Attached files

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EX-32.1 - EX-32.1 - Zayo Group Holdings, Inc.zayo-ex321_9.htm
EX-10.2 - EX-10.2 - Zayo Group Holdings, Inc.zayo-ex102_510.htm
EX-31.2 - EX-31.2 - Zayo Group Holdings, Inc.zayo-ex312_6.htm
EX-32.2 - EX-32.2 - Zayo Group Holdings, Inc.zayo-ex322_7.htm
EX-31.1 - EX-31.1 - Zayo Group Holdings, Inc.zayo-ex311_8.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 September 30, 2015

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 November 6, 2015, was 244,866,876 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 September 30, 2015 and June 30, 2015

 

1

 

Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2015 and 2014

 

2

 

Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended September 30, 2015 and 2014

 

3

 

Condensed Consolidated Statement of Stockholders’ Equity for the Three Months Ended September 30, 2015

 

4

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2015 and 2014

 

5

 

Notes to Condensed Consolidated Financial Statements

 

6

 

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

 

24

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

36

 

Item 4. Controls and Procedures

 

36

 

Part II. OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

 

37

 

Item 1A. Risk Factors

 

37

 

Item 5. Other Information

 

37

 

Item 6. Exhibits

 

38

 

Signatures

 

39

 

 

 

 

 

 


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)  

 

 

 

September 30,

2015

 

 

June 30,

2015

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

345.7

 

 

$

308.6

 

Trade receivables, net of allowance of $4.2 and $3.4 as of September 30, 2015 and

   June 30, 2015, respectively

 

 

90.3

 

 

 

88.0

 

Due from related parties

 

 

0.3

 

 

 

0.6

 

Prepaid expenses

 

 

34.9

 

 

 

37.3

 

Deferred income taxes, net

 

 

129.5

 

 

 

129.5

 

Other assets

 

 

8.4

 

 

 

3.9

 

Total current assets

 

 

609.1

 

 

 

567.9

 

Property and equipment, net

 

 

3,349.0

 

 

 

3,299.2

 

Intangible assets, net

 

 

925.3

 

 

 

948.3

 

Goodwill

 

 

1,218.8

 

 

 

1,224.4

 

Other assets

 

 

63.7

 

 

 

54.8

 

Total assets

 

$

6,165.9

 

 

$

6,094.6

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

16.5

 

 

$

16.5

 

Accounts payable

 

 

36.4

 

 

 

40.0

 

Accrued liabilities

 

 

180.2

 

 

 

182.2

 

Accrued interest

 

 

76.3

 

 

 

57.2

 

Capital lease obligations, current

 

 

4.4

 

 

 

4.4

 

Deferred revenue, current

 

 

90.4

 

 

 

86.6

 

Total current liabilities

 

 

404.2

 

 

 

386.9

 

Long-term debt, non-current

 

 

3,651.1

 

 

 

3,652.2

 

Capital lease obligation, non-current

 

 

32.1

 

 

 

28.3

 

Deferred revenue, non-current

 

 

637.2

 

 

 

612.7

 

Stock-based compensation liability

 

 

2.4

 

 

 

1.9

 

Deferred income taxes, net

 

 

168.4

 

 

 

174.7

 

Other long-term liabilities

 

 

27.0

 

 

 

26.7

 

Total liabilities

 

 

4,922.4

 

 

 

4,883.4

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value-- 50,000,000 shares authorized; no shares issued

   and outstanding as of September 30, 2015 and June 30, 2015, respectively

 

 

 

 

 

 

Common stock, $0.001 par value--850,000,000 shares authorized; 245,236,924 and

   243,008,679 shares issued and outstanding as of September 30, 2015

   and June 30, 2015, respectively

 

 

0.2

 

 

 

0.2

 

Additional paid-in capital

 

 

1,757.3

 

 

 

1,705.8

 

Accumulated other comprehensive loss

 

 

(11.9

)

 

 

(7.9

)

Accumulated deficit

 

 

(502.1

)

 

 

(486.9

)

Total stockholders' equity

 

 

1,243.5

 

 

 

1,211.2

 

Total liabilities and stockholders' equity

 

$

6,165.9

 

 

$

6,094.6

 

 

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 per share data)

 

 

 

Three months ended September 30,

 

 

 

2015

 

 

2014

 

Revenue

 

$

366.8

 

 

$

320.6

 

Operating costs and expenses

 

 

 

 

 

 

 

 

Operating costs (excluding depreciation and amortization and including

   stock-based compensation—Note 8)

 

 

113.0

 

 

 

107.3

 

Selling, general and administrative expenses (including stock-based

   compensation—Note 8)

 

 

84.6

 

 

 

156.8

 

Depreciation and amortization

 

 

117.1

 

 

 

96.0

 

Total operating costs and expenses

 

 

314.7

 

 

 

360.1

 

Operating income/(loss)

 

 

52.1

 

 

 

(39.5

)

Other expenses

 

 

 

 

 

 

 

 

Interest expense

 

 

(53.8

)

 

 

(46.9

)

Foreign currency loss on intercompany loans

 

 

(10.7

)

 

 

(14.7

)

Other expense, net

 

 

(0.1

)

 

 

 

Total other expenses, net

 

 

(64.6

)

 

 

(61.6

)

Loss from operations before income taxes

 

 

(12.5

)

 

 

(101.1

)

Provision for income taxes

 

 

2.7

 

 

 

9.4

 

Net loss

 

$

(15.2

)

 

$

(110.5

)

Weighted-average shares used to compute net loss per share:

 

 

 

 

 

 

 

 

Basic and Diluted

 

 

243.0

 

 

 

223.0

 

Net loss per share:

 

 

 

 

 

 

 

 

Basic and Diluted

 

$

(0.06

)

 

$

(0.50

)

 

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

September 30,

 

 

 

2015

 

 

2014

 

Net loss

 

$

(15.2

)

 

$

(110.5

)

Foreign currency translation adjustments

 

 

(4.0

)

 

 

(12.3

)

Comprehensive loss

 

$

(19.2

)

 

$

(122.8

)

 

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)

THREE MONTHS ENDED SEPTEMBER 30, 2015

(in millions, except share data)

 

 

 

Common

Shares

 

 

Common

Stock

 

 

Additional

paid-in

Capital

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Accumulated

Deficit

 

 

Total

Stockholders'

Equity

 

Balance at June 30, 2015

 

 

243,008,679

 

 

$

0.2

 

 

$

1,705.8

 

 

$

(7.9

)

 

$

(486.9

)

 

$

1,211.2

 

Stock-based compensation

 

 

2,228,245

 

 

 

 

 

 

43.6

 

 

 

 

 

 

 

 

 

43.6

 

Tax benefits from stock-based compensation

 

 

 

 

 

 

 

 

7.9

 

 

 

 

 

 

 

 

 

7.9

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

(4.0

)

 

 

 

 

 

(4.0

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15.2

)

 

 

(15.2

)

Balance at September 30, 2015

 

 

245,236,924

 

 

$

0.2

 

 

$

1,757.3

 

 

$

(11.9

)

 

$

(502.1

)

 

$

1,243.5

 

 

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)

 

 

 

Three months ended

September 30,

 

 

 

2015

 

 

2014

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(15.2

)

 

$

(110.5

)

Adjustments to reconcile net loss to net cash provided by operating

   activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

117.1

 

 

 

96.0

 

Non-cash interest expense

 

 

3.5

 

 

 

2.7

 

Stock-based compensation

 

 

46.1

 

 

 

123.1

 

Amortization of deferred revenue

 

 

(20.4

)

 

 

(17.3

)

Additions to deferred revenue

 

 

49.7

 

 

 

43.2

 

Foreign currency loss on intercompany loans

 

 

10.7

 

 

 

14.7

 

Excess tax benefit from stock-based compensation

 

 

(7.9

)

 

 

Deferred income taxes

 

 

2.0

 

 

 

6.2

 

Provision for bad debts

 

 

0.6

 

 

 

0.6

 

Non-cash loss on investments

 

 

0.2

 

 

 

Changes in operating assets and liabilities, net of acquisitions

 

 

 

 

 

 

 

 

Trade receivables

 

 

(5.6

)

 

 

4.0

 

Prepaid expenses

 

 

2.2

 

 

 

(2.1

)

Payables to/(from) related parties, net

 

 

0.1

 

 

 

Accounts payable and accrued liabilities

 

 

24.5

 

 

 

(46.8

)

Other assets and liabilities

 

 

(12.4

)

 

 

4.4

 

Net cash provided by operating activities

 

 

195.2

 

 

 

118.2

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(159.2

)

 

 

(115.3

)

Acquisition of Neo Telecoms, net of cash acquired

 

 

 

 

(73.9

)

Acquisition of Colo Facilities Atlanta, net of cash acquired

 

 

 

 

(52.5

)

Other

 

 

(0.3

)

 

 

(0.1

)

Net cash used in investing activities

 

 

(159.5

)

 

 

(241.8

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Principal payments on long-term debt

 

 

(4.1

)

 

 

(5.1

)

Principal payments on capital lease obligations

 

 

(1.2

)

 

 

(0.7

)

Excess tax benefit from stock-based compensation

 

 

7.9

 

 

 

Net cash provided by/(used in) financing activities

 

 

2.6

 

 

 

(5.8

)

Net cash flows

 

 

38.3

 

 

 

(129.4

)

Effect of changes in foreign exchange rates on cash

 

 

(1.2

)

 

 

(0.7

)

Net increase/(decrease) in cash and cash equivalents

 

 

37.1

 

 

 

(130.1

)

Cash and cash equivalents, beginning of year

 

 

308.6

 

 

 

297.4

 

Cash and cash equivalents, end of period

 

$

345.7

 

 

$

167.3

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Cash paid for interest, net of capitalized interest

 

$

29.3

 

 

$

73.6

 

Cash paid for income taxes

 

 

4.7

 

 

 

8.7

 

Non-cash purchases of equipment through capital leasing

 

 

5.3

 

 

 

1.6

 

Increase in accounts payable and accrued expenses for purchases of property

   and equipment

 

 

11.0

 

 

 

6.0

 

 

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 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 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.

 

·

Cloud and Connectivity services, previously referred to as Lit Services, including wavelengths, Ethernet, IP, SONET, and Cloud services.

 

·

Other services, including Zayo Professional Services.

The Company’s shares are listed on the New York Stock Exchange (NYSE) under the ticker symbol “ZAYO”.

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, 2015 included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2015. In the opinion of management, all adjustments considered necessary for a fair presentation of financial position, results of operations and cash flows of the Company have been included herein. The results of operations for the three month period ended September 30, 2015 are not necessarily indicative of the operating results for any future interim period or the full year.

Unless otherwise noted, dollar amounts and disclosures throughout the notes to the condensed consolidated financial statements are presented in millions of dollars.

The Company’s fiscal year ends June 30 each year, and we refer to the fiscal year ended June 30, 2015 as “Fiscal 2015” and the fiscal year ending June 30, 2016 as “Fiscal 2016.”

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 three months ended September 30, 2015 and 2014 as the Company incurred a loss from continuing operations in those periods and the effect of inclusion would have been anti-dilutive. 

Significant Accounting Policies

There have been no changes to the Company’s significant accounting policies described in its Annual Report on Form 10-K for the year ended June 30, 2015.

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

6


ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except share data)

 

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 billing disputes, determining useful lives for depreciation and amortization and accruals for exit activities associated with real estate leases, assessing the need for impairment charges (including those related to intangible assets and goodwill), determining the fair values of assets acquired and liabilities assumed in business combinations, accounting for income taxes and related valuation allowances against deferred tax assets 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 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

In September 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which requires acquirers who have reported provisional amounts for items in a business combination to recognize adjustments to provisional amounts that are identified during the measurement period, in the reporting period in which the adjustments are determined. The ASU also requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.  Prior to the issuance of ASU 2015-16, adjustments to provisional amounts were required to be retrospectively adjusted. The Company prospectively early-adopted ASU 2015-16 effective July 1, 2015. The adoption of this standard did not have a material impact on the financial statements.

In May 2014, the FASB issued 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. In July 2015, the FASB deferred the effective date to annual reporting periods and interim reporting periods within annual reporting periods beginning after December 15, 2017.  Early adoption is permitted as of the original effective date or annual reporting periods and interim reporting periods within annual reporting periods beginning after December 15, 2016. 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

Since its formation, the Company has consummated 34 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

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 $51.9 million. The acquisition was considered an asset purchase for tax purposes.

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 million (or $73.9 million), net of cash acquired, was in consideration of acquiring 96% equity ownership in

7


ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except share data)

 

Neo and a call option to purchase the remaining 4% equity interest in Neo. The fair value of the 4% non-controlling interest in Neo as of the acquisition date was $2.9 million and recorded in Other long-term liabilities. The consideration consisted of cash and was paid with cash on hand from the proceeds of the Term Loan Facility (as defined below). €8.7 million (or $11.9 million) of the purchase consideration is currently held in escrow pending the expiration of the indemnification adjustment period. The acquisition was considered a stock purchase for tax purposes.

IdeaTek Systems, Inc. (“IdeaTek”)

Effective January 1, 2015, the Company acquired all of the equity interest in IdeaTek. The purchase price, subject to certain post-closing adjustments, was $52.7 million and was paid with cash on hand. $3.2 million of the purchase consideration is currently held in escrow pending the expiration of the indemnification adjustment period.  The acquisition was considered a stock purchase for tax purposes.

The IdeaTek acquisition added 1,800 route miles to the Company’s network in Kansas, and includes a dense metro footprint in Wichita, Kansas. The network spans across Kansas and connects to approximately 600 cellular towers and over 100 additional buildings.

Latisys Holdings, LLC (“Latisys”)

On February 23, 2015, the Company acquired the operating units of Latisys, a colocation and infrastructure as a service (“Iaas”) provider for a price of $677.8 million, net of cash acquired.  The Latisys acquisition was funded with the proceeds of the January Notes Offering (as defined in Note 5 – Long-Term Debt). $31.4 million of the purchase consideration is currently held in escrow pending the expiration of the indemnification adjustment period. The acquisition was considered a stock 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 September 30, 2015, 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 goodwill and intangible assets, deferred revenue and resulting deferred taxes related to its acquisitions of Latisys and Ideatek. All information presented with respect to certain working capital and non-working capital acquired assets and liabilities assumed as it relates to these acquisitions is preliminary and subject to revision pending the final fair value analysis.

8


ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except share data)

 

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

 

 

 

AtlantaNAP

 

 

Neo

 

 

IdeaTek

 

 

Latisys

 

Acquisition date

 

July 1, 2014

 

 

July 1, 2014

 

 

January 1, 2015

 

 

February 23, 2015

 

Cash

 

$

 

 

$

4.2

 

 

$

 

 

$

9.4

 

Other current assets

 

 

0.2

 

 

 

9.5

 

 

 

0.8

 

 

 

17.2

 

Property and equipment

 

 

7.0

 

 

 

31.3

 

 

 

32.3

 

 

 

222.9

 

Deferred tax assets, net

 

 

 

 

 

 

 

 

2.9

 

 

 

0.7

 

Intangibles

 

 

21.0

 

 

 

26.4

 

 

 

7.6

 

 

 

250.2

 

Goodwill

 

 

25.2

 

 

 

32.5

 

 

 

38.8

 

 

 

279.3

 

Other assets

 

 

 

 

 

2.3

 

 

 

 

 

 

5.0

 

Total assets acquired

 

 

53.4

 

 

 

106.2

 

 

 

82.4

 

 

 

784.7

 

Current liabilities

 

 

1.5

 

 

 

13.5

 

 

 

4.5

 

 

 

10.0

 

Deferred revenue

 

 

 

 

 

3.7

 

 

 

25.2

 

 

 

3.2

 

Deferred tax liability, net

 

 

 

 

 

7.6

 

 

 

 

 

 

84.3

 

Other liabilities

 

 

 

 

 

3.3

 

 

 

 

 

 

 

Total liabilities assumed

 

 

1.5

 

 

 

28.1

 

 

 

29.7

 

 

 

97.5

 

Net assets acquired

 

 

51.9

 

 

 

78.1

 

 

 

52.7

 

 

 

687.2

 

Less cash acquired

 

 

 

 

 

(4.2

)

 

 

 

 

 

(9.4

)

Net consideration paid

 

$

51.9

 

 

$

73.9

 

 

$

52.7

 

 

$

677.8

 

 

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

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 nil and $3.4 million during the three months ended September 30, 2015 and 2014, 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.

 

 

(3) GOODWILL

The Company’s goodwill balance was $1,218.8 million and $1,224.4 million as of September 30, 2015 and June 30, 2015, respectively.

The Company’s reporting units are comprised of its strategic product groups (“SPGs”): Zayo Dark Fiber (“Dark Fiber”), Zayo Wavelength Services (“Waves”), Zayo SONET Services (“SONET”), Zayo Ethernet Services (“Ethernet”), Zayo IP Services (“IP”), Zayo Mobile Infrastructure Group (“MIG”), Zayo Colocation (“zColo"), Zayo Cloud Services (“Cloud”) and Other (primarily Zayo Professional Services (“ZPS”)).

9


ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except share data)

 

The following reflects the changes in the carrying amount of goodwill during the three months ended September 30, 2015:

 

Product Group

 

As of

June 30, 2015

 

 

Adjustments to

Fiscal 2015

Acquisitions

 

 

Foreign Currency

Translation and

Other

 

 

As of

September 30, 2015

 

Dark Fiber

 

$

299.1

 

 

$

 

 

$

(3.2

)

 

$

295.9

 

Waves

 

 

265.6

 

 

 

 

 

(1.9

)

 

 

263.7

 

Sonet

 

 

50.3

 

 

 

 

 

 

 

50.3

 

Ethernet

 

 

104.2

 

 

 

 

 

 

 

104.2

 

IP

 

 

86.3

 

 

 

 

 

 

 

86.3

 

MIG

 

 

73.4

 

 

 

 

 

 

 

73.4

 

zColo

 

 

273.2

 

 

 

(0.5

)

 

 

 

 

272.7

 

Cloud

 

 

57.0

 

 

 

 

 

 

 

57.0

 

Other

 

 

15.3

 

 

 

 

 

 

 

15.3

 

Total

 

$

1,224.4

 

 

$

(0.5

)

 

$

(5.1

)

 

$

1,218.8

 

 

During the three months ended September 30, 2015, the Company recorded adjustments to its provisional accounting estimates associated with working capital account balances acquired from the Latisys acquisition, which resulted in a $0.5 million reduction to goodwill.

 

 

 

(4) INTANGIBLE ASSETS

Identifiable acquisition-related intangible assets as of September 30, 2015 and June 30, 2015 were as follows:

 

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Finite-Lived Intangible Assets

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

1,077.9

 

 

$

(174.9

)

 

$

903.0

 

Trade names

 

 

0.2

 

 

 

(0.1

)

 

 

0.1

 

Underlying rights

 

 

1.7

 

 

 

(0.3

)

 

 

1.4

 

Total

 

 

1,079.8

 

 

 

(175.3

)

 

 

904.5

 

Indefinite-Lived Intangible Assets

 

 

 

 

 

 

 

 

 

 

 

 

Certifications

 

 

3.5

 

 

 

 

 

 

3.5

 

Underlying Rights

 

 

17.3

 

 

 

 

 

 

17.3

 

Total

 

$

1,100.6

 

 

$

(175.3

)

 

$

925.3

 

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Finite-Lived Intangible Assets

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

1,080.3

 

 

$

(155.0

)

 

$

925.3

 

Trade names

 

 

0.2

 

 

 

(0.1

)

 

 

0.1

 

Underlying rights

 

 

1.7

 

 

 

(0.2

)

 

 

1.5

 

Total

 

 

1,082.2

 

 

 

(155.3

)

 

 

926.9

 

Indefinite-Lived Intangible Assets

 

 

 

 

 

 

 

 

 

 

 

 

Certifications

 

 

3.5

 

 

 

 

 

 

3.5

 

Underlying Rights

 

 

17.9

 

 

 

 

 

 

17.9

 

Total

 

$

1,103.6

 

 

$

(155.3

)

 

$

948.3

 

 

 

10


ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except share data)

 

(5) LONG-TERM DEBT

As of September 30, 2015 and June 30, 2015, long-term debt was as follows:

 

 

 

September 30,

2015

 

 

June 30,

2015

 

Term Loan Facility due 2021

 

$

1,642.6

 

 

$

1,646.8

 

10.125% Senior Unsecured Notes due 2020

 

 

325.6

 

 

 

325.6

 

6.00% Senior Unsecured Notes Due 2023

 

 

1,430.0

 

 

 

1,430.0

 

6.375% Senior Unsecured Notes Due 2025

 

 

350.0

 

 

 

350.0

 

Total debt obligations

 

 

3,748.2

 

 

 

3,752.4

 

Unamortized discount on Term Loan Facility

 

 

(19.0

)

 

 

(19.8

)

Unamortized premium on 6.00% Senior Unsecured Notes

 

 

6.9

 

 

 

7.1

 

Unamortized debt issuance costs

 

 

(68.5

)

 

 

(71.0

)

Carrying value of debt

 

 

3,667.6

 

 

 

3,668.7

 

Less current portion

 

 

(16.5

)

 

 

(16.5

)

Long-term debt, less current portion

 

$

3,651.1

 

 

$

3,652.2

 

 

Term Loan Facility due 2021 and Revolving Credit Facility

On May 6, 2015, ZGL entered into an Amendment and Restatement Agreement whereby the Company’s Credit Agreement (the “Credit Agreement”) governing its senior secured term loan facility (the “Term Loan Facility”) and $450 million senior secured revolving credit facility (the “Revolver”) was amended and restated in its entirety. The amended and restated Credit Agreement extended the maturity date of the Company’s outstanding term loans under the Term Loan Facility to May 6, 2021. The interest rate margins applicable to the Term Loan Facility were decreased by 25 basis points to LIBOR plus 2.75% with a minimum LIBOR of 1.0%. In addition, the amended and restated Credit Agreement removed the fixed charge coverage ratio covenant and replaced such covenant with a springing senior secured leverage ratio maintenance requirement applicable only to the Revolver, increased certain lien and debt baskets, and removed certain covenants related to collateral. The terms of the Term Loan Facility require the Company to make quarterly principal payments of $4.1 million plus an annual payment of up to 50% of excess cash flow, as determined in accordance with the Credit Agreement (no such payment was required during the three months ended September 30, 2015 or 2014).  

The Revolver matures at the earliest of (i) April 17, 2020, (ii) six months prior to the maturity date of the Company’s Term Loan Facility, subject to amendment thereof, and (iii) six months prior to the maturity date of the Company’s 2020 Unsecured Notes (as defined below), subject to repayment or amendment thereof.  The Credit Agreement also allows for letter of credit commitments of up to $50.0 million.  The Revolver is subject to a fee per annum of 0.25% to 0.375% (based on the Company’s current leverage ratio) of the weighted-average unused capacity, and the undrawn amount of outstanding letters of credit backed by the Revolver are subject to a 0.25% fee per annum. Outstanding letters of credit backed by the Revolver accrue interest at a rate ranging from LIBOR plus 2.0% to LIBOR plus 3.0% per annum based upon the Company’s leverage ratio.

Interest rates on the Term Loan Facility as of September 30, 2015 and June 30, 2015 were 3.75%. Interest rates on the Revolver as of September 30, 2015 and June 30, 2015 were approximately 3.0%.

As of September 30, 2015, no amounts were outstanding under the Revolver. Standby letters of credit were outstanding in the amount of $9.2 million as of September 30, 2015, leaving $440.8 million available under the Revolver.

10.125% Senior Unsecured Notes due 2020

On July 2, 2012, ZGL and Zayo Capital, Inc. (the “Issuers”) issued $500.0 million aggregate principal amount of 10.125% senior unsecured notes due 2020 (the “2020 Unsecured Notes”).  On December 15, 2014, the Issuers redeemed $174.4 million of their outstanding 2020 Unsecured Notes at a price of 110.125% and $75.0 million of their outstanding 8.125% Senior Secured Notes at a price of 108.125% (the “Note Redemption”). As part of the Note Redemption, the Company recorded an early redemption call premium of $23.8 million which was recorded as a loss on extinguishment of debt on the consolidated statements of operations during three months ended December 31, 2014.

11


ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except share data)

 

6.00% Senior Unsecured Notes Due 2023 and 6.375% Senior Unsecured Notes due 2025

On January 23, 2015, the Issuers completed a private offering (the “January Notes Offering”) of $700.0 million aggregate principal amount of 6.00% senior unsecured notes due in 2023 (the “2023 Unsecured Notes”).  On March 9, 2015, the Issuers completed a private offering of an additional $730.0 million aggregate principal amount of 2023 Unsecured Notes at a premium of 1% (the “March Notes Offering”) resulting in aggregate gross proceeds for the 2023 Unsecured Notes of $1,437.3 million.  The issue premium of $7.3 million on the March Notes Offering is being accreted against interest expense over the term of the notes under the effective interest method.  The 2023 Unsecured Notes bear interest at the rate of 6.00% per year, which is payable on April 1 and October 1 of each year, beginning on October 1, 2015. The 2023 Unsecured Notes will mature on April 1, 2023.  The net proceeds from the January Notes Offering were used to fund the Latisys acquisition (see Note 2 – Acquisitions).   The net proceeds from the March Notes Offering were used to redeem the remaining $675.0 million of the Issuers’ then outstanding 8.125% senior secured notes due 2020 at a price of 105.75% (the “Second Notes Redemption”). As part of the Second Notes Redemption, the Company recorded an early redemption call premium of $38.8 million.  The call premium was recorded as a loss on extinguishment of debt on the consolidated statements of operations during the three months ended March 31, 2015.

On May 6, 2015, the Issuers completed a private offering of $350.0 million aggregate principal amount of 6.375% senior unsecured notes due in 2025 (the “2025 Unsecured Notes”). Interest on the 2025 Unsecured Notes is payable on May 15 and November 15 of each year, beginning on November 15, 2015. The 2025 Unsecured Notes will mature on May 15, 2025.  The net proceeds from the 2025 Unsecured Notes were used to repay $344.5 million of the Company’s Term Loan Facility. As a result of the repayment, the Company recorded a loss on extinguishment of debt of $8.4 million during the three months ended June 30, 2015.

Debt covenants

The indentures (the “Indentures”) governing the 2020 Unsecured Notes, the 2023 Unsecured Notes and the 2025 Unsecured Notes (collectively the “Notes”) contain covenants that, among other things, restrict the ability of ZGL and its subsidiaries to incur additional indebtedness and issue preferred stock; pay dividends or make other distributions with respect to any equity interests, make certain investments or other restricted payments, create liens, sell assets, incur restrictions on the ability of ZGL’s restricted subsidiaries to pay dividends or make other payments to ZGL, consolidate or merge with or into other companies or transfer all or substantially all of their assets, engage in transactions with affiliates, and enter into sale and leaseback transactions.  The terms of the Indentures include customary events of default.

The Credit Agreement contains customary events of default, including among others, non-payment of principal, interest, or other amounts when due, inaccuracy of representations and warranties, breach of covenants, cross default to certain other indebtedness, insolvency or inability to pay debts, bankruptcy, or a change of control. The Credit Agreement also contains a covenant, applicable only to the Revolver, that ZGL maintain a senior secured leverage ratio below 5.25:1.00 at any time when the aggregate principal amount of loans outstanding under the Revolver is greater than 35% of the commitments under the Revolver.

The indenture governing the 2020 Unsecured Notes limits any increase in ZGL’s secured indebtedness (other than certain forms of secured indebtedness expressly permitted under such indenture) to a pro forma secured debt ratio of 4.50 times the Company’s previous quarter’s annualized modified EBITDA, as defined in the indenture, and limits ZGL’s incurrence of additional indebtedness to a total indebtedness ratio of 5.25 times the previous quarter’s annualized modified EBITDA. The indentures governing the 2023 Unsecured Notes and the 2025 Unsecured Notes limit any increase in ZGL’s secured indebtedness (other than certain forms of secured indebtedness expressly permitted under such indentures) to a pro forma secured debt ratio of 4.50 times ZGL’s previous quarter’s annualized modified EBITDA (as defined in such indentures), and limit ZGL’s incurrence of additional indebtedness to a total indebtedness ratio of 6.00 times the previous quarter’s annualized modified EBITDA.

The Company was in compliance with all covenants associated with its debt agreements as of September 30, 2015.

Guarantees

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

12


ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except share data)

 

Debt issuance costs

In connection with the Credit Agreement (and subsequent amendments thereto), and the various Notes offerings, the Company incurred debt issuance costs of $99.3 million (net of extinguishments). These costs are being amortized to interest expense over the respective terms of the underlying debt instruments using the effective interest method, unless extinguished earlier, at which time the related unamortized costs are to be immediately expensed.

Unamortized debt issuance costs of $23.2 million associated with the Company’s previous indebtedness were recorded as part of the loss on extinguishment of debt during Fiscal 2015. 

The balance of debt issuance costs as of September 30, 2015 and June 30, 2015 was $68.5 million and $71.0 million, net of accumulated amortization of $30.8 million and $28.3 million, 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 indebtedness and changes in the fair value of the Company’s interest rate derivatives.  Interest expense associated with the amortization of debt issuance costs was $2.5 million and $3.8 million for the three months ended September 30, 2015 and 2014, respectively.

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

Interest rate derivatives

On August 13, 2012, the Company entered into forward-starting interest rate swap agreements with an aggregate notional value of $750.0 million, a maturity date of June 30, 2017, and a start date of June 30, 2013. There were no up-front fees for these agreements. The contract states that the Company shall pay a 1.67% fixed rate of interest for the term of the agreement beginning on the start date. The counter-party will pay to the Company the greater of actual LIBOR or 1.25%. The Company entered into the forward-starting swap arrangements to reduce the risk of increased interest costs associated with potential changes in LIBOR rates.

Changes in the fair value of interest rate swaps are recorded in interest expense in the condensed consolidated statements of operations for the applicable period. The fair value of the interest rate swaps of $4.5 million and $4.1 million are included in “Other long term liabilities” in the Company’s condensed consolidated balance sheets as of September 30, 2015 and June 30, 2015, respectively. During the three months ended September 30, 2015 and 2014, $0.4 million and $(2.0) million were recorded as an increase/(decrease) in interest expense for the change in the fair value of the interest rate swaps.

 

 

(6) INCOME TAXES

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

 

 

 

Three months ended September 30,

 

 

 

2015

 

 

2014

 

Current Income Taxes

 

 

 

 

 

 

 

 

Federal

 

$

0.1

 

 

$

1.5

 

State

 

 

0.4

 

 

 

0.9

 

Foreign

 

 

0.2

 

 

 

0.8

 

Total

 

$

0.7

 

 

$

3.2

 

Deferred Income Taxes

 

 

 

 

 

 

 

 

Federal

 

$

1.7

 

 

$

6.3

 

State

 

 

(0.2

)

 

 

0.2

 

Foreign

 

 

0.5

 

 

 

(0.3

)

Total

 

 

2.0

 

 

 

6.2

 

Total provision for income taxes

 

$

2.7

 

 

$

9.4

 

 

13


ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except share data)

 

The United States and foreign components of loss from operations before income taxes for the three months ended September 30, 2015 and 2014 are as follows:

 

 

 

Three months ended September 30,

 

 

 

2015

 

 

2014

 

United States

 

$

(13.7

)

 

$

(92.6

)

Foreign

 

 

1.2

 

 

 

(8.5

)

Total

 

$

(12.5

)

 

$

(101.1

)

 

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 and deductions, such as the stock-based compensation expense related to the common units of Communications Infrastructure Investments, LLC (“CII”) that is recorded as an expense for financial reporting purposes but is not deductible for tax purposes (see Note 7 – Equity).

A reconciliation of the actual income tax provision and the tax computed by applying the U.S. federal rate to the earnings before income taxes during the three-month periods ended September 30, 2015 and 2014 is as follows:

 

 

 

Three months ended September 30,

 

 

 

2015

 

 

2014

 

Expected benefit at the statutory rate

 

$

(4.2

)

 

$

(35.3

)

Increase/(decrease) due to:

 

 

 

 

 

 

 

 

Non-deductible stock-based compensation

 

 

7.4

 

 

 

47.3

 

State income taxes benefit, net of federal benefit

 

 

(0.6

)

 

 

(4.5

)

Transaction costs not deductible for tax purposes

 

 

 

 

0.2

 

Foreign tax rate differential

 

 

(0.1

)

 

 

1.1

 

Other, net

 

 

0.2

 

 

 

0.6

 

Provision for income taxes

 

$

2.7

 

 

$

9.4

 

 

 

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 items for which management is unable to make reliable estimates or that are 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, tax 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 judgments, 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 differences, and the likelihood of realizing deferred tax assets generated in both the current year and prior years. The accounting estimates used to compute the interim provision for income taxes may change as new events occur, more experience is acquired, additional information is obtained, or the tax environment changes. 

 

 

(7) EQUITY

Prior to October 16, 2014, the Company was a wholly owned subsidiary of CII. CII was organized on November 6, 2006, and subsequently capitalized on May 7, 2007, with capital contributions from various institutional and founder investors. Prior to October 16, 2014, the Company was controlled by the CII board of managers, which was in turn controlled by the members of CII in accordance with the rights specified