UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

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

Commission File Number: 333-169979

Zayo Group, LLC

(Exact Name of Registrant as Specified in Its Charter)

DELAWARE		26-2012549
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o
				(Do not check if a small reporting company)

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

 

 

ZAYO GROUP, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

INDEX

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

ZAYO GROUP, LLC AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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

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

ZAYO GROUP, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

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

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

ZAYO GROUP, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF MEMBER’S EQUITY (UNAUDITED)

						Retained
						Earnings/
		Member’s				(Accumulated				Total Member’s
		interest				Deficit)				equity
Balance at July 1, 2010		$	217,129			$	(3,993	)		$	213,136
Capital contributed (cash)			35,500				—				35,500
Non-cash settlements with Parent, net			(234	)			—				(234	)
Stock-based compensation			419				—				419
Net earnings			—				1,609				1,609
Balance at December 31, 2010		$	252,814			$	(2,384	)		$	250,430

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

ZAYO GROUP, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

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

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

(Continued)

ZAYO GROUP, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)

Supplemental disclosure of non-cash, investing and financing activities:

The Company had approximately $9,142, $7,032, $3,574 and $3,665 of accrued construction liabilities relating to its various development projects as of December 31, 2010, June 30, 2010, December 31, 2009 and June 30, 2009, respectively. The Company has adjusted the total purchases of property and equipment by these amounts to reflect the cash amounts paid in the respective periods. In addition, the Company entered into capital leases of approximately $200 and $129 during the six months ended December 31, 2010 and 2009, respectively. The Company has offset purchases of property and equipment by these amounts.

Refer to Note 3 — Acquisitions, to the Company’s condensed consolidated financial statements for details of the Company’s recent acquisitions and Note 4 — Spin-off of Onvoy Voice Services Segment, for details of the Company’s discontinued operations.

Refer to Note 11 — Equity, to the Company’s condensed consolidated financial statements for details of the non-cash capital contributions.

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

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(1) ORGANIZATION AND DESCRIPTION OF BUSINESS

Zayo Group, LLC, a Delaware Limited Liability Company, formerly CII Holdco, Inc., and, prior to that, Zayo Bandwidth, Inc., was formed on May 4, 2007, and is the operating parent company of a number of subsidiaries engaged in telecommunication and Internet infrastructure services. Zayo Group, LLC and its subsidiaries are collectively referred to as “Zayo Group” or the “Company.” Headquartered in Louisville, Colorado, the Company operates an integrated metropolitan and nationwide fiber optic infrastructure to offer:

•

Bandwidth infrastructure services on metro and regional fiber networks.

•

Colocation and interconnection services.

•

Converged and data services.

Zayo Group, LLC is wholly owned by Zayo Group Holdings, Inc., (“Holdings”) which in turn is wholly-owned by Communications Infrastructure Investments, LLC (“CII”). Zayo Group Holdings, Inc. has no operations and was formed to pledge its equity interest in Zayo Group, LLC, to the Company’s lenders.

(2) BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

a.

Basis of Presentation

The accompanying condensed consolidated financial statements include all the accounts of the Company and its wholly-owned subsidiaries. All intercompany 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 information and note disclosures required by U.S. generally accepted accounting principles 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, 2010 included in Amendment No. 1 to the Company’s Registration Statement on Form S-4 filed with the SEC on November 8, 2010. In the opinion of management, all adjustments considered necessary for fair presentation of financial position, results of operations and cash flows of the Company have been included. The results of operations for the period ended December 31, 2010 are not necessarily indicative of the operating results for the full year.

Unless otherwise noted, dollar amounts and disclosures throughout the Company’s Notes to the condensed consolidated financial statements relate to the Company’s continuing operations and are presented in thousands of dollars.

b.

Spin-off of Operating Segment

On March 12, 2010, the Company completed a spin-off of one of its operating segments, Onvoy Voice Services (“Onvoy”). The Company distributed all assets and liabilities of Onvoy to Holdings. Consistent with the discontinued operations reporting provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 280-20, Discontinued Operations, the Company determined that it had discontinued all significant cash flows and continuing involvement with respect to Onvoy’s operations and therefore consider these to be discontinued operations. Therefore, for the three and six months ended December 31, 2009 the results of the operations of Onvoy have been aggregated and are presented in a single caption entitled “Earnings from discontinued operations, net of income taxes” on the accompanying condensed consolidated statements of operations. The Company has not allocated any general corporate overhead to amounts presented in discontinued operations, nor has it elected to allocate interest costs.

c.

Use of Estimates

The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Significant estimates are used when establishing allowances for doubtful accounts, reserves for disputed line cost billings, determining useful lives for depreciation and amortization, assessing the need for impairment charges, allocating purchase price among the fair values of assets acquired and liabilities assumed, accounting for income taxes, estimating the stock-based compensation liability and various other items. The Company evaluates these estimates and judgments on an ongoing basis and bases its estimates 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.

d.

Cash and Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments with original maturities of three months or less to be cash and cash equivalents. Cash equivalents are stated at cost, which approximates fair value. Restricted cash consists of cash balances held by various financial institutions as collateral for letters of credit and surety bonds. These balances are reclassified to cash and cash equivalents when the underlying obligation is satisfied, or in accordance with the governing agreement. Restricted cash balances expected to become unrestricted during the next twelve months are recorded as current assets.

e.

Investments

Investments in which the Company does not have significant influence over the investee, or investments that do not have a readily determinable fair value are recorded using the cost method of accounting for investments. Under this method, the investment is recorded in the balance sheet at historical cost. Subsequently, the Company recognizes as income dividends received that are distributed from earnings since the date of initial investment. Dividends received that are distributed from earnings prior to the date of the initial investment are recorded as a reduction of the cost of the investment. Cost method investments are reviewed for impairment if factors indicate that a decrease in value of the investment has occurred.

f.

Trade Receivables

Trade receivables are recorded at the invoiced amount and do not bear interest. Amounts collected on trade receivables are included in net cash provided by operating activities in the condensed consolidated statements of cash flows. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its trade receivable portfolio. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and the customer’s financial condition, the amount of receivables in dispute, and the age of receivables and current payment patterns. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company charges late fees on past-due balances however recognition of revenue associated with late fees is deferred until the cash is collected.

g.

Property and Equipment

The Company’s property and equipment includes assets in service and under construction or development.

Property and equipment is recorded at historical cost or acquisition date fair value. Costs associated directly with network construction, service installations and development of business support systems including employee related costs, are capitalized. Depreciation is calculated on a straight-line basis over the assets’ estimated useful lives from the date placed into service, which are determined based on historical usage with consideration given to technological changes, trends in the industry and other economic factors that could impact the network architecture and asset utilization. Assets held for sale are stated at the lower of the carrying value or fair market value less costs to sell and are not depreciated.

Equipment acquired under capital leases is recorded at the lower of the fair value of the asset or the net present value of the minimum lease payments at the inception of the lease. Amortization of equipment held under capital leases is included in depreciation and amortization expense, and is calculated on a straight-line basis over the estimated useful lives of the assets, or the related lease term, whichever is shorter.

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of its assets may not be recoverable. An impairment loss is recognized when the assets’ carrying value exceeds both the assets’ estimated undiscounted future cash flows and the assets’ estimated fair value. Measurement of the impairment loss is then based on the estimated fair value of the assets. Considerable judgment is required to project such future cash flows and, if required, to estimate the fair value of the long-lived assets and the amount of the impairment.

The Company capitalizes interest for all assets that require a period of time to get them ready for their intended use.

h.

Goodwill and Purchased Intangibles

Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in a business combination. Goodwill is reviewed for impairment at least annually in April and when a triggering event occurs between impairment test dates. The goodwill impairment test is a two-step test. Under the first step, the estimated fair value of the reporting unit is compared with its carrying value (including goodwill). If the estimated fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a discounted cash flow analysis. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed.

Intangible assets with estimable useful lives are amortized over their respective estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. No impairment charges were recorded for goodwill or intangibles during three and six month periods ended December 31, 2010 or 2009.

i.

Derivative Financial Instruments

The Company from time-to-time utilizes interest rate swaps to mitigate its exposure to interest rate risk. Derivative instruments are recorded in the balance sheet as either assets or liabilities, measured at fair value. Changes in fair value are recognized in earnings. The Company has historically entered into interest rate swaps to convert a portion of its floating rate debt to fixed rate debt and did not elect to apply hedge accounting. The interest rate differentials to be paid or received under such derivatives and the changes in the fair value of the instruments are recognized and recorded as adjustments to interest expense. The principal objectives of the derivative instruments are to minimize the interest rate risks associated with financing activities. The Company does not use financial instruments for trading purposes. The Company utilized interest rate swap contracts in connection with obtaining the Company’s term loans which were fully paid off in March 2010. These swaps expired in September 2010. See Note 9 — Long-term Debt, for further discussion of the Company’s debt obligations and Note 13 — Fair Market Measurements, for a discussion of the fair market value of the interest rate swaps.

j.

Revenue Recognition

The Company recognizes revenues derived from leasing fiber optic telecommunications infrastructure and the provision of telecommunications and co-location services when the service has been provided and when there is persuasive evidence of an arrangement, the fee is fixed or determinable and collection of the receivable is reasonably assured. Taxes collected from customers and remitted to governmental authority are reported on a net basis and are excluded from revenue.

Most revenue is billed in advance on a fixed rate basis. The remainder of revenue is billed in arrears on a transactional basis determined by customer usage. Fees billed in connection with customer installations and other up-front charges are deferred and recognized as revenue ratably over the contract term.

The Company typically records revenues from leases of dark fiber pursuant to indefeasible rights-of-use (“IRU”) agreements as services are provided. Dark fiber IRU agreements generally require the customer to make a down payment upon execution of the agreement; however in some cases the Company receives up to the entire lease payment at the inception of the lease and recognizes the revenue ratably over the lease term. IRU contract terms are reviewed to determine if the terms would require sales-type accounting treatment which would result in revenue recognition upon the execution of the contract. Sales-type accounting treatment is required for dark fiber leases when the agreements provide for the transfer of legal title to the dark fiber to the customer at the end of the agreement’s term and the following criteria have been met:

	•		the sale has been consummated;
	•		the customer’s initial and continuing investments is adequate to demonstrate a commitment to pay for the property;
	•		the Company’s receivable is not subject to future subordination; and
	•		the Company has transferred to the buyer the usual risks and rewards of ownership in a transaction that is in substance a sale and does not have a substantial continuing involvement with the property.

The Company did not enter into any contracts during the periods presented that would have required sales-type accounting treatment.

k.

Operating Costs and Accrued Liabilities

The Company leases certain network facilities, primarily circuits, from other local exchange carriers to augment its owned infrastructure for which it is generally billed a fixed monthly fee. The Company also uses the facilities of other carriers for which it is billed on a usage basis.

The Company recognizes the cost of these facilities or services when it is incurred in accordance with contractual requirements. The Company disputes incorrect billings. The most prevalent types of disputes include disputes for circuits that are not disconnected on a timely basis and usage bills with incorrect or inadequate call detail records. Depending on the type and complexity of the issues involved, it may take several quarters to resolve disputes.

In determining the amount of such operating expenses and related accrued liabilities to reflect in its condensed consolidated financial statements, management considers the adequacy of documentation of disconnect notices, compliance with prevailing contractual requirements for submitting such disconnect notices and disputes to the provider of the facilities, and compliance with its interconnection agreements with these carriers. Significant judgment is required in estimating the ultimate outcome of the dispute resolution process, as well as any other amounts that may be incurred to conclude the negotiations or settle any litigation.

l.

Stock-Based Compensation

The common units granted by the Company’s ultimate parent company, CII, are considered stock-based compensation with terms that require the awards to be classified as liabilities. As such, the Company accounts for these awards as a liability and re-measures the liability at each reporting date. These awards vest over a period of four years or fully vest subsequent to a liquidation event.

The preferred units granted by the Company’s ultimate parent company, CII, are considered stock-based compensation with terms that require the awards to be classified as equity. As such, the Company accounts for these awards as equity which requires the cost to be measured at the grant date based on the fair value of the award which is recognized as expense over the requisite service period.

Determining the fair value of share-based awards at the grant date and subsequent reporting dates requires judgment. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.

m.

Government Grants

The Company receives grant moneys from the National Telecommunications and Information Administrations (“NTIA”) Broadband Technology Opportunity Program. The Company recognizes government grants when it is probable that the Company will comply with the conditions attached to the grant arrangement and the grant will be received. The Company accounts for grant moneys received as a deduction from the cost of the asset in arriving at its book value. The grant is thus recognized in earnings over the useful life of a depreciable asset by way of a reduced depreciation charge.

n.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date.

There are various factors that may cause tax assumptions to change in the near term, and the Company may have to record a future valuation allowance against its deferred tax assets. The Company recognizes the benefit of an uncertain tax position taken or expected to be taken on its income tax returns if it is “more likely than not” that such tax position will be sustained based on its technical merits.

The Company records interest related to unrecognized tax benefits and penalties in income tax expense.

o.

Fair Value of Financial Instruments

The Company adopted ASC 820-10 Fair Value Measurements, for its financial assets and liabilities effective June 30, 2009. This pronouncement defines fair value, establishes a framework for measuring fair value, and requires expanded disclosures about fair value measurements. ASC 820-10 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820-10 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost), which are each based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions.

Fair Value Hierarchy

ASC 820-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. GAAP establishes three levels of inputs that may be used to measure fair value:

Level 1

Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.

Level 2

Inputs to the valuation methodology include:

	•		quoted prices for similar assets or liabilities in active markets;
	•		quoted prices for identical or similar assets or liabilities in inactive markets;
	•		inputs other than quoted prices that are observable for the asset or liability; and
	•		inputs that are derived principally from or corroborated by observable market data by correlation or other means.

If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.

Level 3

Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The Company views fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, management considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.

p.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentration of credit risk consist principally of temporary cash investments and accounts receivable. The Company does not enter into financial instruments for trading or speculative purposes. The Company’s cash and cash equivalents are held in commercial bank accounts in the United States of America. Account balances generally exceed federally insured limits; however, the Company limits its cash investments to high quality financial institutions in order to minimize its credit risk. The Company’s trade receivables, which are unsecured, are geographically dispersed. During the three and six month periods ended December 31, 2010 the Company had one customer that accounted for 11 percent of the revenue recognized during those periods. During the three and six month periods ended December 31, 2009 the Company had one customer that accounted for 12 percent of the revenue recognized during those periods. As of December 31, 2010 and June 30, 2010 the Company did not have a single customer with a trade receivable balance exceeding 10 percent of the Company’s consolidated net trade receivable balance.

q.

Recently Issued Accounting Standards

From time to time, the FASB or other standards setting bodies issue new accounting pronouncements. Updates to ASC’s are communicated through issuance of an Accounting Standards Update (“ASU”).

In June 2009, the FASB issued ASU 2009-17, Consolidations (ASC Topic 810), a new accounting standard that changes the consolidation rules as they relate to variable interest entities (“VIE’s”). The new standard makes significant changes to the model for determining who should consolidate a variable interest entity, and also addresses how often this assessment should be performed. The amendments to ASC 810 replaced the quantitative-based risk and rewards calculation for determining which reporting entity, if any, has a controlling interest in a VIE with an approach focused on identifying which reporting entity has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (i) the obligation to absorb losses of the VIE or (ii) the right to receive benefits from the VIE. The amendments also require additional disclosures about a reporting entity’s involvement with VIE’s. The standard became effective for Zayo on July 1, 2010. The adoption of the new accounting standards update did not have an impact on the Company’s consolidated results of operations, financial condition or financial disclosures.

In October 2009, the FASB issued ASU Number 2009-13, Revenue Recognition (ASC 605) Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force. This ASU establishes a new selling price hierarchy to use when allocating the sales price of a multiple element arrangement between delivered and undelivered elements. This ASU is generally expected to result in revenue recognition for more delivered elements than under current rules. The Company is required to adopt this ASU prospectively for new or materially modified agreements beginning January 1, 2011. Management is evaluating the effect of this ASU, but does not expect its adoption to have a material effect on its consolidated financial statements.

In December 2010, the FASB issued ASU Number 2010-09, Disclosure of Supplementary Pro Forma Information for Business Combinations. This ASU clarifies the disclosure requirements for pro forma presentation of revenue and earnings related to a business combination. The Company elected to early adopt this guidance during the second quarter of Fiscal 2011. See Note 3 for the required pro forma presentation related to the Company’s acquisitions during the periods presented.

In December 2010, the FASB issued ASU Number 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (Topic 350)—Intangibles—Goodwill and Other. ASU 2010-28 amends the criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires performing Step 2 if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. We will adopt ASU 2010-28 in fiscal 2012 and any impairment to be recorded upon adoption will be recognized as an adjustment to our beginning retained earnings. We are currently evaluating the impact of the pending adoption of ASU 2010—28 on our consolidated financial statements.

(3) ACQUISITIONS

Since the formation of Zayo Group, LLC in May 2007, the Company has consummated twelve business combinations. The consummation of the acquisitions was executed as part of the Company’s business strategy of expanding through acquisitions. The acquisition 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 and financial position of the acquired entities from their respective acquisition dates.

Acquisition during the six months ended December 31, 2010

American Fiber Systems Holding Corporation (“AFS”)

On October 1, 2010, the Company completed a merger (the “Merger”) with American Fiber Systems Holding Corporation, the parent company of American Fiber Systems, Inc. The Merger was consummated with the exchange of $110,000 in cash and a $4,500 non-interest bearing promissory note due in 2012 for all of the interest in AFS. The Company calculated the fair market value of the promissory note to be $4,141 resulting in an aggregate purchase price of $114,141. The purchase price was based upon the valuation of both the business and assets directly owned by AFS and their ownership interest in US Carrier Telecom Holdings, LLC (“US Carrier”). There was no contingent consideration associated with the purchase.

AFS was a provider of lit and dark Bandwidth Infrastructure services in nine metropolitan markets: Atlanta, Georgia, Boise, Idaho, Cleveland, Ohio, Kansas City, Missouri, Las Vegas, Nevada, Minneapolis, Minnesota, Nashville, Tennessee, Reno, Nevada and Salt Lake City, Utah. At the time of the acquisition, AFS owned and operated approximately 1,251 routes miles and over 172,415 fiber miles of fiber networks and had 644 on-net buildings in its markets.

The following table presents the Company’s preliminary allocation, which is subject to change, of the purchase price to the assets acquired and liabilities assumed, which is based on their estimated fair values on the acquisition date.

		AFS
Acquisition date		October 1, 2010
Current assets		$	3,799
Property and equipment			56,481
Intangibles — customer relationships			57,082
Goodwill			14,050
Investment in US Carrier			15,075
Other assets			336
Total assets acquired			146,823
Current liabilities			3,404
Deferred revenue			23,905
Deferred tax liability			2,246
Other liabilities			3,127
Total liabilities assumed			32,682
Net assets			114,141
Seller Note payable to former AFS Holdings owners			(4,141	)
Net cash paid		$	110,000

The goodwill of $14,050 arising from the Merger consists of the synergies and economies-of-scale expected from the Merger. The goodwill associated with the Merger is deductible for tax purposes. The Company has allocated the goodwill to the business segments that are expected to benefit from the acquired goodwill. The allocation was determined based on the excess of the fair value of the acquired business over the fair value of the individual assets acquired and liabilities assumed that are assigned to the business segments. On the Merger date, a goodwill balance of $7,496 and $6,554 was allocated to the Zayo Bandwidth and Zayo Fiber Solutions business segments, respectively.

In connection with the Merger, the Company acquired significant customer relationships. These relationships represent a valuable intangible asset as the Company anticipates continued business from the AFS customer base. The company valued the AFS customer relationships utilizing the multi-period excess earnings valuation technique which resulted in a fair market value of $57,082.

In connection with the AFS merger, the previous owners had entered into various agreements, including indefeasible rights-of-use agreements with other telecommunication service providers to lease them fiber and other bandwidth infrastructure. The Company recorded the acquired deferred revenue balance at the acquisition date at fair market value which was determined based upon management’s assessment of the future costs to be incurred in connection with the Company’s continued legal obligation associated with the acquired deferred revenue plus a reasonable profit margin. A fair value of $23,905 was assigned to the acquired deferred revenue balance of AFS. The balance of the deferred revenue with no remaining obligations was not recorded. The acquired deferred revenue is expected to be recognized over the next five to twenty years.

AGL Networks, LLC (“AGL Networks”)

On July 1, 2010 the Company acquired all of the equity interest in AGL Networks. AGL Networks is a communication service provider focused on providing dark fiber services to its customers who are primarily located in the Atlanta, Georgia, Phoenix, Arizona, and Charlotte, North Carolina markets. AGL Networks operated a network of approximately 786 route miles and over 190,000 fiber miles. The purchase price of this acquisition, after post-close adjustments, was $73,666. The acquisition was financed with cash on hand. There was no contingent consideration associated with the purchase.

The following table presents the Company’s preliminary allocation, which is subject to change, of the purchase price to the assets acquired and liabilities assumed, based on their estimated fair values.

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

The goodwill of $209 arising from the AGL Networks acquisition consists of the synergies and economies-of-scale expected from combining the operations of AGL Networks and the Company. The goodwill associated with the AGL Networks acquisitions is deductible for tax purposes. The full amount of the goodwill recognized in the AGL Networks acquisition has been assigned to the Zayo Fiber Solutions business segment.

In connection with the AGL Networks acquisition, the Company acquired certain customer relationships. These relationships represent a valuable intangible asset as the Company anticipates continued business from the AGL Networks customer base. The company valued the AGL Networks customer relationships utilizing the multi-period excess earnings valuation technique which resulted in a fair market value of $3,433.

In connection with the AGL Networks acquisition, the previous owners had entered into various agreements, including indefeasible rights-of-use agreements with other telecommunication service providers to lease them fiber and other bandwidth infrastructure. The Company recorded the acquired deferred revenue balance at the acquisition date at fair market value which was determined based upon management’s assessment of the future costs to be incurred in connection with the Company’s continued legal obligation associated with the acquired deferred revenue plus a reasonable profit margin. A fair value of $26,511 was assigned to the acquired deferred revenue balance of AGL Networks. The balance of the deferred revenue with no remaining obligations was not recorded. The acquired deferred revenue is expected to be recognized over the next five to twenty years.

During the three months ended December 31, 2010 the Company adjusted its fair market value estimate related to the continuing obligation associated with the acquired deferred revenue resulting in an increase to the acquired deferred revenue of $142 and a corresponding increase to the goodwill associated with the AGL Networks acquisition.

The Company incurred acquisition-related costs of $691 and $850 which have been charged to selling, general and administrative expenses during the three and six month periods ended December 31, 2010, respectively, related to these acquisitions.

Acquisition during the three and six month periods ended December 31, 2009

FiberNet Networks Telecom Group, Inc. (“FiberNet”)

On September 9, 2009 the Company acquired all of the outstanding equity interest in FiberNet. The purchase price of this acquisition, after post-close adjustments, was $96,571. The acquisition was financed with cash on hand. There was no contingent consideration associated with the purchase.

FiberNet was a communications service provider focused on providing complex interconnection services which enabled the exchange of voice, video and data traffic between global networks. FiberNet owned and operated integrated colocation facilities and diverse transport routes in the two gateway markets of New York/New Jersey and in Los Angeles, Chicago, Miami and San Francisco. FiberNet’s network infrastructure and facilities were designed to provide comprehensive broadband interconnectivity for the world’s largest network operators, including leading domestic and international telecommunications carriers, service providers and enterprises.

The following table presents the allocation of the purchase price to the assets acquired and liabilities assumed, and based on their estimated fair values.

		FiberNet
Acquisition date		September 9, 2009
Current assets		$	16,824
Property and equipment			50,734
Intangibles			43,900
Deferred income taxes			19,659
Other assets			838
Total assets acquired			131,955
Current liabilities			11,534
Deferred revenue			7,257
Total liabilities assumed			18,791
Net assets			113,164
Excess of net assets over purchase consideration (bargain purchase)			9,081
Purchase consideration			104,083
Less cash acquired			(7,512	)
Net cash paid		$	96,571

In connection with the FiberNet acquisition, the Company recognized a gain on bargain purchase. The gain of $9,081 was a result of recording of deferred income tax assets for the Net Operating Loss carryforwards (“NOLs”) of FiberNet, in view of the Company’s evaluation that these deferred income tax assets will more likely than not be realized. This determination was made and the Company recorded the gain on bargain purchase in June of 2010. Upon the determination that the Company was going to recognize a gain related to the bargain purchase, the Company reassessed its valuation assumptions utilized as part of the acquisition accounting. No adjustments to the acquisition accounting valuations were identified as a result of management’s reassessment.

In connection with the FiberNet acquisition, the Company acquired $500 in tradenames and $43,400 in customer relationships. These relationships represent a valuable intangible asset as the Company anticipates continued business from the FiberNet acquired customer base. The company valued the acquired customer relationships utilizing the multi-period excess earnings valuation technique which resulted in a fair market value of $43,400.

In connection with the Fibernet acquisition, the previous owners had entered into various agreements, including indefeasible rights-of-use agreements with other telecommunication service providers to lease them fiber and other bandwidth infrastructure. The Company recorded the acquired deferred revenue balance at the acquisition date at fair market value which was determined based upon management’s assessment of the future costs to be incurred in connection with the Company’s continued legal obligation associated with the acquired deferred revenue plus a reasonable profit margin. A fair value of $7,257 was assigned to the acquired deferred revenue balance of Fibernet. The balance of the deferred revenue with no remaining obligations was not recorded. The acquired deferred revenue is expected to be recognized over the next five to twenty years.

Acquisition-related costs of $94 and $698 have been charged to selling, general and administrative expenses during the three and six month periods ended December 31, 2009, respectively.

Pro-forma Financial Information

The unaudited pro forma results presented below include the effects of the Company’s September 2009 acquisition of FiberNet, the July 2010 acquisition of AGL Networks and the October 2010 Merger with of AFS as if the acquisitions and merger had been consummated as of July 1, 2009. The pro-forma earnings/(loss) for the three and six month periods ended December 31, 2010 and 2009 include the additional depreciation and amortization resulting from the adjustments to the value of property and equipment and intangible assets resulting from purchase accounting and a reduction to revenue as a result of the acquisition date valuation of acquired deferred revenue balances. The pro-forma revenue and earnings/(loss) figures below include a reduction to revenue resulting from purchase accounting adjustments associated with certain acquired deferred revenue balances which did not represent continuing obligations of the Company. The pro-forma results also include interest expense associated with debt used to fund the acquisitions. The pro-forma results for the three and six month periods ended December 31, 2010 includes a non-recurring adjustment to earnings related to historical compensation expense related to the compensation paid to executives and employees that was directly attributable to the Merger. However, the pro forma results do not include any anticipated synergies or other expected benefits of the acquisition. Accordingly, the unaudited pro forma financial information below is not necessarily indicative of either future results of operations or results that might have been achieved had the acquisitions and merger been consummated as of July 1, 2009.

		Three months ended								Six months ended
		December 31,								December 31,
		2010				2009				2010				2009
Revenue		$	77,885			$	73,678			$	154,335			$	143,625
Earnings/ (loss) from continuing operations			2,266			$	3,550				851			$	(1,051)

(4) SPIN-OFF OF ONVOY VOICE SERVICES SEGMENT

During the third quarter of fiscal year 2010, management determined that the services provided by one of the Company’s operating segments — Onvoy Voice Services (“Onvoy”), did not fit within the Company’s current business model of providing telecom and internet infrastructure services, and the Company therefore spun-off Onvoy to Holdings, the parent of the Company.

Consistent with the discontinued operations reporting provisions of ASC 205-20, Discontinued Operations, the Company determined that it has discontinued all significant cash flows and continuing involvement with respect to the Onvoy operations effective March 12, 2010. Therefore, for the three month and six month periods ended December 31, 2009 the results of the Onvoy operations have been aggregated in a single caption entitled “Earnings from discontinued operations, net of income taxes” on the accompanying condensed consolidated statements of operations. The Company has not allocated any general corporate overhead to amounts presented in discontinued operations, nor has it elected to allocate interest costs.

Earnings from discontinued operations, net of income taxes in the accompanying condensed consolidated statements of operations are comprised of the following:

		Three months ended				Six months ended
		December 31, 2009				December 31, 2009
Revenue		$	10,920			$	21,077
Earnings before income taxes			2,022				4,523
Income tax expense			(857	)			(1,856	)
Earnings from discontinued operations, net of income taxes		$	1,165			$	2,667

The Company continues to have ongoing contractual relationships with Onvoy, which are based on agreements which were entered into at estimated market rates among the relevant Onvoy and Zayo parties. Subsequent to the spin-off the Company has contractual relationships to provide Onvoy with certain data and colocation services and Onvoy has contractual relationships to provide the Company with certain voice services. Prior to March 12, 2010 these transactions were eliminated upon consolidation.

(5) INVESTMENT

In connection with the AFS Merger, the Company obtained 100% ownership of American Fiber Systems Holding Corporation which owns 100% of American Fiber Systems, Inc. (“AFS, Inc.”). AFS, Inc. in turn has and continues to maintain an ownership interest in US Carrier Telecom Holdings, LLC (“US Carrier”). US Carrier is a regional provider of certain telecommunication services to and from cities and rural communities throughout Georgia and other states in the Southeast United States. AFS Inc.’s continued ownership in US Carrier is comprised of 55% of the outstanding Class A membership units and 34% of the outstanding Class B membership units. Subsequent to the AFS Merger, the board of managers of US Carrier has recognized AFS Inc.’s economic interest in US Carrier; however, the board of managers has claimed that the Merger at the American Fiber Systems Holdings Corporation level resulted in an unauthorized transfer of AFS Inc.’s ownership interest under the US Carrier operating agreement which would result in a loss of the AFS Inc.’s voting interest. The Company has requested the financial information which would be required to account for the US Carrier investment utilizing the equity method of accounting but has been denied this information by the board of managers of US Carrier. The Company has also requested that US Carrier recognize AFS Inc.’s continued and uninterrupted representation on the board of managers but such requests have been denied. The Company has filed an arbitration proceeding against US Carrier to protect its ownership position in US Carrier, including all of its rights under the US Carrier operating agreement. Although the Company has a significant ownership position in US Carrier, at this time and in light of US Carrier’s wrongful actions, AFS Inc. is unable to exercise significant influence over US Carrier’s operating and financial polices and as such the Company has accounted for this investment utilizing the cost method of accounting.

At the time of the AFS Merger, the Company estimated the fair market value of its interest in US Carrier to be $15,075. In valuing our interest in US Carrier, we utilized both a income and market based approach to estimate the acquisition date fair market value. Since the acquisition, the Company has not received any dividend payments from US Carrier nor has the Company invested additional capital in US Carrier.

(6) PROPERTY AND EQUIPMENT

Property and equipment, including assets held under capital leases, was comprised of the following:

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

The Company recognized depreciation expense of $12,866 and $7,185 during the three months ended December 31, 2010 and 2009, respectively. The Company recognized depreciation expense of $22,386 and $13,260 during the six months ended December 31, 2010 and 2009, respectively.

As of December 31, 2010 the Company has received a total of $554 in grant money from the NTIA’s Broadband Technology Opportunities Program (“the Program”) for reimbursement of property and equipment expenditures of which $235 and $485 was received during the three and six month periods ended December 31, 2010. The Company has accounted for these funds as a reduction of the cost of its fiber optic network. The Company anticipates the receipt of an additional $37,929 in grant money related to grant agreements entered into under the Broadband Technology Opportunities Program as of December 31, 2010. See Note 14 — Commitments and Contingencies Other Commitments.

During the three and six months ended December 31, 2010 the Company capitalized interest in the amount of $1,011 and $1,951, respectively. No interest was capitalized during fiscal year 2009. The Company capitalized $1,390 and $749 of labor during the three months ended December 31, 2010 and 2009, respectively. The Company capitalized $2,634 and $1,434 of labor during the six months ended December 31, 2010 and 2009, respectively.

(7) GOODWILL

The Company’s goodwill balance was $83,010 and $68,751 as of December 31, 2010 and June 30, 2010, respectively, and was allocated as follows to the Company’s business segments:

		As of June 30,												As of December 31,
		2010				Transfers				Additions				2010
Zayo Bandwidth		$	66,548			$	(4,170	)		$	7,496			$	69,874
Zayo Enterprise Networks			2,203				—				—				2,203
Zayo Fiber Solutions			—				4,170				6,763				10,933
Total		$	68,751			$	—			$	14,259			$	83,010

As discussed in Note 16 — Segment Reporting, the Company established a fourth business segment — Zayo Fiber Solutions, in connection with the AGL Networks acquisition. As a result of the creation of this business segment, certain assets and liabilities which align with the business goals of the new segment were transferred from the Company’s existing segments to the Zayo Fiber Solutions segment. The assets and liabilities which were transferred to Zayo Fiber Solutions represent the Company’s assets and liabilities which support the Company’s dark fiber infrastructure and customer base. All of the assets and liabilities associated with the Company’s acquisition of Columbia Fiber Solutions (“CFS”) in September of 2008 align with the business objective of the Zayo Fiber Solutions segment and as such were transferred to this segment on July 1, 2010 including the goodwill of $4,170 which was recognized as a result of the CFS acquisition.

(8) INTANGIBLE ASSETS

Identifiable acquisition-related intangible assets as of December 31, 2010 and June 30, 2010 were as follows:

		Gross
		Carrying				Accumulated
		Amount				Amortization				Net
December 31, 2010
Customer relationships		$	139,253			$	(25,400	)		$	113,853
Non-compete agreements			8,835				(8,835	)			—
Tradenames			500				(500	)			—
Total		$	148,588			$	(34,735	)		$	113,853
June 30, 2010
Customer relationships		$	78,738			$	(19,182	)		$	59,556
Non-compete agreements			8,835				(8,623	)			212
Tradenames			500				(417	)			83
Total		$	88,073			$	(28,222	)		$	59,851

The amortization of intangible assets for the three months ended December 31, 2010 and 2009 was $3,577 and $3,380, respectively. The amortization of intangible assets for the six month period ended December 31, 2010 and 2009 was $6,513 and $6,367, respectively. Estimated future amortization of intangible assets is as follows:

Year ending June 30,
2011 (remaining 6 months)		$	7,153
2012			14,306
2013			14,306
2014			11,275
2015			8,521
Thereafter			58,292
Total		$	113,853

(9) LONG-TERM DEBT

In March 2010, the Company co-issued, with its 100 percent owned finance subsidiary — Zayo Capital Inc., (at an issue price of 98.779%) $250 million of Senior Secured Notes (the “Notes”). The Notes bear interest at 10.25% annually and are due on March 15, 2017. The net proceeds from this debt issuance were approximately $239,050 after deducting the discount on the Notes of $3,052 and debt issuance costs of approximately $7,898. The Notes are being accreted to their par value over the term of the Notes as additional interest expense. The effective interest rate of the Company’s March Notes is 10.87%. The Company used a portion of the proceeds from the notes to repay its term loans in March of 2010.

In September 2010, the Company completed an offering of an additional $100 million in Notes. These Notes are part of the same series as the $250 million Senior Secured Notes and also accrue interest at a rate of 10.25% and mature on March 15, 2017. The net proceeds from this debt issuance were approximately $98,966 after adding the premium on the Notes of $3,000 and deducting debt issuance costs of approximately $4,034. The effective interest rate on the Notes issued in September is 10.41%. The Company used a portion of the proceeds from the Notes to fund the American Fiber Solutions acquisition — See Note 3 — Acquisitions.

The balance of the Notes was $350,161 at December 31, 2010, net of unamortized premiums and discounts of $161.

In October 2010, in connection with the merger with AFS holdings, the former owners of AFS Holdings provided the Company with a promissory note in the amount of $4,500. The note is a non-interest bearing note and is due in full on October 1, 2012. The Company recorded this note at its fair market value on the acquisition date which was determined to be $4,141. Management estimates the imputed interest associated with this note to be $359 which will be recognized over the term of the promissory note. During the three months ended December 31, 2010, the Company recognized interest expense and a corresponding increase to the promissory note obligation of $ 40.

In September 2009 the Company entered into a $30 million term loan to finance the FiberNet acquisition. This loan was paid off in March 2010 with the proceeds from the Notes issued in March.

In March 2010 the Company also entered into a revolving line-of-credit with Sun Trust Bank (“the Revolver”). Concurrent with offering the $100 million Notes in September 2010, the Company amended the terms of its Revolver to increase the borrowing capacity from $75 million to $100 million (adjusted for letter of credit usage). The Company has capitalized $2,148 in debt acquisition costs associated with the new Revolver.

The Revolver expires on March 1, 2014 and bears interest at the option of the Company as either a base rate or as a Eurodollar rate plus the applicable margin which is based on the following table:

						Applicable Margin for				Applicable Margin for
Level				Leverage Ratio		LIBOR Advances				Base Rate Advances
I				Greater than or equal to 3.25 to 1.00			4.50	%			3.50	%
II				Greater than or equal to 2.50 to 1.00 but less than 3.25 to 1.00			4.00	%			3.00	%
III				Greater than or equal to 1.75 to 1.00 but less than 2.50 to 1.00			3.75	%			2.75	%
IV				Less than 1.75 to 1.00			3.50	%			2.50	%

The leverage ratio as defined in the credit agreement is determined based on the Company’s total outstanding debt (including capital leases) divided by the previous quarters annualized earnings before interest expense, income taxes, depreciation and amortization. In addition to the interest rate on outstanding borrowings, the Company is required to pay an unused line fee of 0.5% on any undrawn portion of the Revolver.

As of December 31, 2010, no amounts were outstanding under the Revolver. Standby letters of credit were outstanding in the amount of $6,020 resulting in $93,980 being available on the Revolver as of December 31, 2010. Outstanding letters of credit backed by the Revolver accrue interest at a rate ranging from 3.5 to 4.5 percent per annum based upon the Company’s leverage ratio. As of December 31, 2010 the interest rate was 4.5 percent.

Guarantees

The Notes 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. The Notes were co-issued with Zayo Group Capital, Inc., which is a 100 percent owned finance subsidiary of the parent and does not have independent assets or operations. Zayo Group (the parent company) does not have material independent operations or assets other than a cash balance of $6,013 at December 31, 2010.

Debt issuance costs

Debt issuance costs have been capitalized on the accompanying condensed consolidated balance sheets and are being amortized using the effective interest rate method over the term of the borrowing agreements, unless terminated earlier, at which time the unamortized costs are immediately expensed. Debt issuance costs associated with the Notes issued in March 2010 and September 2010 were $7,898 and $4,034, respectively. Debt issuance costs associated with the Revolver were $2,148. The balance of debt issuance costs as of December 31, 2010 and June 30, 2010 was $12,553 (net of accumulated amortization of $1,577) and $9,560 (net of accumulated amortization of $486), respectively. Interest expense associated with the amortization of debt issuance costs was $594 and $470 during the three months ended December 31, 2010 and 2009, respectively. Interest expense associated with the amortization of debt issuance costs was $1,039 and $821 during the six months ended December 31, 2010 and 2009, respectively.

Debt covenants

The Company’s credit agreement associated with the $100 million Revolver contains two financial covenants: (1) a maximum leverage ratio and (2) a minimum fixed charge coverage ratio.

Leverage ratio: The Company must not exceed a consolidated leverage ratio (funded debt to annualized EBITDA), as determined under the credit agreement, of 4.25x the last quarter’s annualized EBITDA.

Fixed charge coverage ratio: The Company must maintain a consolidated fixed charge coverage ratio, as determined under the credit agreement, of at least 1.0x for the periods ending September 30 and December 31, 2010; 1.1x for the periods ending March 31 and June 30, 2011; 1.15x for the periods ending September 30 and December 31, 2011 and March 31 and June 30, 2012; and 1.25x for the periods ending September 30, 2012 and each fiscal quarter thereafter.

The Company’s credit agreement restricts certain dividend payments to the company’s parent. Under the terms of the agreement, if the Company’s revolver availability is in excess of $32,500 the Company is able to pay an annual dividend to its parent of up to $45,000 which is limited based upon the following leverage ratios:

Leverage Ratio		Maximum Annual Dividend Payment
³ 3.5x		$	—
< 3.5x but ³ 2.5x		$	25,000
<,2.5x but ³ 1.5x		$	35,000
<1.5x		$	45,000

The Company does not have any restrictions on its subsidiaries ability to pay dividends to their parent — the co-issuer of the Notes.

The Company’s credit agreement contains customary representations and warranties, affirmative and negative covenants, and 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 indebtedness in excess of $10.0 million, insolvency or inability to pay debts, bankruptcy, or a change of control.

The Company was in compliance with all covenants associated with its Notes and credit agreement as of December 31, 2010.

Redemption Rights

At any time prior to March 15, 2013, the Company may redeem all or part of the Notes at a redemption price equal to the sum of (i) 100% of the principal amount thereof, plus (ii) the applicable premium as of the date of redemption, plus (iii) accrued and unpaid interest and additional interest, if any, to the date of redemption, subject to the rights of the holders of the Notes on the relevant record date to receive interest due on the relevant interest payment date. The applicable premium is the greater of (i) 1.0% of the principal amount of the redeemed Notes and (ii) the excess of (A) the present value at the date of redemption of (1) the redemption price of the Notes at March 15, 2013, plus (2) all remaining required interest payments due on such Notes through March 15, 2013 (excluding accrued but unpaid interest to the date of redemption), discounted to present value using a discount rate equal to the Treasury Rate plus 50 basis points, over (B) the principal amount of such Notes.

On or after March 15, 2013, the Company may redeem all or part of the Notes, at the redemption prices (expressed as percentages of principal amount (set forth below) plus accrued and unpaid interest and additional interest, if any, thereon, to the applicable redemption date, subject to the rights of the holders of the Notes on the relevant record date to receive interest due on the relevant interest payment date, if redeemed during the 12-month period beginning on March 15 of the years indicated below:

Year		Redemption Price
2013			105.125	%
2014			102.563	%
2015 and thereafter			100.000	%

In the event of an equity offering, at any time prior to March 15, 2013, the Company may redeem up to 35% of the aggregate principal amount of the Notes issued under the Company’s indenture agreement at a redemption price of 110.25% of the principal amount thereof, plus accrued and unpaid interest and additional interest, if any, thereon to the redemption date, subject to the rights of the holders of the Notes on the relevant record date to receive interest due on the relevant interest payment date, with the net cash proceeds of one or more equity offerings, provided that at least (i) 65% of the aggregate principal amount of the Notes issued under the Indenture remains outstanding immediately after the occurrence of such redemption and (ii) the redemption must occur within 90 days of the date of the closing of such equity offering.

The Company may purchase the Notes in open-market transactions, tender offers or otherwise. The Company is not required to make any mandatory redemption or sinking fund payments with respect to the Notes.

Interest rate derivatives

On June 30, 2008, the Company entered into an interest rate swap agreement on a notional value of $60,000 with a maturity date of September 13, 2010. There was no up-front cost for this agreement. The contract stated that the Company shall pay 3.69% fixed for the term of the agreement. The counterparty either paid to the Company or received from the Company the difference between actual LIBOR and the fixed rate.

On March 23, 2009, the Company entered into another interest rate swap agreement on a notional value of $40,000 with a maturity date of September 13, 2010. There was no up-front cost for this agreement. The contract stated that the Company shall pay 1.42% fixed for the term of the agreement. The counterparty either paid to the Company or received from the Company the difference between actual LIBOR and the fixed rate.

Any change in fair value of interest rate swaps are recorded as an increase or decrease in interest expense in the condensed consolidated statements of operations for the applicable period. During the three and six month periods ended December 31, 2009 $169 and $226, respectively, were recorded as an increase in interest expense for the change in the fair value of the interest rate swaps.

Upon the expiration of the swaps on September 13, 2010, the Company made a final payment of $566 on its interest rate swap obligation. No payments were made on the interest rate swaps during the three and six month periods ended December 31, 2009. The liability associated with the swaps was $566 as of June 30, 2010.

(10) INCOME TAXES

The Company, a limited liability corporation, is taxed at its parent level, Holdings. The parent is a holding company with no operations and therefore all income tax balances are pushed down to the Company.

The Company’s provision for income taxes is summarized as follows:

		For the three months ended								For the six months ended
		December 31,								December 31,
		2010				2009				2010				2009
Federal income taxes — current		$	76			$	—			$	224			$	—
Federal income taxes — deferred			1,878				1,904				4,157				2,439
Provision for federal income taxes			1,954				1,904				4,381				2,439
State income taxes — current			62				169				431				258
State income taxes — deferred			303				169				504				196
Provision for state income taxes			365				338				935				454
Total provision for income taxes		$	2,319			$	2,242			$	5,316			$	2,893

Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The major temporary differences that give rise to the deferred tax assets and liabilities are depreciation and amortization, net operating loss carryforwards and deferred revenue.

The Company’s effective income tax rate differs from what would be expected if the federal statutory rate were applied to earnings before income taxes primarily because of certain expenses which represent permanent differences between book versus tax expenses/deduction, such as stock-based compensation expenses that are deductible for financial reporting purposes but not deductible for tax purposes.

A reconciliation of the actual income tax provision and the tax computed by applying the U.S. federal rate (34%) to the earnings before income taxes during the three and six month periods ended December 31, 2010 and 2009 follows:

		For the three months ended								For the six months ended
		December 31,								December 31,
		2010				2009				2010				2009
Expected provision at statutory rate of 34%		$	1,428			$	1,745			$	2,354			$	1,999
Increase due to:
Non-deductible stock-based compensation			576				201				2,328				491
State income taxes, net of federal benefit			35				112				287				131
Transactions costs not deductible			235				32				289				237
Other, net			45				152				58				35
Provision for income taxes		$	2,319			$	2,242			$	5,316			$	2,893

Each interim period, the Company estimates the annual effective tax rate and applies that rate to its reported year-to-date earnings. The tax expense or benefit related to significant, unusual or extraordinary items that will be separately reported or reported net of their related tax effect, are individually computed and are recognized in the interim period in which those items occur. In addition, the effect of changes in enacted tax laws or rates or tax status is recognized in the interim period in which the change occurs.

The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in various jurisdictions, permanent and temporary differences, and the likelihood of realizing deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is acquired, additional information is obtained or as the tax environment changes.

Management believes it is more likely than not that it will utilize its net deferred tax assets to reduce or eliminate tax payments in future periods. The Company’s evaluation encompassed (i) a review of its recent history of profitability for the past three years (excluding permanent book versus tax differences) and (ii) a review of internal financial forecasts demonstrating its expected capacity to utilize deferred tax assets.

(11) EQUITY

Zayo Group, LLC was initially formed on May 4, 2007 and is a wholly-owned subsidiary of Holdings, which in turn is wholly- owned by CII. CII was organized on November 6, 2006 and subsequently capitalized on May 7, 2007 with capital contributions from various institutional and founder investors. Cash, property and service proceeds from the capitalization of CII were contributed to the Company and are reflected in the Company’s member’s equity.

During the six months ended December 31, 2010 and 2009, CII contributed $35,500 and $37,000, respectively in capital to the Company through Holdings. CII funded these amounts from equity contributions from its investors. As of December 31, 2010, the equity commitments from CII’s investors have been fulfilled.

CII has issued preferred units to certain executives as compensation. The terms of these preferred unit awards require equity accounting treatment. As such, the Company estimates the fair value of these equity awards on the grant date and recognized the related expense over the vesting period of the awards.

During fiscal year 2008, CII issued 6,400,000 Class A preferred units in CII to the two founders of the Company. The vesting period for these units ended in September 2010. Stock-based compensation expense recognized in connection with these Class A units issued for the three month periods ended December 31, 2010 and 2009 was $0 and $285, respectively. Stock based compensation expense recognized in connection with these Class A units during the six month periods ended December 31, 2010 and 2009 was $240, and $625, respectively. These Class A Preferred Units which are now fully vested, were in lieu of any significant cash compensation during the period beginning on May 1, 2007 and ending October 31, 2010.

CII issued 465,000 Class A preferred units to three of the Company’s executives in fiscal 2009. The Class A preferred units issued to two of the executives vested during the year ended June 30, 2009 and the remaining units became fully vested in February 2010. Stock-based compensation expense recognized for these grants for the three and six month periods ended December 31, 2009 was $17 and $33, respectively.

In June 2010, CII issued 136,985 Class B preferred units to two of the Company’s Board members. The Class B preferred units issued vest over a period of four years. Stock-based compensation expense recognized for these grants for the three and six month periods ended December 31, 2010 was $20 and $45, respectively.

In December 2010, CII issued 390,000 Class B preferred units to a founder of the Company. The Company estimated the fair value of the equity awards on the grant date to be $967 based on a weighted average of various market and income based valuation approaches. The Company will recognize the related expense over the vesting period of three years which began October 31, 2010. In January of 2011, CII issued an additional 580,000 Class B preferred units to the same founder. The Company estimated the fair value of these equity awards on the grant date to be $1,438 and will recognize the related expense over a vesting period of three years which began October 31, 2010. The preferred units issued to the Company founder are in lieu of any significant cash compensation for the founder during the three year vesting period that started on October 31, 2010. Stock-based compensation expense recognized for these class B preferred units during the three months ended December 31, 2010 was $134.

As these awards have been issued by CII to employees and Directors of the Company as compensation, the expense has been recorded by the Company in the accompanying condensed consolidated statements of operations.

Onvoy was spun-off from Zayo Group, LLC on March 12, 2010 to its parent — Holdings (see Note 4 — Spin-Off of Onvoy Voice Services Segment). In connection with the spin-off, the Company entered into a tax sharing agreement with Onvoy and CII — the taxable entity. The agreement allows for the sharing of the CII net operating loss carryforward balance between the Company and Onvoy however, to the extent that either entity utilizes NOL’s which were generated by the other, the entities will settle the related party transfer of deferred tax asset associated with such NOL’s and other deferred tax transfers between the companies via an increase or decrease to the respective entities member’s equity. During the six months ended December 31, 2010, the Company utilized $4,888 of Onvoy’s gross NOLs resulting in a non-cash capital contribution from CII, the taxable entity and parent of the Company, in the amount of $1,955. Offsetting the utilization of Onvoy’s NOL’s was an adjustment to the allocation of $1,524 in deferred tax liabilities of CII from the Company to Onvoy. Additionally, during the period the Company settled net related party receivable in the amount of $665 via a non-cash dividend to Zayo Group Holdings resulting in a decrease to the Company’s member’s interest account.

(12) STOCK COMPENSATION

The Company has been given authorization by CII to issue 125,000,000 of CII’s common units as awards to employees and directors. CII has three classes of common units with different liquidation preferences — Class A, B and C units. Common units are issued to employees and to independent directors and are allocated by the Chief Executive Officer and the board of managers on the terms and conditions specified in the employee equity agreement. At December 31, 2010, 73,199,713 of common units were issued and outstanding.

As these awards have been issued by CII to employees and directors of the Company, the related compensation expense has been pushed down and recorded by the Company in the accompanying condensed consolidated statements of operations in accordance with ASC 718 — Compensation — Stock Compensation.

The common units are considered to be stock-based compensation with terms which require the awards to be classified as liabilities. As such, the Company accounts for these awards as a liability and re-measures the liability at each reporting date until the date of settlement.

As of December 31, 2010 and June 30, 2010, the value of the Class A common units was calculated to be $0.58 and $0.49 per unit, respectively. As of December 31, 2010 and June 30, 2010 the value of the Class B common units was determined to be $0.33 and $.28 per unit, respectively. As of December 31, 2010 and June 30, 2010 the value of Class C common units was determined to be $0.03.

The liability associated with the common units was $28,231 and $21,623 as of December 31, 2010 and June 30, 2010, respectively. The stock-based compensation expenses associated with the common units was $1,720 and $273 during the three months ended December 31, 2010 and 2009, respectively. The stock-based compensation expense associated with the common units was $6,608 and $786 during the six months ended December 31, 2010 and 2009, respectively.

The holders of common units are not entitled to exercise their units, receive dividends or distributions, except at the discretion of the Board of Directors. Upon a liquidation of CII, or upon a non-liquidating distribution, the holders of common units share in the proceeds after the CII preferred unit holders receive their unreturned capital contributions and their priority return (6% per annum). After the preferred unreturned capital contributions and the priority return are satisfied, the remaining proceeds are allocated on a scale ranging from 85% to the Class A preferred unit holders and 15% to the common unit holders and 80% to the Class A preferred unit holders and 20% to the common unit holders depending upon the return multiple to the Class A preferred unit holders up to the amount of the Class A gain percentage. Once the amount of proceeds related to the Class A percentage gain has been distributed, then proceeds attributable to the Class B gain percentages are distributed in a similar method as the Class A gains.

(13) FAIR VALUE MEASUREMENTS

The Company’s financial instruments consist of cash and cash equivalents, restricted cash, trade receivable, accounts payable, interest rate swaps, long-term debt and stock-based compensation. The carrying values of cash and cash equivalents, restricted cash, trade receivable and accounts payable approximated their fair values at December 31, 2010 and June 30, 2010 because of the short maturity of these instruments. Interest rate swaps are recorded in the condensed consolidated balance sheets at fair value. The carrying value of the Company’s Notes reflects the original amounts borrowed, net of unamortized discounts or accretion of premiums and was $350,160 and $247,080 as of December 31, 2010 and June 30, 2010, respectively. Based on current market interest rates for debt of similar terms and average maturities and based on recent transactions, the fair value of the Notes balance as of December 31, 2010 and June 30, 2010, is estimated to be $381,500 and $252,500, respectively, based on the trading price of the Notes. The Company recorded its promissory note with AFS at its fair market value on the acquisition date which was determined to be $4,141. Management estimated the imputed interest associated with this note to be $359 which is being recognized over the term of the promissory note. The fair value of this note is not re-measured each reporting period. The Company records its stock-based compensation liability at its estimated fair value.

Financial instruments measured at fair value on a recurring and non-recurring basis are summarized below:

		Level		December 31, 2010				June 30, 2010
Liabilities Recorded at Fair Value in the Financial Statements:
Interest rate swap liabilities		Level 2		$	—			$	566
Stock-based compensation liability		Level 3			28,231				21,623
Total liabilities recorded at fair value in the consolidated financial statements				$	28,231			$	22,189
Liabilities not Recorded at Fair Value in the Financial Statements:
Long-term debt				$	354,342			$	247,080

The interest rate swaps are valued using discounted cash flow techniques that use observable market inputs, such as LIBOR-based yield curves, forward rates, and credit ratings. Changes in the fair market value of the interest rate swaps resulted in an increase of $169 and $226 to interest expense during the three and six month periods ended December 31, 2009.

The stock-based compensation liability is valued using both an income and market based approach. The income based approach is based on an analysis of discounted cash flows. The market based approach is primarily based on an analysis of prices paid by investors and acquirers of interests of comparable companies in the public and private markets. After estimating the stock-based compensation liability from the valuation techniques above, we discount the liability in order to account for the lack of marketability of the units.

Changes in the estimated fair value of common units resulted in an increase of $1,720 and $273 in the stock-based compensation liability during the three months ended December 31, 2010 and 2009, respectively. Changes in the estimated fair value of common units resulted in an increase of $6,608 and $786 in the stock-based compensation liability during the six months ended December 31, 2010 and 2009, respectively.

(14) COMMITMENTS AND CONTINGENCIES

Purchase Commitments

At December 31, 2010, the Company was contractually committed for $27,592 of capital expenditures for construction materials and purchases of property and equipment all of which are expected to be acquired in the next twelve months. These purchase commitments are primarily success-based, that is, the Company has executed customer contracts which support the future capital expenditures.

Outstanding letters of credit

As of December 31, 2010, the Company had $6,020 in outstanding letters of credit primarily to collateralize surety bonds securing the Company’s performance under various contracts.

Other Commitments

In February 2010, the Company was awarded an NTIA Broadband Technology Opportunities Program grant for a fiber network project in Indiana (the “Indiana Stimulus Project”). The Indiana Stimulus Project involves approximately $31,425 of capital expenditures, of which $25,100 is to be funded by a government grant and approximately $6,285 is to be funded by the Company. In connection with this project, 626 route miles of fiber are to be constructed and lit. The Company began capitalizing certain preconstruction costs associated with this project in April of 2010 and began receiving grant funds in May 2010. As of December 31, 2010, the Company has been reimbursed for $96 of expenses and $521 of capital expenditures related to the Indiana Stimulus Project. As of December 31, 2010 the Company has incurred $652 in capital expenditures associated with the Indiana Stimulus Project. The Company anticipates this project will be completed within the next three years.

In July 2010, the Company was awarded from the NTIA Broadband Technology Opportunities Program a $13,383 grant to construct 286 miles of fiber network in Anoka County, Minnesota, outside of Minneapolis (“the Anoka Stimulus Project”). The Anoka Stimulus Project involves approximately $19,117 of capital expenditures, of which $13,383 is to be funded by a government grant and approximately $5,735 is to be funded by the Company. As of December 31, 2010 the Company has incurred $33 in capital expenditures associated with the Anoka Stimulus Project. The Company anticipates this project will be completed within the next two years.

Contingencies

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

(15) RELATED PARTY TRANSACTIONS

As of December 31, 2010, the Company had a due to related parties balance of $151. This balance primarily relates to services provided by Onvoy to the Company which were not settled on the balance sheet date. See Note 4 — Spin-Off of Onvoy Voice Services Segment, for a discussion of the types of services Onvoy and the Company continue to provide each other subsequent to the spin-off date.

Subsequent to the spin-off, the revenue and expenses associated with transactions with Onvoy are recorded in the results from continuing operations. The Company recognized revenue from Onvoy in the amount of $1,172 and $2,366 during the three and six month periods ended December 31, 2010. The Company incurred $620 and $1,189 in expenses related to transactions with Onvoy during the three and six month periods ended December 31, 2010.

On September 14, 2010, Dan Caruso, the Company’s President, Chief Executive Officer and Director, purchased $500 of the Company’s Notes in connection with the Company’s $100 million notes offering in September 2010. The purchase price of the notes acquired by Mr. Caruso was $516 after considering the premium on the notes and accrued interest.

(16) SEGMENT REPORTING

An operating segment is a component of an entity that has all of the following characteristics:

	•		It engages in business activities from which it may earn revenues and incur expenses.
	•		Its operating results are regularly reviewed by the public entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance.
	•		Its discrete financial information is available.

The Company operates its business as four business segments which are defined by the product sets they offer and customers they target. Zayo Bandwidth (“ZB”) offers lit bandwidth infrastructure services to the Company’s 200 largest users, Zayo Enterprise Networks (“ZEN”) provides lit bandwidth infrastructure to regional and enterprise customers and converged and data communications services and zColo provides colocation services and inter-connection transport services.

In connection with the AGL Networks acquisition (See Note 3 — Acquisitions), Zayo established a fourth business segment, Zayo Fiber Solutions (“ZFS”). Zayo Fiber Solutions is dedicated to marketing and supporting dark fiber related services to a broad set of customers. Upon the acquisition of AGL Networks on July 1, 2010 all of the Company’s dark fiber assets and the related revenues and expenses associated with dark fiber customers were transferred to the ZFS business segment. As a result of the formations of the ZFS business segment, the composition of the Company’s business segments has changed effective July 1, 2010. The Company has not restated the corresponding items of the segment information included within this quarterly report for earlier periods as management has determined it is impractical to do so.

Revenues for all of the Company’s products are included in one of these four business segments. The results of operations for each business segment include an allocation of certain corporate overhead costs. The allocation is based on a percentage determined by management that represents management’s estimate of the relative burden each segment bears of corporate overhead costs. Identifiable assets for each business segment are reconciled to total consolidated assets including unallocated corporate assets and intercompany eliminations. Unallocated corporate assets consist primarily of cash, deferred tax assets and debt issuance costs.

The following tables summarize significant financial information of each of the segments:

		As of and for the three months ended December 31, 2010
																		Corporate/
		ZB				ZEN				zColo				ZFS				eliminations				Total
Revenue		$	52,833			$	8,088			$	7,386			$	11,136			$	—			$	79,443
Intersegment revenue			(722	)			(228	)			(608	)			—				—				(1,558	)
Revenue from external customers			52,111				7,860				6,778				11,136				—				77,885
Gross profit (revenue less operating costs excluding depreciation and amortization)			38,781				4,179				3,888				10,970				(654	)			57,164
Depreciation and amortization			10,397				928				1,326				3,792				—				16,443
Operating income/(loss)			10,359				(157	)			1,094				2,992				(1,041	)			13,247
Interest expense			259				—				56				2				8,715				9,032
Other expense/(income), net			19				—				—				(2	)			(1	)			16
Total assets			450,796				25,338				56,269				212,307				24,319				769,029
Capital expenditures, net of stimulus grant reimbursements			32,415				1,251				562				3,266				—				37,494

		As of and for the six months ended December 31, 2010
																		Corporate/
		ZB				ZEN				zColo				ZFS				eliminations				Total
Revenue		$	100,038			$	16,254			$	14,580			$	18,633			$	—			$	149,505
Intersegment revenue			(1,422	)			(450	)			(1,170	)			—				—				(3,042	)
Revenue from external customers			98,616				15,804				13,410				18,633				—				146,463
Gross profit (revenue less operating costs excluding depreciation and amortization)			72,840				8,492				7,496				18,335				(1,281	)			105,882
Depreciation and amortization			18,598				1,937				2,674				5,690				—				28,899
Operating income/(loss)			19,172				(138	)			2,090				4,955				(3,688	)			22,391
Interest expense			521				—				115				5				14,648				15,289
Other expense/(income), net			18				—				—				(4	)			163				177
Capital expenditures, net of stimulus grant reimbursements			50,356				2,810				990				4,739				—				58,895

		As of and for the three months ended December 31, 2009
																		Corporate/
		ZB				ZEN				Zcolo				ZFS				eliminations				Total
Revenue		$	44,956			$	8,803			$	7,018			$	—			$	—			$	60,777
Intersegment revenue			(1,866	)			(170	)			(514	)			—				—				(2,550	)
Revenue from external customers			43,090				8,633				6,504				—				—				58,227
Gross profit (revenue less operating costs excluding depreciation and amortization)			31,285				4,628				3,658				—				(1,121	)			38,450
Depreciation and amortization			8,439				762				1,364				—				—				10,565
Operating income/(loss)			7,820				803				1,061				—				(1,311	)			8,373
Interest expense			288				—				—				—				2,953				3,241
Other expense/(income), net			—				—				—				—				—				—
Capital expenditures			9,389				424				23				—				—				9,836

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

During the three months ended December 31, 2010, Management approved a restructuring of the Company’s operating segments. The Company intends to restructure its operating segments to more closely align with its product offerings. This will result in the Zayo Enterprise Networks (“ZEN”) segment transferring its bandwidth infrastructure and ethernet and IP products to the Zayo Bandwidth segment and its colocation products the zColo segment. The existing ZEN segment will contain only the legacy managed services/competitive local exchange carrier (“CLEC”) products. These organizational and segment changes will be implemented during the quarter ended March 31, 2011.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Certain Factors That May Affect future Results

Information contained or incorporated by reference in this Quarterly Report on Form 10-Q, in other SEC filings by Zayo Group, LLC (“”we” or “us”), in press releases and in presentations by us or our management that are not historical by nature constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 which can be identified by the use of forward-looking terminology such as “believes,” “expects,” “plans,” “intends,” “estimates,” “projects,” “could,” “may,” “will,” “should,” or “anticipates” or the negatives thereof, other variations thereon or comparable terminology, or by discussions of strategy. No assurance can be given that future results expressed or implied by the forward-looking statements will be achieved. Such statements are based on management’s current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, those relating to our financial and operating prospects, current economic trends, future opportunities, ability to retain existing customers and attract new ones, our acquisition strategy and ability to integrate acquired companies and assets, outlook of customers, reception of new products and technologies, and strength of competition and pricing. Other factors and risks that may affect the our business and future financial results are detailed in our Securities and Exchange Act (“SEC”) filings, including, but not limited to, those described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” within this Quarterly Report on Form 10-Q. We caution you not to place undue reliance on these forward-looking statements, which speak only as of their respective dates. We undertake no obligation to publicly update or revise forward-looking statements to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.

The following discussion and analysis should be read together with our unaudited condensed consolidated financial statements and the related notes appearing in this Quarterly Report on Form 10-Q and in our audited annual financial statements as of and for the year ended June 30, 2010, included in Amendment No. 1 to the Form S-4 filed with the SEC on November 8, 2010.

Overview

Introduction

We are a provider of Bandwidth Infrastructure and network-neutral colocation and interconnection services, which are key components of telecommunications and Internet infrastructure services. These services enable our customers to manage, operate and scale their telecommunications and data networks and data center related operations. We provide our Bandwidth Infrastructure services over our dense regional and metropolitan fiber networks, enabling our customers to transport data, voice, video, and Internet traffic, as well as to interconnect their networks. Our Bandwidth Infrastructure services are primarily used by wireless service providers, carriers and other communications service providers, media and content companies, and other bandwidth-intensive enterprises. We typically provide our lit Bandwidth Infrastructure services for a fixed-rate monthly recurring fee under long-term contracts, which are usually three to five years in length (and typically seven to ten years for fiber-to-the-tower services). Our dark-fiber contracts are generally longer term in nature, up to 20 years and in a few cases longer. Our network-neutral colocation and interconnection services facilitate the exchange of voice, video, data and Internet traffic between multiple third-party networks.

Our fiber networks span over 23,000 route miles, serve 153 geographic markets in the United States, and connect to over 4,000 buildings, including approximately 1,681 cellular towers, allowing us to provide our Bandwidth Infrastructure services to our customers over redundant fiber facilities between key customer locations. The majority of the markets that we serve and buildings to which we connect have few other networks capable of providing similar Bandwidth Infrastructure services, which we believe provides us with a sustainable competitive advantage in these markets. As a result, we believe that the services we provide our customers would be difficult to replicate in a cost- and time-efficient manner. We provide our network-neutral colocation and interconnection services utilizing our own data centers located within carrier hotels in the important gateway markets of New York and New Jersey. We currently manage approximately 4,367 interconnections, enabling our customers to directly connect their discrete networks with each other.

We are a wholly-owned subsidiary of Zayo Group Holdings, Inc, a Delaware corporation (“Holdings”), which is in turn wholly owned by Communications Infrastructure Investments, LLC, a Delaware limited liability company (“CII”).

Our fiscal year ends June 30 each year and we refer to the fiscal year ended June 30, 2010 as “Fiscal 2010” and the year ended June 30, 2011 as “Fiscal 2011)

Our Business segments

We are organized into four autonomous business segments: Zayo Bandwidth, zColo, Zayo Enterprise Networks and Zayo Fiber Solutions. Each business segment is structured to provide sales, delivery, and customer support for its specific telecom and Internet infrastructure services.

Zayo Bandwidth. Through our Zayo Bandwidth unit, we provide Bandwidth Infrastructure services over our metropolitan and regional fiber networks. These services are primarily lit bandwidth, meaning that we use optronics to “light” the fiber, and consist of private line, wavelength and Ethernet services. Our target customers within this unit are primarily wireless service providers, telecommunications service providers (including ILECs, IXCs, RLECs, CLECs, and foreign carriers), media and content companies (including cable and satellite video providers), and other Internet-centric businesses that require an aggregate minimum of 10 Gbps of bandwidth across their networks.

zColo. Through our zColo unit, we provide network-neutral colocation and interconnection services in three major carrier hotels in the New York metropolitan area (60 Hudson Street and 111 8th Avenue in New York, New York, and 165 Halsey Street in Newark, New Jersey) and in facilities located in Chicago, Illinois; Los Angeles, California and Nashville, Tennessee. In addition, we are the exclusive operator of the Meet-Me Room at 60 Hudson Street, which is one of the most important carrier hotels in the United States with approximately 200 global networks interconnecting within this facility. Our zColo data centers house and power Internet and private network equipment in secure, environmentally-controlled locations that our customers use to aggregate and distribute data, voice, Internet, and video traffic. Throughout two of the three facilities we operate intra-building interconnect networks that, along with the Meet-Me Room at 60 Hudson Street, are utilized by our customers to efficiently and cost-effectively interconnect with other Internet, data, video, voice, and wireless networks. As of December 31, 2010 and June 30, 2010 the zColo segment managed 50,091 and 41,091 square feet of billable colocation space.

Zayo Enterprise Networks. Through our Zayo Enterprise Networks unit, we provide Bandwidth Infrastructure, enterprise IP, and other managed data and telecommunications services to customers who require fiber-based bandwidth solutions such as healthcare, financial, education, technology, and media and content companies, as well as schools, hospitals, municipalities and other governmental or semi-governmental entities. We operate exclusively in areas where we have fiber networks and primarily focus our sales efforts on customers who have at least 100 Mbps of bandwidth needs and, consequently, produce sufficient monthly recurring revenue potential to justify the capital investment required to connect their buildings to our fiber networks. The operations of our Zayo Enterprise Networks unit cover over 50% of our existing network footprint. We plan to continue to expand our market reach by adding new buildings to our fiber networks when we have entered into a contract that justifies the capital expenditure.

Zayo Fiber Solutions. The Zayo Fiber Solutions unit was formally launched on July 1, 2010, after our acquisition of AGL Networks, LLC (“AGL Networks”), a company whose business was comprised solely of dark-fiber-related services. See “— Recent Developments.” The assets of AGL Networks complement our existing dark-fiber services, which had previously been provided by Zayo Enterprise Networks and Zayo Bandwidth. After the acquisition, we transferred those existing dark-fiber customer contracts to our Zayo Fiber Solutions unit, and intend to leverage a portion our pre-existing fiber network to provide dark-fiber solution offerings.

Through our Zayo Fiber Solutions unit, we provide dark-fiber and related services primarily on our existing fiber footprint. We lease dark-fiber pairs to our customers and, as part of our service offering, we manage and maintain the underlying fiber network for the customer. Our customers light the fiber using their own optronics, and as such, we do not manage the bandwidth that the customer receives. This allows the customer to manage bandwidth on their own metro and long haul networks according to their specific business needs. Zayo Fiber Solutions’ customers include carriers, ISPs, wireless service providers, major media and content companies, large enterprises, and other companies that have the expertise to run their own fiber optic networks. We market and sell dark-fiber-related services under long-term contracts (up to 20 years and in a few cases longer); our customers generally pay us on a monthly recurring basis for these services.

Recent Developments

Acquisition of AGL Networks

On July 1, 2010, we acquired 100% of the equity of AGL Networks from its parent, AGL Resources Inc., and changed AGL Networks’ name to Zayo Fiber Solutions, LLC. We paid the purchase price of approximately $73.7 million with cash on hand. AGL Networks’ assets were comprised of dense, high-fiber-count networks totaling 786 (761 of which are incremental to our existing footprint) route miles and over 190,000 fiber miles, and included 289 (281 incremental) on-net buildings across the metropolitan markets of Atlanta, Georgia, Charlotte, North Carolina, and Phoenix, Arizona. AGL Networks generated all of its revenue from providing dark-fiber related services to both wholesale and enterprise customers.

In connection with the AGL Networks acquisition, we established a fourth business segment on July 1, 2010 — Zayo Fiber Solutions. The assets of AGL Networks complement our existing dark-fiber services, which had previously been provided by Zayo Enterprise Networks and Zayo Bandwidth. After the acquisition, we transferred those existing dark-fiber customer contracts to our Zayo Fiber Solutions unit, and intend to leverage a portion our pre-existing fiber network to provide dark-fiber solution offerings.

Merger with American Fiber Systems Holding Corporation (“AFS”)

On October 1, 2010, we completed a merger (the “Merger”) with AFS, the parent company of AFS, Inc. The Merger was consummated with the exchange of $110,000 in cash and a $4,500 non-interest bearing promissory note due in 2012 for all of the interest in AFS. The Company calculated the fair market value of the promissory note to be $4,141 resulting in an aggregate purchase price of $114,141. The merger was effected through a merger between AFS and a special purpose vehicle created for the merger. The purchase price was based upon the valuation of both the business and assets directly owned by AFS and the ownership interest in US Carrier, held by AFS, Inc., for which we estimated the fair value to be $15.1 million. AFS is a provider of Bandwidth Infrastructure services in nine metropolitan markets: Atlanta, Georgia, Boise, Idaho, Cleveland, Ohio, Kansas City, Missouri, Las Vegas, Nevada, Minneapolis, Minnesota, Nashville, Tennessee, Reno, Nevada and Salt Lake City, Utah. American Fiber Systems owns and operates over 1,200 route miles (about 1,000 of which are incremental to our existing footprint) and over 160,000 fiber miles of fiber networks and has over 600 incremental on-net buildings in these markets.

Acquisition of Dolphini Assets

On September 20, 2010, our zColo business segment acquired certain colocation assets in Nashville, Tennessee of Dolphini Corporation for a cash purchase price of $0.2 million.

Broadband Stimulus Awards

In 2010, we have been an active participant in federal broadband stimulus projects created through the American Recovery and Reinvestment Act. To date, we have been awarded, as a direct recipient, federal stimulus funds for two projects by the National Telecommunication and Information Administration. The projects involve the construction, ownership, and operation of fiber networks for the purpose of providing broadband services to governmental and educational institutions, as well as underserved, and usually rural, communities. As part of the award, the federal government funds a large portion of the construction and development costs. On the two projects awarded to us to date, the stimulus funding will cover, on average, approximately 77% of the total expected cost of the projects. Commitments by other third parties will provide additional funding representing approximately 10% of the total cost of the projects. Both of these projects allow for our ownership or use of the network for other commercial purposes, including the sale of our Bandwidth Infrastructure services to new and existing customers. The details of the two awards are as follows:

	•		In February 2010, Zayo Bandwidth, as the direct recipient, was awarded $25.1 million in funding to construct 626 miles of fiber network connecting 21 community colleges in Indiana.
	•		In July 2010, Zayo Bandwidth, as the direct recipient, was awarded a $13.4 million grant to construct 286 miles of fiber network in Anoka County, Minnesota, outside of Minneapolis.

In addition, there are three additional stimulus applications, pending review or finalization, in which we may participate as a sub-recipient or supporting role.

Restructuring of Operating Segments

We currently operate our business as four operating segments which are defined by the product sets they offer and customers they target. Zayo Bandwidth (“ZB”) offers lit bandwidth infrastructure services to our 200 largest users, Zayo Enterprise Networks (“ZEN”) provides lit bandwidth infrastructure to regional and enterprise customers and converged and data communications services, zColo provides colocation services and intra building transport services and Zayo Fiber Solutions (“ZFS”) is dedicated to marketing and supporting dark fiber related services to a broad set of customers. During the quarter ended March 31, 2011 we intend to restructure our operating segments to more closely align with product categories. This will result in our ZEN segment transferring its bandwidth infrastructure products and ethernet and IP products to the ZB segment and its colocation products to zColo. The existing ZEN segment will contain only the legacy managed services/competitive local exchange carrier (“CLEC”) products.

Factors Affecting Our Results of Operations

Business Acquisitions

We were founded in 2007 in order to take advantage of the favorable Internet, data and wireless growth trends driving the demand for Bandwidth Infrastructure services. These trends have continued in the years since our founding, despite volatile economic conditions, and we believe that we are well-positioned to continue to capitalize on those trends. We have built our network and services through 16 acquisitions and asset purchases for an aggregate purchase consideration (including assumed debt) of $565.1 million (after deducting our acquisition cost for Onvoy Voice Services, a business segment operated by our subsidiary Onvoy, Inc. (“Onvoy”), which we spun-off during Fiscal 2010).

On September 9, 2009, we completed our acquisition of all of the outstanding shares of common stock of FiberNet Telecom Group, Inc. (“FiberNet”). We accounted for the FiberNet acquisition using the purchase method of accounting, with the assets acquired and liabilities recorded at estimated fair values. In conformity with applicable accounting standards effective for Fiscal 2010 that replaced the prior standards, third-party costs related to the acquisition were expensed rather than capitalized and a gain on bargain purchase was recognized in earnings in June 2010.

We formed our zColo business segment from a portion of the legacy FiberNet business, and thus that business segment is only included in our Fiscal 2010 operating results for the period September 10, 2009 through December 31, 2009. The remaining portion of the legacy FiberNet business was added to our existing Zayo Bandwidth business segment.

As discussed in the Recent Developments section, above, on July 1, 2010 we completed our acquisition of all of the equity interest in AGL Networks and thus the results of the legacy AGL Networks business are included in the operating results for the three and six month periods ended December 31, 2010. Additionally, on October 1, 2010 we completed a merger with AFS, and thus the results of the legacy AFS business are included in the operating results for the three months ended December 31, 2010.

Onvoy Spin-Off

We previously had another business segment, Onvoy Voice Services, which was engaged in the wholesale voice services segment of the telecommunications industry and was operated by one of our subsidiaries, Onvoy. After our acquisition of Onvoy, we transferred the non-Onvoy Voice Services assets and businesses within Onvoy to our Zayo Bandwidth and Zayo Enterprise Networks business segments. During Fiscal 2010, we determined that the services provided by Onvoy Voice Services did not fit within our business model of providing telecom and Internet infrastructure services. On March 12, 2010, we distributed all of the shares of common stock of Onvoy to Holdings. Consistent with the discontinued operations reporting provisions of FASB ASC 280-20, Discontinued Operations, we determined that we had discontinued all significant cash flows and continuing involvement with respect to the Onvoy operations effective March 12, 2010. Therefore, for the three and six month period ended December 31, 2009, the results of the operations of Onvoy have been aggregated and are presented in a single caption entitled “Earnings from discontinued operations, net of income taxes” on the accompanying condensed consolidated statements of operations. We have not allocated any general corporate overhead to amounts presented in discontinued operations, nor have we elected to allocate interest costs. All discussions contained in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” relate only to our results of operations from our continuing operations.

Substantial Capital Expenditures

During the six months ended December 31, 2010 and 2009, we invested $58.9 million (net of stimulus grant reimbursements) and $21.5 million, respectively, in capital expenditures related to property and equipment to expand our fiber network, principally in connection with new customer contracts. We expect to continue to make significant capital expenditures in future periods.

As a result of the growth of our business from the acquisitions described above, as well as from such capital expenditures, our results of operations for the respective periods presented and discussed herein are not comparable.

Substantial Indebtedness

We had total indebtedness (excluding capital leases) of $354.3 million and $247.1 million as of December 31, 2010 and June 30, 2010, respectively, reflecting principally our borrowings to fund our acquisitions and for other working capital purposes. The nominal interest rate on our $350 million Senior Secured Notes (“Notes”) as of December 31, 2010 and June 30, 2010 was 10.25 percent.

Critical Accounting Policies and Estimates

This discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We base our estimates on historical results which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate these estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.

We have accounting policies that involve estimates such as the allowance for doubtful accounts, revenue reserves, useful lives of long-lived assets, fair value of our common and preferred units issued as compensation, accruals for estimated tax and legal liabilities, accruals for disputes and valuation allowance for deferred tax assets. We have identified the policies below which require the most significant judgments and estimates to be made in the preparation of our condensed consolidated financial statements, as critical to our business operations and an understanding of our results of operations.

Revenue and receivables

We recognize revenue derived from leasing fiber optic telecommunications infrastructure and the provision of telecommunications and co-location services when the service has been provided and when there is persuasive evidence of an arrangement, the fee is fixed or determinable and collection of the receivable is reasonably assured. Taxes collected from customers and remitted to government authorities are excluded from revenue.

Most revenue is billed in advance on a fixed-rate basis. The remainder of revenue is billed in arrears on a transaction basis determined by customer usage. Fees billed in connection with customer installations and other up-front charges are deferred and recognized as revenue ratably over the contract life.

Revenue attributable to leases of dark fiber pursuant to indefeasible rights-of-use agreements (“IRUs”) are accounted for in the same manner as the accounting treatment around the sales of real estate with property improvements or integral equipment. This accounting treatment typically results in the deferral of revenue for the cash that has been received and the recognition of revenue ratably over the term of the agreement (generally up to 20 years). However, ASC 360-20 Property Plant and Equipment: Real Estate Sales, allows for full profit recognition on IRU contracts when the following conditions have been met: 1) a sale has been consummated, 2) the buyer’s initial and continuing investments are adequate to demonstrate a commitment to pay for the underlying property, 3) the sellers receivable is not subject to future subordination; and 4) the seller has transferred to the buyer the usual risks and rewards of ownership in a transaction that is in substance a sale and does not have a substantial continuing involvement with the property. During the three and six month periods ended December 31, 2010 and 2009 the company did not enter into any IRU contracts with customers that were accounted for using full profit revenue recognition.

Revenue is recognized at the amount expected to be realized, which includes billing and service adjustments. During each reporting period, we make estimates for potential future sales credits to be issued in respect of current revenue, related to service interruptions and customer disputes, which are recorded as a reduction in revenue. We analyze historical credit activity when evaluating our credit reserve requirements. We reserve for known service interruptions as incurred. We review customer disputes and reserve against those we believe to be valid claims. The determination of the customer dispute credit reserve involves significant estimations and assumptions.

We defer recognition of revenue until cash is collected on certain components of revenue, such as contract termination charges.

We estimate the ability to collect our receivables by performing ongoing credit evaluations of our customers’ financial condition, and provide an allowance for doubtful accounts based on expected collection of our receivables. Our estimates are based on assumptions and other considerations, including payment history, credit ratings, customer financial performance, industry financial performance and aging analysis.

Network Expenses and Accrued Liabilities

We lease certain network facilities, primarily circuits, from other local exchange carriers to augment our owned infrastructure for which we are generally billed a fixed monthly fee. We also use the facilities of other carriers for which we are billed on a usage basis.

We recognize the cost of these facilities or services when it is incurred in accordance with contractual requirements. We dispute incorrect billings. The most prevalent types of disputes include disputes for circuits that are not disconnected on a timely basis and usage bills with incorrect or inadequate call detail records. Depending on the type and complexity of the issues involved, it may take several quarters to resolve disputes.

In determining the amount of such operating expenses and related accrued liabilities to reflect in our financial statements, we consider the adequacy of documentation of disconnect notices, compliance with prevailing contractual requirements for submitting such disconnect notices and disputes to the provider of the facilities, and compliance with our interconnection agreements with these carriers. Significant judgment is required in estimating the ultimate outcome of the dispute resolution process, as well as any other amounts that may be incurred to conclude the negotiations or settle any litigation.

Stock-Based Compensation

We account for our stock-based compensation in accordance with the provisions of ASC 718 — Compensation: Stock Compensation, which requires stock compensation to be recorded as either liability or equity awards based on the terms of the grant agreement. The common units granted to employees are considered to be stock-based compensation with terms which require the awards to be classified as liabilities. As such, we account for these awards as a liability and re-measure the liability at each reporting date until the date of settlement. Each reporting period the value of the vested portion of our liability awards are adjusted to their fair value. The preferred units granted to certain employees and directors are considered to be stock-based compensation with terms which require the awards to be classified as equity. As such, we account for these awards as equity which requires us to determine the fair market value of the award on the grant date and amortize the expense over the vesting period of the award.

We use a third party to assist in the valuation of our common units each reporting period and preferred units when granted. In developing a value for these units we use a two step valuation approach. In the first step we develop a valuation based upon the assumption that an investment in us represents an investment in the assets of a going concern. The second step involves allocating this value across our capital structure. The valuation is conducted in consideration of the guidance provided in the American Institute of Certified Public Accountant (“AICPA”) Practice Aid “Valuation of Privately-Held Company Equity Securities Issued as Compensation” and with adherence to the Uniform Standards of Professional Appraisal Practice (“USPAP”) set forth by the Appraisal Foundation.

In estimating our fair value we evaluated a variety of market and income based valuation approaches. Based on the nature of our business we believe the following valuation approaches are most relevant to us:

Market Approaches

We utilize the Guideline Public Companies valuation methodology when estimating our value via a market approach. We believe the most relevant Guideline Public Companies ratios for our business are the Total Enterprise Value (“TEV”) to estimated 2010 revenues, estimated 2011 revenues and estimated 2010 EBITDA. In our overall valuation we have assigned a weighting of 5%, 5% and 35% to the TEV to estimated 2010 and 2011 revenues and estimated 2010 EBITDA, respectively in order to estimate our fair value.

Income Approach

We also utilize a discounted cash flow approach which involves developing a projected free cash flow, estimating an appropriate risk adjusted present value discount rate, calculating the present value of our projected free cash flows, and calculating a terminal value. In estimating our fair value, we utilized the following discounted cash flow valuation techniques: Total Enterprise Value to Terminal Revenue and Total Enterprise to terminal EBITDA. Both of these income approaches were weighted at 27.5 percent in estimating our fair value. There are several inputs which are required to develop an estimate of the enterprise value when utilizing these income approaches including forecasted earnings, discount rate and the terminal multiple. We have developed a forecast of our revenues and EBITDA for the four year period ended December 31, 2014. Our forecasted revenues and EBITDA are based on our composition as of the balance sheet date not adjusted for potential acquisitions. The next step in the income approach is to estimate a discount rate which most appropriately reflects our cost of capital. In our analysis we utilized a weighted average cost of capital (“WACC”) utilizing the Capital Asset Pricing Model (“CAPM”) build —up method. This method derives the cost of equity in part from the volatility (risk) statistics suggested by the Guideline Public Companies in the form of their five year historical betas. We included certain incremental risk premiums specific to us to account for the fact that we have historically depended on outside investment to operate, are significantly smaller than the Guideline Public Companies and have a history of substantial volatility in earnings and cash flows. Based on our projections and discount rate we estimate the present value of our future cash flows. In order to estimate the enterprise value we add to the estimated discounted cash flows an estimated terminal value. The terminal value is estimated utilizing the “Observed Market Multiple” method. This method requires us to observe prevailing valuations associated with the Guideline Public Companies and the acquisitions of guideline Companies. This terminal value is converted to a present value through the use of an appropriate present value factor.

The resulting enterprise valuation is then allocated across our capital structure. Upon a liquidation of CII, or upon a non-liquidating distribution, the holders of common units share in the proceeds after the CII preferred unit holders receive their unreturned capital contributions and their priority return (6% per annum). After the preferred unreturned capital contributions and the priority return are satisfied, the remaining proceeds are allocated on a scale ranging from 85% to the Class A preferred unit holders and 15% to the common unit holders and 80% to the Class A preferred unit holders and 20% to the common unit holders depending upon the return multiple to the Class A preferred unit holders up to the amount of the Class A gain percentage. Once the amount of proceeds related to the Class A percentage gain has been distributed, then proceeds attributable to the Class B gain percentages are distributed in a similar method as the Class A gains.

The value attributable to each class of shares is then discounted in order to account for the lack of marketability of the units. In quantifying the magnitude of the discount we rely upon a method known as the protective put method which estimates a discount to be applied by calculating the cost of purchasing a put when the underlying asset value and strike price are equal.

As of December 31, 2010, we estimate the value of the Class A, B and C common units to be $0.58, $0.33 and $0.03, respectively.

Property and Equipment

We record property and equipment acquired in connections with a business combination at their estimated fair values — See Critical Account Policies and Estimates: Acquisitions — Purchase Price Allocation, on the acquisition date. Purchases of property and equipment are stated at cost, net of depreciation. Major improvements are capitalized, while expenditures for repairs and maintenance are expensed when incurred. Costs incurred prior to a capital project’s completion are reflected as construction-in-progress and are part of network infrastructure assets. Depreciation begins once the property and equipment is available and ready for use. Certain internal direct labor costs of constructing or installing property and equipment are capitalized. Capitalized direct labor reflects a portion of the salary and benefits of certain field engineers that is directly related to the construction and installation of network infrastructure assets. Depreciation and amortization is provided on a straight-line basis over the estimated useful lives of the assets, with the exception of leasehold improvements, which are amortized over the lesser of the estimated useful lives or the term of the lease.

Estimated useful lives of our property and equipment are as follows:

Land			N/A
Buildings improvements and site improvements			8 to 15
Furniture, fixtures and office equipment			3 to 7
Computer hardware			2 to 5
Software			2 to 3
Machinery and equipment			3 to 7
Fiber optic equipment			4 to 8
Circuit switch equipment			10
Packet switch equipment			3 to 5
Fiber optic network			8 to 20
Construction in progress			N/A

We perform periodic internal reviews to estimate useful lives of our property, plant and equipment. Due to rapid changes in technology and the competitive environment, selecting the estimated economic life of telecommunications property, plant, and equipment requires a significant amount of judgment. Our internal reviews take into account input from our network services personnel regarding actual usage, physical wear and tear, replacement history, and assumptions regarding the benefits and costs of implementing new technology that factor in the need to meet our financial objectives.

When property and equipment is retired or otherwise disposed of, the cost and accumulated depreciation is removed from the accounts, and resulting gains or losses are reflected in operating income.

From time to time, we are required to replace or re-route existing fiber due to structural changes such as construction and highway expansions, which is defined as a “relocation.” In such instances, we fully depreciate the remaining carrying value of network infrastructure removed or rendered unusable and capitalize the new fiber and associated construction costs of the relocation placed into service, which is reduced by any reimbursements received for such costs. To the extent that relocation requires only the movement of existing network infrastructure to another location, the related costs are included in our results of operations.

Interest costs are capitalized for all assets that require a period of time to get them ready for their intended use. This policy is based on the premise that the historical cost of acquiring an asset should include all costs necessarily incurred to bring it to the condition and location necessary for its intended use, in principle, the cost incurred in financing expenditures for an asset during a required construction or development period is itself a part of the asset’s historical acquisition cost. The amount of interest costs capitalized for qualifying assets is determined based on the portion of the interest cost incurred during the assets’ acquisition periods that theoretically could have been avoided if expenditures for the assets had not been made. The amount of interest capitalized in an accounting period is calculated by applying the capitalization rate to the average amount of accumulated expenditures for the asset during the period. The capitalization rates used to determine the value of interest capitalized in an accounting period is based on our weighted average effective interest rate for outstanding debt obligations during the respective accounting period.

We periodically evaluate the recoverability of our long-lived assets and evaluate such assets for impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. Impairment is determined to exist if the estimated future undiscounted cash flows are less than the carrying value of such assets. We consider various factors to determine if an impairment test is necessary. The factors include: consideration of the overall economic climate, technological advances with respect to equipment, our strategy and capital planning. Since our inception, no event has occurred nor has the business environment changed which would trigger an impairment test for our property and equipment assets.

Deferred Tax Accounting

Deferred tax assets arise from a variety of sources, the most significant being: a) tax losses that can be carried forward to be utilized against profits in future years; and b) expenses recognized in our income statement but disallowed in our tax return until the associated cash flow occurs.

We record a valuation allowance to reduce our deferred tax assets to the amount which is expected to be recognized. The level of deferred tax asset recognition is influenced by management’s assessment of our future profitability with regard to relevant business plan forecasts. At each balance sheet date, existing assessments are reviewed and, if necessary, revised to reflect changed circumstances. In a situation where recent losses have been incurred, the relevant accounting standards require convincing evidence that there will be sufficient future profitability.

In connection with several of our acquisition, we have acquired significant net operating loss (“NOL”) carryforwards. The Tax Reform Act of 1986 contains provisions that limit the utilization of NOLs if there has been an “ownership change” as described in Section 382 of the Internal Revenue Code. In general, this would occur if certain ownership changes related to our stock that is held by 5% or greater stockholders, exceeds 50 percent measured over a rolling three year period. If we experience such an ownership change, our utilization of NOLs to reduce future federal income tax obligations could be limited (see “Risk Factors—Our ability to use net operating loss carryforwards to reduce future tax payments could be negatively impacted if there is an “ownership change” as defined under Section 382 of the Internal Revenue Code”).

Upon acquiring a company that has NOL’s, management prepares an assessment to determine if we have a legal right to utilize the acquired NOL balance. In performing this assessment we follow the regulations within the Internal Revenue Code Section 382: Net Operating Loss Carryovers Following Changes in Ownership. Any disallowed NOL’s acquired are written off in purchase accounting.

A valuation allowance is required for deferred tax assets if, based on available evidence, it is more-likely-than-not that all or some portion of the asset will not be realized due to the inability to generate sufficient taxable income in the period and/or of the character necessary to utilize the benefit of the deferred tax asset. When evaluating whether it is more-likely-than-not that all or some portion of the deferred tax asset will not be realized, all available evidence both positive and negative, that may affect the realizability of deferred tax assets is identified and considered in determining the appropriate amount of the valuation allowance. We continue to monitor our cumulative net loss position and other evidence each quarter to determine the appropriateness of our valuation allowance. If we are unable to meet our taxable income forecasts in future periods we may change our conclusion about the appropriateness of the valuation allowance which could create a substantial income tax expense in our consolidated statement of operations in the period such change occurred.

As of December 31, 2010, we have a cumulative NOL carryforward balance of $142.9 million of which we expect to utilize all but $1.0 million. During the three months ended December 31, 2010 we added an additional $40.9 million to our NOL carryforward balance as a result of NOLs acquired from the AFS Merger. These NOL carryforwards, if not utilized to reduce taxable income in future periods, will expire in various amounts beginning in 2020 and ending in 2029. We utilized NOLs to offset income tax obligations in each of the years ended June 30, 2010 and 2009. As a result of Internal Revenue Service regulations we are currently limited to utilizing a maximum of $12.5 million NOL’s during Fiscal 2011; however to the extent that we do not utilize $12.5 million NOL’s during the current year the difference between the $12.5 maximum usage and the actual NOL’s usage is carried over to the next calendar year. During the year ended June 30, 2010 we offset our taxable income with $10.3 million in NOL’s — the maximum allowed by IRS regulations for that period. The deferred tax assets recognized at December 31, 2010 have been based on future profitability assumptions over a five-year horizon.

As a result of the annual limitations placed on us and the expiration dates of our NOL’s, management has estimated that $1 million of the NOL balance will expire unused and as such we have recorded a valuation allowance of $0.4 million against the gross deferred tax asset as of December 31, 2010.

The analysis of our ability to utilize our NOL balance is based on our forecasted taxable income. The forecasted assumptions approximate our best estimates including market growth rates, future pricing, market acceptance of our products and services, future expected capital investments and discount rates. Although our forecasted income includes increased taxable earnings in future periods, flat earnings over the period in which our NOL’s are available would result in full utilization of our current unreserved NOL carryforwards.

Goodwill and Purchased Intangibles

We perform an assessment of goodwill for impairment annually in April each year or more frequently if we determine that indicators of impairment exist. Our impairment review process compares the fair value of each reporting unit to its carrying value. Our reporting units are consistent with the reportable segments identified in Note 16 — Segment Reporting, to our condensed consolidated financial statements

In performing the annual goodwill impairment test, if the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and no further testing is performed. If the carrying value of the reporting unit exceeds its fair value, then a second step must be performed, and the implied fair value of the reporting unit’s goodwill must be determined and compared to the carrying value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then an impairment loss equal to the difference will be recorded.

We consider the use of multiple valuation techniques in accordance with fair value measurements and disclosures guidance to estimate the fair value of its reporting segments and has consistently applied an income and market based approach to measure fair value.

Under the income approach, we estimate the reportable segments fair market value using the discounted cash flow method. The discounted cash flow method involves the following key steps:

	•		the development of projected free cash flows;
	•		the estimation of an appropriate risk adjusted present value discount rate;
	•		the calculation of the present value of projected free cash flow; and
	•		the calculation of a terminal value.

In developing the projected free cash flows, management utilizes expected growth rates implied by the financial projections which have been developed by senior management. The cash flow forecasts are based upon upside, midpoint and downside scenarios. Using the projected cash flow and discount rate inputs, we calculate the present value of our projected cash flows. In calculating the terminal value, we estimate a long-term growth rate which management believes appropriately reflect the expected long-term growth in nominal U.S. gross domestic product. The terminal value is converted to a present value through the use of the appropriate present value factor. This figure is then summed with the present value of projected free cash flow for the projection period to render a valuation estimate for each reporting segment.

Under the market approach, we estimate the reportable segments fair market value using the Analysis of Guideline Public Companies method. The use of this method involves the following:

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

In identifying and selecting the guideline companies that could be deemed appropriate for our reporting units, we screened potential companies using a research tool with parameters including constraints regarding geographic location, primary industry classification and market capitalization. We selected the Enterprise Value to Revenue and EBITDA ratios as the most appropriate market based valuation technique for us. With the assistance of a third-party vendor, we estimated the 2010 revenue trading multiples based on Guideline Public Companies. Utilizing third-party market studies, we used estimated a control premium as part of the market based calculations which is in-line with historical control premiums offered for comparable transaction in the communications industry, the availability of financing, and number of potential buyers.

In estimating the fair market value of each of our reportable segments, we averaged the valuations from each of the approaches above. The resulting valuations are significantly higher than the current carrying value of these segments. Although we estimate the fair value of our segments utilizing the average of various valuation techniques, none of the valuation techniques on a stand-alone basis indicated an impairment of any of our segments during the current year.

Acquisitions — Purchase Price Allocation

We apply the purchase method of accounting to account for acquisitions of businesses. The cost of an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred and equity instruments issued. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date. The excess of the cost of the acquisition over our interest in the fair value of the identifiable net assets acquired is recorded as goodwill. If our interest in the fair value of the identifiable net assets acquired in a business combination exceeds the cost of the acquisition a gain is recognized in earnings on the acquisition date only after we have reassessed whether we have correctly identified all of the assets acquired and all of the liabilities assumed.

For most acquisitions, we engage outside appraisal firms to assist in the fair value determination of identifiable intangible assets such as customer relationships, tradenames, property and equipment and any other significant assets or liabilities. We adjust the preliminary purchase price allocation, as necessary, after the acquisition closing date through the end of the measurement period of one year or less as we finalize valuations for the assets acquired and liabilities assumed.

The determination and allocation of fair values to the identifiable assets acquired and liabilities assumed is based on various assumptions and valuation methodologies requiring considerable management judgment. The most significant variables in these valuations are discount rates, terminal values, the number of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. Management determines discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons. Terminal values are based on the expected life of products and forecasted life cycle and forecasted cash flows over that period. Although we believe that the assumptions applied in the determination are reasonable based on information available at the date of acquisition, actual results may differ from the forecasted amounts and the difference could be material.

Background for Review of Our Results of Operations

Operating Costs

Our operating costs consist primarily of third-party network service costs, colocation facility costs and colocation facility utilities costs. Third-party network service costs result from our leasing of certain network facilities, primarily circuits, from other local exchange carriers to augment our owned infrastructure for which we are generally billed a fixed monthly fee. Our colocation facility costs represent rent and license fees paid to the landlords of the buildings in which our zColo business operates. The colocation facility utilities cost is the cost of power used in those facilities.

Recurring transport costs are the largest component of our operating costs and primarily include monthly service charges from telecommunication carriers related to the circuits utilized by us to interconnect our customers. While increases in demand will drive additional operating costs in our business, we expect to primarily utilize our existing network infrastructure and augment, when necessary, with additional circuits or services from third-party providers. Non-recurring transport costs primarily include the cost of the initial installation of such circuits.

Selling, General and Administrative Expenses

Our selling, general and administrative (“SG&A”) expenses include personnel costs, costs associated with the operation of our network (network operations) and other related expenses, including sales commissions, marketing programs, office rent, professional fees, travel, software maintenance costs and other.

After compensation and benefits, network operations costs are the largest component of our SG&A expenses. Network operations costs include all of the non-personnel related expenses of maintaining our network infrastructure, including contracted maintenance fees, right-of-way costs, rent for locations where fiber is located (including cellular towers), pole attachment fees and relocation expenses.

Stock-Based Compensation

We compensate certain members of our management and directors through grants of common units of CII, which vest over varying periods of time, depending on the terms of employment of each such member of management or directors. In addition, certain of our senior executives and directors have been granted preferred units of CII.

For the common units granted to members of management and directors, we recognize an expense equal to the fair value of all of those common units granted during the period, and record a liability in respect of that amount. Subsequently, we recognize changes in the fair value of those common units through increases or decreases in stock-based compensation expense and related adjustments to the related stock-based compensation liability.

When the preferred units are initially granted, we recognize no expense. We use the straight line method, over the vesting period, to amortize the fair value of those units, as determined on the date of grant. Subsequent changes in the fair value of the preferred units granted to those executive officers and directors are not taken into consideration as we amortize that expense.

Results of Operations

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