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ZAYO GROUP LLC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) Certain Factors That May Affect Future Results Information contained or incorporated by reference in this Quarterly Report on Form 10-Q (this "Report") and in other filings by Zayo Group, LLC ("we" or "us"), with the Securities and Exchange Commission (the "SEC") that is not historical by nature constitutes "forward-looking statements," and can be identified by the use of forward-looking terminology such as "believes," "expects," "plans," "intends," "estimates," "projects," "could," "may," "will," "should," or "anticipates," or the negatives thereof, other variations thereon or comparable terminology, or by discussions of strategy. No assurance can be given that future results expressed or implied by the forward-looking statements will be achieved, and actual results may differ materially from those contemplated by the forward-looking statements. Such statements are based on our current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, those relating to our financial and operating prospects, current economic trends, future opportunities, ability to retain existing customers and attract new ones, our acquisition strategy and ability to integrate acquired companies and assets, outlook of customers, reception of new products and technologies, and strength of competition and pricing. Other factors and risks that may affect our business and future financial results are detailed in our SEC filings, including, but not limited to, those described under "Risk Factors" in our Annual Report on Form 10-K filed with the SEC on September 23, 2013 and in this "Management's Discussion and Analysis of Financial Condition and Results of Operations." We caution you not to place undue reliance on these forward-looking statements, which speak only as of their respective dates. We undertake no obligation to publicly update or revise forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events, except as may be required by law. The following discussion and analysis should be read together with our unaudited condensed consolidated financial statements and the related notes appearing in this Report and in our audited annual consolidated financial statements as of and for the year ended June 30, 2013, included in our Annual Report on Form 10-K filed with the SEC on September 23, 2013. Amounts presented in this Item 2 are rounded. As such, rounding differences could occur in period over period changes and percentages reported throughout this Item 2. Overview Introduction We are a provider of bandwidth infrastructure and network-neutral colocation and connectivity services, which are key components of telecommunications and Internet infrastructure services. These services enable our customers to manage, operate, and scale their telecommunications and data networks and data center related operations. We provide our bandwidth infrastructure services over our dense metropolitan, regional, national and international fiber networks, enabling our customers to transport data, voice, video, and Internet traffic, as well as to interconnect their networks. Our bandwidth infrastructure services are primarily used by wireless service providers, carriers and other communications service providers, financial services companies, social networking companies, web-centric companies, law firms, education and healthcare institutions, and other companies that require fiber based bandwidth services. We typically provide our lit bandwidth infrastructure services for a fixed-rate monthly recurring fee under contracts, which usually vary between one and twenty years in length. Our network-neutral colocation and connectivity services facilitate the exchange of voice, video, data, and Internet traffic between multiple third-party networks. 35 -------------------------------------------------------------------------------- ZAYO GROUP, LLC AND SUBSIDIARIES As of March 31, 2014, our fiber networks spanned approximately 77,113 route miles and 5,723,985 fiber miles, served 297 geographic markets in the United States and Europe, and connected to 14,490 buildings, including 3,838 cellular towers, allowing us to provide our bandwidth infrastructure services to our customers over redundant fiber facilities between key customer locations. We use undersea capacity on the trans-Atlantic undersea telecommunications network ("TAT-14") and other trans-Atlantic cables to provide connectivity from the U.S. to Europe and from London to continental Europe. We operate a Tier 1 IP network over our metro and long haul networks with connectivity to the U.S. and Europe. The majority of the markets that we serve, and buildings to which we connect, have few other networks capable of providing similar bandwidth infrastructure services, which we believe provides us with a sustainable competitive advantage in these markets. As a result, we believe that the services we provide to our customers would be difficult to replicate in a cost- and time-efficient manner. We provide our network-neutral colocation and connectivity services utilizing our own data centers located within major carrier hotels and other strategic buildings in 27 locations throughout the United States. We are a wholly-owned subsidiary of Zayo Group Holdings, Inc., a Delaware corporation ("Holdings"), which is in turn wholly owned by Communications Infrastructure Investments, LLC, a Delaware limited liability company ("CII"). Our fiscal year ends June 30 each year, and we refer to the fiscal year ended June 30, 2013 as "Fiscal 2013" and the fiscal year ending June 30, 2014 as "Fiscal 2014." Reportable Segments and Our Strategic Product Groups As the Company has increased in scope and scale, it has developed its management and reporting structure to support this growth. The Company's bandwidth infrastructure and network-neutral colocation and connectivity services are comprised of various related product groups generally defined around the type of service the customer is buying, referred to as Strategic Product Groups ("SPG" or "SPGs"). Each SPG is responsible for the revenue, costs and associated capital expenditures of their respective services. The SPGs enable sales, make pricing and product decisions, engineer networks and deliver services to customers, and support customers for their specific telecom and Internet infrastructure services. With the continued increase in the Company's scope and scale, effective January 1, 2014 the Company's chief operating decision maker ("CODM"), the Company's Chief Executive Officer, implemented certain organizational changes to the management and operation of the business that directly impacts how the CODM makes resource allocation decisions and manages the Company. The change in structure had the impact of combining the seven existing SPGs (also previously identified as reportable segments) into two reportable segments: Physical Infrastructure and Lit Services. The Physical Infrastructure reporting segment is comprised of the following SPGs: Zayo Dark Fiber ("Dark Fiber"), Zayo Mobile Infrastructure Group ("MIG"), and Zayo Colocation ("zColo"). The Lit Services reporting segment is comprised of the following SPGs: Zayo Wavelength Services ("Waves"), Zayo SONET Services ("SONET"), Zayo Ethernet Services ("Ethernet"), and Zayo Internet Protocol Services ("IP"). SPGs now report directly to the segment managers who are responsible for the operations and financial results for the Physical Infrastructure and Lit Services reportable segments. The segment managers for each of the Physical Infrastructure and Lit Services reportable segments report directly to the CODM, and it is the financial results of those segments that are evaluated and drive the resource allocation decisions Further, certain cost allocations among SPGs and from corporate were modified to more appropriately represent utilization of resources (and improve the fidelity of SPG and therefore reportable segment results). As of March 31, 2014, the Company has two reportable segments as described below: •Physical Infrastructure. The Physical Infrastructure reportable segment consists of the SPGs that represent the most basic or "raw" services, namely the leasing of dark fiber (both metro and long-haul) and the provisioning of technical space and power (along with the corresponding interconnection of equipment in those spaces). Physical Infrastructure also includes the SPGs associated with delivering backhaul services to wireless carriers (whether lit or dark and whether to macro towers or small cells). The Physical Infrastructure segment also contains the fiber and colocation assets as well as the employees responsible for the maintenance of those assets. Physical Infrastructure customers include carriers and other communication service providers, Internet service providers, wireless service providers, major media and content companies, large enterprises, and other companies that have the expertise to run their own fiber optic networks or require interconnected technical space. The Physical Infrastructure related services tend to be sold on longer term contracts (up to 20 years in the case of certain dark fiber contracts) compared to the Company's Lit Services. •Lit Services. The Lit Services reportable segment consists of the SPGs providing lit bandwidth capacity to customers utilizing optical technologies where the Company (not the customer) provisions the equipment to light and manage the networks. The amount of capacity provided to customers ranges from 1.54Mps to 100Gps and includes wavelength, ethernet, internet protocol and SONET technologies. Lit Services customers include carriers, financial services companies, healthcare, government institutions, education institutions and other enterprises. The Lit Services contracts are generally shorter than Physical Infrastructure contracts, ranging from one to ten years. 36 -------------------------------------------------------------------------------- ZAYO GROUP, LLC AND SUBSIDIARIESDemand for our services does not materially fluctuate based on seasonality. Factors Affecting Our Results of Operations Business Acquisitions For a detailed description of factors affecting the results of our operations for the three and nine months ended March 31, 2014 and 2013, see Note 2 - Acquisitions. Debt and Equity Financing On November 26, 2013, we entered into a Fifth Amendment to our credit agreement (the "Fifth Amendment"). Under the terms of the Fifth Amendment, effective November 26, 2013, the Company's Term Loan Facility was increased by $150.0 million to $1,749.8 million, and the interest rate was further adjusted to LIBOR plus 3.0% (the "Term Loan LIBOR Spread") with a minimum LIBOR rate of 1.0%. The amended terms represented a downward adjustment of 50 basis points on the Term Loan LIBOR Spread from the Fourth Amendment. The Company's Revolver was adjusted to bear interest at LIBOR plus 2.75% (based on the Company's current leverage ratio) (the "Revolving Loan LIBOR Spread"), which represented a downward adjustment of 25 basis points on the Revolving Loan LIBOR Spread from the Fourth Amendment. We recognized debt extinguishment expense in November 2013 of $1.9 million related to the Fifth Amendment and incurred an additional $1.5 million in debt issuance costs. In connection with the Fifth Amendment, we did not incur a re-pricing premium. During the quarter ended December 31, 2013, we drew $45.0 million on our Revolver in connection with the acquisition of FiberLink and repaid the outstanding balance during the same period. The Revolver was undrawn as of March 31, 2014. In August 2012, we entered into interest rate swap agreements with an aggregate notional value of $750.0 million and a maturity date of June 30, 2017. The contracts state that we pay a 1.67% fixed rate of interest for the term of the agreement beginning June 30, 2013. The counterparties pay to us the greater of actual LIBOR or 1.25%. We entered into the swap arrangements to reduce the risk of increased interest costs associated with potential future increases in LIBOR rates. Substantial Capital Expenditures During the nine months ended March 31, 2014 and 2013, we invested $265.9 million and $221.3 million (net of stimulus grant reimbursements) respectively, in capital expenditures related to property and equipment primarily to expand our fiber network and largely in connection with new customer contracts. We expect to continue to make significant capital expenditures in future periods. Change in Reporting Segments With the continued increase in the Company's scope and scale and corresponding increase in SPGs, the Company implemented certain organizational changes to the management, operation and reporting of its SPGs effective January 1, 2014. The change in structure had the impact of aggregating the legacy SPGs into two new reportable segments: Physical Infrastructure and Lit Services. The Physical Infrastructure reporting segment is comprised of the following SPGs: Dark Fiber, MIG, and zColo. The Lit Services reporting segment is comprised of the following SPGs: Waves, SONET, Ethernet, and IP. All financial information presented herein has been recast for comparative purposes to reflect these new segments beginning July 1, 2011. Critical Accounting Policies and Estimates For a description of our critical accounting policies and estimates, see Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013. Background for Review of Our Results of Operations Operating Costs 37 -------------------------------------------------------------------------------- ZAYO GROUP, LLC AND SUBSIDIARIES Our operating costs consist primarily of colocation facility costs, colocation facility utilities costs and third-party network service costs. Our colocation facility costs include rent and license fees paid to the landlords of the buildings in which our zColo business operates along with the utility costs to power those facilities. Third-party network service costs result from our leasing of certain network facilities, primarily leases of circuits and dark fiber, from other local exchange carriers to augment our owned infrastructure for which we are generally billed a fixed monthly fee. While increases in demand will drive additional operating costs in our business, consistent with our strategy of leveraging our infrastructure assets, we expect to primarily utilize our existing network infrastructure and augment, when necessary, with additional circuits or services from third-party providers. Transport costs include the upfront cost of the initial installation of such circuits. We have excluded depreciation and amortization expense from our operating costs. Selling, General and Administrative Expenses Our selling, general and administrative ("SG&A") expenses include personnel costs (including compensation and benefits and stock-based compensation), costs associated with the operation of our network (network operations), and other related expenses, including sales commissions, marketing programs, office rent, professional fees, travel, software maintenance costs, costs incurred related to potential and closed acquisitions (i.e., transaction costs) and other expenses. We compensate certain members of our management and independent directors through grants of common units of CII, which vest over varying periods of time, depending on the terms of employment of each such member of management or director. In addition, certain of our senior executives and independent directors have been granted preferred units of CII. For the common units granted to members of management and directors, we recognize an expense equal to the fair value of all of those common units vested during the period, and record a liability in respect of that amount. Subsequently, we recognize changes in the fair value of those vested common units through increases or decreases in stock-based compensation expense and adjustments to the related stock-based compensation liability. When the preferred units are initially granted, we recognize no expense. We use the straight line method, over the vesting period, to amortize the fair value of those units, as determined on the date of grant. Subsequent changes in the fair value of the preferred units granted to those executive officers and directors are not taken into consideration as we recognize that expense. After compensation and benefits and stock-based compensation, network operations expenses are the largest component of our SG&A expenses. Network operations expenses include all of the non-personnel related expenses of maintaining our network infrastructure, including contracted maintenance fees, right-of-way costs, rent for locations where fiber is located (including cellular towers), pole attachment fees, and relocation expenses. 38 -------------------------------------------------------------------------------- ZAYO GROUP, LLC AND SUBSIDIARIESResults of Operations Three months ended March 31, Nine months ended March 31, 2014 2013 2014 2013 (amounts in thousands) Revenue Physical Infrastructure $ 125,708 45 % $ 107,956 43 % $ 361,691 44 % $ 305,708 42 % Lit Services 152,330 55 145,192 57 454,292 56 425,746 58 Intercompany eliminations - - - - - - (1,539 ) - Total revenue $ 278,038 100 % $ 253,148 100 % $ 815,983 100 % $ 729,915 100 % Operating costs and expenses Operating costs, excluding depreciation and amortization 35,358 13 35,130 14 105,267 13 102,735 14 Selling, general and administrative expenses, excluding stock-based compensation 77,734 28 70,419 28 230,005 28 229,238 31 Stock-based compensation 64,964 23 23,453 9 164,332 20 67,379 9 Selling, general and administrative expenses 142,698 51 93,872 37 394,337 48 296,617 41 Depreciation and amortization 83,392 30 79,473 31 245,223 30 242,489 33 Total operating costs and expenses 261,448 94 208,475 82 744,827 91 641,841 88 Operating income $ 16,590 6 % $ 44,673 18 % $ 71,156 9 % $ 88,074 12 % Other expenses Interest expense, net (49,131 ) (18 ) (49,618 ) (20 ) (150,905 ) (18 ) (164,808 ) (23 ) Loss on extinguishment of debt - - (6,571 ) (3 ) (1,911 ) - (77,253 ) (11 ) Other income, net 125 - (508 ) - 1,265 - 301 - Total other expenses, net (49,006 ) (18 ) (56,697 ) (22 ) (151,551 ) (19 ) (241,760 ) (33 ) Loss from continuing operations before income taxes (32,416 ) (12 ) (12,024 ) (5 ) (80,395 ) (10 ) (153,686 ) (21 ) Provision/(benefit) for income taxes 11,327 4 6,519 3 27,559 3 (33,507 ) (5 ) Loss from continuing operations (43,743 ) (16 ) (18,543 ) (7 ) (107,954 ) (13 ) (120,179 ) (16 ) Earnings from discontinued operations, net of income taxes - - - - - - 1,808 - Net loss $ (43,743 ) (16 )% $ (18,543 ) (7 )% $ (107,954 ) (13 )% $ (118,371 ) (16 )% Reconciliation to adjusted EBITDA: Earnings from discontinued operations, net of income taxes $ - $ - $ - $ (1,808 ) Depreciation and amortization 83,392 79,473 245,223 242,489 Interest expense 49,131 49,618 150,905 164,808 Loss on extinguishment of debt - 6,571 1,911 77,253 Provision/(benefit) for income taxes 11,327 6,519 27,559 (33,507 ) Foreign currency (gain)/loss on intercompany loans (95 ) 637 (944 ) (42 ) Stock-based compensation 64,964 23,453 164,332 67,379 Transaction costs 36 72 789 13,089 Adjusted EBITDA $ 165,012 59 % $ 147,800 58 % $ 481,821 59 % $ 411,290 56 % Selected cash flow data Net cash flows provided by operating activities $ 159,368 $ 73,309 $ 396,196 $ 258,717 Purchases of property and equipment, net of stimulus grants (90,923 ) (95,732 ) (265,872 ) (221,297 ) Acquisitions (17,597 ) 577 (101,009 ) (2,476,124 ) 39-------------------------------------------------------------------------------- ZAYO GROUP, LLC AND SUBSIDIARIES Other - 837 - 3,837 Net cash flows used in investing activities $ (108,520 ) $ (94,318 ) $ (366,881 ) $ (2,693,584 ) Net cash flows provided by/(used in) financing activities $ (2,975 ) $ (14,681 ) $ 131,918 $ 2,339,585 40-------------------------------------------------------------------------------- ZAYO GROUP, LLC AND SUBSIDIARIES Three Months Ended March 31, 2014 Compared to the Three Months Ended March 31, 2013 Revenue Our total revenue increased by $24.9 million, or 9.8%, from $253.1 million to $278.0 million for the three months ended March 31, 2013 and 2014, respectively. The increase in revenue was primarily a result of our Fiscal 2013 and Fiscal 2014 acquisitions and organic growth. The table below reflects the revenue recognized by each entity acquired during Fiscal 2013 and Fiscal 2014 during the quarterly period immediately preceding the respective acquisition date multiplied by four ("LQA revenue"). The table also reflects the Company's estimates of the allocation of those revenues, based upon the nature of the service, to each of our reportable segments. The amounts below include adjustments to the historical amounts recognized by the acquired company resulting from estimated purchase accounting adjustments. Physical Acquired Entity Acquisition Date Infrastructure Lit Services Total (in thousands) FiberGate August 31, 2012 $ 10,644 $ - $ 10,644 USCarrier October 1, 2012 1,761 14,527 16,288 First Telecom December 14, 2012 25,385 5,920 31,305 Litecast December 31, 2012 1,814 2,001 3,815 Core NAP May 31, 2013 5,259 - 5,259 Colocation Asset Purchase August 1, 2013 7,764 - 7,764 Access October 1, 2013 5,568 - 5,568 FiberLink October 2, 2013 6,004 - 6,004 CoreXchange March 4, 2014 7,978 - 7,978 Total $ 72,177 $ 22,448 $ 94,625 In addition to the acquisition related revenue growth during the period resulting from the aforementioned acquisitions was organic growth of approximately 9%. As a result of internal sales efforts since March 31, 2013, we have entered into $1,557.6 million in gross new sales contracts. Since March 31, 2013, we have received acceptance on gross installations that have resulted in incremental monthly revenue of $19 million as of March 31, 2014 as compared to March 31, 2013. This increase in revenue related to our organic growth is partially offset by total customer churn of $14.5 million in monthly revenue since March 31, 2013. Installations Churn Gross New Sales (additional (reduction to monthly Product Group (Contract Value) monthly revenue) revenue) Net Installations (in millions) Physical Infrastructure $ 1,155.6 $ 7.7 $ 4.2 $ 3.5 Lit Services 402.0 11.3 10.3 1.0 Total $ 1,557.6 $ 19.0 $ 14.5 $ 4.5 The following table reflects the stratification of our revenues during the three months ended March 31, 2014 and 2013: Three months ended March 31, 2014 2013 (in thousands) Monthly recurring revenue $ 257,807 93 % $ 239,723 95 % Amortization of deferred revenue 13,866 5 % 10,645 4 % Other revenue 6,365 2 % 2,780 1 % Total revenue $ 278,038 100 % $ 253,148 100 % Operating Costs Our operating costs, which exclude depreciation and amortization, increased by $0.2 million, or 0.6%, from $35.1 million to $35.4 million for the three months ended March 31, 2014 and 2013, respectively. The increase in operating costs 41 -------------------------------------------------------------------------------- ZAYO GROUP, LLC AND SUBSIDIARIES primarily relates to additional network costs incurred in order to support new customer contracts entered into subsequent to March 31, 2013 and additional costs associated with our Fiscal 2013 and Fiscal 2014 acquisitions. The 0.6% increase in operating costs occurred during the same period in which our revenues increased by 9.8%. The lower ratio of operating costs as compared to revenues is primarily a result of gross installed revenues having a lower component of associated operating costs than the prior period's installed revenue base due to a higher percentage of our newly installed revenue being supported by our owned infrastructure assets (i.e., on-net). The ratio also benefited from a higher percentage of acquired revenue being on-net and from network related synergies realized related to our Fiscal 2013 and Fiscal 2014 acquisitions. Selling, General and Administrative Expenses The table below sets forth the components of our selling, general and administrative ("SG&A") expenses during the three months ended March 31, 2014 and 2013. Three months ended March 31, 2014 2013 (in thousands) Compensation and benefits expenses $ 28,989 $ 26,872 Network operations expenses 31,821 29,788 Other SG&A expenses 16,888 13,687 Transaction costs 36 72 Stock-based compensation 64,964 23,453 Total SG&A expenses $ 142,698 $ 93,872 Compensation and Benefits Expenses. Compensation and benefits expenses decreased by $2.1 million, or 7.9%, from $26.9 million to $29.0 million for the three months ended March 31, 2014 and 2013, respectively. The decrease reflects a reduction in salaries and wages, benefits and payroll taxes and severance costs paid in connection with acquisition-related activity during the third quarter of Fiscal 2013, which was partially offset by an increase in headcount during the fourth quarter of Fiscal 2013 and the first three quarters of Fiscal 2014 to support our growing business, including certain employees retained from acquired businesses. At March 31, 2014, we had 1,392 full time employees compared to 1,063 full time employees at March 31, 2013. Network Operations Expenses. Network operations expenses increased by $2.0 million, or 6.8%, from $29.8 million to $31.8 million for the three months ended March 31, 2014 and 2013, respectively. The increase in such expenses principally reflects the growth of our network assets and the related expenses of operating that expanded network. Other SG&A. Other SG&A expenses, which includes expenses such as property tax, franchise fees, travel, office expense, and maintenance expense on colocation facilities, increased by $3.2 million, or 23.4%, from $13.7 million to $16.9 million for the three months ended March 31, 2013 and 2014, respectively. The increase is principally a result of additional expenses attributable to our Fiscal 2014 and Fiscal 2013 acquisitions. Transaction Costs. Transaction costs include expenses associated with professional services (i.e., legal, accounting, regulatory, etc.) rendered in connection with acquisitions, travel expense, severance expense incurred on the date of acquisition and other direct expenses incurred that are associated with potential and closed acquisitions. Stock-Based Compensation. Stock-based compensation expenses increased by $41.5 million, or 177.0%, from $23.5 million to $65.0 million during the three months ended March 31, 2013 and 2014, respectively. The stock-based compensation expense associated with the common units is impacted by both the estimated value of the common units and the number of common units that are granted and vest during the period. The following table reflects the estimated fair value of the common units during the relevant periods impacting the stock-based compensation expense for the three months ended March 31, 2014 and 2013. 42 -------------------------------------------------------------------------------- ZAYO GROUP, LLC AND SUBSIDIARIES Estimated fair value as of December 31, March 31, December 31, March 31, Common Units 2013 2014 2012 2013 (estimated value per unit) Class A $ 1.90 $ 2.17 $ 1.21 $ 1.32 Class B 1.69 1.93 1.06 1.16 Class C 1.45 1.65 0.89 0.96 Class D 1.40 1.60 0.86 0.93 Class E 1.20 1.38 0.73 0.78 Class F 1.07 1.22 0.64 0.68 Class G 0.56 0.65 0.33 0.31 Class H 0.47 0.53 n/a .24 Class I 0.28 0.31 n/a n/a Class J n/a 0.22 n/a n/a The increase in the estimated value of the common units in the current period is primarily a result of our organic growth since March 31, 2013 and synergies realized and expected to be realized from our Fiscal 2013 and Fiscal 2014 acquisitions. We recognize changes in the fair value of the common units through increases or decreases in stock-based compensation expense and adjustments to the related stock-based compensation liability. The stock-based compensation liability associated with the common units was $310.9 million and $158.5 million as of March 31, 2014 and June 30, 2013, respectively. The liability is impacted by changes in the estimated value of the common units, number of vested common units, and distributions made to holders of the common units. Depreciation and Amortization Depreciation and amortization expense increased by $3.9 million, or 4.9%, from $79.5 million to $83.4 million for the three months ended March 31, 2013 and 2014, respectively. The increase is primarily the result of depreciation related to capital expenditures since March 31, 2013 and acquisition-related growth from Fiscal 2013 and 2014 acquisitions. Total Other Expense, Net The table below sets forth the components of our total other expense, net for the three months ended March 31, 2014 and 2013, respectively. Three months ended March 31, 2014 2013 (in thousands) Interest expense $ (49,131 ) $ (49,618 ) Loss on extinguishment of debt - (6,571 ) Other income, net 125 (508 ) Total other expenses, net $ (49,006 ) $ (56,697 ) Interest Expense. Interest expense decreased by $0.5 million, or 1.0%, from $49.6 million to $49.1 million for the three months ended March 31, 2013 and 2014, respectively. The decrease in interest expense is primarily the result of the Company's amendment of its credit facilities during the second and third quarters of fiscal 2013 and second quarter of fiscal 2014 to lower the interest rates on these debt instruments, in addition to quarterly principal payments on our term loan facility reducing our outstanding debt obligations. The decrease was partially offset by additional interest expense related to a $150.0 million add-on to our term loan facility during the second quarter of Fiscal 2014. Loss on Extinguishment of Debt. In connection with the re-pricing on our term loan facility during the third quarter of Fiscal 2013, we recognized an expense in February 2013 of $6.6 million associated with debt extinguishment costs. The loss consisted of a cash expense of $1.8 million associated with the payment of an early call premium paid to certain creditors and other third party expenses and $4.8 million associated with the write-off of unamortized debt issuance costs and discounts. Other Income, net. Other income, net during the three months ended March 31, 2014 and 2013, respectively, primarily relates to an unrealized foreign currency gain/(loss) on an intercompany loan. Our domestic subsidiaries have an intercompany loan denominated in U.S. dollars with our U.K. foreign subsidiary. The intercompany loan balance is eliminated in consolidation; however, the weakening of the British pound over the U.S. dollar during the three months ended March 31, 2014 43 -------------------------------------------------------------------------------- ZAYO GROUP, LLC AND SUBSIDIARIES resulted in an unrealized foreign exchange gain of $0.1 million at our foreign subsidiary, and the strengthening of the British pound over the U.S. dollar during the three months ended March 31, 2013 resulted in an unrealized foreign exchange loss of $0.6 million at our foreign subsidiary. Provision for Income Taxes The Company recorded a provision for income taxes of $11.3 million and $6.5 million during the three months ended March 31, 2014 and 2013, respectively. Our provision for income taxes includes both the current provision and a provision for deferred income tax expense resulting from timing differences between tax and financial reporting accounting bases. We are unable to combine our net operating losses ("NOLs") for application to the income of our subsidiaries in some states and thus our state income tax expense is higher than the expected blended rate. In addition, as a result of our stock-based compensation and transaction costs not being deductible for income tax purposes, our effective tax rate is higher than the statutory rate. The Company's foreign operations have historically incurred operating losses, resulting in the inability to repatriate funds. In the event that the Company has future positive earnings in foreign jurisdictions and repatriates these funds, the Company would be required to accrue and pay the appropriate income tax in the U.S. It is the Company's intent that any current or future profits from foreign operations will be reinvested in property and equipment in those foreign jurisdictions. The following table reconciles an expected tax provision based on the statutory federal tax rate applied to our earnings before income taxes: Three months ended March 31, 2014 2013 (in thousands) Expected provision at statutory rate $ (11,241 ) $ (4,208 ) Increase due to: Non-deductible stock-based compensation 23,021 8,175 State income taxes (benefit)/provision, net of federal benefit (1,055 ) 423 Transactions costs not deductible for tax purposes 73 25 Foreign tax rate differential 1,063 (409 ) Provision to return adjustment (514 ) Other, net (20 ) 2,513 Provision for income taxes $ 11,327 $ 6,519 Nine Months Ended March 31, 2014 Compared to the Nine Months Ended March 31, 2013 Revenue Our total revenue increased by $86.1 million, or 11.8%, from $729.9 million to $816.0 million for the nine months ended March 31, 2013 and 2014, respectively. The increase in revenue was primarily a result of our Fiscal 2013 and Fiscal 2014 acquisitions and organic growth. See - Results of Operations - Three Months Ended March 31, 2014 Compared to the Three Months Ended March 31, 2013, for a summary of revenue acquired from our Fiscal 2013 and 2014 acquisitions and a discussion of organic growth since July 1, 2012. The following table reflects the stratification of our revenues during these periods: Nine months ended March 31, 2014 2013 (in thousands) Monthly recurring revenue $ 759,137 93 % $ 690,783 95 % Amortization of deferred revenue 39,205 5 % 30,162 4 % Other revenue 17,641 2 % 8,970 1 % Total revenue $ 815,983 100 % $ 729,915 100 % Operating Costs Our operating costs, which exclude depreciation and amortization, increased by $2.5 million, or 2.5%, from $102.7 million to $105.3 million for the nine months ended March 31, 2013 and 2014, respectively. The increase in operating costs primarily relates to additional network costs incurred in order to support new customer contracts entered into subsequent to March 31, 2013 and additional costs associated with our Fiscal 2013 and Fiscal 2014 acquisitions. The 2.5% increase in 44 -------------------------------------------------------------------------------- ZAYO GROUP, LLC AND SUBSIDIARIES operating costs occurred during the same period in which our revenues increased by 11.8%. The lower ratio of operating costs as compared to revenues is primarily a result of gross installed revenues having a lower component of associated operating costs than the prior period's installed revenue base due to a higher percentage of our newly installed revenue being supported by our owned infrastructure assets (i.e., on-net). The ratio also benefited from a higher percentage of acquired revenue being on-net and from network related synergies realized related to our Fiscal 2013 and Fiscal 2014 acquisitions. Selling, General and Administrative Expenses The table below sets forth the components of our selling, general and administrative ("SG&A") expenses during the nine months ended March 31, 2014 and 2013. Nine months ended March 31, 2014 2013 (in thousands) Compensation and benefits expenses $ 87,531 $ 91,342 Network operations expenses 96,508 83,018 Other SG&A expenses 45,178 41,789 Transaction costs 788 13,089 Stock-based compensation 164,332 67,379 Total SG&A expenses $ 394,337 $ 296,617 Compensation and Benefits Expenses. Compensation and benefits expenses decreased by $3.8 million, or 4.2%, from $91.3 million to $87.5 million for the nine months ended March 31, 2013 and 2014, respectively. The decrease reflects a decrease in salaries and wages, benefits and payroll taxes, and severance costs paid in connection with acquisition-related activity, which was partially offset by an increase in headcount during the fourth quarter of Fiscal 2013 and the first three quarters of Fiscal 2014 to support our growing business, including certain employees retained from acquired businesses. Network Operations Expenses. Network operations expenses increased by $13.5 million, or 16.2%, from $83.0 million to $96.5 million for the nine months ended March 31, 2013 and 2014, respectively. The increase in such expenses principally reflects the growth of our network assets and the related expenses of operating that expanded network. Other SG&A. Other SG&A expenses, which includes expenses such as property tax, franchise fees, travel, office expense, and maintenance expense on colocation facilities, increased by $3.4 million, or 8.1%, from $41.8 million to $45.2 million for the nine months ended March 31, 2013 and 2014, respectively. The increase is principally a result of additional expenses attributable to our Fiscal 2014 and Fiscal 2013 acquisitions, which was partially offset by the receipt of $3.8 million in connection with an escrow settlement reached for the 360networks acquisition during the second quarter of Fiscal 2014. Transaction Costs. Transaction costs include expenses associated with professional services (i.e., legal, accounting, regulatory, etc.) rendered in connection with acquisitions, travel expense, severance expense incurred on the date of acquisition and other direct expenses incurred that are associated with potential and closed acquisitions. Transaction costs decreased by $12.3 million from $13.1 million to $0.8 million for the nine months ended March 31, 2013 and 2014, respectively, due to an increased level of transaction-related costs associated with the AboveNet acquisition during the first quarter of Fiscal 2013. Stock-Based Compensation. Stock-based compensation expenses increased by $97.0 million, or 143.9%, from $67.4 million to $164.3 million during the nine months ended March 31, 2013 and 2014, respectively. The stock-based compensation expense associated with the common units is impacted by both the estimated value of the common units and the number of common units vesting during the period. The following table reflects the estimated fair value of the common units during the relevant periods impacting the stock-based compensation expense for the nine months ended March 31, 2014 and 2013. 45 -------------------------------------------------------------------------------- ZAYO GROUP, LLC AND SUBSIDIARIES Estimated fair value as of June 30, March 31, June 30, March 31, Common Units 2013 2014 2012 2013 (estimated value per unit) Class A $ 1.50 $ 2.17 $ 0.92 $ 1.32 Class B 1.34 1.93 0.81 1.16 Class C 1.14 1.65 0.68 0.96 Class D 1.10 1.60 0.65 0.93 Class E 0.95 1.38 0.55 0.78 Class F 0.75 1.22 0.49 0.68 Class G 0.46 0.65 n/a 0.31 Class H 0.38 0.53 n/a 0.24 Class I n/a 0.31 n/a n/a Class J n/a 0.22 n/a n/a The increase in the estimated value of the common units in the current period is primarily a result of our organic growth since March 31, 2013 and synergies realized and expected to be realized from our Fiscal 2013 and Fiscal 2014 acquisitions. Depreciation and Amortization Depreciation and amortization expense increased by $2.7 million, or 1.1%, from $242.5 million to $245.2 million for the nine months ended March 31, 2013 and 2014, respectively. The increase is primarily the result of depreciation related to capital expenditures since March 31, 2013 and acquisition-related growth. Total Other Expense, Net The table below sets forth the components of our total other expense, net for the nine months ended March 31, 2014 and 2013, respectively. Nine months ended March 31, 2014 2013 (in thousands) Interest expense $ (150,905 ) $ (164,808 ) Loss on extinguishment of debt (1,911 ) (77,253 ) Other income, net 1,265 301 Total other expenses, net $ (151,551 ) $ (241,760 ) Interest Expense. Interest expense decreased by $13.9 million, or 8.4%, from $164.8 million to $150.9 million for the nine months ended March 31, 2013 and 2014, respectively. The decrease in interest expense is primarily the result of the Company's amendment of its credit facilities during the second and third quarters of Fiscal 2013 to lower the interest rates on these debt instruments, in addition to quarterly principal payments on our term loan facility reducing our outstanding debt obligations. Also contributing to the decrease in interest expense was the impact of changes in market value of our interest rate swap during the nine months ended March 31, 2014 as compared to the 2013 period. We recorded additional interest expense of $1.9 million during the nine months ended March 31, 2014, as compared to additional $5.1 million of interest expense during the nine months ended March 31, 2013 to reflect the change in the fair value of our interest rate swaps, representing a change in interest expense of $3.2 million. The decrease was partially offset by additional interest expense related to the $150.0 million add-on to our term loan facility during the second quarter of Fiscal 2014. Loss on Extinguishment of Debt. In connection with the debt refinancing activities during the second quarter of Fiscal 2014, we recognized an expense of $1.9 million associated with debt extinguishment costs, including a cash expense of $0.9 million associated with the payment of third party costs and non-cash expenses of $1.0 million, consisting of $0.7 million associated with the write-off of unamortized debt issuance costs and $0.3 million associated with the write-off of the net unamortized discount on the extinguished debt balances. In connection with the debt refinancing activities during the first three quarters of Fiscal 2013, we recognized an expense of $77.3 million associated with debt extinguishment costs, including a cash expense of $43.1 million associated with the payment of early redemption fees and other third party expenses on our previous indebtedness and non-cash expenses, including $34.2 million associated with the write-off of unamortized debt issuance costs and unamortized discounts. 46 -------------------------------------------------------------------------------- ZAYO GROUP, LLC AND SUBSIDIARIES Other Income, net. Other income, net during the nine months ended March 31, 2014 primarily relates to an unrealized foreign currency gain/(loss) on an intercompany loan. Our domestic subsidiaries have an intercompany loan denominated in U.S. dollars with our U.K. foreign subsidiary. The intercompany loan balance is eliminated in consolidation; however, the weakening of the British pound over the U.S. dollar during the nine months ended March 31, 2014 resulted in an unrealized foreign exchange gain on the intercompany loan of $0.9 million at our foreign subsidiary. Provision for Income Taxes The Company recorded a provision for income taxes of $27.6 million during the nine months ended March 31, 2014 as compared to a benefit of $33.5 million during the nine months ended March 31, 2013. Our provision for income taxes includes both the current provision and a provision for deferred income tax expense resulting from timing differences between tax and financial reporting accounting bases. We are unable to combine our net operating losses ("NOLs") for application to the income of our subsidiaries in some states and thus our state income tax expense is higher than the expected blended rate. In addition, as a result of our stock-based compensation and transaction costs not being deductible for income tax purposes, our effective tax rate is higher than the statutory rate. The Company's foreign operations have historically incurred operating losses. In the event that the Company has future positive earnings in foreign jurisdictions and repatriates these funds, the Company would be required to accrue and pay the appropriate income tax in the U.S. It is the Company's intent that any current or future profits from foreign operations will be reinvested in property and equipment in those foreign jurisdictions. The following table reconciles an expected tax provision based on the statutory federal tax rate applied to our earnings before income taxes: Nine months ended March 31, 2014 2013 (in thousands) Expected benefit at statutory rate $ (27,963 ) $ (53,797 ) Increase/(decrease) due to: Non-deductible stock-based compensation 62,234 22,755 State income taxes (benefit), net of federal benefit (3,844 ) (4,911 ) Transactions costs not deductible for tax purposes 201 970 Foreign tax rate differential (62 ) (1,096 ) Provision to return adjustment (514 ) Release of accrual for uncertain tax position (2,600 ) - Other, net 107 2,572 Provision/(benefit) for income taxes $ 27,559 $ (33,507 ) Adjusted EBITDA We define Adjusted EBITDA as earnings/(loss) from continuing operations before interest, income taxes, depreciation and amortization ("EBITDA") adjusted to exclude transaction costs, stock-based compensation, and certain non-cash items. We use Adjusted EBITDA to evaluate operating performance, and this financial measure is among the primary measures used by management for planning and forecasting future periods. We believe that the presentation of Adjusted EBITDA is relevant and useful for investors because it allows investors to view results in a manner similar to the method used by management and facilitates comparison of our results with the results of other companies that have different financing and capital structures. We also monitor Adjusted EBITDA because we have debt covenants that restrict our borrowing capacity that are based on a leverage ratio, which utilizes a modified EBITDA, as defined in our Credit Agreement. The modified EBITDA is consistent with our definition of Adjusted EBITDA; however, it includes the pro forma Adjusted EBITDA of and expected synergies from the companies acquired by us during the quarter in which the debt compliance certification is due. The indentures governing our Notes limit any increase in our secured indebtedness (other than certain forms of secured indebtedness expressly permitted under the indentures) to a pro forma secured debt ratio of 4.5 times our previous quarter's annualized modified EBITDA and limit our incurrence of additional indebtedness to a total indebtedness ratio of 5.25 times our previous quarter's annualized modified EBITDA, which is consistent with the incurrence restrictions in the Credit Agreement governing our Term Loan Facility. Adjusted EBITDA results, along with other quantitative and qualitative information, are also utilized by management and our compensation committee for purposes of determining bonus payouts to employees. Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation from, or as a 47 -------------------------------------------------------------------------------- ZAYO GROUP, LLC AND SUBSIDIARIES substitute for, analysis of our results as reported under GAAP. For example, Adjusted EBITDA: • does not reflect capital expenditures, or future requirements for capital and major maintenance expenditures or contractual commitments; • does not reflect changes in, or cash requirements for, our working capital needs; • does not reflect the significant interest expense, or the cash requirements necessary to service the interest payments, on our debt; and • does not reflect cash required to pay income taxes. Our computation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies because all companies do not calculate Adjusted EBITDA in the same fashion. Reconciliations from net earnings/(loss) from continuing operations to Adjusted EBITDA and net cash provided by operating activities to Adjusted EBITDA are as follows: Reconciliation from net earnings/(loss) to Adjusted EBITDA Three months ended March 31, 2014 Physical Infrastructure Lit Services Corp./ elimination Zayo Group (in millions) Net earnings/(loss) $ (67.1 ) $ 34.6 $ (11.2 ) $ (43.7 ) Interest expense $ 29.8 $ 19.3 - 49.1 Provision for income taxes $ - $ - 11.3 11.3 Depreciation and amortization expense $ 51.1 $ 32.3 - 83.4 Transaction costs $ - $ - - - Stock-based compensation $ 68.5 $ (3.6 ) - 65.0 Foreign currency gain on intercompany loan $ - $ - (0.1 ) (0.1 ) Adjusted EBITDA $ 82.4 $ 82.6 $ - $ 165.0 Three months ended March 31, 2013 Physical Infrastructure Lit Services Corp./ elimination Zayo Group (in millions) Net earnings/(loss) $ (17.1 ) $ 5.7 $ (7.2 ) $ (18.5 ) Interest expense 29.2 20.4 - 49.6 Benefit for income taxes - - 6.5 6.5 Depreciation and amortization expense 47.3 32.2 - 79.5 Transaction costs - - - 0.1 Stock-based compensation 10.4 13.1 - 23.5 Loss on extinguishment of debt 3.8 2.7 - 6.6 Foreign currency loss on intercompany loan - - 0.6 0.6 Adjusted EBITDA $ 73.7 $ 74.1 $ - $ 147.8 Nine months ended March 31, 2014 Physical Infrastructure LitServices Corp./ elimination Zayo Group (in millions) Net earnings/(loss) $ (119.4 ) $ 38.0 $ (26.6 ) $ (108.0 ) Interest expense 90.2 60.7 - 150.9 Provision for income taxes - - 27.6 27.6 Depreciation and amortization expense 149.3 95.9 - 245.2 Transaction costs 0.6 0.1 - 0.8 Stock-based compensation 115.3 49.1 - 164.3 Loss on extinguishment of debt 1.1 0.8 - 1.9 Foreign currency gain on intercompany loan - - (0.9 ) (0.9 ) Adjusted EBITDA $ 237.1 $ 244.7 $ - $ 481.8 48-------------------------------------------------------------------------------- ZAYO GROUP, LLC AND SUBSIDIARIES Nine months ended March 31, 2013 Physical Infrastructure Lit Services Corp./ elimination Zayo Group (in millions) Net earnings/(loss) $ (108.8 ) $ (43.4 ) $ 33.8 $ (118.4 ) Earnings from discontinued operations, net of taxes - - (1.8 ) (1.8 ) Interest expense 96.8 68.0 - 164.8 Benefit for income taxes - - (33.5 ) (33.5 ) Depreciation and amortization expense 135.9 106.6 - 242.5 Transaction costs 6.7 6.4 - 13.1 Stock-based compensation 29.9 37.5 - 67.4 Loss on extinguishment of debt 45.1 32.2 - 77.3 Foreign currency (gain)/loss on intercompany loan - - - - Adjusted EBITDA $ 205.5 $ 207.3 $ (1.6 ) $ 411.3 Liquidity and Capital Resources Our primary sources of liquidity have been cash provided by operations, equity contributions, and borrowings. Our principal uses of cash have been for acquisitions, capital expenditures, and debt service requirements. See Item 2- "Management's Discussion and Analysis of Financial Condition and Results of Operations - Cash Flows," below. We anticipate that our principal uses of cash in the future will be for acquisitions, capital expenditures, working capital, and debt service. We have financial covenants under the indentures governing our Notes and our Credit Agreement that, under certain circumstances, restrict our ability to incur additional indebtedness. The indentures governing our Notes limit any increase in our secured indebtedness (other than certain forms of secured indebtedness expressly permitted under the Indentures) to a pro forma secured debt ratio of 4.5 times our previous quarter's annualized modified EBITDA and limit our incurrence of additional indebtedness to a total indebtedness ratio of 5.25 times our previous quarter's annualized modified EBITDA. Similarly, the Credit Agreement limits our incurrence of additional indebtedness to a total indebtedness ratio of 5.25 times our previous quarter's annualized modified EBITDA. The modified EBITDA, as defined in both the indentures and the Credit Agreement, is consistent with our definition of Adjusted EBITDA; however, it includes the pro forma effect of and expected synergies from our acquisitions consummated during the quarter for which the debt compliance certification is due. As of March 31, 2014, we had $249.8 million in cash and cash equivalents and a working capital surplus of $167.4 million. Cash and cash equivalents consist of amounts held in bank accounts and highly-liquid U.S. treasury money market funds. Additionally, as of March 31, 2014, we had $243.6 million available under our Revolver. Our capital expenditures, net of stimulus grants, increased by $44.6 million, or 20%, during the three months ended March 31, 2014, as compared to the three months ended March 31, 2013, from $221.3 million to $265.9 million, respectively. The increase in capital expenditures is a result of meeting the needs of our larger customer base resulting from our acquisitions and organic growth. We expect to continue to invest in our network for the foreseeable future. These capital expenditures, however, are expected to primarily be success-based; that is, in most situations, we will not invest the capital until we have an executed customer contract that supports the investment. As part of our corporate strategy, we continue to be regularly involved in discussions regarding potential acquisitions of companies and assets, some of which may be quite large. We expect to fund such acquisitions with cash from operations, debt (including available borrowings under our $250.0 million Revolver), equity contributions, and available cash on hand. Cash Flows We believe that our cash flow from operating activities, in addition to cash and cash equivalents currently on-hand, will be sufficient to fund our operating activities for the foreseeable future, and in any event for at least the next 12 to 18 months. Given the generally volatile global economic climate, no assurance can be given that this will be the case. The following table sets forth components of our cash flow for the nine months ended March 31, 2014 and 2013. Nine months ended March 31, 2014 2013 (in thousands) Net cash provided by operating activities 396,196 258,717 Net cash used in investing activities (366,881 ) (2,693,584 ) Net cash provided by financing activities 131,918 2,339,585 49 -------------------------------------------------------------------------------- ZAYO GROUP, LLC AND SUBSIDIARIES Net Cash Flows from Operating Activities Net cash flows from operating activities increased by $137.5 million, or 53%, from $258.7 million to $396.2 million during the nine months ended March 31, 2013 and 2014, respectively. Net cash flows from operating activities during the nine months ended March 31, 2014 represents the loss from continuing operations of $108.0 million, plus the add backs of non-cash items deducted in the determination of net loss, principally depreciation and amortization of $245.2 million, loss on extinguishment of debt of $1.9 million, stock-based compensation expense of $164.3 million, provision for bad debts of $1.6 million, additions to deferred revenue of $112.7 million, and non-cash interest expense of $14.9 million, less amortization of deferred revenue of $39.2 million and changes in the deferred tax provision of $27.4 million, minus the net change in working capital components. Net cash flows from operating activities during the nine months ended March 31, 2013 represents our net loss from continuing operations of $120.2 million, plus the add back to our net loss of non-cash items deducted in the determination of net loss, principally depreciation and amortization of $242.5 million, loss on extinguishment of debt of $77.3 million, non-cash interest expense of $18.6 million, additions to deferred revenue of $27.1 million, provision for bad debts of $1.7 million, the deferred tax provision of $32.2 million and non-cash stock-based compensation expense of $67.4 million, less amortization of deferred revenue of $30.2 million, plus the change in working capital components. The increase in net cash flows from operating activities during the nine months ended March 31, 2014 as compared to the nine months ended March 31, 2013 is primarily a result of additional earnings from synergies realized from our Fiscal 2013 and Fiscal 2014 acquisitions and organic growth. Cash Flows Used for Investing Activities We used cash in investing activities of $366.9 million and $2,693.6 million during the nine months ended March 31, 2014 and 2013, respectively. During the nine months ended March 31, 2014, our principal uses of cash for investing activities were $265.9 million in additions to property and equipment, $0.3 million for the colocation asset purchase, $40.1 million for the acquisition of Access, $43.1 million for the acquisition of FiberLink, and $17.5 million for the acquisition of CoreXchange. During the nine months ended March 31, 2013, our principal uses of cash for investing activities were $2,212.5 million for the acquisition of AboveNet, $118.3 million for the acquisition of FiberGate, $16.1 million for the acquisition of USCarrier, $109.7 million for the acquisition of First Telecom, $22.2 million for the acquisition of Litecast, and $221.3 million in additions to property and equipment, net of stimulus grant reimbursements. Partially offsetting the net cash used in investing activities during the nine months ended March 31, 2013 was purchase consideration of $2.7 million returned from our acquisition of MarquisNet and Arialink and proceeds of $3.8 million received from repayments on related party loans. Cash Flows from Financing Activities Our net cash used in financing activities was $131.9 million during the nine months ended March 31, 2014. Our net cash provided by financing activities was $2,339.6 million during the nine months ended March 31, 2013. Our cash flows from financing activities during the nine months ended March 31, 2014 are primarily comprised of $150.0 million from the proceeds of long-term borrowings and $4.6 million in equity contributions. This cash inflow was partially offset by $12.9 million principal payments on long-term debt, $6.9 million in principal repayments on capital lease obligations, $1.2 million in distributions to parent, and $1.7 million in payment of deferred debt issuance costs during the nine months ended March 31, 2014. Our cash flows from financing activities during the nine months ended March 31, 2013 are comprised of $3,188.0 million from the proceeds from long-term borrowings, $342.8 million in equity contributions, and a $22.7 million net change in restricted cash. This cash inflow was partially offset by $83.0 million in debt issuance costs, $1,050.5 million in principal repayments on long-term debt, $72.1 million in payments of early redemption fees on debt extinguished, $7.2 million cash contributed to ZPS, and $1.1 million in principal payments on capital leases during the period. Off-Balance Sheet Arrangements We do not have any special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support and we do not engage in leasing, hedging, or other similar activities that expose us to any significant liabilities that are not (i) reflected on the face of the consolidated financial statements, (ii) disclosed in Note 11 - Commitments and Contingencies to the consolidated financial statements, or in the Future Contractual Obligations table included in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended June 30, 2013 or (iii) discussed under "Item 3: Quantitative and Qualitative Disclosures About Market Risk" below. 50 -------------------------------------------------------------------------------- ZAYO GROUP, LLC AND SUBSIDIARIES |