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EX-31.2 - EX-31.2 - Zayo Group Holdings, Inc.zayo-ex312_20141231946.htm
EX-32.2 - EX-32.2 - Zayo Group Holdings, Inc.zayo-ex322_20141231948.htm
EX-10.4 - EX-10.4 - Zayo Group Holdings, Inc.zayo-ex104_20141231950.htm
EX-32.1 - EX-32.1 - Zayo Group Holdings, Inc.zayo-ex321_20141231947.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x

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

For the quarterly period ended December 31, 2014

OR

¨

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

Commission File Number: 001-36690

 

Zayo Group Holdings, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

DELAWARE

 

26-1398293

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1805 29th Street, Suite 2050,

Boulder, CO 80301

(Address of Principal Executive Offices)

(303) 381-4683

(Registrant’s Telephone Number, Including Area Code)

 

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

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  x    No  ¨

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

 

¨

 

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

x  (Do not check if a small reporting company)

 

Smaller reporting company

 

¨

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

The number of outstanding shares of common stock of Zayo Group Holdings, Inc. as of February 11, 2015, was 239,008,679 shares.

 

 

 

 


ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES

INDEX

 

 

 

Page

Part I. FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements (Unaudited)

 

1

 

Condensed Consolidated Balance Sheets As of December 31, 2014 and June 30, 2014

 

1

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2014 and 2013

 

2

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended December 31, 2014 and 2013

 

3

 

Condensed Consolidated Statement of Stockholders’ Equity for the Six Months Ended December 31, 2014

 

4

 

Condensed Consolidated Statements of Cash Flows for the  Six Months Ended December, 2014 and 2013

 

5

 

Notes to Condensed Consolidated Financial Statements

 

6

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

27

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

44

 

Item 4. Controls and Procedures

 

45

 

Part II. OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

 

46

 

Item 1A. Risk Factors

 

46

 

Item 6. Exhibits

 

47

 

Signatures

 

49

 

Exhibit 31.1

 

 

 

Exhibit 31.2

 

 

 

Exhibit 32.1

 

 

 

Exhibit 32.2

 

 

 

 

 


ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS (UNAUDITED)

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in millions, except share amounts)

 

 

 

December 31,

2014

 

 

June 30,

2014

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

163.6

 

 

$

297.4

 

Trade receivables, net of allowance of $3.6 and $3.7 as of December 31, 2014 and

   June 30, 2014, respectively

 

 

71.8

 

 

 

59.0

 

Due from related parties

 

 

-

 

 

 

0.1

 

Prepaid expenses

 

 

26.2

 

 

 

25.6

 

Deferred income taxes, net

 

 

160.3

 

 

 

160.4

 

Other assets

 

 

6.2

 

 

 

2.4

 

Total current assets

 

 

428.1

 

 

 

544.9

 

Property and equipment, net

 

 

2,930.6

 

 

 

2,821.4

 

Intangible assets, net

 

 

719.4

 

 

 

709.7

 

Goodwill

 

 

868.7

 

 

 

845.3

 

Debt issuance costs, net

 

 

74.7

 

 

 

89.4

 

Other assets

 

 

42.4

 

 

 

39.7

 

Total assets

 

$

5,063.9

 

 

$

5,050.4

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

20.5

 

 

$

20.5

 

Accounts payable

 

 

31.5

 

 

 

27.0

 

Accrued liabilities

 

 

162.4

 

 

 

162.5

 

Accrued interest

 

 

-

 

 

 

57.1

 

Capital lease obligations, current

 

 

3.2

 

 

 

2.4

 

Deferred revenue, current

 

 

74.2

 

 

 

75.4

 

Total current liabilities

 

 

291.8

 

 

 

344.9

 

Long-term debt, non-current

 

 

2,961.9

 

 

 

3,219.7

 

Capital lease obligation, non-current

 

 

26.4

 

 

 

22.9

 

Deferred revenue, non-current

 

 

548.9

 

 

 

496.9

 

Stock-based compensation liability

 

 

2.0

 

 

 

392.4

 

Deferred income taxes, net

 

 

136.1

 

 

 

134.9

 

Other long-term liabilities

 

 

21.8

 

 

 

22.3

 

Total liabilities

 

 

3,988.9

 

 

 

4,634.0

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value--50,000,000 shares authorized; no shares issued and          outstanding as of December 31, 2014 and June 30, 2014, respectively

 

 

 

 

 

 

Common Stock, $0.001 par value--850,000,000 shares authorized; Issued and outstanding 239,008,679 shares and 223,000,000 shares as of December 31, 2014 and June 30, 2104, respectively

 

 

0.2

 

 

 

0.2

 

Additional paid-in capital

 

 

1,519.7

 

 

 

755.4

 

Accumulated other comprehensive (loss)/income

 

 

(6.6

)

 

 

14.4

 

Accumulated deficit

 

 

(438.3

)

 

 

(331.6

)

Note receivable from shareholder

 

 

-

 

 

 

(22.0

)

Total stockholders' equity

 

 

1,075.0

 

 

 

416.4

 

Total liabilities and stockholders' equity

 

$

5,063.9

 

 

$

5,050.4

 

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

 

 

1


ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in millions, except share and per share data)

 

 

 

Three months ended

December 31,

 

 

Six months ended

December 31,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Revenue

 

$

323.9

 

 

$

277.0

 

 

$

644.5

 

 

$

545.1

 

Operating costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs (excluding depreciation and amortization)

 

 

97.8

 

 

 

86.0

 

 

 

205.1

 

 

 

166.0

 

Selling, general and administrative expenses

 

 

32.1

 

 

 

86.7

 

 

 

188.9

 

 

 

162.8

 

Depreciation and amortization

 

 

96.9

 

 

 

81.7

 

 

 

192.9

 

 

 

162.7

 

Total operating costs and expenses

 

 

226.8

 

 

 

254.4

 

 

 

586.9

 

 

 

491.5

 

Operating income

 

 

97.1

 

 

 

22.6

 

 

 

57.6

 

 

 

53.6

 

Other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(53.4

)

 

 

(50.3

)

 

 

(100.3

)

 

 

(101.8

)

Loss on extinguishment of debt

 

 

(30.9

)

 

 

(1.9

)

 

 

(30.9

)

 

 

(1.9

)

Foreign currency (loss)/gain on intercompany loans

 

 

(13.3

)

 

 

0.2

 

 

 

(27.9

)

 

 

0.8

 

Other (expense)/income, net

 

 

(0.1

)

 

 

0.2

 

 

 

(0.2

)

 

 

0.3

 

Total other expenses, net

 

 

(97.7

)

 

 

(51.8

)

 

 

(159.3

)

 

 

(102.6

)

Loss from operations before income taxes

 

 

(0.6

)

 

 

(29.2

)

 

 

(101.7

)

 

 

(49.0

)

(Benefit)/provision for income taxes

 

 

(4.4

)

 

 

8.4

 

 

 

5.0

 

 

 

17.7

 

Income/(loss) from continuing operations

 

 

3.8

 

 

 

(37.6

)

 

 

(106.7

)

 

 

(66.7

)

Earnings from discontinued operations, net of income taxes

 

 

 

 

 

0.8

 

 

 

 

 

 

2.5

 

Net income/(loss)

 

$

3.8

 

 

$

(36.8

)

 

$

(106.7

)

 

$

(64.2

)

Weighted-average shares used to compute net income/(loss) per

   share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

236,224,561

 

 

 

223,000,000

 

 

 

229,612,280

 

 

 

223,000,000

 

Diluted

 

 

237,208,647

 

 

 

223,000,000

 

 

 

229,612,280

 

 

 

223,000,000

 

Income/(loss) from continuing operations per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.02

 

 

$

(0.17

)

 

$

(0.46

)

 

$

(0.30

)

Diluted

 

$

0.02

 

 

$

(0.17

)

 

$

(0.46

)

 

$

(0.30

)

Earnings from discontinued operations per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

 

 

$

0.00

 

 

$

 

 

$

0.01

 

Net income/(loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.02

 

 

$

(0.17

)

 

$

(0.46

)

 

$

(0.29

)

Diluted

 

$

0.02

 

 

$

(0.17

)

 

$

(0.46

)

 

$

(0.29

)

 

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

 

 

 

2


ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)

(in millions)

 

 

 

Three months ended

December 31,

 

 

Six months ended

December 31,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net income/(loss)

 

$

3.8

 

 

$

(36.8

)

 

$

(106.7

)

 

$

(64.2

)

Foreign currency translation adjustments

 

 

(8.7

)

 

 

22.4

 

 

 

(21.0

)

 

 

13.1

 

Comprehensive loss

 

$

(4.9

)

 

$

(14.4

)

 

$

(127.7

)

 

$

(51.1

)

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

 

 

 

3


ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

SIX MONTHS ENDED DECEMBER 31, 2014

(in millions, except share data)

 

 

 

Common Shares

 

 

Common

Stock

 

 

Additional

paid-in

Capital

 

 

Accumulated

Other

Comprehensive

Income/(Loss)

 

 

Accumulated

Deficit

 

 

Note

receivable

from shareholder

 

 

Total

Stockholders'

Equity

 

Balance at June 30, 2014

 

 

223,000,000

 

 

$

0.2

 

 

$

755.4

 

 

$

14.4

 

 

$

(331.6

)

 

$

(22.0

)

 

$

416.4

 

Proceeds from issuance of common stock

 

 

16,008,679

 

 

 

 

 

 

282.0

 

 

 

 

 

 

 

 

 

 

 

 

282.0

 

Reclassification of common unit liability to

   additional paid-in capital

 

 

 

 

 

 

 

 

490.2

 

 

 

 

 

 

 

 

 

 

 

 

490.2

 

Stock-based compensation

 

 

 

 

 

 

 

 

14.1

 

 

 

 

 

 

 

 

 

 

 

 

14.1

 

Non-cash settlement of note receivable from

   Communications Infrastructure Investments,

   LLC (Note 8)

 

 

 

 

 

 

 

 

(22.0

)

 

 

 

 

 

 

 

 

22.0

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

(21.0

)

 

 

 

 

 

 

 

 

(21.0

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(106.7

)

 

 

 

 

 

(106.7

)

Balance at December 31, 2014

 

 

239,008,679

 

 

$

0.2

 

 

$

1,519.7

 

 

$

(6.6

)

 

$

(438.3

)

 

$

 

 

$

1,075.0

 

 

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

 

 

 

4


 

ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES

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

 

 

 

Six months ended

December 31,

 

 

 

2014

 

 

2013

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(106.7

)

 

$

(64.2

)

Earnings from discontinued operations, net of income taxes

 

 

 

 

 

2.5

 

Loss from continuing operations

 

 

(106.7

)

 

 

(66.7

)

Adjustments to reconcile net loss to net cash provided by operating activities of continuing operations

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

192.9

 

 

 

162.7

 

Loss on extinguishment of debt

 

 

30.9

 

 

 

1.9

 

Non-cash interest expense

 

 

9.4

 

 

 

10.5

 

Non-cash loss on investments

 

 

0.5

 

 

 

 

Stock-based compensation

 

 

117.1

 

 

 

99.9

 

Amortization of deferred revenue

 

 

(34.6

)

 

 

(26.2

)

Additions to deferred revenue

 

 

84.1

 

 

 

47.4

 

Provision for bad debts

 

 

0.9

 

 

 

0.8

 

Foreign currency loss/(gain) on intercompany loans

 

 

27.9

 

 

 

(0.8

)

Deferred income taxes

 

 

(0.7

)

 

 

15.6

 

Changes in operating assets and liabilities, net of acquisitions

 

 

 

 

 

 

 

 

Trade receivables

 

 

(5.0

)

 

 

14.8

 

Prepaid expenses

 

 

0.2

 

 

 

1.7

 

Accounts payable and accrued liabilities

 

 

(67.5

)

 

 

(16.8

)

Other assets and liabilities

 

 

(7.5

)

 

 

(5.4

)

Net cash provided by operating activities of continuing operations

 

 

241.9

 

 

 

239.4

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(244.8

)

 

 

(175.0

)

Acquisition of Neo Telecoms, net of cash acquired

 

 

(73.9

)

 

 

 

Acquisition of Colo Facilities Atlanta, net of cash acquired

 

 

(52.5

)

 

 

 

Acquisition of FiberLink, LLC, net of cash acquired

 

 

 

 

 

(43.1

)

Acquisition of Access Communications, Inc.

 

 

(0.1

)

 

 

(40.1

)

Acquisition of Corelink Data Centers, LLC, net of cash acquired

 

 

 

 

 

(0.3

)

Net cash used in investing activities of continuing operations

 

 

(371.3

)

 

 

(258.5

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from debt

 

 

 

 

 

150.0

 

Proceeds from revolving credit facility

 

 

 

 

 

45.0

 

Proceeds from initial public offering

 

 

304.2

 

 

 

 

Direct costs associated with initial public offering

 

 

(22.2

)

 

 

 

Distribution to parent

 

 

 

 

 

(1.2

)

Principal payments on long-term debt

 

 

(259.7

)

 

 

(8.5

)

Payment of early redemption fees on debt extinguished

 

 

(23.8

)

 

 

 

Principal repayments on capital lease obligations

 

 

(1.3

)

 

 

(5.9

)

Payments on revolving credit facility

 

 

 

 

 

(45.0

)

Payment of debt issuance costs

 

 

 

 

 

(1.7

)

Net cash (used in)/provided by financing activities of continuing operations

 

 

(2.8

)

 

 

132.7

 

Cash flows from continuing operations

 

 

(132.2

)

 

 

113.6

 

Cash flows from discontinued operations

 

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

6.4

 

Investing activities

 

 

 

 

 

(2.3

)

Financing activities

 

 

 

 

 

(2.5

)

Cash flows from discontinued operations

 

 

 

 

 

1.6

 

Effect of changes in foreign exchange rates on cash

 

 

(1.6

)

 

 

0.2

 

Net (decrease)/increase in cash and cash equivalents

 

 

(133.8

)

 

 

115.4

 

Continuing operations:

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of year

 

$

297.4

 

 

$

91.3

 

Cash flows from continuing operations

 

 

(132.2

)

 

 

113.6

 

Cash flows from discontinued operations

 

 

 

 

 

1.6

 

Effect of changes in foreign exchange rates on cash

 

 

(1.6

)

 

 

0.2

 

Cash and cash equivalents, end of period

 

$

163.6

 

 

$

206.7

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Cash paid for interest, net of capitalized interest - continuing operations

 

$

144.7

 

 

$

91.8

 

Cash paid for interest, net of capitalized interest - discontinued operations

 

$

-

 

 

$

0.2

 

Cash paid for income taxes

 

$

10.8

 

 

$

1.1

 

Non-cash purchases of equipment through capital leasing

 

$

5.8

 

 

$

5.1

 

Increase/(decrease) in accruals for purchases of property and equipment - continuing operations

 

$

5.9

 

 

$

(16.9

)

 

 

Refer to Note 2 — Acquisitions for details regarding the Company’s recent acquisitions.

 

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

 

 

5


ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

(in millions, except share and per share data)

 

 

(1) BUSINESS AND BASIS OF PRESENTATION

Business

Zayo Group Holdings, Inc., a Delaware corporation, was formed on November 13, 2007, and is the parent company of a number of subsidiaries engaged in bandwidth infrastructure provision and services. Zayo Group Holdings, Inc. and its subsidiaries are collectively referred to as “Zayo Group Holdings” or the “Company.” The Company’s primary operating subsidiary is Zayo Group, LLC (“ZGL”). Headquartered in Boulder, Colorado, the Company operates bandwidth infrastructure assets, including fiber networks and datacenters, in the United States and Europe to offer:

Physical infrastructure, including dark fiber, mobile infrastructure and colocation services.

Lit services, including wavelengths, Ethernet, IP, and SONET services.

Other services, provided by Zayo Professional Services and Zayo France.

On October 22, 2014, the Company completed an initial public offering (“IPO”) of shares of its common stock, which were listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “ZAYO”. Prior to its IPO, Zayo Group Holdings was wholly owned by Communications Infrastructure Investments, LLC ("CII"). The Company’s fiscal year ends June 30 each year.  The fiscal year ended June 30, 2014 is referred to as “Fiscal 2014” and the fiscal year ending June 30, 2015 as “Fiscal 2015.”

Stock Split and Amended and Restated Certificate of Incorporation

On October 9, 2014, the Company’s Board of Directors approved a 223,000-for-one stock split of the Company’s common stock. The stock split became effective upon filing of the amended and restated certificate of incorporation on October 10, 2014. Immediately subsequent to the stock split, 223,000,000 shares of common stock were outstanding. All of the shares outstanding and per share amounts have been retroactively adjusted to reflect the stock split in the accompanying condensed consolidated financial statements.

On October 10, 2014, the Company filed its amended and restated certificate of incorporation to authorize the issuance of additional shares of common and preferred stock, establish related voting and holding rights for these shares, and address certain other matters related to corporate governance.

Initial Public Offering

On October 22, 2014, the Company completed an IPO of 24,079,002 shares of common stock at an offering price of $19 per share. Shares sold in the IPO consisted of 16,008,679 shares sold by the Company and 8,070,323 shares sold by selling stockholders (including CII investors and employees, former employees, and directors and officers of the Company). The shares sold included the exercise of an option by the underwriters to purchase an additional 3,026,371 shares from selling shareholders.  The underwriters’ option to purchase additional shares was exercised on October 20, 2014. Proceeds to the Company after deducting the underwriting discount and other offering expenses totaled approximately $282.0, and net proceeds to selling stockholders, including the exercised underwriter option, totaled approximately $150.2. Proceeds to the Company from the IPO are recorded as an increase in common stock and additional paid-in-capital, net of direct offering costs (including previously capitalized amounts), during the second quarter of Fiscal 2015. The Company’s shares were listed on the New York Stock Exchange (NYSE) on October 17, 2014.

6


ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

(in millions, except share and per share data)

 

Basis of Presentation

The accompanying condensed consolidated financial statements include all the accounts of the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. The accompanying condensed consolidated financial statements and related notes are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for quarterly reports on Form 10-Q, and do not include all of the note disclosures required by GAAP for complete financial statements. These condensed consolidated financial statements should, therefore, be read in conjunction with the consolidated financial statements and notes thereto for the year ended June 30, 2014 included in the Company’s final prospectus filed with the SEC on October 17, 2014. 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 herein. The results of operations for the three and six-month periods ended December 31, 2014 are not necessarily indicative of the operating results for any future interim period or the full year.

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

Earnings or Loss per Share

Basic earnings or loss per share attributable to the Company’s common shareholders is computed by dividing net earnings or loss attributable to common shareholders by the weighted average number of common shares outstanding for the period.   Diluted earnings or loss per share attributable to common shareholders presents the dilutive effect, if any, on a per share basis of potential common shares (such as restricted stock units) as if they had been vested or converted during the periods presented.  No such items were included in the computation of diluted loss per share for the six months ended December 31, 2014 or for the three- and six months ended December 31, 2013 because the Company incurred a loss from continuing operations in each of these periods and the effect of inclusion would have been anti-dilutive.

The effect of 146,001 Part A restricted stock units and 2,210,534 maximum shares that may be issued for Part B restricted stock units outstanding have been included in the computation of diluted income per share for the three months ended December 31, 2014.

Significant Accounting Policies

There have been no changes to the Company’s significant accounting policies described in its final prospectus filed with the SEC on October 17, 2014.

Discontinued Operations

On June 13, 2014, the Company completed a spin-off of Onvoy, LLC and its subsidiaries (“OVS”) to CII. The spin-off is reported as an equity distribution at carryover basis equal to the net assets and liabilities of OVS on the spin-off date, as the transaction was between entities under common control. See Note 3—Spin-off of Business.

Use of Estimates

The preparation of the Company’s 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 and accruals for disputed line cost billings, determining useful lives for depreciation and amortization and accruals for exit activities associated with real estate leases, assessing the need for impairment charges (including those related to intangible assets and goodwill), determining the fair values of assets acquired and liabilities assumed in business combinations, accounting for income taxes and related valuation allowances against deferred tax assets and estimating the common unit and restricted stock unit grant fair values used to compute the stock-based compensation liability and expense. Management evaluates these estimates and judgments on an ongoing basis and makes estimates based on historical experience, current conditions, and various other assumptions that are believed to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and

7


ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

(in millions, except share and per share data)

 

assessing the accounting treatment with respect to commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions.

Recently Issued Accounting Pronouncements

On May 28, 2014, the Financial Accounting Standards Board issued Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for the Company on or after July 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

 

 

(2) ACQUISITIONS

As of December 31, 2014 and since its formation, the Company has consummated 32 transactions accounted for as business combinations. The acquisitions were executed as part of the Company’s business strategy of expanding through acquisitions. The acquisitions of these businesses have allowed the Company to increase the scale at which it operates, which in turn affords the Company the ability to increase its operating leverage, extend its network reach, and broaden its customer base.

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

Acquisitions Completed During Fiscal 2015

Neo Telecoms (“Neo”)

On July 1, 2014, the Company acquired a 96% equity interest in Neo, a Paris-based bandwidth infrastructure company. The purchase agreement also includes a call option to acquire the remaining equity interest on or after December 31, 2015. The purchase consideration of €54.1 (or $73.9), net of cash acquired, was in consideration of acquiring 96% equity ownership in Neo and a call option to purchase the remaining 4% equity interest in Neo, and is subject to certain adjustments post-closing. The consideration consisted of cash and was paid with cash on hand from the proceeds of the Sixth Amendment to the Company’s term loan facility. €8.7 (or $11.9) of the purchase consideration is currently held in escrow pending the expiration of the indemnification adjustment period. The acquisition was considered an asset purchase for tax purposes.

Colo Facilities Atlanta (“AtlantaNAP”)

On July 1, 2014, the Company acquired 100% of the equity interest in AtlantaNAP, a datacenter and managed services provider in Atlanta, for cash consideration of $52.5. $5.3 of the purchase price is currently held in escrow pending the expiration of the indemnification adjustment period. The acquisition was considered an asset purchase for tax purposes.

Acquisitions Completed During Fiscal 2014

Corelink Data Centers, LLC (“Corelink”)

On August 1, 2013, the Company entered into an asset purchase agreement to acquire Corelink. The transaction was consummated on the same date, at which time the Company acquired substantially all of the net assets of this business for consideration of approximately $1.9, comprised of 301,949 preferred units of CII with an estimated fair value of $1.6 and cash of $0.3 net of cash acquired. The acquisition was considered a stock purchase for tax purposes. The cash consideration was paid with cash on hand.    

Access Communications, Inc. (“Access”)

On October 1, 2013, the Company acquired 100% of the equity interest in Access, a Minnesota corporation, for cash consideration of $40.1, net of cash acquired, of which $4.0 is currently held in escrow pending the expiration of the indemnification adjustment period. The acquisition was considered a stock purchase for tax purposes. The purchase price was paid with cash on hand.

8


ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

(in millions, except share and per share data)

 

FiberLink, LLC (“FiberLink”)

On October 2, 2013, the Company acquired 100% of the equity interest in FiberLink, an Illinois limited liability company, for cash consideration of $43.1, which was primarily funded with available funds drawn on the Company’s revolving credit facility. The acquisition was considered an asset purchase for tax purposes.  

CoreXchange, Inc. (“CoreXchange”)

On March 4, 2014, the Company acquired 100% of the equity interest in CoreXchange, a data center, bandwidth and managed services provider located in Dallas, Texas for consideration of $17.5, net of cash acquired. Through the transaction, the Company acquired one new data center operation located at 8600 Harry Hines Blvd. and secured additional square footage in its existing data center. The consideration was paid with cash on hand. $1.8 is currently held in escrow pending the expiration of the indemnification adjustment period. The acquisition was considered an asset purchase for tax purposes.

Geo Networks Limited (“Geo”)

On May 16, 2014, the Company acquired 100% of the equity interest in Ego Holdings Limited, a London-based dark fiber provider. The consideration consisted of cash of £174.3 (or $292.3), net of cash acquired, and was funded with a combination of cash on hand and available funds drawn on the Company’s revolving credit facility. In conjunction with the acquisition, the Company repaid Geo’s existing debt obligations to the note holders totaling £113.4 and £69.1 was paid to the shareholders. The acquisition was considered an asset purchase for tax purposes.

Acquisition Method Accounting Estimates

The Company initially recognizes the assets and liabilities acquired from the aforementioned acquisitions based on its preliminary estimates of their acquisition date fair values. As additional information becomes known concerning the acquired assets and assumed liabilities, management may make adjustments to the opening balance sheet of the acquired company up to the end of the measurement period, which is no longer than a one year period following the acquisition date. The determination of the fair values of the acquired assets and liabilities assumed (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. As of December 31, 2014, the Company has not completed its fair value analysis and calculations in sufficient detail necessary to arrive at the final estimates of the fair value of certain working capital and non-working capital acquired assets and assumed liabilities, including the allocations to property, plant and equipment, goodwill and intangible assets, deferred revenue and resulting deferred taxes related to its acquisitions of CoreXchange, Geo, AtlantaNAP and Neo. All information presented with respect to certain working capital and non-working capital acquired assets and liabilities assumed as it relates to these acquisitions are preliminary and subject to revision pending the final fair value analysis. During the first quarter of Fiscal 2015, the Company finalized its fair value analysis and resulting purchase accounting for the Access and FiberLink acquisitions consummated in Fiscal 2014.

9


ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

(in millions, except share and per share data)

 

The table below reflects the Company's preliminary estimates of the acquisition date fair values of the assets and liabilities assumed from its Fiscal 2015 acquisitions:

 

 

 

 

AtlantaNAP

 

 

Neo

 

Acquisition date

 

 

July 1, 2014

 

 

July 1, 2014

 

Cash

 

 

$

 

 

$

4.2

 

Other current assets

 

 

 

0.3

 

 

 

13.1

 

Property and equipment

 

 

 

9.7

 

 

 

42.9

 

Deferred tax assets, net

 

 

 

0.1

 

 

 

 

Intangibles

 

 

 

30.4

 

 

 

13.4

 

Goodwill

 

 

 

13.7

 

 

 

25.2

 

Other assets

 

 

 

 

 

 

2.4

 

Total assets acquired

 

 

 

54.2

 

 

 

101.2

 

Current liabilities

 

 

 

1.4

 

 

 

10.6

 

Deferred revenue

 

 

 

0.3

 

 

 

6.3

 

Capital lease obligations

 

 

 

 

 

 

 

Deferred tax liability, net

 

 

 

 

 

 

6.2

 

Total liabilities assumed

 

 

 

1.7

 

 

 

23.1

 

Net assets acquired

 

 

 

52.5

 

 

 

78.1

 

Less cash acquired

 

 

 

 

 

 

(4.2

)

Net consideration paid

 

 

$

52.5

 

 

$

73.9

 

 

The table below reflects the Company's estimates of the acquisition date fair values of the assets and liabilities assumed from its Fiscal 2014 acquisitions:

 

 

 

Access

 

 

FiberLink

 

 

CoreXchange

 

 

Geo

 

Acquisition date

 

October 1, 2013

 

 

October 2, 2013

 

 

March 4, 2014

 

 

May 16, 2014

 

Cash

 

$

1.2

 

 

$

 

 

$

 

 

$

13.7

 

Other current assets

 

 

2.3

 

 

 

0.8

 

 

 

0.6

 

 

 

10.7

 

Property and equipment

 

 

11.5

 

 

 

15.9

 

 

 

3.2

 

 

 

219.5

 

Deferred tax assets, net

 

 

 

 

 

7.7

 

 

 

0.2

 

 

 

 

Intangibles

 

 

18.0

 

 

 

19.3

 

 

 

11.0

 

 

 

61.2

 

Goodwill

 

 

24.0

 

 

 

19.8

 

 

 

3.6

 

 

 

92.3

 

Other assets

 

 

 

 

 

0.1

 

 

 

 

 

 

9.8

 

Total assets acquired

 

 

57.0

 

 

 

63.6

 

 

 

18.6

 

 

 

407.2

 

Current liabilities

 

 

1.0

 

 

 

1.3

 

 

 

0.5

 

 

 

18.9

 

Deferred revenue

 

 

5.1

 

 

 

19.2

 

 

 

0.4

 

 

 

44.3

 

Capital lease obligations

 

 

 

 

 

 

 

 

0.2

 

 

 

 

Deferred tax liability, net

 

 

9.6

 

 

 

 

 

 

 

 

 

38.0

 

Total liabilities assumed

 

 

15.7

 

 

 

20.5

 

 

 

1.1

 

 

 

101.2

 

Net assets acquired

 

 

41.3

 

 

 

43.1

 

 

 

17.5

 

 

 

306.0

 

Less cash acquired

 

 

(1.2

)

 

 

 

 

 

 

 

 

(13.7

)

Net consideration paid

 

$

40.1

 

 

$

43.1

 

 

$

17.5

 

 

$

292.3

 

 

The goodwill arising from the Company’s acquisitions results from synergies, anticipated incremental sales to the acquired company customer base, and economies-of-scale expected from the acquisitions. The Company has allocated the goodwill to the reporting units (in existence on the respective acquisition dates) that were expected to benefit from the acquired goodwill. The allocation was determined based on the excess of the estimated fair value of the reporting unit over the estimated fair value of the individual assets acquired and liabilities assumed that were assigned to the reporting units. Note 4 - Goodwill, discloses the preliminary and/or final allocation of the Company’s acquired goodwill to each of its reporting units.

10


ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

(in millions, except share and per share data)

 

In each of the Company’s Fiscal 2014 and Fiscal 2015 acquisitions, the Company acquired certain customer relationships. These relationships represent a valuable intangible asset, as the Company anticipates continued business from the acquired customer bases. The Company’s estimate of the fair value of the acquired customer relationships is based on a multi-period excess earnings valuation technique that utilizes Level 3 inputs. The fair value of the acquired customer relationships for each acquisition was determined as follows: Fiscal 2015 acquisitions - AtlantaNAP, $30.4; and Neo, $13.4; Fiscal 2014 acquisitions - Access, $18.0; FiberLink, $19.3; CoreXchange, $11.0; and Geo, $61.2. The Company has not yet finalized the valuation of acquired customer relationships for CoreXchange, Geo, AtlantaNAP and Neo. For Fiscal 2015, the Company estimated the useful life of the acquired customer relationships to be approximately 11 years for AtlantaNAP and 15 years for Neo. For Fiscal 2014, the Company estimated the useful life of the acquired customer relationships to be approximately 20 years for Access, 12 years for Geo, 12 years for CoreXchange, and 18 years for FiberLink.

The previous owners of Geo had entered into various agreements, including IRU agreements with other telecommunication service providers to lease fiber and other bandwidth infrastructure in exchange for upfront cash payments. The Company accounted for acquired deferred revenue at its acquisition date fair value, which was determined utilizing the market approach. The market approach incorporated the actual up-front payments received by Geo under contracts entered within 18 months of the acquisition, as those were recent market transactions between parties unrelated to the Company. A fair value of $44.3 was assigned to the acquired deferred revenue balance of Geo. The acquired deferred revenue is being recognized over a weighted average remaining contract term of 9.7 years for Geo.

Purchase Accounting Estimates Associated with Deferred Taxes

Based on the Company’s fair value assessment related to deferred tax assets acquired in the Geo acquisition, a value of $38.0 was assigned to the acquired net deferred tax liabilities.

The tax effect of temporary differences that give rise to significant portions of the net deferred tax liabilities are as follows:

 

 

 

Geo

 

 

 

May 16, 2014

 

Deferred income tax assets:

 

 

 

 

Net operating loss carry forwards

 

$

2.5

 

Deferred revenue

 

 

4.4

 

Total deferred income tax assets

 

 

6.9

 

Deferred income tax liabilities:

 

 

 

 

Property and equipment

 

 

(32.7

)

Intangible assets

 

 

(12.2

)

Total deferred income tax liabilities

 

 

(44.9

)

Net deferred income tax liabilities

 

$

(38.0

)

 

Adjustments to Purchase Accounting Estimates Associated with Prior Year Acquisitions

Access and FiberLink

During the first quarter of Fiscal 2015, the Company finalized its acquisition accounting for Access and FiberLink and its previously reported allocation of the purchase consideration associated with these acquisitions as a result of changes to the original fair value estimates of certain items acquired. These changes are the result of additional information obtained since June 30, 2014 that related to facts and circumstances that existed at the respective acquisition dates. Related to the Access acquisition, property, plant and equipment increased by $3.1, customer relationship intangible assets increased by $2.0, and deferred tax liabilities increased by $2.0 related to the Company's final valuation of non-working capital acquired assets and the related deferred tax impacts. Related to the FiberLink acquisition, property, plant and equipment increased by $9.9, customer relationship intangible assets increased by $2.1, and deferred tax assets increased by $0.7 related to the Company's final valuation of non-working capital acquired assets and the related deferred tax impacts. The Company has recast the previously reported consolidated balance sheet as of June 30, 2014 in connection with the finalization of acquisition accounting for these acquisitions. The Company did not recast the previously reported consolidated statement of operations for the year ended June 30, 2014 due to the immaterial effect of the related adjustments.

11


ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

(in millions, except share and per share data)

 

Fibergate Holdings, Inc. (“Fibergate”) Settlement

On August 31, 2012, the Company acquired 100% of the equity interest in Fibergate, a privately held corporation, for total consideration of $118.3.  $17.6 of the purchase price was held in escrow pending the expiration of the working capital and indemnification adjustment period. Prior to the expiration of the indemnification adjustment period, the Company filed an indemnification claim against the former owners of Fibergate.  During the three months ended December 31, 2014, the Company and the former owners of Fibergate entered into a settlement agreement and mutual release, which resulted in a refund of $2.5 of the purchase price.  The $2.5 proceeds are included as a reduction to selling, general and administrative expenses on the condensed consolidated statement of operations for the three and six months ended December 31, 2014.

Transaction Costs

Transaction costs include expenses associated with professional services (i.e., legal, accounting, regulatory, etc.) rendered in connection with signed and/or closed acquisitions or disposals (including spin-offs), travel expense, severance expense incurred on the date of acquisition or disposal, and other direct expenses incurred that are associated with such acquisitions or disposals. The Company incurred transaction costs of $1.3 and $4.8 during the three and six months ended December 31, 2014, respectively, and $0.2 and $0.8 during the three and six months ended December 31, 2013, respectively. Transaction costs have been included in selling, general and administrative expenses in the condensed consolidated statements of operations and in cash flows from operating activities in the condensed consolidated statements of cash flows during these periods.

Pro-forma Financial Information

The pro forma results presented below include the effects of the Company’s Fiscal 2014 acquisitions of Corelink, Access, FiberLink, CoreXchange, and Geo and Fiscal 2015 acquisitions of the AtlantaNAP and Neo as if the acquisitions occurred on July 1, 2013. The pro forma net income/ (loss) for the periods ended December 31, 2014 and 2013 includes the additional depreciation and amortization resulting from the adjustments to the value of property and equipment and intangible assets resulting from purchase accounting and adjustment to amortized revenue during Fiscal 2014 and 2015 as a result of the acquisition date valuation of assumed deferred revenue. The pro forma results also include interest expense associated with debt used to fund the acquisitions. The pro forma results do not include any anticipated synergies or other expected benefits of the acquisitions. The unaudited pro forma financial information below is not necessarily indicative of either future results of operations or results that might have been achieved had the acquisitions been consummated as of July 1, 2013.

 

 

 

Three months ended December 31,