our consolidated financial statements. We are required to adopt the provisions of ASU 2016-13 no later than July 1, 2020.

Recently Adopted Accounting Pronouncements

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 are required to recognize a right-of-use asset and a lease liability for virtually all leases. The liability is equal to the present value of lease payments. The asset is based on the liability, subject to certain adjustments. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Lessor accounting remains similar to the current model but updated to align with certain changes to the lessee model and the new revenue recognition standard (ASC 606). ASU 2016-02 requires both quantitative and qualitative disclosures regarding key information about leasing arrangements. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

The Company adopted ASC 842 effective July 1, 2019 using the modified retrospective transition method. Under this method, the Company recognized a cumulative effect adjustment in the first quarter of Fiscal 2020, rather than restating any prior periods. Comparative information for prior periods has not been restated and continues to be reported in accordance with Topic 840.

The Company elected the package of practical expedients permitted under the transition guidance, which does not require reassessment of prior conclusions related to contracts containing a lease, lease classification and initial direct lease costs. As an accounting policy election, the Company will exclude short-term leases (term of 12 months or less) from the balance sheet presentation and will account for non-lease and lease components in a contract as a single lease component for certain asset classes. The Company also elected the land easements practical expedient which permits the Company to carry forward the historical accounting treatment for agreements entered into prior to the adoption date.

The adoption of ASC 842 impacted the Company’s condensed consolidated balance sheet with the recognition of existing operating leases as lessee resulting in $527.6 million of right-of-use (“ROU”) assets and $545.1 million of lease liabilities recorded as of July 1, 2019. The standard did not materially impact the Company’s consolidated net earnings or cash flows for the three months ended September 30, 2019.

As lessor, accounting for the Company’s leases remains largely unchanged from ASC 840. The Company leases dark fiber and circuits (within the Zayo Networks segment) and provides leases of colocation space (within the zColo segment) which have contract terms that are accounted for as operating leases and are further described in Note 15 – Segment Reporting. The new lease standard more narrowly defines initial direct costs as only costs that are incremental to origination of a lease (i.e. costs that would not have been incurred had the lease not been obtained). The Company did not historically capitalize non-incremental costs; therefore, this change will not have an impact on the accounting for initial direct costs in the condensed consolidated financial statements on a prospective basis.

(2) ACQUISITIONS AND DISPOSITIONS

Since inception through September 30, 2019, 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

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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.

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 utilizing 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 associated with signed and/or closed acquisitions or disposals and unsuccessful acquisitions. The Company incurred transaction costs of $2.0 million and $0.7 million for the three months ended September 30, 2019 and 2018, respectively. Transaction costs of $2.0 million in the three months ended September 30, 2019 are related to the Merger Agreement between the Company, Parent and Merger Sub (see Note 1 – Organization and Description of Business). 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.

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 September 30, 2019, $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. The Company concluded SRT was not a significant disposal group and did not represent a strategic shift, and therefore was not classified as discontinued operations.

(3) GOODWILL

During the fourth quarter of Fiscal 2019, the Company implemented organizational changes resulting in changes to its reportable segments. In connection with the organizational change, the Company’s reporting units changed and goodwill was re-allocated to the new reporting units on a relative fair value basis. The Company completed an assessment immediately prior to and after the organizational change and determined it is more likely than not the fair value of the Company’s reporting units is greater than their carrying amounts.

The following reflects the changes in the carrying amount of goodwill during the three months ended September 30, 2019:


Product Group	As of June 30, 2019		Foreign Currency Translation and Other		As of September 30, 2019
	(in millions)
Fiber Solutions	$	1,000.9	$	(3.2)	$	997.7
Layer 2/3		200.8		(0.7)		200.1
Transport		176.2		(0.6)		175.6
zColo		259.6		(1.0)		258.6
Cloud		14.7		—		14.7
Allstream		39.0		—		39.0
Other		15.4		—		15.4
Total	$	1,706.6	$	(5.5)	$	1,701.1

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(4) INTANGIBLE ASSETS

Identifiable intangible assets as of September 30, 2019 and June 30, 2019 were as follows:


	Gross Carrying Amount		Accumulated Amortization		Net
	(in millions)
September 30, 2019
Finite-Lived Intangible Assets
Customer relationships	$	1,550.6	$	(477.0)	$	1,073.6
Underlying rights and other		3.4		(1.7)		1.7
Total		1,554.0		(478.7)		1,075.3
Indefinite-Lived Intangible Assets
Certifications		3.5		—		3.5
Underlying rights and other		14.0		—		14.0
Total	$	1,571.5	$	(478.7)	$	1,092.8
June 30, 2019
Finite-Lived Intangible Assets
Customer relationships	$	1,597.6	$	(498.7)	$	1,098.9
Underlying rights and other		3.4		(1.5)		1.9
Total		1,601.0		(500.2)		1,100.8
Indefinite-Lived Intangible Assets
Certifications		3.5		—		3.5
Underlying rights and other		14.5		—		14.5
Total	$	1,619.0	$	(500.2)	$	1,118.8

(5) LONG-TERM DEBT

As of September 30, 2019 and June 30, 2019, long-term debt was as follows:


	Date of				Outstanding as of
	Issuance or most recent amendment	Maturity	Interest Payments	Interest Rate	September 30, 2019		June 30, 2019
					(in millions)
Term Loan Facility due 2021	Jan 2017	Jan 2021	Monthly	LIBOR +2.00%	$	487.5	$	488.7
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	Jan/Apr 2019 ⁽¹⁾	Jul 2020⁽²⁾	Monthly	LIBOR +1.75%		125.0		145.0
Total obligations						5,861.8		5,883.0
Unamortized premium, net						11.9		11.9
Unamortized debt issuance costs						(47.6)		(50.2)
Carrying value of debt						5,826.1		5,844.7
Less current portion⁽²⁾						(130.0)		(5.0)
Total long-term debt, less current portion					$	5,696.1	$	5,839.7

(1)

The most recent borrowings under the Revolving Loan Facility occurred in January 2019 and the most recent amendment on the Revolving Loan Facility was April 2019.

(2)

The earliest possible maturity under the Extension Amendment No. 1 entered into on April 3, 2019 is July 2020 and as a result, the Revolving Loan Facility is classified as current. See below for further details.

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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 the Credit Agreement (the “Credit Agreement”) governing the 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 2020 or Fiscal 2019).

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 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.

On December 22, 2017, the Company 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, which was subsequently extended on April 3, 2019. Refer below for more information on the extension. 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 the Company’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 the Company’s leverage ratio.

On February 26, 2018, the Company and Zayo Capital entered into an amendment to the Credit Agreement and 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.

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On April 3, 2019, the Company and Zayo Capital entered into Extension Amendment No. 1 to the Credit Agreement (the “Extension Amendment”) with respect to the Revolver. Under the terms of the Extension Amendment, the maturity date of the revolving credit facility was extended from April 17, 2020 to the earliest of (i) April 17, 2023, (ii) six months prior to the maturity date of the $500.0 million term loan tranche, which matures on January 19, 2021, subject to the refinancing thereof with debt having a maturity date no earlier than April 17, 2023 or repayment in full, and (iii) six months prior to the maturity date of the 2023 Unsecured Notes, which mature on April 1, 2023, subject to the refinancing thereof with debt having a maturity date no earlier than April 17, 2023 or repayment in full. As of September 30, 2019, the Company has reclassified the Revolver to current portion of long-term debt because July 2020 is the earliest possible maturity date under the Extension Amendment.

The weighted average interest rates (including margin) on the Term Loan Facility were approximately 4.2% and 4.6% at September 30, 2019 and June 30, 2019, respectively. The weighted average interest rates on the Revolver were approximately 3.8% and 4.2% at September 30, 2019 and June 30, 2019, respectively.

The Company had no borrowings under the Revolver during the three months ended September 30, 2019 and 2018. As of September 30, 2019, $125.0 million was outstanding under the Revolver and $1,756.8 million in aggregate principal amount was outstanding under the Term Loan Facility. Standby letters of credit were outstanding in the amount of $8.6 million as of September 30, 2019, leaving $316.4 million available under the Revolver, subject to certain conditions.

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

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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 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 September 30, 2019.

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 $114.8 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 September 30, 2019 and June 30, 2019 was $47.6 million and $50.2 million, net of accumulated amortization of $67.3 million and $64.6 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

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associated with the amortization of debt issuance costs of $2.7 million and $2.5 million for the three months ended September 30, 2019 and 2018, respectively.

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

(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 month periods ended September 30, 2019 and 2018 is as follows:


	Three Months Ended September 30,
	2019		2018
	(in millions)
Expected provision at the statutory rate	$	6.7	$	8.9
Increase/(decrease) due to:
Stock-based compensation		0.7		1.1
State income taxes expense, net of federal benefit		1.9		1.5
Change in statutory tax rate, outside U.S.		—		(0.1)
Change in uncertain tax benefits		1.0		—
Foreign tax rate differential		1.2		0.2
State NOL expirations		1.6		—
U.S. Tax Reform		—		7.6
Change in valuation allowance		—		(0.3)
Other, net		0.9		1.6
Provision for income taxes	$	14.0	$	20.5

The Company’s interim income tax provision reflects an estimate of the effective tax rate for the full fiscal year, applied to the year-to-date book income, adjusted for any discrete events, which are recorded in the period in which they occur. The estimates are re-evaluated each quarter based on estimated tax expense for the full fiscal year.

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. Provisional impacts of U.S. Tax Reform were recorded in the six months ended June 30, 2018 and further adjusted during the three months ended September 30, 2018. In accordance with SAB 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, the Company recorded the final impacts of U.S. Reform at the end of the provisional measurement period on December 31, 2018.

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 prior to 2014.

The Company had gross unrecognized tax benefits of $16.4 million and $15.7 million, as of September 30, 2019 and June 30, 2019, respectively. These amounts include accrued interest and penalties of $2.5 million and $2.2 million, respectively as of September 30, 2019 and June 30, 2019. The Company recognizes interest and penalties related to uncertain tax positions in the provision for income taxes.

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(7) EQUITY

On May 7, 2018, the Board of Directors of ZGH authorized the repurchase of up to $500 million of shares of ZGH outstanding common stock from time to time using a variety of methods, including open market purchases, privately negotiated transactions and other means in accordance with federal securities laws. During the three months ended September 30, 2018, the Company repurchased 6,229 shares of ZGH outstanding common stock at an average price of $34.00, or $0.2 million. The authorization expired on November 7, 2018 with the Company having repurchased $496.0 million under the authorization. The stock repurchase on behalf of ZGH is included in the condensed consolidated statement of member’s equity as a capital distribution to ZGH.

During the three months ended September 30, 2019 and 2018, the Company recorded $26.3 million in each period in member’s interest 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 September 30,
	2019		2018
	(in millions)
Included in:
Operating costs	$	3.2	$	2.7
Selling, general and administrative expenses		24.0		24.0
Total stock-based compensation expense	$	27.2	$	26.7

Part A restricted stock units	$	22.7	$	23.3
Part B restricted stock units		3.8		2.9
Part C restricted stock units		0.7		0.5
Total stock-based compensation expense	$	27.2	$	26.7

Performance Compensation Incentive Program

During October 2014, the Company adopted the 2014 Performance Compensation Incentive Program (“PCIP”). The PCIP includes incentive cash compensation and equity (in the form of restricted stock units or “RSUs”). Grants under the PCIP RSU plans are made quarterly for all participants. The PCIP was effective on October 16, 2014 and will remain in effect for a period of 10 years (or through October 16, 2024) unless it is earlier terminated by 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 the Company’s measured value creation for the quarter, as well as such other subjective factors that it deems relevant (including group and individual level performance factors). The number of Part A RSUs granted will be calculated based on the final award value determined by the Compensation Committee divided by the average closing price of the Company’s common stock over the last ten trading days of the respective performance period. Part A RSUs will vest assuming continuous employment fifteen months subsequent to the end of the performance period (for awards relating to quarterly periods through June 30, 2017) or twelve months subsequent to

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the end of the performance period (for awards relating to quarterly periods subsequent to June 30, 2017). Upon vesting, the RSUs convert to an equal number of shares of ZGH’s common stock. Additionally, Part A RSU awards may be granted to certain employees upon commencement of their employment with the Company.

The September 2019 and June 2019 quarterly awards were recorded as liabilities totaling $6.7 million and $6.2 million, as of September 30, 2019 and June 30, 2019, respectively, as the awards represent an obligation denominated in a fixed dollar amount to be settled in a variable number of shares during the subsequent quarter. The quarterly stock-based compensation liability is included in 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 September 30, 2019, the remaining unrecognized compensation cost to be expensed over the remaining vesting period for Part A awards is $29.2 million.

The following table summarizes the Company’s Part A RSU activity for the three months ended September 30, 2019:


	Number of Part A RSUs	Weighted average grant-date fair value per share		Weighted average remaining contractual term in months
Outstanding at July 1, 2019	2,324,396	$	28.49	6.6
Granted	640,191		33.73
Vested	(552,064)		25.93
Forfeited	(74,448)		n/a
Outstanding at September 30, 2019	2,338,075	$	30.39	5.8

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”) and Chief Financial Officer (“CFO”) are 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, in the case of the CEO, and beginning with the grant during the three months ended March 31, 2019, in the case of the CFO, 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 and CFO 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.

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The following table summarizes the Company’s Part B RSU activity for the three months ended September 30, 2019:


	Number of Part B RSUs	Weighted average grant-date fair value per unit		Weighted average remaining contractual term in months
Outstanding at July 1, 2019	289,254	$	49.73	8.0
Granted	64,705		69.86
Vested	(57,336)		64.41
Forfeited	—		n/a
Outstanding at September 30, 2019	296,623	$	51.28	7.5

The table below reflects the total Part B RSUs granted during each period presented, 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 to 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
	September 30, 2019
Part B RSUs granted		64,705
Maximum eligible shares of ZGH’s common stock		446,465
Grant date fair value per Part B RSU	$	69.86
Units converted to ZGH’s common stock at vesting date		n/a


	During the Three Months Ended
	June 30, 2019		March 31, 2019		December 31, 2018		September 30, 2018
Part B RSUs granted		75,370		98,342		61,123		58,418
Maximum eligible shares of ZGH's common stock		520,053		678,560		421,749		403,084
Grant date fair value per Part B RSU	$	63.67	$	52.81	$	22.43	$	64.41
Units converted to ZGH's common stock at vesting date		n/a		n/a		n/a		—

The grant date fair value of Part B RSU grants is estimated utilizing a Monte Carlo simulation. This simulation estimates the ten-day average closing stock price ending on the vesting date, the stock price performance over the performance period, and the number of common shares to be issued at the vesting date. Various assumptions are utilized in the valuation method, including the target stock price performance ranges and respective share payout percentages, the ZGH historical stock price performance and volatility, peer companies’ historical volatility and an appropriate risk-free rate. The aggregate future value of the grant under each simulation is calculated using the estimated per share value of the common stock at the end of the vesting period multiplied by the number of common shares projected to be granted at the vesting date. The present value of the aggregate grant is then calculated under each of the simulations, resulting in a distribution of potential present values. The fair value of the grant is then calculated based on the average of the potential present values. The remaining unrecognized compensation cost associated with Part B RSU grants is $8.8 million at September 30, 2019.

Part C

Under Part C of the PCIP, independent directors of the Company are eligible to receive quarterly awards of RSUs. Independent directors electing to receive a portion of their annual director fees in the form of RSUs are granted a set dollar amount of Part C RSUs each quarter. The quantity of Part C RSUs granted is based on the average closing price of ZGH’s common stock over the last ten trading days of the quarter ended immediately prior to the grant date and

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vest at the end of each quarter for which the grant was made. During the three months ended September 30, 2019 and 2018, the Company’s independent directors were granted 19,347 and 14,137 Part C RSUs, respectively.

(9) EMPLOYEE BENEFITS

In connection with the Company’s acquisition of Allstream, Inc. in January 2016, the Company assumed sponsorship for a defined pension plan for certain employees of Allstream, Inc. The Company also assumed sponsorship of an OPEB for certain employees of Allstream, Inc., which provides health care and life insurance benefits for certain eligible retirees. These OPEB plans are not funded. Benefits are paid directly to the participants of these plans.

The service cost component of the defined benefit pension and post-retirement benefit (OPEB) plans is included within selling, general and administrative expenses and all other components are recognized in other income, net in the accompanying condensed consolidated statements of operations.


	Pension Plans
	Three Months Ended September 30,
	2019		2018
	(in millions)
Service cost	$	0.6	$	0.8
Interest cost		0.9		0.9
Expected return on plan assets		(1.3)		(1.4)
Amortization of service cost from earlier periods		0.2		0.2
Gain on curtailment⁽¹⁾		—		(0.4)
Net periodic pension benefit cost	$	0.4	$	0.1

(1)

During the three months ended September 30, 2018, the Company approved an amendment to the defined benefit pension plan freezing benefit accruals for certain members of the pension plan as of September 30, 2018. The plan freeze had an immaterial impact to the financial statements for the period ended September 30, 2018.


	OPEB Plans
	Three Months Ended September 30,
	2019		2018
	(in millions)
Interest cost	$	0.1		0.1
Net periodic OPEB benefit cost	$	0.1	$	0.1

(10) FAIR VALUE MEASUREMENTS

The Company’s financial instruments consist of cash and cash equivalents, restricted cash, trade receivables, accounts payable, long-term debt, certain post-employment plans and stock-based compensation liability. The carrying values of cash and cash equivalents, restricted cash, trade receivables and accounts payable approximated their fair values at September 30, 2019 and June 30, 2019 due to the short maturity of these instruments.

The carrying value of the Company’s Notes, excluding debt issuance costs, reflects the original amounts borrowed, inclusive of net unamortized premium, and was $4,000.4 million and $4,001.1 million as of September 30, 2019 and June 30, 2019, respectively. Based on market interest rates for debt of similar terms and average maturities, the fair value of the Company's Notes as of September 30, 2019 and June 30, 2019 was estimated to be $4,069.1 million and $4,067.7 million, respectively. The Company’s fair value estimates associated with its Note obligations were derived utilizing Level 2 inputs – quoted prices for similar instruments in active markets.

The carrying value of the Company’s Term Loan Facility, excluding debt issuance costs, reflects the original amounts borrowed, inclusive of unamortized discounts, and was $1,748.3 million and $1,748.8 million as of September 30, 2019 and June 30, 2019, respectively. The Company’s Term Loan Facility accrues interest at variable rates based upon the one month, three month or nine month LIBOR plus i) a spread of 2.0% on the Company’s $500.0 million

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tranche (which has a LIBOR floor of 0.0%) and ii) a spread of 2.25% on its B-2 Term Loan tranche (which has a LIBOR floor of 1.00%). Based on market interest rates for debt of similar terms and average maturities, the fair value of the Company’s Term Loan Facility as of September 30, 2019 and June 30, 2019 was estimated to be $1,762.8 million and $1,758.0 million, respectively. The Company’s fair value estimates associated with its Term Loan Facility obligations were derived utilizing Level 2 inputs—quoted prices for similar instruments in active markets.

As of September 30, 2019 and June 30, 2019, the outstanding balance under the Company’s Revolver was $125.0 million and $145.0 million, respectively.

A hypothetical increase in the applicable interest rate on the Company’s Term Loan Facility of one percentage point above the 1.0% LIBOR floor would increase the Company’s annual interest expense by approximately $18.8 million.

(11) COMMITMENTS AND CONTINGENCIES

Purchase Commitments

As of September 30, 2019, the Company was contractually committed for $586.7 million of capital expenditures for construction materials and purchases of property and equipment. A majority of these obligations are expected to be satisfied in the next twelve months. These obligations are primarily success based; that is, the Company has executed customer contracts that support the future capital expenditures.

During the year ended June 30, 2019, the Company entered into a CAD $127.0 million (or $95.9 million) commitment for telecommunications services over a two year period. As of September 30, 2019, CAD $83.0 million (or $62.7 million) remained on the commitment.

Also, during the year ended June 30, 2019, the Company entered into a CAD $40.0 million (or $30.2 million) commitment for telecommunications services over a three year period. As of September 30, 2019, CAD $22.2 million (or $16.8 million) remained on the commitment.

Outstanding Letters of Credit

As of September 30, 2019, the Company had $8.6 million in outstanding letters of credit, which were primarily entered into in connection with various lease agreements. Additionally, as of September 30, 2019, Zayo Canada, Inc., a subsidiary of the Company, had CAD $2.8 million (or $2.1 million) in letters of credit under a CAD $5.0 million (or $3.8 million) unsecured credit agreement.

Contingencies

In the normal course of business, the Company is party to various outstanding legal proceedings, asserted and unasserted claims, and disputes. In the opinion of management, the ultimate disposition of these matters, both asserted and unasserted, will not have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.

The Company accrues for losses related to contingencies when a loss from such claims is probable and the amount of loss can be reasonably estimated. In determining whether a loss from a claim is probable and the loss can be reasonably estimated, the Company reviews and evaluates its litigation and regulatory matters in light of potentially relevant factual and legal developments. If the Company determines an unfavorable outcome is not probable or the amount of loss cannot be reasonably estimated, the Company does not accrue for a potential litigation loss. In those situations, the Company discloses an estimate or range of the reasonably possible losses, if such estimates can be made. At this time, the Company does not believe that it is possible to estimate the reasonably possible losses or a range of reasonably possible losses related to the matters described below.

Following the filing of the preliminary proxy statement on June 3, 2019, several complaints were filed against ZGH and its Board of Directors challenging the Merger. Four actions were filed in the United States District Court for the District of Delaware captioned Scarantino v. Zayo Group Holdings, Inc., et al., Case No. 1:19-cv-01068-RGA (D.

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Del.), Klein v. Zayo Group Holdings, Inc., et al., Case No. 1:19-cv-01085-RGA (D. Del.), Duggan v. Zayo Group Holdings, Inc., et al., Case No. 1:19-cv-01112-RGA (D. Del.), and Dixon v. Zayo Group Holdings, Inc., et al., Case No. 1:19-cv-01123-RGA (D. Del.); one action was filed in the United States District Court for the District of Colorado captioned Graves v. Zayo Group Holdings, Inc., et al., Case No. 1:19-cv-01747-LTB (D. Colo.); and one action was filed in the District Court of Boulder County, Colorado captioned Saroop v. Zayo Group Holdings, Inc., et al., Case No. 2019CV30601. The complaints generally alleged, among other things, that ZGH and its directors disseminated an allegedly false and materially misleading proxy statement or that ZGH’s Board of Directors breached their fiduciary duties in connection with the merger. The complaints sought, among other things, to enjoin the merger, a declaration that the proxy statement violated federal securities laws, unspecified damages, and an award of attorneys’ and experts’ fees.

ZGH issued supplemental disclosures in the definitive proxy statement dated June 26, 2019. In light of those supplemental disclosures, as of September 30, 2019, each of the above-referenced complaints was voluntarily dismissed as moot.

Three ZGH stockholders also filed complaints in the Delaware Court of Chancery pursuant to 8 Del. C. §220 seeking corporate books and records, captioned Teamsters Local 237 Additional Security Benefit Fund, et al. v. Zayo, C.A. No. 2019-0572-TMR (July 25, 2019); Massachusetts Laborers' Annuity Fund v. Zayo Group Holdings, Inc., C.A. No. 2019-0573-TMR; and Waterhouse v. Zayo Group Holdings, Inc., C.A. No. 2019-0589-TMR (July 31, 2019). The Company intends to vigorously defend against these actions.

(12) REVENUE AND CONTRACT COSTS

Nature of the Company’s Products and Offerings

Refer to the Revenue Recognition section of Note 2 – Basis of Presentation and Significant Accounting Policies and Note 15 – Revenue and Contract Costs in our annual report on Form 10-K for the year ended June 30, 2019 for further information regarding our application of ASC 606, including practical expedients and judgments applied in determining the amounts and timing of revenue from contracts with customers.

Reconciliation of Total Revenue to Revenue from Contracts with Customers

The following table provides the amount of revenue that is not subject to ASC 606, but is instead governed by other accounting standards:


	Three Months Ended September 30,
		2019		2018
		(in millions)
Revenue from Contracts with Customers - ASC 606		$	346.9		380.9
Lease Revenue - ASC 842 ⁽¹⁾			291.7		260.2
Total revenue		$	638.6	$	641.1

⁽¹⁾ Includes revenue from use of long-term Fiber Contracts and Colocation solutions, which are not within the scope of ASC 606. See Note 13 –Leases.

Remaining Performance Obligation Associated with Non-Lease Arrangements

A majority of the Company’s revenue is provided over a contract term. When allocating the total contract transaction price to identified performance obligations, a portion of the total transaction price relates to performance obligations that are yet to be satisfied or are partially satisfied as of the end of the reporting period.

Remaining performance obligations associated with the Company’s contracts reflect recurring charges billed, adjusted to reflect estimates for sales incentives and revenue adjustments. At September 30, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $1.2 billion. For contracts with original durations of more than one year remaining, we expect to recognize approximately 49.3%, 31.2% and 13.2%

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of our remaining performance obligations as revenue during the remainder of the nine months ended June 30, 2020, year ended June 30, 2021 and year ended June 30, 2022, respectively, with the remaining balance thereafter.

Contract Assets and Liabilities

The timing of revenue recognition may differ from the time of billing to the Company’s customers. Customer receivables represent an unconditional right to consideration net of an estimated allowance for doubtful accounts. Contract balances represent amounts from an arrangement when either the Company has performed, by transferring a solution to the customer in advance of receiving all or partial consideration for such goods and offerings from the customer, or the customer has made payment to the Company in advance of obtaining control of the goods and/or offerings promised to the customer in the contract.

Contract liabilities arise when the Company bills its customers and receives consideration in advance of providing the goods or offerings promised in the contract. Contract liabilities are recognized as revenue when product offerings are provided to the customer. Contract liabilities are presented in the Company’s condensed consolidated balance sheet as deferred revenue.

The following table presents information about the Company’s customer receivables, contract assets and contract liabilities as of September 30, 2019 and June 30, 2019:


	September 30, 2019		June 30, 2019
	(in millions)
Customer receivable, net⁽¹⁾	$	86.6	$	136.4
Contract liabilities⁽¹⁾	$	47.1	$	50.5

⁽¹⁾ Amounts do not include balances associated with lease revenue from the Company’s Zayo Networks and zColo segments.

During the three months ended September 30, 2019 and 2018, the Company recognized $4.8 million and $5.4 million, respectively, of revenue that was included in contract liabilities as of June 30, 2019 and June 30, 2018, respectively.

Contract Costs

The Company recognizes an asset for incremental commission and bonus expenses paid to internal sales personnel and third party agents in conjunction with obtaining certain customer contracts. These costs are only deferred when the commissions are incremental and would not have been incurred absent the customer contract. Costs to obtain a contract are amortized and recorded ratably within selling, general and administrative expenses on the Company’s condensed consolidated statements of operations over the estimated contract term.

The Company also defers costs incurred to fulfill contracts that relate directly to the contract, are expected to generate resources that will be used to satisfy the Company’s performance obligation under the contract and are expected to be recovered through revenue generated under the contract. Contract fulfillment costs are expensed to cost of service as the Company satisfies its performance obligations. These costs principally relate to direct costs associated with activating new customer solutions.

The Company estimates the amortization period for its costs incurred to obtain and fulfill customer contracts at a portfolio level due to the similarities within its customer contract portfolios. Other costs, such as general costs or costs related to past performance obligations, are expensed as incurred.

As of September 30, 2019 and June 30, 2019, the Company had $5.6 million and $5.7 million, respectively, of short-term unamortized contract costs included in other current assets and $4.5 million and $3.8 million, respectively, of long term unamortized contact contract costs included in other assets on its condensed consolidated balance sheets. During the three months ended September 30, 2019 and 2018, the Company recorded $1.7 million and $2.1 million, respectively, in selling, general and administrative expenses associated with the amortization of deferred contract costs. The amortization period for these contract costs ranges from 1 to 18 years.

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(13) LEASES

As previously discussed in Note 1, the Company adopted ASC 842 effective July 1, 2019 using the modified retrospective transition method at the adoption date. In addition, the Company elected the package of practical expedients permitted under the transition guidance which permits companies to carry forward the historical lease classification. Adoption of the new standard resulted in $527.6 million of ROU assets and $545.1 million of lease liabilities recorded as of July 1, 2019. The standard did not materially impact the Company’s consolidated net income or cash flows in the three months ended September 30, 2019. The Company’s financial position for reporting periods beginning on or after July 1, 2019 are presented under the new guidance, while prior period amounts are not adjusted for the new guidance and continue to be reported in accordance with previous guidance.

Leases as Lessee

The Company determines if an arrangement is a lease at inception and whether that lease meets the classification criteria of a finance or operating lease in accordance with U.S. GAAP. The Company leases office space, warehouse space, network assets, switching and transport sites, points of presence, components and equipment under non-cancelable operating leases. For leases with an initial term of 12 months or less, the Company recognizes lease expense on a straight-line basis over the lease term but does not recognize a ROU asset or lease liability.

Operating lease assets have been included as right-of-use operating lease assets on the condensed consolidated balance sheets. The associated lease liabilities have been included as operating lease obligations, current or operating lease liabilities, non-current on the condensed consolidated balance sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Variable lease payments consist of non-lease services related to the lease. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. As the Company’s leases as lessee typically do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company assessed multiple variables when determining the incremental borrowing rate, such as lease term, payment terms, collateral, economic conditions, and creditworthiness. ROU assets also include any lease payments made and exclude lease incentives. Rental expense for lease payments related to operating leases is recognized on a straight-line basis over the lease term.

Some of the Company’s lease arrangements contain lease components and non-lease components. The Company generally accounts for each component separately based on the estimated standalone price of each component. For colocation leases, the Company accounts for the lease and non-lease components as a single lease component.

Many of the Company’s lease agreements contain renewal options; however, the Company does not recognize ROU assets or lease liabilities for renewal periods unless it is determined the Company is reasonably certain of renewing the lease at inception or when a triggering event occurs. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain to be exercised. The Company’s lease agreements do not contain any material purchase option, material residual value guarantees or material restrictive covenants.

Lease expense consisted of the following:


	Three Months Ended September 30, 2019
		(in millions)
Operating and short-term lease cost	$	57.9
Finance lease cost:
Amortization of right-of-use assets		3.5
Interest on lease liability		2.9
Total finance lease cost		6.4
Total lease cost	$	64.3

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Supplemental unaudited condensed consolidated balance sheet information and other information related to leases (in millions unless otherwise stated):


Leases	Classification on the Balance Sheet	As of September 30, 2019
		(in millions)
Assets
Operating lease assets	Right-of-use operating lease assets	$	499.2
Finance lease assets	Property, plant and equipment, net of accumulated depreciation		153.8
Total leased assets			653.0

Liabilities
Current
Operating	Operating lease obligations, current	$	127.2
Finance	Finance lease obligation, current		9.5
Noncurrent
Operating	Operating lease liabilities, non-current		387.4
Finance	Finance lease obligations, non-current		176.0
Total lease liabilities		$	700.1

Weighted-average remaining lease term (years)
Operating leases			7.1
Finance leases			11.9
Weighted-average discount rate
Operating leases			3.95%
Finance leases			5.78%

Supplemental unaudited condensed consolidated cash flow statement information related to leases:


	Three Months Ended September 30, 2019
		(in millions)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	37.2
Operating cash flows from finance leases		2.9
Finance cash flows from finance leases		2.1
Total lease cost	$	42.2

As of September 30, 2019, maturities of lease liabilities were as follows:


	Operating Leases		Finance Leases
Year Ended June 30,		(in millions)
2020 (remaining nine months)	$	95.5	$	15.4
2021		111.7		20.1
2022		84.2		20.3
2023		67.2		20.1
2024		53.8		19.3
Thereafter		193.1		180.3
Total lease payments	$	605.5	$	275.5
Less: interest		(90.9)		(90.0)
Total	$	514.6	$	185.5
Less: current portion		(127.2)		(9.5)
Long-term portion	$	387.4	$	176.0

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As of September 30, 2019, the Company had no material operating or finance leases that had not yet commenced.

Future contractual payments under the terms of the Company’s finance lease obligations as of June 30, 2019 were as follows:


Year Ended June 30,		(in millions)
2020	$	20.1
2021		20.0
2022		20.3
2023		19.9
2024		19.5
Thereafter		171.0
Total minimum lease payments		270.8
Less amounts representing interest		(88.6)
Less current portion		(10.0)
Finance lease obligations, non-current	$	172.2

Minimum contractual lease payments due under the Company’s long-term operating leases as of June 30, 2019 are as follows:


Year Ended June 30,	(in millions)
2020	$	128.1
2021		107.0
2022		83.7
2023		68.0
2024		55.7
Thereafter		215.8
	$	658.3

Leases as Lessor

As of September 30, 2019, maturities of non-cancellable leases were as follows:


Year Ended June 30,	(in millions)
2020 (remaining nine months)	$	719.3
2021		728.7
2022		598.6
2023		496.4
2024		432.5
Thereafter		399.3
Total lease payments	$	3,374.8

The Company leases dark fiber and circuits (within the Zayo Networks segment) and zColo segments have contract terms that are accounted for as operating leases and are further described in Note 15 – Segment Reporting. Lease income is included in operating revenue in the condensed consolidated statements of operations. The Company’s lease revenue contains both minimum lease payments as well as variable lease payments. See Note 12 – Revenue and Contract Costs for further details on the Company’s disaggregated revenue streams and associated accounting treatment.

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(14) RELATED-PARTY TRANSACTIONS

Dan Caruso, the Company’s Chief Executive Officer and Chairman of the Board, is a party to an aircraft charter (or membership) agreement through his affiliate, Bear Equity LLC, for business and personal travel. Under the terms of the charter agreement, all fees for the use of the aircraft are effectively variable in nature. For his business travel on behalf of the Company, Mr. Caruso is reimbursed for his use of the aircraft subject to an annual maximum reimbursement threshold approved by the Company's Nominating and Governance Committee. In each of the three months ended September 30, 2019 and 2018, the Company reimbursed Mr. Caruso $0.1 million for his business use of the aircraft.

(15) SEGMENT REPORTING

The Company uses the management approach to determine the segment financial information that should be disaggregated and presented separately in the Company's notes to its condensed consolidated financial statements. The management approach is based on the manner by which management has organized the segments within the Company for making operating decisions, allocating resources, and assessing performance.

As the Company has increased in scope and scale, it has developed its management and reporting structure to support this growth. The Company’s bandwidth infrastructure, colocation and connectivity offerings are comprised of various related product groups generally defined around the type of offering to which the customer is licensing access, referred to as SPGs. Each SPG is responsible for the revenue, costs and associated capital expenditures of its respective solutions. The SPGs enable licensing and sales, make pricing and product decisions, engineer networks and deliver solutions to customers, and support customers for specific telecom and internet infrastructure requirements.

During the fourth quarter of Fiscal 2019, with the continued increase in our scope and scale, our chief operating decision maker ("CODM"), who is our Chief Executive Officer, implemented certain organizational changes to the management and operation of the business that directly impact how the CODM makes resource allocation decisions and manages the Company. The changes in structure had the impact of combining our legacy Fiber Solutions, Transport and Enterprise segments into a single new segment, Zayo Networks and re-aligning our Cloud and Cybersecurity SPG from our legacy Enterprise segment to our zColo segment. These changes to our existing reportable segments have been recast for all prior periods. The Company’s segments are further described below:

Zayo Networks. Our Zayo Networks segment provides access to bandwidth infrastructure. This includes our Fiber, Layer 2/3 and Transport solutions. Within the Fiber business, Zayo provides access to mobile infrastructure (fiber-to-the-tower and small cell). Our mobile infrastructure solutions permit direct fiber connections to cell towers, small cells, hub sites and mobile switching centers. Fiber solutions customers include carriers and other communication service providers, internet service providers, wireless service providers, major media and content companies, large enterprises and other companies that have the expertise to run their own fiber optic networks or require interconnected technical space. The contract terms for fiber solutions customers tend to range from three to twenty or more years. Our Layer 2/3 line of business provides connectivity and telecommunications solutions to medium and large enterprises. Our offerings within Layer 2/3 include Ethernet, internet offerings, Wide Area Networking products and CloudLink. Solutions range from point-to-point data connections to multi-site managed networks to international outsourced IT infrastructure environments. The contract terms for Layer 2/3 solutions tend to range from one to five years. Our Transport line of business provide access to lit communications bandwidth infrastructure using customer-accessed optronics to light the fiber and, and our customers pay for access based on the amount and type of bandwidth they require. We target customers who require a significant amount of bandwidth across their networks. Transport customers include carriers, content providers, financial services companies, healthcare, government entities, education institutions and other medium and large enterprises. The contract terms in this segment tend to range from two to five years.

Zayo Colocation (“zColo”). The zColo segment provides data center and cloud infrastructure solutions to a broad range of enterprise, carrier, cloud and content customers. Our offerings within this segment include the provision of colocation space, power and interconnection offerings in North America and Western

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Europe. Solutions range in size from single cabinet solutions to 1MW+ data center infrastructure environments. Our data centers also support a large component of networking components for the purpose of aggregating and accommodating customers’ data, voice, internet and video traffic. The contract terms in this segment tend to range from two to five years. Our Cloud and Cybersecurity SPG is included in the zColo segment. The Cloud and Cybersecurity SPG combines private cloud, public cloud and managed offerings in order to provide its customers secure infrastructure as a service (IaaS), which enables on-demand scaling and virtual computing in hybrid environments.

Allstream. The Allstream segment provides Cloud VoIP and Data Solutions. This includes a full range of local voice offerings allowing business customers to complete telephone calls in their local exchange, as well as make long distance, toll-free and related calls. Unified Communications is the integration of real-time communication services such as telephony (including Cloud-based IP telephony), instant messaging and video conferencing with non-real-time communication services, such as integrated voicemail and e-mail. Allstream also provides customers with comprehensive telecommunications services including Ethernet, and IP/MPLS VPN Solutions.

Other. The Other segment is primarily comprised of Zayo Professional Services (“ZPS”). ZPS provides network and technical resources to customers who wish to leverage the Company’s expertise in designing, acquiring and maintaining a network. The contract terms typically run for one year for a fixed recurring monthly fee in the case of network and on an hourly basis for technical resources (usage revenue). ZPS also generates revenue via telecommunication equipment sales.

The results of operations for each segment include an allocation of certain indirect costs and corporate related costs, including overhead and third party-financed debt. The allocation is based on a percentage that represents management’s estimate of the relative burden each segment bears of indirect and corporate costs. Management has evaluated the allocation methods utilized to allocate these costs and determined they are systematic, rational and consistently applied. Identifiable assets for each reportable segment are reconciled to total consolidated assets including unallocated corporate assets and intersegment eliminations. Unallocated corporate assets consist primarily of cash and deferred taxes.

Segment Adjusted EBITDA

Segment Adjusted EBITDA is the primary measure used by the Company’s CODM to evaluate segment operating performance.

The Company defines Segment Adjusted EBITDA as earnings from operations before interest, income taxes, depreciation and amortization (“EBITDA”) adjusted to exclude acquisition or disposal-related transaction costs, losses on extinguishment of debt, stock-based compensation, unrealized foreign currency gains/(losses) on intercompany loans, gains/(losses) on business dispositions and non-cash income/(loss) on equity and cost method investments. The Company uses Segment Adjusted EBITDA to evaluate operating performance, and this financial measure is among the primary measures used by management for planning and forecasting of future periods. The Company believes the presentation of Segment Adjusted EBITDA is relevant and useful for investors because it allows investors to view results in a manner similar to the method used by management and facilitates comparison of the Company’s results with the results of other companies that have different financing and capital structures.

Segment Adjusted EBITDA results, along with other quantitative and qualitative information, are also utilized by the Company and its Compensation Committee for purposes of determining bonus payouts to employees.

Segment Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation from, or as a substitute for, analysis of the Company’s results from operations and operating cash flows as reported under GAAP. For example, Segment Adjusted EBITDA:

●does not reflect capital expenditures, or future requirements for capital and major maintenance expenditures or contractual commitments;

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●does not reflect changes in, or cash requirements for, working capital needs;

●does not reflect the significant interest expense, or the cash requirements necessary to service the interest payments, on the Company’s debt; and

●does not reflect cash required to pay income taxes.

The Company’s computation of Segment Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies because all companies do not calculate segment Adjusted EBITDA in the same manner.


	As of and for the Three Months Ended September 30, 2019
	Zayo Networks		zColo		Allstream		Other		Corp/ Eliminations		Total
	(in millions)
Revenue from external customers	$	483.2	$	63.7	$	86.6	$	5.1	$	—	$	638.6
Segment Adjusted EBITDA		277.5		26.6		9.3		1.4		—		314.8
Total assets		7,992.4		1,312.2		388.6		33.1		154.8		9,881.1
Capital expenditures		194.8		18.1		4.2		—		—		217.1


	For the Three Months Ended September 30, 2018
	Zayo Networks		zColo		Allstream		Other		Corp/ Eliminations		Total
	(in millions)
Revenue from external customers	$	461.6	$	69.3	$	105.0	$	5.2	$	—	$	641.1
Segment Adjusted EBITDA		266.2		31.3		20.8		1.1		—		319.4
Capital expenditures		149.2		28.7		4.6		—		—		182.5


	As of June 30, 2019
	Zayo Networks		zColo		Allstream		Other		Corp/ Eliminations		Total
	(in millions)
Total assets	$	7,677.4		1,152.3		376.9		35.1		92.1	$	9,333.8

Reconciliation from Total Segment Adjusted EBITDA to income from operations before taxes:


	Three Months Ended September 30,
	2019		2018
	(in millions)
Total Segment Adjusted EBITDA	$	314.8	$	319.4
Interest expense		(84.7)		(82.2)
Depreciation and amortization expense		(156.1)		(167.8)
Transaction costs		(2.0)		(0.7)
Stock-based compensation		(27.2)		(26.7)
Foreign currency loss on intercompany loans		(12.9)		(4.6)
Gain on business disposition		—		5.5
Non-cash loss on investments		—		(0.3)
Income from operations before income taxes	$	31.9	$	42.6

(16) CONDENSED CONSOLIDATING FINANCIAL INFORMATION

As discussed Note 5 – Long-Term Debt, as of September 30, 2019, the Company has outstanding $1430.0 million 2023 Unsecured Notes, $900.0 million 2025 Unsecured Notes and $1,650.0 million of 2027 Unsecured Notes. 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. Zayo Capital does not have independent assets or

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operations. The non-guarantor subsidiaries consist of the foreign subsidiaries that were acquired in conjunction with the Company's acquisitions.

The accompanying condensed consolidating financial information has been prepared and is presented to display the components of the Company’s balance sheets, statements of operations and statements of cash flows in a manner that allows an existing or future holder of the Company’s Notes to review and analyze the current financial position and recent operating results of the legal subsidiaries that guarantee the Company’s debt obligations.

The operating activities of the separate legal entities included in the Company’s condensed consolidated financial statements are interdependent. The accompanying condensed consolidating financial information presents the results of operations, financial position and cash flows of each legal entity. Zayo Group and its guarantors provide services to each other during the normal course of business. These transactions are eliminated in the consolidated results of operations of the Company. Activity related to income taxes is included at the issuer, or Zayo Group level, and the Company's non-guarantor subsidiaries and is not allocated to the Company's guarantor subsidiaries in the condensed consolidated financial information presented below.

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Condensed Consolidating Balance Sheets (Unaudited)

September 30, 2019


	Zayo Group,
	LLC		Guarantor		Non-Guarantor
	(Issuer)		Subsidiaries		Subsidiaries		Eliminations		Total
	(in millions)
Assets
Current assets
Cash and cash equivalents	$	145.1	$	7.4	$	101.4	$	—	$	253.9
Trade receivables, net of allowance		92.5		1.4		58.0		—		151.9
Prepaid expenses		55.1		0.2		12.8		—		68.1
Other current assets		129.8		—		(72.8)		—		57.0
Total current assets		422.5		9.0		99.4		—		530.9
Property and equipment, net		5,055.9		—		795.9		—		5,851.8
Intangible assets, net		963.3		6.9		122.6		—		1,092.8
Goodwill		1,520.4		14.6		166.1		—		1,701.1
Right-of-use operating lease assets		328.7		1.9		168.6		—		499.2
Deferred income taxes, net		—		—		21.3		—		21.3
Other assets		149.3		—		34.7		—		184.0
Investment in subsidiary		635.2		—		—		(635.2)		—
Total assets	$	9,075.3	$	32.4	$	1,408.6	$	(635.2)	$	9,881.1
Liabilities and member's equity
Current liabilities
Accounts payable	$	15.7	$	0.1	$	16.1	$	—	$	31.9
Accrued liabilities		260.3		0.8		62.5		—		323.6
Accrued interest		84.9		—		—		—		84.9
Current portion of long-term debt		130.0		—		—		—		130.0
Operating lease obligations, current		95.7		1.8		29.7		—		127.2
Finance lease obligations, current		8.3		—		1.2		—		9.5
Deferred revenue, current		135.0		0.1		37.8		—		172.9
Total current liabilities		729.9		2.8		147.3		—		880.0
Long-term debt, non-current		5,318.4		—		377.7		—		5,696.1
Operating lease liabilities, non-current		252.1		—		135.3		—		387.4
Finance lease obligation, non-current		167.5		—		8.5		—		176.0
Deferred revenue, non-current		1,104.0		—		101.4		—		1,205.4
Deferred income taxes, net		144.1		—		3.4		—		147.5
Other long-term liabilities		0.7		—		29.4		—		30.1
Total liabilities		7,716.7		2.8		803.0		—		8,522.5

Member's equity
Member's interest		1,611.5		10.1		445.5		(464.6)		1,602.5
Accumulated other comprehensive loss		(38.3)		—		(38.3)		38.3		(38.3)
Accumulated deficit		(214.6)		19.5		198.4		(208.9)		(205.6)
Total member's equity		1,358.6		29.6		605.6		(635.2)		1,358.6
Total liabilities and member's equity	$	9,075.3	$	32.4	$	1,408.6	$	(635.2)	$	9,881.1

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Condensed Consolidating Balance Sheets (Unaudited)

June 30, 2019


	Zayo Group,
	LLC		Guarantor		Non-Guarantor
	(Issuer)		Subsidiaries		Subsidiaries		Eliminations		Total
	(in millions)
Assets
Current assets
Cash and cash equivalents	$	85.9	$	9.6	$	89.9	$	—	$	185.4
Trade receivables, net of allowance		97.7		2.6		76.7		—		177.0
Prepaid expenses		47.9		0.1		17.3		—		65.3
Other current assets		131.4		—		(74.6)		—		56.8
Total current assets		362.9		12.3		109.3		—		484.5
Property and equipment, net		5,010.1		—		798.8		—		5,808.9
Intangible assets, net		983.7		7.3		127.8		—		1,118.8
Goodwill		1,520.3		14.6		171.7		—		1,706.6
Deferred income taxes, net		1.0		—		23.8		—		24.8
Other assets		152.4		—		37.8		—		190.2
Related party receivable		358.9		—		—		(358.9)		—
Investment in subsidiary		664.1		—		—		(664.1)		—
Total assets	$	9,053.4	$	34.2	$	1,269.2	$	(1,023.0)	$	9,333.8
Liabilities and member's equity
Current liabilities
Accounts payable	$	53.2	$	0.5	$	20.0	$	—	$	73.7
Accrued liabilities		243.4		1.4		70.0		—		314.8
Accrued interest		73.1		—		—		—		73.1
Current portion of long-term debt		5.0		—		—		—		5.0
Finance lease obligations, current		8.6		—		1.4		—		10.0
Deferred revenue, current		135.1		0.1		39.7		—		174.9
Total current liabilities		518.4		2.0		131.1		—		651.5
Long-term debt, non-current		5,839.7		—		—		—		5,839.7
Related party debt, long-term		—		—		358.9		(358.9)		—
Finance lease obligation, non-current		163.4		—		8.8		—		172.2
Deferred revenue, non-current		1,045.2		—		102.9		—		1,148.1
Deferred income taxes, net		136.6		—		2.2		—		138.8
Other long-term liabilities		21.3		—		33.4		—		54.7
Total liabilities		7,724.6		2.0		637.3		(358.9)		8,005.0

Member's equity
Member's interest		1,587.4		13.5		462.6		(487.3)		1,576.2
Accumulated other comprehensive loss		(23.9)		—		(23.9)		23.9		(23.9)
Accumulated deficit		(234.7)		18.7		193.2		(200.7)		(223.5)
Total member's equity		1,328.8		32.2		631.9		(664.1)		1,328.8
Total liabilities and member's equity	$	9,053.4	$	34.2	$	1,269.2	$	(1,023.0)	$	9,333.8

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Condensed Consolidating Statements of Comprehensive Income

For the Three Months Ended September 30, 2019


	Zayo Group,
	LLC		Guarantor		Non-Guarantor
	(Issuer)		Subsidiaries		Subsidiaries		Eliminations		Total
	(in millions)
Revenue	$	507.0	$	5.1	$	126.5	$	—	$	638.6
Operating costs and expenses
Operating costs (excluding depreciation amortization and including stock-based compensation)		169.9		3.4		57.7		—		231.0
Selling, general and administrative expenses (including stock-based compensation)		95.4		0.4		26.8		—		122.6
Depreciation and amortization		138.2		0.5		17.4		—		156.1
Total operating costs and expenses		403.5		4.3		101.9		—		509.7
Operating income		103.5		0.8		24.6		—		128.9
Other expenses
Interest expense		(79.1)		—		(5.6)		—		(84.7)
Foreign currency loss on intercompany loans		(1.0)		—		(11.9)		—		(12.9)
Other expense		0.3		—		0.3		—		0.6
Equity in net earnings of subsidiaries		8.2		—		—		(8.2)		—
Total other expense, net

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Non-accelerated filer

Smaller reporting company

Emerging growth company

ZAYO GROUP LLC 10-Q