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

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 o No þ The registrant is no longer subject to the filing requirements of the Exchange Act, but has filed all Exchange Act reports as if it were required to do so.

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 þ 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)
Condensed Consolidated Balance Sheets As of September 30, 2011 and June 30, 2011			1
Condensed Consolidated Statements of Operations Three month periods ended September 30, 2011 and 2010			2
Condensed Consolidated Statement of Member’s Equity Three month period ended September 30, 2011			3
Condensed Consolidated Statements of Cash Flows Three month periods ended September 30, 2011 and 2010			4
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			34
Item 3. Quantitative and Qualitative Disclosures about Market Risk			47
Item 4. Controls and Procedures			48
Part II. OTHER INFORMATION
Item 1. Legal Proceedings			49
Item 1A. Risk Factors			49
Item 6. Exhibits			50
Signatures			51
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

ZAYO GROUP, LLC AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION

ITEM 1.		CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

		September 30,				June 30,
		2011				2011
Assets
Current assets
Cash and cash equivalents		$	20,846			$	25,394
Trade receivables, net of allowance of $900 and $799 as of September 30, 2011 and June 30, 2011, respectively			20,976				13,983
Due from related-parties			15				187
Prepaid expenses			6,886				6,388
Deferred income taxes			3,374				3,343
Other assets, current			1,053				645
Total current assets			53,150				49,940
Property and equipment, net of accumulated depreciation of $112,520 and $101,941 as of September 30, 2011 and June 30, 2011, respectively			534,513				518,513
Intangible assets, net of accumulated amortization of $31,968 and $37,980 as of September 30, 2011 and June 30, 2011, respectively			101,349				104,672
Goodwill			83,805				83,820
Debt issuance costs, net			10,867				11,446
Investment in US Carrier			15,075				15,075
Other assets, non-current			5,949				5,795
Total assets		$	804,708			$	789,261
Liabilities and member’s equity
Current liabilities
Accounts payable		$	13,833			$	12,988
Accrued liabilities			26,270				22,453
Accrued interest			1,621				10,627
Capital lease obligations, current			967				950
Due to related-parties			4,590				4,590
Deferred revenue, current			15,911				15,664
Total current liabilities			63,192				67,272
Capital lease obligations, non-current			9,978				10,224
Long-term debt			354,450				354,414
Deferred revenue, non-current			71,996				63,893
Stock-based compensation liability			48,561				45,067
Deferred tax liability			12,289				8,322
Other long term liabilities			2,744				2,724
Total liabilities			563,210				551,916
Commitments and contingencies (Note 14)
Member’s equity
Member’s interest			246,438				245,433
Accumulated deficit			(4,940	)			(8,088	)
Total member’s equity			241,498				237,345
Total liabilities and member’s equity		$	804,708			$	789,261

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
		September 30,
		2011				2010
Revenue		$	78,443			$	62,926
Operating costs and expenses
Operating costs, excluding depreciation and amortization			18,150				17,038
Selling, general and administrative expenses			22,596				20,284
Stock-based compensation			3,704				5,131
Depreciation and amortization			17,062				11,808
Total operating costs and expenses			61,512				54,261
Operating income			16,931				8,665
Other expenses
Interest expense			(9,168	)			(6,257	)
Other expense, net			(11	)			(161	)
Total other expense, net			(9,179	)			(6,418	)
Earnings from continuing operations before provision for income taxes			7,752				2,247
Provision for income taxes			4,604				2,799
Earnings/(loss) from continuing operations			3,148				(552	)
Earnings from discontinued operations, net of income taxes			—				280
Net earnings/(loss)		$	3,148			$	(272	)

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

		Member’s				Accumulated				Total Member’s
		interest				Deficit				equity
Balance at July 1, 2011		$	245,433			$	(8,088	)		$	237,345
Capital contributed (cash)			100				—				100
Capital contributed (non-cash)			695				—				695
Accretion of preferred stock-based compensation			210				—				210
Net earnings			—				3,148				3,148
Balance at September 30, 2011		$	246,438			$	(4,940	)		$	241,498

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

ZAYO GROUP, LLC AND SUBSIDIARIES

		Three months ended
		September 30,
		2011				2010
Cash flows from operating activities
Net earnings/(loss)		$	3,148			$	(272	)
Earnings from discontinued operations			—				280
Earnings/(loss) from continuing operations			3,148				(552	)
Adjustments to reconcile net earnings/(loss) to net cash provided by operating activities
Depreciation and amortization			17,062				11,808
Provision for bad debt expense			148				179
Non-cash interest expense			616				535
Stock-based compensation			3,704				5,131
Amortization of deferred revenues			(2,580	)			(1,737	)
Deferred income taxes			4,462				2,307
Changes in operating assets and liabilities, net of acquisitions
Trade receivables			(7,141	)			(2,155	)
Prepaid expenses			(498	)			(802	)
Other assets			201				1,383
Accounts payable and accrued liabilities			(5,268	)			(5,984	)
Due to/from related parties			169				94
Customer prepayments			10,182				1,602
Other liabilities			20				(1,327	)
Net cash provided by continuing operating activities			24,225				10,482
Cash flows from investing activities
Purchases of property and equipment			(31,442	)			(21,396	)
Broadband stimulus grants received			2,798				250
Acquisition of AGL Networks, LLC, net of cash acquired			—				(73,666	)
Net cash used in investing activities			(28,644	)			(94,812	)
Cash flows from financing activities
Equity contributions			100				35,500
Principal repayments on capital lease obligations			(229	)			(610	)
Advance from Communications Infrastructure Investments, LLC			—				13,026
Proceeds from long-term debt			—				103,000
Changes in restricted cash			—				790
Deferred financing costs			—				(3,319	)
Net cash (used in)/provided by financing activities			(129	)			148,387
Cash flows from discontinued operations
Operating activities			—				1,229
Investing activities			—				(225	)
Net cash provided by discontinued operations			—				1,004
Net (decrease)/increase in cash and cash equivalents			(4,548	)			65,061
Cash and cash equivalents, beginning of period			25,394				87,864
Increase in cash and cash equivalents of discontinued operations			—				(494	)
Cash and cash equivalents, end of period		$	20,846			$	152,431

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

(Continued)

ZAYO GROUP, LLC AND SUBSIDIARIES

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

		Three months ended
		September 30,
		2011				2010
Cash paid for interest		$	18,344			$	13,457
Cash paid for income taxes			323				1,455
Non-cash purchases of equipment through capital leasing			—				125
Increase in accrued expenses for purchases of property and equipment			1,096				3,182

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 Business Unit 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 settlements.

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

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED 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:

	•		Dark and lit bandwidth infrastructure services on metro and regional fiber networks.
	•		Colocation and interconnection 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”).

(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 GAAP for complete financial statements. These condensed consolidated financial statements should therefore be read in conjunction with the consolidated financial statements and notes thereto for the year ended June 30, 2011 included in the Company’s Annual Report on Form 10-K filed with the SEC on September 9, 2011. 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 three month period ended September 30, 2011 are not necessarily indicative of the operating results for any interim period or the full year.

Unless otherwise noted, dollar amounts and disclosures throughout the 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 Business Units

On April 1, 2011, the Company completed a spin-off of its Zayo Enterprise Networks (“ZEN”) business unit. The Company distributed all of the assets and liabilities of ZEN to Holdings on the spin-off date.

Management determined that it had discontinued all significant cash flows and continuing involvement with respect to ZEN’s operations and therefore considers ZEN to be a discontinued operation. During the three months ended September 30, 2010, the results of the operations of ZEN 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. Management 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 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 (including those related to intangible assets and goodwill), allocating purchase price among the fair values of assets acquired and liabilities assumed, accounting for income taxes and related valuation allowance against deferred tax assets, estimating the stock-based compensation liability, and various other items. Management evaluates these estimates and judgments on an ongoing basis and makes estimates based on historical experience, current conditions, and various other assumptions that are believed to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions.

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED STATEMENTS (UNAUDITED)

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. Restricted cash balances which are not expected to become unrestricted during the next twelve months are recorded as other assets, non-current.

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. Under this method, the investment is recorded in the balance sheet at historical cost. Subsequently, the Company recognizes as income any 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 acquisition 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. 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.

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. Management estimates the useful life of property and equipment by reviewing 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.

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. Depreciation 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.

Management reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying value of its property and equipment 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 property and equipment and the resulting amount of the impairment. No impairment charges were recorded for property and equipment during the three months ended September 30, 2011 or 2010.

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED STATEMENTS (UNAUDITED)

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 May 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 finite 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 the three months ended September 30, 2011 or 2010.

i. Revenue Recognition

The Company recognizes revenues derived from leasing fiber optic telecommunications infrastructure and the provision of telecommunications and colocation 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 a 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, including 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 are 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.

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED STATEMENTS (UNAUDITED)

j. 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 charges 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.

k. 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 three or four years and may 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 and 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 the Company’s results of operations could be materially impacted.

l. Government Grants

The Company receives grant moneys from the National Telecommunications and Information Administration (“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 for reimbursement of capital expenditures as a reduction 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.

m. Income Taxes

The Company recognizes income taxes under the asset and liability method. 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.

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED STATEMENTS (UNAUDITED)

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.

n. Fair Value of Financial Instruments

The Company applies ASC 820-10 Fair Value Measurements, for its financial assets and liabilities. 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.

o. Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of 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 primarily 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.

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED STATEMENTS (UNAUDITED)

The Company’s trade receivables, which are unsecured, are geographically dispersed. As of September 30, 2011, the Company had three customers with a trade receivable balance in excess of 10 percent of the Company’s consolidated net trade receivable balance. These three customers accounted for 18 percent, 12 percent and 11 percent of the consolidated net trade receivable balance as of September 30, 2011. As of June 30, 2011 the Company had one customer with a trade receivable balance of 12 percent of total receivables. As of September 30, 2011, the Company had two customers that accounted for over 10 percent of the Company’s monthly recurring revenue — the Company’s largest customer accounted for 13 percent and a second customer accounted for 10 percent of the Company’s monthly recurring revenue. As of September 30, 2010, the Company had one customer that accounted for 10 percent of the Company’s monthly recurring revenue.

p. 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”). Management has reviewed all new accounting pronouncements and believes they will not have a material impact on the Company’s consolidated results of operations, financial condition, or financial disclosure.

(3) ACQUISITIONS

Since the formation of Zayo Group, LLC in May 2007, the Company has consummated 12 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 of the acquired entities from their respective acquisition dates.

Acquisitions during the year ended June 30, 2011

American Fiber Systems Holding Corporation (“AFS”)

On October 1, 2010, the Company completed a merger with American Fiber Systems Holding Corporation, the parent company of American Fiber Systems, Inc. (“AFS Inc.”). The AFS 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 its ownership interest in US Carrier Telecom Holdings, LLC (“US Carrier”). There was no contingent consideration associated with the purchase. The acquisition was financed with cash on hand and proceeds from the issuance of the Company’s $100,000 note issuance — See Note 9— Long-Term Debt.

AFS is 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. AFS owns and operates approximately 1,251 routes miles and over 172,415 fiber miles of fiber networks.

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED STATEMENTS (UNAUDITED)

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

		AFS
Acquisition date		October 1, 2010
Current assets		$	3,808
Property and equipment			56,481
Intangibles — customer relationships			57,082
Goodwill			15,731
Investment in US Carrier			15,075
Other assets			350
Total assets acquired			148,527
Current liabilities			3,396
Deferred revenue			23,905
Deferred tax liability			3,958
Other liabilities			3,127
Total liabilities assumed			34,386
Net assets acquired			114,141
Seller Note payable to former AFS Holdings owners			(4,141	)
Net cash paid		$	110,000

The goodwill of $15,731 arising from the AFS merger consists of the synergies and economies-of-scale expected from the AFS merger. The goodwill associated with the AFS merger is not deductible for tax purposes. The Company has allocated the goodwill to the business units 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 units. Goodwill of $8,061 and $7,670 was allocated to the Zayo Bandwidth and Zayo Fiber Solutions business units, respectively.

In connection with the AFS 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 IRU 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.

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED STATEMENTS (UNAUDITED)

The following table presents the Company’s allocation 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		$	3,714
Property and equipment			93,136
Intangibles — customer relationships			3,433
Goodwill			220
Other assets			680
Total assets acquired			101,183
Current liabilities			1,006
Deferred revenue			26,511
Total liabilities assumed			27,517
Net assets acquired		$	73,666
Purchase consideration/Net cash paid		$	73,666

The goodwill of $220 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 unit.

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.

Acquisition costs

Acquisition costs include expenses incurred which are directly related to potential and closed acquisitions. The Company incurred acquisition-related costs of $330 and $159 which have been charged to selling, general and administrative expenses during the three months ended September 30, 2011 and 2010, respectively.

(4) SPIN-OFF OF BUSINESS UNIT

Effective January 1, 2011, the Company finalized a restructuring of its business units which resulted in the segments more closely aligning with their product offerings rather than a combination of product offerings and customer demographics. See Note 16 — Segment Reporting, for discussion of the restructuring. Prior to the restructuring, the ZEN unit held a mix of bandwidth infrastructure, colocation, interconnection, competitive local exchange carrier (“CLEC”) and enterprise product offerings. Subsequent to the restructuring, the remaining ZEN unit consisted of only CLEC and enterprise product offerings. As the product offerings provided by the restructured ZEN unit fall outside of the Company’s business model of providing bandwidth infrastructure, colocation and interconnection services, the unit was spun-off to Holdings, the parent of the Company, on April 1, 2011.

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED STATEMENTS (UNAUDITED)

Consistent with discontinued operations reporting provisions, management determined that it has discontinued all significant cash flows and continuing involvement with respect to the ZEN operations effective April 1, 2011. Therefore, for the three months ended September 30, 2010, the results of the operations of ZEN 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
		September 30, 2010
Revenue		$	5,653
Earnings before income taxes		$	480
Income tax expense			(200	)
Earnings from discontinued operations, net of income taxes		$	280

The Company continues to have ongoing contractual relationships with ZEN, which are based on agreements which were entered into at estimated market rates. The Company has contractual relationships to provide ZEN with certain data and colocation services and ZEN has contractual relationships to provide the Company with certain enterprise services. Prior to April 1, 2011, transactions with ZEN were eliminated upon consolidation. Since the spin-off date, transactions with ZEN have been included in the Company’s results of operations. See Note 15 — Related-Party Transactions, for a discussion of transactions with ZEN during the three months ended September 30, 2011.

(5) INVESTMENT

In connection with the AFS merger, the Company acquired an ownership interest in 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 AFS 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 AFS Inc.’s voting interest. The Company has requested the financial information which would be necessary 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. AFS Inc. 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 policies and as such the Company has accounted for this investment utilizing the cost method of accounting.

At the time of the AFS merger, management estimated the fair market value of its interest in US Carrier to be $15,075. In valuing the Company’s interest in US Carrier, management used both an 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 any additional capital in US Carrier.

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED STATEMENTS (UNAUDITED)

(6) PROPERTY AND EQUIPMENT

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

		Estimated		As of
		useful lives (in		September 30,				June 30,
		years)		2011				2011
Land		N/A			228			$	228
Building improvements and site improvements		8 to 15			11,976				11,692
Furniture, fixtures and office equipment		3 to 7			1,269				1,295
Computer hardware		2 to 5			2,759				3,461
Software		2 to 3			3,005				4,243
Machinery and equipment		3 to 7			7,012				6,469
Fiber optic equipment		4 to 8			339,053				326,163
Circuit switch equipment		10			7,955				7,378
Packet switch equipment		3 to 5			21,299				20,727
Fiber optic network		8 to 20			198,343				192,926
Construction in progress		N/A			54,134				45,872
Total					647,033				620,454
Less accumulated depreciation					(112,520	)			(101,941	)
Property and equipment, net				$	534,513			$	518,513

Total depreciation expense, including depreciation of assets held under capital leases, for the three months ended September 30, 2011 and 2010 was $13,739 and $9,107, respectively. During the three months ended September 30, 2011, the Company wrote-off $3,160 of fully depreciated property and equipment.

Included within the Company’s property and equipment balance are capital leases with a cost basis of $11,929 (net of accumulated depreciation of $3,897) and $12,215 (net of accumulated depreciation of $3,611) as of September 30, 2011 and June 30, 2011, respectively. The Company recognized depreciation expense associated with assets under capital leases of $286 and $347 for the three months ended September 30, 2011 and 2010, respectively.

During the three months ended September 30, 2011 and 2010, the Company received a total of $2,798 and $250, respectively, in grant money from the NTIA’s Broadband Technology Opportunities Program (“the Program”) for reimbursement of property and equipment expenditures. 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 $31,894 in grant money related to grant agreements entered into as a direct recipient under the Broadband Technology Opportunities Program as of September 30, 2011 which will offset capital expenditures in future periods. As of September 30, 2011, the Company has incurred $3,245 of capital expenditures which are pending reimbursement from the program. The Company’s property and equipment balance will be reduced by this amount upon receipt of these reimbursements. See Note 14 — Commitments and Contingencies- Other Commitments.

During the three months ended September 30, 2011 and 2010, the Company capitalized interest in the amount of $831 and $925, respectively. The Company also capitalized $1,853 and $1,244 of labor to property and equipment accounts during the three months ended September 30, 2011 and 2010, respectively.

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED STATEMENTS (UNAUDITED)

(7) GOODWILL

The Company’s goodwill balance was $83,805 and $83,820 as of September 30, 2011 and June 30, 2011, respectively, and was allocated as follows to the Company’s business units:

		As of June 30,								As of September 30,
		2011				Adjustments				2011
Zayo Bandwidth		$	71,714			$	(15	)		$	71,699
Zayo Fiber Solutions			12,082				—				12,082
zColo			24				—				24
Total		$	83,820			$	(15	)		$	83,805

(8) INTANGIBLE ASSETS

Identifiable acquisition-related intangible assets as of September 30, 2011 and June 30, 2011 were as follows:

		Gross
		Carrying				Accumulated
		Amount				Amortization				Net
September 30, 2011
Customer relationships		$	133,317			$	(31,968	)		$	101,349
June 30, 2011
Customer relationships		$	133,317			$	(28,645	)		$	104,672
Non-compete agreements			8,835				(8,835	)			—
Tradenames			500				(500	)			—
Total		$	142,652			$	(37,980	)		$	104,672

The weighted average amortization period for the customer relationship intangible assets is 11.1 years. The amortization of intangible assets for the three months ended September 30, 2011 and 2010 was $3,323 and $2,701, respectively. During the three months ended September 30, 2011, the Company wrote off $9,335 in fully amortized intangible assets. Estimated future amortization of intangible assets is as follows:

Year ending June 30,
2012 (remaining nine months)		$	9,966
2013			13,289
2014			11,073
2015			8,693
2016			8,598
Thereafter			49,730
Total		$	101,349

(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%), $250,000 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 Notes issued in March is 10.87%. The Company used a portion of the proceeds from this issuance of the Notes to repay its term loans in March of 2010.

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED STATEMENTS (UNAUDITED)

In September 2010, the Company completed an offering of an additional $100,000 in Notes (at an issue price of 103%). These Notes are part of the same series as the $250,000 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 $98,954 after adding the premium on the Notes of $3,000 and deducting debt issuance costs of approximately $4,046. The effective interest rate on the Notes issued in September is 10.41%. The Company used a portion of the proceeds from this issuance of the Notes to fund the merger with AFS (See Note 3 — Acquisitions).

The balance of the Notes was $350,141 and $350,147 at September 30, 2011 and June 30, 2011, net of unamortized premiums and discounts of $141 and $147, respectively.

In October 2010, in connection with the AFS merger, the former owners of AFS 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 estimated the imputed interest associated with this note on the acquisition date to be $359, which is being recognized over the term of the promissory note. During the three months ended September 30, 2011, the Company recognized interest expense and a corresponding increase to the promissory note obligation of $43. The balance of the promissory note was $4,309 and $4,266 as of September 30, 2011 and June 30, 2011, respectively.

In March 2010, the Company also entered into a revolving line-of-credit (the “Revolver”). Concurrent with offering the $100,000 Notes in September 2010, the Company amended the terms of its Revolver to increase the borrowing capacity from $75,000 to $100,000 (adjusted for letter of credit usage). The Company has capitalized $2,248 in debt issuance costs associated with the Revolver.

The Revolver expires on March 1, 2014 and bears interest at the option of the Company at either a base rate or 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 quarter’s 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 September 30, 2011 and June 30, 2011, no amounts were outstanding under the Revolver. Standby letters of credit were outstanding in the amount of $6,420 resulting in $93,580 being available on the Revolver as of September 30, 2011 and June 30, 2011. 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 September 30, 2011, the interest rate was 4.0 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.

Debt issuance costs

Debt issuance costs have been capitalized on the accompanying 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. The balance of debt issuance costs as of September 30, 2011 and June 30, 2011 was $10,867 (net of accumulated amortization of $3,326) and $11,446 (net of accumulated amortization of $2,746), respectively. Interest expense associated with the amortization of debt issuance costs was $580 and $449 during the three months ended September 30, 2011 and 2010, respectively. The amortization of debt issuance costs is included on the condensed consolidated statements of cash flows within the caption “non-cash interest expense” along with the amortization or accretion of the premium and discount on the Company’s outstanding Notes.

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED STATEMENTS (UNAUDITED)

Debt covenants

The Company’s credit agreement associated with the $100,000 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, which is defined as funded debt to annualized earnings before interest, taxes, depreciation and amortization, non-cash charges or reserves and certain extraordinary or non-recurring gains or losses (“modified EBITDA”) of 4.25x the last quarter’s annualized modified EBITDA.

Fixed-charge coverage ratio: The Company must maintain a consolidated fixed-charge coverage ratio, as determined under the credit agreement, of at least 1.1x for the periods ended 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 may 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
Greater than or equal to 3.5x		$	—
Less than 3.5x but greater than or equal to 2.5x		$	25,000
Less than 2.5x but greater than or equal to 1.5x		$	35,000
Less than 1.5x		$	45,000

The Company does not have any restrictions on its subsidiaries’ ability to pay dividends to Zayo Group.

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 $10,000, 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 September 30, 2011 and June 30, 2011.

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 percent 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.

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED STATEMENTS (UNAUDITED)

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 and 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 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.

(10) INCOME TAXES

The Company, a limited liability company, is taxed at its parent level, Holdings. All income tax balances resulting from the operations of Zayo Group are pushed down to the Company.

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

		For the three months ended
		September 30,
		2011				2010
Federal income taxes — current		$	—			$	148
Federal income taxes — deferred			3,717				1,984
Provision for federal income taxes			3,717				2,132
State income taxes — current			143				344
State income taxes — deferred			744				323
Provision for state income taxes			887				667
Provision for income taxes		$	4,604			$	2,799

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 that represent permanent differences between book and tax expenses/deduction, such as stock-based compensation expenses that are deductible for financial reporting purposes but not deductible for tax purposes.

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED STATEMENTS (UNAUDITED)

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 month periods ended September 30, 2011 and 2010 follows:

		For the three months ended
		September 30,
		2011				2010
Expected provision at statutory rate of 34%		$	2,636			$	763
Increase due to:
Non-deductible stock-based compensation			1,259				1,745
State income taxes, net of federal benefit			587				227
Transactions costs not deductible			112				54
Other, net			10				10
Provision for income taxes		$	4,604			$	2,799

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.

Each interim period, management 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 the tax environment changes.

The Company is subject to audit by various taxing authorities, and these audits may result in proposed assessments where the ultimate resolution results in the Company owing additional income taxes. The statute of limitations is open with respect to tax years 2007 to 2010 however, to the extent that the Company has a net operating loss (“NOL”) balance which was generated in a tax year outside of this statute of limitations period, such tax years will remain open until such NOLs are utilized by the Company. The Company establishes reserves, when the management believes there is uncertainty with respect to certain positions and the Company may not succeed in realizing the tax benefits. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The application of income tax law is inherently complex, as such; it requires many subjective assumptions and judgments regarding income tax exposures. Interpretations of and guidance surrounding income tax laws and regulations change over time; as such, changes in these subjective assumptions and judgments can materially affect amounts recognized in the balance sheets and statements of operations. At September 30, 2011 and June 30, 2011, there were no unrecognized tax benefits. As of September 30, 2011 and June 30, 2011, there was no accrued interest or penalties related to uncertain tax positions.

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 its 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 the contributions are reflected in the Company’s member’s equity.

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED STATEMENTS (UNAUDITED)

During the three months ended September 30, 2010, CII contributed $35,500 in capital to the Company through Holdings. CII funded this amount from equity contributions from its investors. During the three months ended September 30, 2011, the Company received an additional $100 in capital from Holdings. As of September 30, 2011, 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 recognizes 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 for these units was completed in September 2010. Management estimated the fair value of the equity awards on the grant date to be $6,400. Stock-based compensation expense recognized in connection with these Class A units was $240 during the three months ended September 30, 2010. These Class A Preferred Units were in lieu of any significant cash compensation to the founders during the period beginning on May 1, 2007 and ending October 31, 2010.

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 three years. Management estimated the fair value of the equity awards on the grant date to be $312. In March of 2011, one of these Board members resigned from his position resulting in a forfeiture of the 63,926 Class B preferred units issued to the Board member and a reversal of the stock compensation expense recognized related to the grant. The grant date fair value of the 73,059 class B preferred units issued to the remaining Board member was determined to be $167. Stock-based compensation expense recognized for these grants during the three months ended September 30, 2011 and 2010 was $10 and $26, respectively.

In December 2010, CII issued 390,000 Class B preferred units to a founder of the Company. Management 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 recognizes 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 the Company recognizes 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 September 30, 2011 was $200.

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

Holdings is the taxable parent of the Company and Onvoy Voice Services, Inc. (“Onvoy”). Subsequent to spinning the ZEN segment to Holdings, Holdings contributed the assets and liabilities of the historical ZEN segment to Onvoy. Holdings allows for the sharing of Holding’s NOL carryforwards between the Company and OVS. To the extent that any entity utilizes NOLs or other tax assets that were generated or acquired by the other entity, the entities will settle the related-party transfer of deferred tax asset associated with such NOLs and other deferred-tax transfers between the companies via an increase or decrease to the respective entities’ member’s equity. During the three months ended September 30, 2011, the Company member’s equity balance increased by $695 as a result of utilizing tax assets of Onvoy.

(12) STOCK COMPENSATION

The Company has been given authorization by CII to issue 125,000,000 of CII’s common units as profits interest awards to employees and directors. As of September 30, 2011, CII had five classes of common units with different liquidation preferences — Class A, B, C, D and E 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 September 30, 2011, 108,462,120 common units were issued and outstanding to employees and directors of the Company and 11,264,440 common units were available to be issued.

The common units are considered to be 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 until the date of settlement.

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED STATEMENTS (UNAUDITED)

As of September 30, 2011 and June 30, 2011, the estimated fair value of the common units was as follows:

		As of
Common Unit Class		September 30, 2011				June 30, 2011
		(estimated per share value)
Class A		$	0.83			$	0.81
Class B		$	0.59			$	0.58
Class C		$	0.36			$	0.33
Class D		$	0.34			$	0.31
Class E		$	0.25			$	0.23

The liability associated with the common units was $48,561 and $45,067 as of September 30, 2011 and June 30, 2011, respectively. The stock-based compensation expenses associated with the common units was $3,494 and $4,865 during the three months ended September 30, 2011 and 2010, respectively.

The holders of common units are not entitled to transfer their units or 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 capital contributions of the CII preferred unit holders plus their priority return of 6% per annum has been reimbursed. The remaining proceeds from a liquidation event are distributed between the preferred and common unit holders on a scale ranging from 85% to the preferred unit holders and 15% to the common unit holders to 80% to the preferred unit holders and 20% to the common unit holders. The percentage allocated to the common unit holders is dependent upon the return multiple realized by the Class A preferred unit holders. The maximum incremental allocation of proceeds from a liquidation event to common unit holders, of 20 percent, occurs if the return multiple realized by the Class A preferred unit holders reaches 3.5 times the Class A preferred holder’s combined capital contributions. As discussed above, the Class A common unit holders receive proceeds from a liquidation event once the preferred shareholders capital contributions and accrued dividends are returned. The Class B common unit holders begin sharing in the proceeds of a liquidation event once the Class A common unit holders have been distributed a total of $15,000 of the liquidation proceeds. The Class C common unit holders begin sharing in the proceeds of a liquidation event once the earlier common unit classes have been distributed a combined $40,000 in proceeds. The Class D common unit holders begin sharing in the proceeds of a liquidation event once the earlier common unit classes have been distributed a combined $45,000 in proceeds. Lastly, the Class E common unit holders begin sharing in the proceeds of a liquidation event once the earlier common unit classes have been distributed a combined $75,000 in proceeds.

(13) FAIR VALUE MEASUREMENTS

The Company’s financial instruments consist of cash and cash equivalents, restricted cash, trade receivable, accounts payable, 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 September 30, 2011 and June 30, 2011 due to the short maturity of these instruments. The carrying value of the Company’s Notes reflects the original amounts borrowed, net of unamortized discounts or accretion of premiums and was $350,141 and $350,147 as of September 30, 2011 and June 30, 2011, 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 September 30, 2011 and June 30, 2011, is estimated to be $364,000 and $385,875, respectively. The Company recorded its promissory note with the previous owners of AFS at its fair 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 through March 2017. The fair value of this note is not re-measured each reporting period; however, based on current interest rates for debt instruments with similar maturity dates, the September 30, 2011 book value of the AFS promissory note approximates fair value. The Company records its stock-based compensation liability at its estimated fair value.

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED STATEMENTS (UNAUDITED)

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

		Level				September 30, 2011				June 30, 2011
Liabilities Recorded at Fair Value in the Financial Statements:
Stock-based compensation liability		Level 3				$	48,561			$	45,067

We use a third party valuation firm 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 utilize a two-step valuation approach. In the first step we estimate the value of our equity instruments through an analysis of valuations associated with various future potential liquidity scenarios for our shareholders. A composite valuation is developed based upon the probability-weighted present values of each of the scenarios. 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 the fair value of the common units, the Company has historically evaluated both market and income based valuation techniques. The income approach was based on managements’ projected free cash flows. The market based approach, estimates the fair value based on the prices paid by investors and acquirers of interests of comparable companies in the public and private markets. The valuation was based on a weighted average of the market and income valuation techniques. As a result of the Company’s expansion since inception and due to the fact that the committed capital from the Company’s ultimate investors has been fully funded, the potential of a liquidation event for the Company’s shareholders in the future has increased. As such, management revised the market based approach utilized in the valuation of the common units to account for potential liquidation events beginning with the quarter ended March 31, 2011.

Effective on March 31, 2011, the Company employed a probability-weighted estimated return method to value the common units. The method estimates the value of the units based on an analysis of values of the enterprise assuming various future outcomes. The estimated fair value of the common units is based on a probability-weighted present value of expected future proceeds to the Company’s shareholders, considering each potential liquidity scenario available to the Company’s investors as well as preferential rights of each security. This approach utilizes a variety of assumptions regarding the likelihood of a certain scenario occurring, if the event involves a transaction, the potential timing of such an event, and the potential valuation that each scenario might yield. The potential future outcomes that were considered by management were remaining a private company with the same ownership, a sale or merger, an initial public offering (“IPO”), and a partial recapitalization.

(14) COMMITMENTS AND CONTINGENCIES

Purchase commitments

At September 30, 2011, the Company was contractually committed for $19,027 of capital expenditures for construction materials and purchases of property and equipment. These purchase commitments exclude commitments related to stimulus projects — see — Other Commitments. A majority of these purchase commitments are expected to be satisfied in the next twelve months. These purchase commitments are primarily success-based; that is, the Company has executed customer contracts that support the future capital expenditures. These purchase commitments include commitments associated with the stimulus grants.

Outstanding letters of credit

As of September 30, 2011, the Company had $6,420 in outstanding letters of credit, primarily to collateralize surety bonds securing the Company’s performance under various contracts.

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED STATEMENTS (UNAUDITED)

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 $25,140 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 September 30, 2011, the Company has been reimbursed for $96 of expenses and $5,945 of capital expenditures related to the Indiana Stimulus Project. The Company also contributed $4,400 of pre-existing network assets to the project. The Company anticipates this project will be completed within the next two 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 September 30, 2011, the Company has been reimbursed for $121 of expenses and $467 of capital expenditures related to the Anoka Stimulus Project. The Company anticipates this project will be completed within the next two years.

In September 2011, the company signed a sub-recipient agreement on an award granted to Com Net, Inc (“Com Net”) from the NTIA Broadband Technology Opportunities Program. The award of approximately $30,032 to Com Net will expand broadband services to rural and underserved communities in Western Ohio. In order to effectively implement the project, Com Net established the GigE Plus Availability Coalition consisting of Zayo, OARnet and an initial group of 33 Broadband Service Providers to deploy broadband to 28 western Ohio counties. Upon completion, the project will add nearly 366 new miles of fiber to Zayo’s existing Ohio network. As a sub recipient, the Company is required to contribute to the federal match. The Company’s maximum contribution is $3,111 which represents a 30 percent match on the assets of which the Company will take ownership. The company anticipates the project will be completed by July 2013.

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 September 30, 2011 and June 30, 2011, the Company had a due to related-party balance with CII of $4,590 which is payable on demand. The liability with CII relates to an interest payment made by CII on the Company’s Notes. During the three months ended September 30, 2010, CII made an advance payment of $13,026 to the Company which was returned to CII during the three months ended December 31, 2010. The advance was used to make an interest payment on the Company’s Notes.

The Company has contractual relationships with Onvoy, which are based on agreements which were entered into at estimated market rates. 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 and enterprise services. As of September 30, 2011 and June 30, 2011, the Company had a net receivable balance due from Onvoy in the amount of $15 and $187, respectively, related to services the Company provided to Onvoy and services Onvoy provided to the Company. The following table represents the revenue and expense transactions recognized with Onvoy which are included in the Company’s condensed consolidated statement of operations during the three months ended September 30, 2011 and 2010.

		For the Three Months Ended
		September 30,
		2011				2010
Revenue		$	1,593				1,195
Operating costs			125				—
Selling, general and administrative expenses			143				568
Net		$	1,325			$	627

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED STATEMENTS (UNAUDITED)

On September 14, 2010, Dan Caruso, the Company’s President, Chief Executive Officer and Director of Zayo Group, LLC, purchased $500 of the Company’s Notes in connection with the Company’s $100,000 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

A business unit 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 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’s business units have historically been identified by both the products they offer and the customers they serve. Effective January 1, 2011, management approved a restructuring of the ZEN unit, which resulted in all of the Company’s business units more closely aligning with their product offerings rather than a combination of product offerings and customer demographics. The restructuring of the ZEN unit resulted in the ZEN unit transferring its bandwidth infrastructure products to the ZB unit and its colocation products to the zColo unit. The restructured ZEN unit, which contained only the Company’s legacy managed services and CLEC product offerings, was spun-off to Holdings on April 1, 2011.

Subsequent to the restructuring, the ZB unit offers primarily lit bandwidth infrastructure services and the zColo unit provides colocation and inter-connection transport services. The Company has restated the comparative historical segment financial information below to account for the restructuring of the business units.

In connection with the AGL Networks acquisition (See Note 3 — Acquisitions), Zayo established the ZFS unit. ZFS is dedicated to marketing and supporting dark fiber related services. Prior to the formation of the ZFS unit, the Company’s dark fiber assets and the related revenues and expenses associated with dark fiber customers were allocated between ZB and ZEN based upon the nature and size of the customers receiving the dark fiber services. Upon the formation of the ZFS business units, effective July 1, 2011, dark fiber assets of the Company and the related revenues and expense associated with dark fiber customers were allocated to the ZFS business unit.

Prior to the formation of the ZFS unit, the Company generated income from dark fiber products. The historical operating results from this product offering were primarily reflected in the results of the ZB business unit. The Company has not restated the historical ZB unit information to carve-out the operating results related to dark fiber services prior to the July 1, 2010 formation of the ZFS unit as management has determined it is impractical to do so.

Revenues for all of the Company’s products are included in one of these three business units. The results of operations for each business unit include an allocation of certain corporate overhead costs. The allocation is based on a percentage that represents management’s estimate of the relative burden each segment bears of corporate overhead costs. Identifiable assets for each business unit 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.

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED STATEMENTS (UNAUDITED)

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

		As of and for the three months ended September 30, 2011
														Corporate/
		ZB				zColo				ZFS				eliminations				Total
Revenue		$	56,544			$	9,668			$	13,231				—			$	79,443
Intersegment revenue			—				(1,000	)			—				—				(1,000	)
Revenue from external customers			56,544				8,668				13,231				—				78,443
Gross profit (revenue less operating costs excluding depreciation and amortization)			43,136				4,935				12,758				(536	)			60,293
Depreciation and amortization			11,744				1,373				3,945				—				17,062
Operating income/(loss)			13,060				1,817				4,120				(2,066	)			16,931
Interest expense			(212	)			(54	)			(7	)			(8,895	)			(9,168	)
Other (expense)/income, net			(19	)			—				1				7				(11	)
Earnings from continuing operations before provision for income taxes			12,829				1,763				4,114				(10,954	)			7,752
Total assets			504,762				52,757				218,863				28,326				804,708
Capital expenditures, net of stimulus grant reimbursements			24,117				900				3,627				—				28,644

		As of and for the three months ended September 30, 2010
														Corporate/
		ZB				zColo				ZFS				eliminations				Total
Revenue		$	48,943			$	7,564			$	7,821			$	—			$	64,328
Intersegment revenue			(794	)			(608	)			—				—				(1,402	)
Revenue from external customers			48,149				6,956				7,821				—				62,926
Gross profit (revenue less operating costs excluding depreciation and amortization)			35,260				3,977				7,665				(1,014	)			45,888
Depreciation and amortization			8,558				1,352				1,898				—				11,808
Operating income/(loss)			8,255				1,334				2,181				(3,105	)			8,665
Interest expense			(262	)			(59	)			(2	)			(5,934	)			(6,257	)
Other income/(expense), net			—				—				2				(163	)			(161	)
Earnings from continuing operations before provision for income taxes			7,993				1,275				2,181				(9,202	)			2,247
Total assets			374,140				58,143				138,132				175,008				745,423
Capital expenditures, net of stimulus grant reimbursements			19,103				438				1,605				—				21,146

(17) CONDENSED CONSOLIDATING FINANCIAL INFORMATION

On June 30, 2011, the Company completed a rollup of certain legal subsidiaries into Zayo Group, LLC. The rollup included the merger of the following legal subsidiaries up and into Zayo Group, LLC: (i) Zayo Bandwidth, LLC; (ii) Zayo Fiber Solutions, LLC; (iii) Zayo Bandwidth Tennessee, LLC; and (iv) Adesta Communications, Inc. In connection with the rollup, the assets, liabilities and operating results of these legacy subsidiaries were consolidated with and into the Zayo Group, LLC entity. Prior to the rollup, Zayo Group, LLC did not have significant independent assets or operations. Subsequent to the rollup, Zayo Colocation , Inc. (and its subsidiaries), American Fiber Systems Holding Corp (and its subsidiary American Fiber Systems, Inc.), and Zayo Capital, Inc. remain the only wholly owned legal subsidiaries of the Company.

In March 2010, the Company co-issued, with its 100 percent owned finance subsidiary — Zayo Capital, Inc. (at an issue price of 98.779%) $250,000 of Senior Secured Notes. The notes bear interest at 10.25% annually and are due on March 15, 2017.

In September 2010, the Company completed an offering of an additional $100,000 in notes (at an issue price of 103%). These notes are part of the same series as the $250,000 Senior Secured Notes and also accrue interest at a rate of 10.25% and mature on March 15, 2017.

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED STATEMENTS (UNAUDITED)

Both note issuances 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. Zayo Capital, Inc., the co-issuer of both Note issuances, does not have independent assets or operations.

The accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10 “Financial statements of guarantors and affiliates whose securities collateralize an issue registered or being registered.”

The operating activities of the separate legal entities included in the Company’s condensed consolidated financial statements are interdependent. The accompanying condensed consolidating financial information presents the results of operations, financial position and cash flows of each legal entity. Zayo Group, LLC and Zayo Colocation, Inc. provide services to each other during the normal course of business. These transactions are eliminated in the consolidated results of the Company.

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED STATEMENTS (UNAUDITED)

Condensed Consolidating Balance Sheets
September 30, 2011

						Zayo
		Zayo Group,				Colocation,
		LLC				Inc.				Eliminations				Total
		(Issuer)				(Guarantor)
Assets
Current assets:
Cash and cash equivalents		$	19,475			$	1,371			$	—			$	20,846
Trade receivables, net			17,753				3,223				—				20,976
Due from related-parties			15				—				—				15
Prepaid expenses			5,857				1,029				—				6,886
Deferred income taxes			3,374				—				—				3,374
Other assets, current			1,049				4				—				1,053
Total current assets			47,523				5,627				—				53,150
Property and equipment, net			503,202				31,311				—				534,513
Intangible assets, net			86,270				15,079				—				101,349
Goodwill			83,781				24				—				83,805
Debt issuance costs, net			10,867				—				—				10,867
Investment in US Carrier			15,075				—				—				15,075
Other assets, non-current			5,233				716				—				5,949
Investment in subsidiary			46,029				—				(46,029	)			—
Total assets		$	797,980			$	52,757			$	(46,029	)		$	804,708
Liabilities and member’s equity:
Current liabilities
Accounts payable		$	13,440			$	393			$	—			$	13,833
Accrued liabilities			22,437				3,833				—				26,270
Accrued interest			1,621				—				—				1,621
Capital lease obligation, current			967				—				—				967
Due to related-parties			4,569				21				—				4,590
Deferred revenue, current			15,533				378				—				15,911
Total current liabilities			58,567				4,625				—				63,192
Capital lease obligations, non-current			9,978				—				—				9,978
Long-term debt			354,450				—				—				354,450
Deferred revenue, non-current			70,856				1,140				—				71,996
Stock-based compensation liability			47,598				963				—				48,561
Deferred tax liability			12,289				—				—				12,289
Other long term liabilities			2,744				—				—				2,744
Total liabilities			556,482				6,728				—				563,210
Member’s equity:
Member’s interest			258,340				34,127				(46,029	)			246,438
(Accumulated deficit)/retained earnings			(16,842	)			11,902				—				(4,940	)
Total member’s equity			241,498				46,029				(46,029	)			241,498
Total liabilities and member’s equity		$	797,980			$	52,757			$	(46,029	)		$	804,708

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED STATEMENTS (UNAUDITED)

Condensed Consolidating Balance Sheets
June 30, 2011

						Zayo
		Zayo Group,				Colocation,
		LLC				Inc.				Eliminations				Total
		(Issuer)				(Guarantor)
Assets
Current assets:
Cash and cash equivalents		$	24,213			$	1,181			$	—			$	25,394
Trade receivables, net			11,856				2,127				—				13,983
Due from related-parties			2,182				—				(1,995	)			187
Prepaid expenses			5,517				871				—				6,388
Deferred income taxes			3,343				—				—				3,343
Other assets, current			640				5				—				645
Total current assets			47,751				4,184				(1,995	)			49,940
Property and equipment, net			486,847				31,666				—				518,513
Intangible assets, net			89,117				15,555				—				104,672
Goodwill			83,796				24				—				83,820
Debt issuance costs, net			11,446				—				—				11,446
Investment in US Carrier			15,075				—				—				15,075
Other assets, non-current			5,060				735				—				5,795
Investment in subsidiary			45,594				—				(45,594	)			—
Total assets		$	784,686			$	52,164			$	(47,589	)		$	789,261
Liabilities and member’s equity:
Current liabilities
Accounts payable		$	12,287			$	701			$	—			$	12,988
Accrued liabilities			19,122				3,331				—				22,453
Accrued interest			10,627				—				—				10,627
Capital lease obligation, current			950				—				—				950
Due to related-parties			6,364				221				(1,995	)			4,590
Deferred revenue, current			15,341				323				—				15,664
Total current liabilities			64,691				4,576				(1,995	)			67,272
Capital lease obligations, non-current			10,224				—				—				10,224
Long-term debt			354,414				—				—				354,414
Deferred revenue, non-current			62,704				1,189				—				63,893
Stock-based compensation liability			44,263				804				—				45,067
Deferred tax liability			8,322				—				—				8,322
Other long term liabilities			2,724				—				—				2,724
Total liabilities			547,342				6,569				(1,995	)			551,916
Member’s equity:
Member’s interest			255,572				35,455				(45,594	)			245,433
(Accumulated deficit)/retained earnings			(18,228	)			10,140				—				(8,088	)
Total member’s equity			237,344				45,595				(45,594	)			237,345
Total liabilities and member’s equity		$	784,686			$	52,164			$	(47,589	)		$	789,261

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED STATEMENTS (UNAUDITED)

Condensed Consolidating Statements of Operations
Three months ended September 30, 2011

						Zayo
		Zayo Group,				Colocation,
		LLC				Inc.				Eliminations				Total
		(Issuer)				(Guarantor)
Revenue		$	69,775			$	9,668			$	(1,000	)		$	78,443
Operating costs and expenses
Operating costs, excluding depreciation and amortization			13,880				4,734				(464	)			18,150
Selling, general and administrative expenses			21,545				1,587				(536	)			22,596
Stock-based compensation			3,546				158				—				3,704
Depreciation and amortization			15,689				1,373				—				17,062
Total operating costs and expenses			54,660				7,852				(1,000	)			61,512
Operating income			15,115				1,816				—				16,931
Other expense
Interest expense			(9,114	)			(54	)			—				(9,168	)
Other expense, net			(11	)			—				—				(11	)
Total other expense, net			(9,125	)			(54	)			—				(9,179	)
Earnings from continuing operations before income taxes			5,990				1,762				—				7,752
Provision for income taxes			4,604				—				—				4,604
Earnings from continuing operations			1,386				1,762				—				3,148
Earnings from discontinued operations, net of income taxes			—				—				—				—
Net earnings		$	1,386			$	1,762			$	—			$	3,148