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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Commission File Number 1-11965)
ICG COMMUNICATIONS, INC.
(Commission File Number 1-11052)
ICG HOLDINGS (CANADA), INC.
(Commission File Number 33-96540)
ICG HOLDINGS, INC.
(Exact names of Registrants as Specified in their Charters)
- -----------------------------------------------------------------------------------------------
Delaware 84-1342022
Canada Not Applicable
Colorado 84-1158866
(State or other jurisdiction of incorporation) (I.R.S. employer identification number)
- -----------------------------------------------------------------------------------------------
9605 East Maroon Circle Not applicable
Englewood, Colorado 80112
1710-1177 West Hastings Street c/o ICG Communications, Inc.
Vancouver, BC V6E 2L3 9605 East Maroon Circle
P.O. Box 6742
Englewood, Colorado 80155-6742
9605 East Maroon Circle Not applicable
Englewood, Colorado 80112
(Address of principal executive offices) (Address of U.S. agent for service)
- -----------------------------------------------------------------------------------------------
Registrants' telephone numbers, including area codes: (800) 650-5960 or (303) 572-5960
Indicate by check mark whether the Registrants (1) have 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
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
The number of Registrants' outstanding common shares as of November 3, 1997 were
33,483,670, 31,822,756 and 1,918, respectively. ICG Holdings (Canada), Inc.
owns all of the issued and outstanding shares of ICG Holdings, Inc.
TABLE OF CONTENTS
PART I..................................................................................................... 3
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS............................................................... 3
---------------------------------
Consolidated Balance Sheets as of December 31, 1996 and September 30, 1997 (unaudited).......... 3
Consolidated Statements of Operations (unaudited) for the Nine Months Ended
September 30, 1996 and 1997................................................................... 5
Consolidated Statement of Stockholders' Deficit (unaudited) for the Three and Nine Months
Ended September 30, 1997....................................................................... 6
Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended
September 30, 1996 and 1997.................................................................... 7
Notes to Consolidated Financial Statements (unaudited).......................................... 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS...................................................................... 17
-------------------------
PART II.................................................................................................... 28
ITEM 1. LEGAL PROCEEDINGS.............................................................................. 28
ITEM 2. CHANGES IN SECURITIES.......................................................................... 28
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................................................ 28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.......................................... 28
ITEM 5. OTHER INFORMATION.............................................................................. 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................................... 28
Exhibits....................................................................................... 28
Reports on Form 8-K............................................................................ 28
2
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997 (UNAUDITED)
December 31, September 30,
1996 1997
------------ -------------
ASSETS (in thousands)
- ------
Current assets:
Cash and cash equivalents $359,934 267,357
Short-term investments available for sale (note 3) 32,601 120,834
Receivables:
Trade, net of allowance of $2,515 and $4,258 at
December 31, 1996 and September 30, 1997,
respectively 41,131 41,343
Revenue earned, but unbilled 6,053 8,850
Other 1,440 1,219
-------- ---------
48,624 51,412
Inventory 2,845 5,181
Prepaid expenses and deposits 5,019 11,946
Notes receivable (note 5) 200 6,398
Restricted cash (note 3) - 6,695
-------- ---------
Total current assets 449,223 469,823
-------- ---------
Property and equipment 460,477 654,185
Less accumulated depreciation (56,545) (88,933)
-------- ---------
Net property and equipment 403,932 565,252
-------- ---------
Investments 5,170 5,170
Long-term notes receivable, net 623 407
Restricted cash (notes 3 and 5) 13,333 15,471
Other assets, net of accumulated amortization:
Goodwill 31,881 29,736
Deferred financing costs 21,963 23,822
Transmission and other licenses 8,526 8,271
Other 9,482 13,698
-------- ---------
71,852 75,527
-------- ---------
$944,133 1,131,650
======== =========
(Continued)
3
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
December 31, September 30,
1996 1997
------------ -------------
LIABILITIES AND STOCKHOLDERS' DEFICIT (in thousands)
- -------------------------------------
Current liabilities:
Accounts payable $24,813 27,933
Accrued liabilities 37,309 57,196
Current portion of long-term debt (note 3) 817 1,770
Current portion of capital lease obligations 24,683 6,089
-------- ---------
Total current liabilities 87,622 92,988
Long-term debt, net of discount, less current portion (note 3) 690,358 863,046
Capital lease obligations, less current portion 71,146 66,525
-------- ---------
Total liabilities 849,126 1,022,559
-------- ---------
Minority interests 1,967 -
Redeemable preferred securities of subsidiaries ($164.8 million
and $406.1 million liquidation value at December 31, 1996 and
September 30, 1997, respectively) (note 3) 159,120 393,618
Stockholders' deficit:
Common stock (note 4) 8,088 700
Additional paid-in capital 294,472 307,811
Accumulated deficit (368,640) (593,038)
-------- ---------
Total stockholders' deficit (66,080) (284,527)
-------- ---------
Commitments and contingencies (note 5) $944,133 1,131,650
======== =========
See accompanying notes to consolidated financial statements.
4
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
Three months ended Nine months ended
September 30, September 30,
----------------------------- ----------------------------
1996 1997 1996 1997
------------- ------------- ------------ -------------
(in thousands, except per share data)
Revenue:
Telecom services $32,162 43,664 74,168 123,187
Network services 15,746 16,432 44,398 50,059
Satellite services 5,197 7,640 15,129 22,306
-------- ------- ------- -------
Total revenue 53,105 67,736 133,695 195,552
-------- ------- ------- -------
Operating costs and expenses:
Operating costs 44,665 59,735 108,143 179,000
Selling, general and administrative expenses 21,397 39,700 58,097 111,943
Depreciation and amortization 8,952 13,667 25,449 37,624
Net loss on disposal of long-lived assets 2,233 1,177 4,098 1,035
Provision for impairment of long-lived assets 9,994 - 9,994 -
-------- ------- ------- -------
Total operating costs and expenses 87,241 114,279 205,781 329,602
Operating loss (34,136) (46,543) (72,086) (134,050)
Other income (expense):
Interest expense (23,342) (28,834) (70,499) (82,315)
Interest income 6,868 5,382 15,550 17,284
Other, net (3,729) 60 (3,884) (336)
-------- ------- ------- -------
(20,203) (23,392) (58,833) (65,367)
-------- ------- ------- -------
Loss before income taxes, minority interest
and share of losses (54,339) (69,935) (130,919) (199,417)
Income tax benefit 649 - 5,131 -
-------- ------- ------- -------
Loss before minority interest and shares
of losses (53,690) (69,935) (125,788) (199,417)
Minority interest in share of losses,
net of accretion and preferred
dividends on subsidiary preferred
securities (3,560) (10,112) (22,091) (24,981)
Share of losses of joint venture and investment (555) - (1,586) -
-------- ------- ------- -------
Net loss (57,805) (80,047) (149,465) (224,398)
======== ======= ======= =======
Loss per share (note 4) $ (1.91) (2.48) (5.42) (7.00)
======== ======= ======= =======
Weighted average number of shares outstanding 30,296 32,248 27,560 32,066
======== ======= ======= =======
See accompanying notes to consolidated financial statements.
5
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1997
Additional Total
Common stock paid-in Accumulated stockholders'
Shares Amount capital deficit deficit
----------- ------------- ------------ -------------- --------------
(in thousands)
BALANCES AT JANUARY 1, 1997 31,895 $8,088 294,472 (368,640) (66,080)
Shares issued for cash in
connection with the
exercise of common stock
options and warrants 290 3 2,826 - 2,829
Shares issued for cash in
connection with
the employee stock
purchase plan 89 1 950 - 951
Shares issued as contribution
to 401(k) plan 139 1 2,170 - 2,171
Exchange of Holdings-Canada
common shares for ICG
common stock - (7,393) 7,393 - -
Net loss - - - (224,398) (224,398)
------- ------ ------- ------- ------
BALANCES AT SEPTEMBER 30, 1997 32,413 700 307,811 (593,038) (284,527)
======= ====== ======= ======= =======
See accompanying notes to consolidated financial statements.
6
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
Nine months ended September 30,
----------------------------------
1996 1997
-------------- --------------
(in thousands)
Cash flows from operating activities:
Net loss $ (149,465) (224,398)
Adjustments to reconcile net loss to net cash
used by operating activities:
Share of losses of joint venture and investment 1,586 -
Minority interest in share of losses, net of
accretion and non-cash preferred
dividends on subsidiary preferred stock 22,091 24,981
Depreciation and amortization 25,449 37,624
Net loss on disposal of long-lived assets 4,098 1,035
Provision for impairment of long-lived assets 9,994 -
Compensation expense related to issuance of
common stock options 39 -
Interest expense deferred and included in
long-term debt 51,947 75,000
Amortization of deferred financing costs
included in interest expense 2,046 1,988
Write-off of deferred debt issuance costs
upon conversion or repayment of debt 2,650 -
Contribution to 401(k) plan through issuance
of common stock 751 2,171
Deferred income tax benefit (5,329) -
Increase in operating assets, excluding the
effects of business acquisitions and dispositions:
Receivables (9,551) (2,862)
Inventory (928) (2,367)
Prepaid expenses and deposits (2,516) (7,140)
Increase in operating liabilities, excluding the
effects of business acquisitions and dispositions:
Accounts payable and accrued liabilities 8,379 22,744
-------- --------
Net cash used by operating activities (38,759) (71,224)
-------- --------
Cash flows from investing activities:
(Increase) decrease in notes receivable 1,267 (6,329)
Advances to affiliates (94) -
Investments in and advances to joint venture (4,308) -
Payments for business acquisitions, net of cash acquired (8,441) -
Purchase of short-term investments (1,853) (88,233)
Increase in restricted cash - (8,833)
Acquisition of property, equipment and other assets (96,980) (204,154)
Proceeds from disposal of property, equipment and other assets 447 3,009
-------- --------
Net cash used by investing activities (109,962) (304,540)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock:
Exercise of common stock options and warrants 1,793 2,829
Employee stock purchase plan - 951
Proceeds from issuance of subsidiary preferred stock,
net of issuance costs 144,000 207,550
Repurchase of redeemable preferred stock of subsidiary
and payment of accrued dividend (32,629) -
Repurchase of redeemable warrants (2,671) -
Principal payments on short-term debt (17,500) -
Proceeds from issuance of long-term debt 300,034 99,908
Principal payments on long-term debt (3,159) (1,179)
Deferred long-term debt issuance costs (11,915) (3,554)
Principal payments on capital lease obligations (9,313) (23,318)
-------- --------
Net cash provided by financing activities 368,640 283,187
-------- --------
Net increase (decrease) in cash and cash equivalents 219,919 (92,577)
Cash and cash equivalents, beginning of period 231,163 359,934
-------- --------
Cash and cash equivalents, end of period 451,082 267,357
======== ========
(Continued)
7
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Nine months ended September 30,
-----------------------------------
1996 1997
-------------- -------------
(in thousands)
Supplemental disclosure of cash flow information:
Cash paid for interest $16,351 5,327
======= ======
Supplemental schedule of non-cash financing
and investing activities:
Common shares issued in connection with business
combinations and repayment of debt or conversion
of liabilities to equity $77,772 -
======= ======
Assets acquired under capital leases (note 5) $54,946 -
======= ======
See accompanying notes to consolidated financial statements.
8
ICG COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997 (UNAUDITED)
(1) NATURE OF BUSINESS AND REFERENCE TO OTHER REPORTS
ICG Communications, Inc. ("ICG"), a Delaware corporation, was
incorporated on April 11, 1996, for the purpose of becoming the new
publicly-traded U.S. parent company of ICG Holdings (Canada), Inc.
("Holdings-Canada"), a Canadian federal corporation (formerly known as
IntelCom Group Inc.), ICG Holdings, Inc. ("Holdings"), a Colorado
corporation (formerly known as IntelCom Group (U.S.A), Inc.), and its
subsidiaries (collectively, the "Company"). The Company's principal
business activity is telecommunications services, including Telecom
Services, Network Services and Satellite Services. Telecom Services
consists of the Company's competitive local exchange carrier operations
which provide services to long distance carriers and resellers, as well
as business end users. Network Services supplies information technology
services and selected networking products, focusing on network design,
installation, maintenance and support for a variety of end users,
including Fortune 1000 firms and other large businesses and
telecommunications companies. Satellite Services provides satellite
voice and data services to major cruise ship lines, the commercial
shipping industry, yachts, the U.S. Navy and offshore oil platforms.
The Company has been considering the disposition of its Satellite
Services operations for some time to better focus on its core Telecom
Services unit, although it has not approved or adopted a formal plan
for such disposition.
(a) REFERENCE TO ANNUAL AND TRANSITION REPORTS
These financial statements should be read in conjunction with the
Annual Report on Form 10-K for the year ended September 30, 1996 and
the Transition Report on Form 10-K for the three months ended December
31, 1996, as certain information and note disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the
rules and regulations of the United States Securities and Exchange
Commission. The interim financial statements reflect all adjustments
which are, in the opinion of management, necessary for a fair
presentation of financial position, results of operations and cash
flows as of and for the interim periods presented. Such adjustments are
of a normal recurring nature. Operating results for the nine months
ended September 30, 1997 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1997.
(b) RECLASSIFICATIONS
Certain 1996 amounts have been reclassified to conform with the 1997
presentation.
(2) BUSINESS COMBINATIONS
In October 1997, the Company purchased approximately 91% of the capital
stock of Communications Buying Group, Inc. ("CBG"), an Ohio based local
exchange and Centrex reseller. The remaining approximately 9% will be
purchased on or before March 24, 1998, pursuant to the terms of the
purchase agreement governing the CBG aquisition. The Company paid total
consideration of approximately $46.5 million, plus the assumption of
certain liabilities, and expects to pay approximately $2.9 million for the
purchase of the remaining approximately 9% interest. Separately, the
Company sold 687,221 shares of common stock for approximately $16.0 million
to certain shareholders of CBG. The Company will account for the
acquisition under the purchase method of accounting.
9
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(2) BUSINESS COMBINATIONS (CONTINUED)
In October 1997, the Company announced that it had signed an agreement and
plan of merger with NETCOM On-Line Communication Services, Inc.
("NETCOM"), a provider of Internet connectivity and Web-hosting services
located in San Jose, California. On the effective merger date, a
subsidiary of the Company will be merged with and into NETCOM and each
share of NETCOM will constitute the right to receive a designated number
of shares of ICG common stock. The Company expects to issue approximately
$283.5 million in common stock to complete the merger, based on the
closing price of ICG common stock on the date immediately preceding the
merger announcement. Subject to the approval of the shareholders of ICG
and NETCOM and the satisfaction of certain other conditions, the Company
anticipates the merger to close during the first quarter of 1998. The
Company will account for the business combination under the pooling-of-
interests method of accounting. In the event that ICG terminates or
prevents the merger, under certain circumstances, the Company would be
required to pay NETCOM a termination fee of approximately $11.3 million.
(3) LONG-TERM DEBT AND REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES
Long-term debt is summarized as follows (in thousands):
December 31, September 30,
1996 1997
------------ -------------
11 5/8% Senior discount notes, net of discount (a) $ - 106,361
12 1/2% Senior discount notes, net of discount 325,530 356,465
13 1/2% Senior discount notes, net of discount 355,955 393,567
Convertible subordinated notes 65 65
Note payable with interest at the 90-day commercial
paper rate plus 4 3/4% (approximately 10 1/4% at
September 30, 1997), due 2001, secured by certain
telecommunications equipment 5,815 5,152
Note payable with interest at 11%, due monthly
through fiscal 1999, secured by equipment 2,625 2,060
Mortgage payable with interest at 8 1/2%, due
monthly through 2009, secured by building 1,177 1,142
Other 8 4
-------- --------
691,175 864,816
Less current portion (817) (1,770)
-------- --------
$690,358 863,046
======== ========
Redeemable preferred securities of subsidiaries is summarized as follows (in
thousands):
December 31, September 30,
1996 1997
---------------- -----------------
6 3/4% Exchangeable preferred securities mandatorily
redeemable 2009 (b) $ - 111,701
14% Exchangeable preferred stock mandatorily
redeemable 2008 (a) - 104,152
14 1/4% Exchangeable preferred stock mandatorily
redeemable 2007 159,120 177,765
---------- ---------
$ 159,120 393,618
========== =========
10
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) LONG-TERM DEBT AND REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES
(CONTINUED)
(a) PRIVATE PLACEMENT OF 11 5/8% NOTES AND 14% PREFERRED STOCK
On March 11, 1997, Holdings completed a private placement of 11 5/8%
Senior Discount Notes due 2007 (the "11 5/8% Notes") and 14%
Exchangeable Preferred Stock Mandatorily Redeemable 2008 (the "14%
Preferred Stock") for gross proceeds of $99.9 million and $100.0
million, respectively. Net proceeds from the private placement, after
costs of approximately $7.5 million, were approximately $192.4 million.
The 11 5/8% Notes are unsecured senior obligations of Holdings
(guaranteed by ICG) that mature on March 15, 2007, at a maturity value
of $176.0 million. Interest will accrue at 11 5/8% per annum beginning
March 15, 2002, and is payable each March 15 and September 15,
commencing September 15, 2002. The 11 5/8% Notes were originally
recorded at approximately $99.9 million. The discount on the 11 5/8%
Notes and the debt issuance costs are being accreted over ten years
until maturity at March 15, 2007.
The accretion of the discount and debt issuance costs is included in
interest expense in the accompanying consolidated financial statements.
The indenture for the 11 5/8% Notes contains certain covenants which
provide for limitations on indebtedness, dividends, asset sales and
certain other transactions and effectively prohibits the payment of
interest and dividends.
The 14% Preferred Stock consists of 100,000 shares of exchangeable
preferred stock of Holdings that bear a cumulative dividend at the rate
of 14% per annum. The dividend is payable quarterly in arrears each
March 15, June 15, September 15, and December 15, commencing June 15,
1997. Through March 15, 2002, the dividend is payable at the option of
Holdings in cash or additional shares of 14% Preferred Stock. Holdings
may exchange the 14% Preferred Stock into 14% Senior Subordinated
Exchange Debentures at any time after the exchange is permitted by
certain indenture restrictions. The 14% Preferred Stock is subject to
mandatory redemption on March 15, 2008.
(b) PRIVATE PLACEMENT OF 6 3/4% PREFERRED SECURITIES
On September 24, 1997, a new subsidiary of the Company, ICG Funding, LLC
("Funding") completed a private placement of 6 3/4% Exchangeable Limited
Liability Company Preferred Securities Mandatorily Redeemable 2009 (the
"6 3/4% Preferred Securities") for gross proceeds of $115.0 million.
Net proceeds from the private placement, after underwriting costs, were
approximately $111.6 million. Included in restricted cash at September
30, 1997 is $22.2 million of proceeds which are designated for the
payment of cash dividends on the 6 3/4% Preferred Securities through
November 15, 2000. The remaining proceeds have been invested in
government securities and are included in short-term investments
available for sale at September 30, 1997.
The 6 3/4% Preferred Securities consist of 2,300,000 exchangeable
preferred securities of Funding that bear a cumulative dividend at the
rate of 6 3/4% per annum. The dividend is paid quarterly in arrears
each February 15, May 15, August 15 and November 15, commencing November
15, 1997. The dividend is payable in cash through November 15, 2000,
and in cash or shares of ICG common stock, at the option of Funding,
thereafter. The 6 3/4% Preferred Securities are exchangeable, at the
option of the holder, at any time prior to November 15, 2009 into shares
of ICG common stock at a rate of 2.0812 shares of ICG common stock per
preferred security, or $24.025 per share. Funding may, at its option,
redeem the 6 3/4% Preferred Securities at any time on or after November
18, 2000. Prior to that time, Funding may redeem the 6 3/4% Preferred
Securities if the current market value of ICG common stock equals or
exceeds the exchange price, for at least 20 days of any 30-day trading
period, by 170% prior to November 16, 1998; 160% from November 16, 1998
through November 15, 1999; and 150% from
11
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) LONG-TERM DEBT AND REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES
(CONTINUED)
November 16, 1999 through November 15, 2000. The 6 3/4% Preferred
Securities are subject to mandatory redemption on November 15, 2009.
On October 3, 1997, the securities underwriter exercised its
option to purchase an additional 15% of 6 3/4% Preferred Securities. Net
proceeds to the Company, after underwriting costs, were approximately
$16.7 million.
(4) STOCKHOLDERS' DEFICIT
(a) COMMON STOCK
Common stock outstanding at September 30, 1997 represents the issued
and outstanding common stock of ICG and Class A common shares of
Holdings-Canada (not owned by ICG) which are exchangeable at any time,
on a one-for-one basis, for ICG common stock. The following table sets
forth the number of common shares outstanding for ICG and Holdings-
Canada on a separate company basis as of September 30, 1997:
Shares Shares
owned not owned
by ICG by ICG
---------------- -----------
ICG common stock, $.01 par value, 100,000,000 shares
authorized; 32,381,310 shares issued and outstanding
at September 30, 1997 - 32,381,310
Holdings-Canada Class A common shares, no par value,
100,000,000 shares authorized; 31,822,756 shares
issued and outstanding at September 30, 1997:
Class A common shares, exchangeable on a one-for-one
basis for ICG common stock at any time - 31,700
Class A common shares owned by ICG 31,791,056 -
----------
Total shares outstanding 32,413,010
==========
(b) LOSS PER SHARE
Loss per share is calculated by dividing the net loss by the weighted
average number of shares outstanding. Weighted average number of shares
outstanding represents Holdings-Canada common shares outstanding for the
period from January 1, 1996 through August 2, 1996 and ICG Common Stock
and Holdings-Canada Class A common shares (not owned by ICG) outstanding
for the periods subsequent to August 5, 1996. Common stock equivalents,
which include options, warrants, convertible subordinated notes and
exchangeable preferred securities, are not included in the loss per
share calculation as their effect is anti-dilutive.
(5) COMMITMENTS AND CONTINGENCIES
(a) NETWORK CONSTRUCTION
In March 1996, the Company and Southern California Edison Company
("SCE") jointly entered into a 25-year agreement under which the Company
will license 1,258 miles of fiber optic cable in Southern California,
and can install up to 500 additional miles of fiber optic cable. This
network, which
12
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(5) COMMITMENTS AND CONTINGENCIES (CONTINUED)
will be maintained and operated primarily by the Company, stretches from
Los Angeles to southern Orange County. Under the terms of this
agreement, SCE is entitled to receive an annual fee for ten years,
certain fixed quarterly payments, a quarterly payment equal to a
percentage of certain network revenue, and certain other installation and
fiber connection fees. The aggregate fixed payments remaining under the
agreement totaled approximately $145.1 million at September 30, 1997.
The agreement has been accounted for as a capital lease in the
accompanying consolidated balance sheets.
In March 1996, the Company entered into a long-term agreement with a
subsidiary of The Southern Company ("Southern") and Alabama Power
Company ("Alabama Power") for the right to use 22 miles of existing
fiber and 122 miles of additional Alabama Power rights of way and
facilities to reach the three major business centers in Birmingham.
Southern will, in conjunction with the Company, construct the network
and provide maintenance services with respect to the fiber installed.
Southern also will provide consulting services to the Company relating
to the build-out of the network and potential enhancements to the
Company's products and services. Under the agreement, the Company is
required to pay Southern a quarterly fee based on specified percentages
of the Company's revenue for services provided through this network.
The Company's estimated costs to complete the network are approximately
$0.3 million. Network construction is expected to be completed in the
fourth quarter of 1997.
In May 1997, the Company entered into a second long-term agreement with
Southern that will permit the Company to construct a 100-mile fiber optic
network in the Atlanta metropolitan area. The Company paid $5.5 million
upon execution of the agreement and is responsible for reimbursement to
Southern for costs of network design, construction, installation,
maintenance and repair. Additionally, the Company is also required to pay
Southern a quarterly fee based on specified percentages of the Company's
revenue derived from services provided over this network. Network
construction on the initial build is expected to be completed in the
first half of 1998. The Company estimates costs to complete the network
to be approximately $9.0 million.
In January 1997, the Company announced a strategic alliance with Central
and Southwest Corporation ("CSW"), named CSW/ICG ChoiceCom, L.P., which
is expected to develop and market telecommunications services in certain
cities in Texas. CSW holds 100% of the partnership interest in ChoiceCom
and the Company has an option to purchase a 50% interest at any time
prior to July 1, 2003. Subsequent to July 1, 1999, if the Company has not
exercised its option, CSW will have the right to sell 51% or 100% of the
partnership interest in ChoiceCom to the Company. The price that the
Company would pay for an ownership interest in ChoiceCom would be
calculated pursuant to a formula set forth in the strategic alliance
documents. Additionally, the Company has committed to loan $15.0 million
to ChoiceCom over the near term, of which the Company has advanced
approximately $6.4 million as of September 30, 1997.
In June 1997, the Company entered into an indefeasible right of use
("IRU") agreement with Qwest Communications Corporation ("Qwest") for
approximately 1,800 miles of fiber optic network and additional broadband
capacity in California, Colorado, Ohio and the Southeast. Network
construction is ongoing and is expected to be completed by December 1998.
The Company is responsible for payment on the construction as segments of
the network are completed and has incurred approximately $4.4 million as
of September 30, 1997, with total costs anticipated to be approximately
$45.0 million. Additionally, the Company has committed to purchase $6.0
million in network capacity from Qwest prior to the end of 1998.
In November 1995, the Company signed an agreement with City Public
Service of San Antonio ("CPS") to license excess fiber optic facilities
on a new 300-mile fiber network being built by the municipally
13
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(5) COMMITMENTS AND CONTINGENCIES (CONTINUED)
owned electric and gas utility to provide for its communications
needs in the greater metropolitan area. Pursuant to this agreement,
the Company provided a $12.0 million irrevocable letter of credit,
secured by cash collateral, for the Company's portion of the
construction costs. In August 1997, the Company and CPS signed an
agreement to cancel all terms of the November 1995 contract and all
cash collateral was refunded to the Company. All legal proceedings
associated with this agreement have been withdrawn as a result of the
agreement to cancel the November 1995 contract.
(b) COMPANY HEADQUARTERS
The Company has acquired property for its new headquarters and has
commenced construction of an office building that the Company expects
will accommodate most of the Company's Colorado operations. The total
cost of the project is expected to be approximately $44.0 million, of
which $16.6 million has been incurred as of September 30, 1997 and is
included in construction in progress. The Company has signed a letter
of intent to sell the completed building to a third party and lease
back the office space under a long-term operating lease. A final
agreement is expected to be reached in the near future. The Company
anticipates that the building will be completed near the end of 1997.
(c) PURCHASE AND OTHER COMMITMENTS
The Company is obligated to purchase, at fair market value, all of the
shares of Maritime Telecommunications Network, Inc. ("MTN"), a 64%
owned subsidiary of the Company, that are owned by the minority
shareholders, upon demand of the minority shareholders, if a
transaction has not been effected which converts the minority shares
into publicly traded securities or cash by January 3, 1998.
The Company has entered into various equipment purchase agreements
with certain of its vendors. Under these agreements, if the Company
does not meet a minimum purchase level in any given year, the vendor
may discontinue for that year certain discounts, allowances and
incentives otherwise provided to the Company. In addition, the
agreements may be terminated by either the Company or the vendor upon
prior written notice. Additionally, the Company has entered into
certain commitments to purchase capital assets with an aggregate
purchase price of approximately $15.5 million at September 30, 1997.
(d) LITIGATION
On April 4, 1997, certain shareholders of the Company's majority owned
subsidiary, Zycom Corporation ("Zycom"), an Alberta, Canada
corporation, filed a shareholder derivative suit and class action
complaint for unspecified damages, purportedly on behalf of all of the
minority shareholders of Zycom, in the District Court of Harris
County, Texas (Cause No. 97-17777) against the Company, Zycom and
certain of their subsidiaries. This complaint alleges that the
Company and certain of its subsidiaries breached certain duties owed
to the plaintiffs. The Company is vigorously defending the claims.
While it is not possible to predict the outcome of this litigation,
management believes these proceedings will not have a material adverse
effect on the Company's financial condition, results of operations or
cash flows.
The Company is a party to certain other litigation which has arisen in
the ordinary course of business. In the opinion of management, the
ultimate resolution of these matters will not have a significant
effect on the Company's financial condition, results of operations or
cash flows.
14
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(6) SUMMARIZED FINANCIAL INFORMATION OF ICG HOLDINGS, INC.
The 11 5/8% Notes issued by Holdings during 1997 are guaranteed by ICG.
The 12 1/2% Senior Discount Notes (the "12 1/2% Notes") and the 13 1/2%
Senior Discount Notes (the "13 1/2% Notes") (collectively with the 11 5/8%
Notes, the "Senior Notes") issued by Holdings during 1996 and 1995,
respectively, are guaranteed by ICG and Holdings-Canada.
The separate complete financial statements of Holdings have not been
included herein because such disclosure is not considered to be material to
the holders of the Senior Notes. However, summarized combined financial
information for Holdings and subsidiaries and affiliates is as follows (in
thousands):
Condensed Balance Sheet Information
December 31, 1996 September 30, 1997
-------------------------- -----------------------
Current assets $449,059 354,866
Property and equipment, net 403,932 565,252
Due from affiliate - 3,450
Other non-current assets, net 88,183 93,718
Current liabilities 87,423 92,595
Long-term debt, less current portion 690,293 862,981
Due to parent 11,485 17,532
Other long-term liabilities 73,113 66,525
Preferred stock 159,120 281,917
Stockholder's deficit (80,260) (304,264)
Condensed Statement of Operations Information
Three months ended September 30, Nine months ended September 30,
------------------------------------------- ------------------------------------
1996 1997 1996 1997
------------------- ------------------ --------------- ---------------
Total revenue $ 53,105 67,736 133,695 195,552
Total operating costs and expenses 86,527 114,270 202,705 1,035
Operating loss (33,442) (46,532) (69,010) (133,808)
Net loss (57,091) (79,884) (146,389) (224,003)
(7) CONDENSED FINANCIAL INFORMATION OF ICG HOLDINGS (CANADA), INC.
Condensed financial information for Holdings-Canada only is as follows (in
thousands):
Condensed Balance Sheet Information
December 31, 1996 September 30, 1997
-------------------------- ----------------------
Current assets $ 165 162
Advances to subsidiaries 11,485 17,532
Other non-current assets, net 2,793 2,651
Current liabilities 199 732
Long-term debt, less current portion 65 65
15
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(7) CONDENSED FINANCIAL INFORMATION OF ICG HOLDINGS (CANADA), INC. (CONTINUED)
Condensed Balance Sheet Information (continued)
December 31, 1996 September 30, 1997
-------------------------- ----------------------
Due to parent 1,566 7,090
Losses in excess of investment in subsidiary 80,260 304,264
Shareholders' deficit (67,647) (291,797)
Condensed Statement of Operations Information
Three months ended September 30, Nine months ended September 30,
------------------------------------------ --------------------------------------
1996 1997 1996 1997
------------------ ------------------- ------------------- -------------
Total revenue $ - - - -
Total operating costs and expenses 714 47 3,076 147
Operating loss (714) (47) (3,076) (147)
Share of losses of subsidiary (57,091) (79,884) (146,389) (224,003)
Net loss attributable to common
shareholders (57,805) (79,931) (149,465) (224,150)
(8) CONDENSED FINANCIAL INFORMATION OF ICG COMMUNICATIONS, INC. (PARENT
COMPANY)
The sole assets of ICG are its investments in Holdings-Canada and Funding.
Certain corporate expenses of the parent company are included in ICG's
statement of operations and were zero and approximately $0.1 million for
the three months and nine months ended September 30, 1997, respectively.
ICG has no operations other than those of Holdings-Canada and its
subsidiaries.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
The following discussion includes certain forward-looking statements which
are affected by important factors including, but not limited to, dependence on
increased traffic on the Company's facilities, the successful implementation of
the Company's strategy of offering an integrated telecommunications package of
local, long distance, data and value added services, continued development of
the Company's network infrastructure and actions of competitors and regulatory
authorities that could cause actual results to differ materially from the
forward-looking statements. The results for the three months and nine months
ended September 30, 1996 and 1997 have been derived from the Company's unaudited
Consolidated Financial Statements included elsewhere herein. The Company
changed its fiscal year end to December 31 from September 30, effective January
1, 1997. All dollar amounts are in U.S. dollars.
COMPANY OVERVIEW
The Company provides Telecom Services, Network Services and Satellite
Services. Telecom Services consist primarily of the Company's competitive local
exchange carrier ("CLEC") operations. CLECs seek to provide an alternative to
the incumbent local exchange carriers ("ILECs") for a full range of
telecommunications services. The Company is one of the largest providers of
competitive local telephone services in the United States, based on estimates of
the industry's 1996 revenue. As a CLEC, the Company operates networks in four
regional clusters covering major metropolitan statistical areas in California,
Colorado, Ohio and the Southeast. Network Services consist of information
technology services and selected networking products, focusing on network
design, installation, maintenance and support. Satellite Services consist of
maritime and international satellite transmission services and provide private
data networks utilizing VSATs. The Company has been considering the disposition
of its Satellite Services operations for some time to better focus its efforts
on its core Telecom Services unit, although it has not approved or adopted a
formal plan for such disposition. As a leading participant in the rapidly
growing competitive local telecommunications industry, the Company has
experienced significant growth, with total revenue increasing from $59.1 million
for fiscal 1994 to $252.5 million for the 12-month period ended September 30,
1997. The Company's rapid growth is the result of the initial installation,
acquisition and subsequent expansion of its fiber optic networks and the
expansion of its communication service offerings.
Prior to fiscal 1996, the majority of the Company's revenue had been
derived from Network Services. However, the Company's Network Services revenue
(as well as Satellite Service revenue) will continue to represent a diminishing
percentage of the Company's consolidated revenue as the Company continues to
emphasize its core Telecom Services. In March 1996, the Company completed the
sale of four of its teleports which were used in the Company's Satellite
Services operations.
The Telecommunications Act and procompetitive state regulatory
initiatives have substantially changed the telecommunications regulatory
environment in the United States. Due to these regulatory changes, the Company
is now permitted to offer all interstate and intrastate telephone services,
including competitive local dial tone. The Company is marketing and selling
competitive local dial tone services in major metropolitan areas in the
following regions: California, which began service in late January 1997,
followed by Ohio in February 1997, Colorado in March 1997 and the Southeast in
May 1997. During the nine months ended September 30, 1997, the Company sold
approximately 92,000 local access lines, of which approximately 51,000 were in
service at that date. In addition, the Company's operating networks have grown
from 323 fiber route miles at the end of fiscal 1994 to 3,021 fiber route miles
at September 30, 1997. The Company has 18 operating high capacity digital voice
switches and 15 data communications switches, and plans to install additional
switches as demand warrants. As a complement to its local exchange services,
the Company has begun marketing bundled service offerings which include long
distance, enhanced telecommunications services and data services. To facilitate
the expansion of its services, the Company has entered into agreements with
Lucent Technologies, Inc., Northern Telecom, Inc. and Cascade Communications,
Inc. to purchase a full range of switching systems, fiber optic cable, network
electronics, software and services.
The Company will continue to expand its network through construction,
leased facilities, strategic joint ventures and potentially through
acquisitions. For example, in October 1997, the Company announced that it had
signed an agreement and plan of merger with NETCOM, located in San Jose,
California. NETCOM is a provider of Internet connectivity and Web-hosting
services and a suite of software applications. For calendar years 1995, 1996 and
the nine months ended September 30, 1997, NETCOM reported revenue of $52.4
17
million, $120.5 million and $120.1 million, respectively, and EBITDA of $(5.8)
million, $(5.1) million and $(2.4) million, respectively. The Company intends to
account for the business combination under the pooling-of-interests method of
accounting and thus, upon the closing of the merger, the Company's financial
statements will be restated to reflect the operations of NETCOM and the Company
on a combined basis for all historical periods. Subject to the approval of the
shareholders of ICG and NETCOM and satisfaction of certain other conditions, the
Company anticipates the merger to close during the first quarter of 1998. Also
in October 1997, the Company purchased approximately 91% of the capital stock of
CBG, an Ohio based local exchange and Centrex reseller. CBG has approximately
27,000 Centrex lines in service and over 30,000 business lines in service,
principally pursuant to various resale and other agreements with Ameritech, the
ILEC in the markets it serves. Further, for the calendar years 1995 and 1996 and
the nine months ended September 30, 1997, CBG's revenue was approximately $15.4
million, $21.4 million and $24.1 million, respectively, and EBITDA losses were
approximately $(1.3) million, $(1.0) million and $(1.3) million, respectively.
Pursuant to the terms of the purchase agreement governing the acquisition of
CBG, the Company will purchase the remaining 9% interest in CBG on or before
March 24, 1998. The Company previously announced an agreement with a subsidiary
of Southern that will permit the Company to construct a 100-mile fiber optic
network in the Atlanta metropolitan area. In addition, the Company is expanding
its geographic focus to include Texas (and may also expand to Arkansas,
Louisiana and Oklahoma) through its strategic alliance with CSW that will
develop and market telecommunications services, including local service, in
these markets. In June 1997, the Company entered into an IRU agreement with
Qwest for approximately 1,800 miles of fiber optic network and additional
broadband capacity in California, Colorado, Ohio and the Southeast. The Company
expects this new capacity will be used for the transmission of local, long
distance and communications services in and between the Company's markets.
Telecom Services revenue has increased from $14.9 million for fiscal 1994
to $158.0 million for the 12-month period ended September 30, 1997. The Company
has experienced declining prices and increasing price competition for access
services which, to date, have been more than offset by increasing network usage.
The Company expects to continue to experience declining prices and increasing
price competition for the foreseeable future.
In conjunction with the increase in its service offerings, the Company will
need to spend significant amounts on sales, marketing, customer service,
engineering and support personnel prior to the generation of appreciable
revenue. This will have an adverse effect on operating margins until such time
as sufficient volumes of customers' telecommunications traffic are attained. As
the Company's customer base grows, the Company anticipates that operating
margins will improve as incremental revenue will exceed incremental operating
expenses. The preceding forward-looking statement is dependent upon the
successful implementation of the Company's local dial tone, data and long
distance services strategy, continued development of the Company's network
infrastructure, increased traffic on the Company's facilities, any or all of
which may not occur, and upon actions of competitors and regulatory authorities.
Currently, the Company is experiencing negative operating margins from its
switched services while its networks are in the development and construction
phases and while the Company relies on ILEC networks to carry a significant
portion of its customers' switched traffic. The Company expects overall
operating margins from switched services to improve as local dial tone, local
toll, long distance and data communications services become a relatively larger
portion of its business mix and the Company de-emphasizes its wholesale switched
services. In addition, the Company believes that the unbundling of ILEC services
and the implementation of local telephone number portability, which are mandated
by the Telecommunications Act, will reduce the Company's costs of providing
switched services and facilitate the marketing of local and other services.
The Company believes that the provisions of the Telecommunications Act,
including the opening of the local telephone services market to competition,
will facilitate the Company's plan to provide a full array of local, long
distance and data communications services. In order to fully implement its
strategy, the Company must make significant capital expenditures to provide
additional switching capacity, network infrastructure and electronic components.
The Company must also make significant investments and expenditures to develop,
train and manage its marketing and sales personnel. The Company has limited
experience providing such services and there can be no assurance that the
Company will be successful.
The continued development, construction and expansion of the Company's
business requires significant capital, a large portion of which is expended
before related revenue is generated. The Company has experienced, and expects to
continue to experience, negative cash flow and significant losses while it
expands its operations to provide a wide range of telecommunications services
and establishes a sufficient revenue-generating customer base. There can be no
assurance that the Company will be able to establish or retain such a customer
base.
18
RESULTS OF OPERATIONS
The following table provides a breakdown of revenue and operating costs for
Telecom Services, Network Services and Satellite Services, and certain other
financial data for the Company for the periods indicated. The table also shows
certain revenue, expenses, operating loss and EBITDA as a percentage of the
Company's total revenue.
Three months ended September 30, Nine months ended September 30,
------------------------------------------- -----------------------------------------
1996 1997 1996 1997
------------------- -------------------- --------------------- ------------------
$ % $ % $ % $ %
(unaudited)
STATEMENT OF OPERATIONS DATA: (in thousands)
Revenue:
Telecom services 32,162 60 43,664 65 74,168 56 123,187 63
Network services 15,746 30 16,432 24 44,398 33 50,059 26
Satellite services 5,197 10 7,640 11 15,129 11 22,306 11
------ --- ------ --- ------- --- ------- ---
Total revenue 53,105 100 67,736 100 133,695 100 195,552 100
Operating costs:
Telecom services 29,306 55 42,348 63 66,823 50 126,242 65
Network services 12,631 24 13,151 19 34,258 25 40,569 21
Satellite services 2,728 5 4,236 6 7,062 5 12,189 6
------ --- ------ --- ------- --- ------- ---
Total operating costs 44,665 84 59,735 88 108,143 80 179,000 92
Selling, general and administrative 21,397 40 39,700 59 58,097 44 111,943 57
Depreciation and amortization 8,952 17 13,667 20 25,449 19 37,624 19
Net loss on disposal of long-lived
assets 2,233 4 1,177 2 4,098 3 1,035 1
Provision for impairment of
long-lived assets 9,994 19 - - 9,994 8 - -
------ --- ------ --- ------- --- ------- ---
Operating loss (34,136) (64) (46,543) (69) (72,086) (54) (134,050) (68)
OTHER DATA:
EBITDA /(1)/ (12,957) (24) (31,699) (47) (32,545) (24) (95,391) (49)
Net cash used by operating activities (8,327) (33,318) (38,759) (71,224)
Net cash used by investing activities (47,911) (193,593) (109,962) (304,540)
Net cash (used) provided by financing
activities (6,844) 112,048 368,640 283,187
Capital expenditures /(2)/ 39,503 71,588 151,926 204,154
September 30, December 31, March 31, June 30, September 30,
1996 1996 1997 1997 1997
-------------------------------------------------------------------------
(unaudited)
STATISTICAL DATA /(3)/:
Full time employees 1,323 1,424 1,606 1,854 2,083
Telecom services:
Access lines in service /(4)/ - - 5,371 20,108 50,551
Buildings connected:
On-net 478 522 545 560 590
Hybrid /(5)/ 1,589 1,547 1,550 1,704 1,726
-------- -------- ------- ------- --------
Total buildings connected 2,067 2,069 2,095 2,264 2,316
Customer circuits in service (VGEs)/(6)/ 630,697 748,528 816,238 917,656 1,006,916
Operational switches:
Voice 14 14 16 17 18
Data - 1 10 15 15
-------- -------- ------- ------- --------
Total operational switches 14 15 26 32 33
Switched minutes of use (millions) 563 607 682 742 788
Fiber route miles /(7)/:
Operational 2,143 2,385 2,483 2,898 3,021
Under construction - - - - 1,029
Fiber strand miles /(7)/:
Operational 70,067 75,490 83,334 101,788 109,510
Under construction - - - - 16,833
Wireless miles /(9)/ 491 506 511 511 511
Satellite services:
VSATs 835 860 875 895 934
C-Band installations /(10)/ 48 54 57 57 54
L-Band installations /(11)/ 109 204 355 671 768
19
(1) EBITDA consists of revenue less operating costs and selling, general and
administrative expenses. EBITDA is provided because it is a measure
commonly used in the telecommunications industry. It is presented to
enhance an understanding of the Company's operating results and is not
intended to represent cash flows or results of operations in accordance
with generally accepted accounting principles ("GAAP") for the periods
indicated. Net cash flows from operating, investing and financing
activities as determined using GAAP are also presented in Other Data. See
the Company's Consolidated Financial Statements contained elsewhere in this
Quarterly Report.
(2) Capital expenditures include assets acquired under capital leases.
(3) Amounts presented are for three-month periods ended, or as of the end of,
the period presented.
(4) Access lines in service at September 30, 1997 includes 38,223 lines which
are provisioned through the Company's switch and 12,328 lines which are
provisioned through resale and other agreements with various local exchange
carriers. Resale lines typically generate lower margins and are used
primarily to obtain customers. Although the Company plans to migrate lines
from resale to higher margin on-switch lines, there are no assurances that
it will be successful in executing this strategy.
(5) Hybrid buildings connected represent buildings connected to the Company's
network via another carrier's facilities.
(6) Customer circuits in service are measured in voice grade equivalents
("VGEs").
(7) Fiber route miles refers to the number of miles of fiber optic cable,
including leased fiber. As of September 30, 1997, the Company had 3,021
fiber route miles, of which 171 fiber route miles were leased under
operating leases. Fiber route miles under construction represents fiber
under construction which is expected to be operational within six months.
(8) Fiber strand miles refers to the number of fiber route miles, including
leased fiber, along a telecommunications path multiplied by the number of
fiber strands along that path. As of September 30, 1997, the Company had
109,510 fiber strand miles, of which 15,165 fiber strand miles were leased
under operating leases. Fiber strand miles under construction represents
fiber under construction which is expected to be operational within six
months.
(9) Wireless miles represents the total distance of the digital microwave paths
between Company transmitters which are used in the Company's networks.
(10) C-Band installations service cruise ships, U.S. Navy vessels and offshore
oil platform installations.
(11) L-Band installations service smaller maritime installations, and both
mobile and fixed land-based units.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
Revenue. Revenue for the three months ended September 30, 1997 increased
-------
$14.6 million, or 28%, from the three months ended September 30, 1996. Telecom
Services revenue increased 36% to $43.7 million due to an increase in network
usage for both switched and special access services, offset in part by a decline
in average unit pricing. Switched services revenue increased from $13.2 million
(41% of Telecom Services revenue) for the three months ended September 30, 1996
to $22.2 million (51% of Telecom Services revenue) for the three months ended
September 30, 1997. Switched access (terminating long distance) represented
approximately 86% of the Company's switched services revenue component for the
three months ended September 30, 1997, compared to 100% for the three months
ended September 30, 1997. The Company expects that switched access services
will represent a diminishing percentage of switched services revenue in the
future as revenue from local dial tone services increases and the Company de-
emphasizes its wholesale switched services. Special access revenue increased
from $10.3 million (32% of Telecom Services revenue) for the three months ended
September 30, 1996 to $14.4 million (33% of Telecom Services revenue) for the
three months ended September 30, 1997. Also included in Telecom Services
revenue for the three months ended September 30, 1997 is $7.1 million generated
by Zycom, compared to $8.6 million for the same period in 1996. Substantially
all of the decrease in Zycom revenue for the three months ended September 30,
1997 as compared to the same period in 1996 relates to a decrease in switched
minutes and per minute rates as a result of a changing customer
20
base. At September 30, 1997, the Company had 50,551 access lines in service
compared to zero at September 30, 1996. Special access network usage reflected
in voice grade equivalents ("VGEs") increased 60% from approximately 631,000
VGEs at September 30, 1996, to approximately 1,007,000 VGEs at September 30,
1997. At September 30, 1997, the Company had 2,316 buildings connected to its
networks compared to 2,067 buildings connected at September 30, 1996.
Additionally, switched minutes of use increased 40% from 563 million minutes
during the three months ended September 30, 1996 to 788 million minutes during
the three months ended September 30, 1997. Revenue from long distance and data
services did not generate a material portion of total revenue during either
period. Network Services revenue increased 4% to $16.4 million for the three
months ended September 30, 1997 as compared to $15.7 million for the three
months ended September 30, 1996 due to additional projects from new and existing
customers. Satellite Services revenue increased $2.4 million, or 47%, to $7.6
million for the three months ended September 30, 1997. This increase is
primarily due to the operations of MarineSat Communications Network, Inc.
(formerly known as Maritime Cellular Tele-Network, Inc. ("MCN")), a wholly owned
subsidiary of the Company acquired in March 1996, which comprised $1.6 million
of total Satellite Services revenue for the three months ended September 30,
1997 compared to $0.3 million during the same period in 1996. The remaining
increase can be attributed to the general growth of Maritime Telecommunications
Network, Inc. ("MTN") and its increased sales of C-Band equipment to offshore
oil and gas customers.
Operating costs. Total operating costs for the three months ended
---------------
September 30, 1997 increased $15.1 million, or 34% from the three months ended
September 30, 1996. Telecom Services operating costs increased from $29.3
million, or 91% of Telecom Services revenue, for the three months ended
September 30, 1996, to $42.3 million, or 97% of Telecom Services revenue, for
the three months ended September 30, 1997. Telecom Services operating costs
consist of payments to ILECs for the use of network facilities to support
special and switched access services, network operating costs, right of way fees
and other costs. The increase in operating costs in absolute dollars is
attributable to the increase in switched access services and the addition of
engineering and operations personnel dedicated to the development of local
exchange services. The increase in operating costs as a percentage of total
revenue is due primarily to the increase in switched access services revenue,
which generates negative margins as a result of the higher costs associated with
utilizing ILEC network facilities, and the investment in the development of
local exchange services without the benefit of corresponding revenue in the same
period. The Company expects that its Telecom Services ratio of operating costs
to revenue will begin to improve as the Company provides a greater volume of
higher margin services, principally local exchange services, carries more
traffic on its own facilities rather than the ILEC facilities, and obtains the
right to use unbundled ILEC facilities on satisfactory terms, any or all of
which may not occur. Network Services operating costs as a percentage of
Network Services revenue was 80% for both the three-month periods ended
September 30, 1996 and 1997. Network Services operating costs include the cost
of equipment sold, direct hourly labor and other indirect project costs.
Satellite Services operating costs increased to $4.2 million for the three
months ended September 30, 1997, from $2.7 million for the three months ended
September 30, 1996. Satellite Services operating costs as a percentage of
Satellite Services revenue also increased from 53% for the three months ended
September 30, 1996 to 55% for the three months ended September 30, 1997. This
increase is due to an increase in MCN's sales in the current three-month period
as well as the increased volume of equipment sales, both of which provide lower
margins than other maritime services. Satellite Services operating costs consist
primarily of transponder lease costs and the cost of equipment sold.
Selling, general and administrative expenses. Selling, general and
--------------------------------------------
administrative ("SG&A") expenses for the three months ended September 30, 1997
increased $18.3 million, or 86%, compared to the three months ended September
30, 1996. This increase was principally due to the continued rapid expansion of
the Company's Telecom Services networks and related significant additions to the
Company's management information systems, customer service, marketing and sales
staffs dedicated to the expansion of the Company's networks and implementation
of the Company's expanded services strategy, primarily the development of local
and long distance telephone services. SG&A expenses as a percentage of total
revenue increased from 40% for the three months ended September 30, 1996 to 59%
for the three months ended September 30, 1997. There is typically a period of
higher administrative and marketing expense prior to the generation of
appreciable revenue from newly developed networks or services. The Company
expects SG&A expenses for Telecom Services to increase slightly over the near
term as a result of hiring new staff to facilitate the marketing and development
of local dial tone, local toll, long distance and data transmission services.
Depreciation and amortization. Depreciation and amortization increased
-----------------------------
$4.7 million, or 53%, for the three months ended September 30, 1997, compared to
the three months ended September 30, 1996, due to increased investment in
depreciable assets resulting from the continued expansion of the Company's
networks and services. The Company reports high levels of depreciation expense
relative to revenue during the early years of operation of a new
21
network because the full cost of a network is depreciated using the straight-
line method despite the low rate of capacity utilization in the early stages of
network operation.
Net loss on disposal of long-lived assets. Net loss on disposal of long-
-----------------------------------------
lived assets decreased from $2.2 million for the three months ended September
30, 1996 to $1.2 million for the three months ended September 30, 1997. Net
loss on disposal of long-lived assets for the three months ended September 30,
1996 includes the loss recorded on the sale of four of the Company's teleports
used in its Satellite Services operations ($0.2 million) as well as the loss
recorded on the disposal of other operating assets ($2.0 million). For the
three months ended September 30, 1997, net loss on disposal of long-lived assets
primarily relates to losses recorded on the disposal of the Company's investment
in its Melbourne network.
Provision for impairment of long-lived assets. Provision for impairment of
---------------------------------------------
long-lived assets for the three months ended September 30, 1996 includes
valuation allowances for the amounts receivable for advances made to the Phoenix
network joint venture included in long-term note receivable ($5.8 million), the
investments in the Melbourne network ($2.7 million) and the Satellite Services
Mexico subsidiary ($0.1 million) and the note receivable from NovoComm, Inc.
($1.3 million).
Interest expense. Interest expense increased $5.5 million, from $23.3
----------------
million for the three months ended September 30, 1996, to $28.8 million for the
three months ended September 30, 1997, which included $27.1 million of non-cash
interest. The increase in interest expense is due to the issuance of the 11
5/8% Notes in March 1997. In addition, the Company's interest expense
increased, and will continue to increase, because the principal amount of its
indebtedness increases until Holdings' senior indebtedness begins to pay
interest in cash.
Interest income. Interest income decreased $1.5 million, from $6.9 million
---------------
for the three months ended September 30, 1996, to $5.4 million for the three
months ended September 30, 1997. The decrease is attributable to the decrease
in the average balance of cash, cash equivalents and short-term investments
during the three months ended September 30, 1997. The Company expects interest
income to continue to decrease over time as cash, cash equivalents and short-
term investments decline.
Other, net. Other, net fluctuated from $3.7 million net expense in the
----------
three months ended September 30, 1996 to $0.1 million net income for the three
months ended September 30, 1997. Other expense recorded in the three-month
period ended September 30, 1996 consists primarily of the write-off of deferred
financing costs associated with the conversion or repayment of debt. For the
three-month period ended September 30, 1997, other, net consists of
miscellaneous other income.
Minority interest in share of losses, net of accretion and preferred
--------------------------------------------------------------------
dividends on subsidiary preferred securities. Minority interest in share of
- --------------------------------------------
losses, net of accretion and preferred dividends on subsidiary preferred
securities increased $6.6 million, from $3.6 million for the three months ended
September 30, 1996 to $10.1 million for the three months ended September 30,
1997. The increase is due primarily to the issuance of the 14% Preferred Stock
in March 1997. Minority interest in share of losses, net of accretion and
preferred dividends on subsidiary preferred securities recorded during the
current three-month period consists of the accretion of issue costs ($0.1
million) and the accrual of the preferred security dividends ($10.2 million)
associated with the 14% Preferred Stock and the 14 1/4% Preferred Stock, offset
by minority interest in losses of subsidiaries of $0.2 million.
Share of losses in joint venture and investment. Effective October 1,
-----------------------------------------------
1996, the Company sold its 50% interest in the Phoenix network joint venture.
As a result, no share of losses in joint venture was recorded during the three
months ended September 30, 1997, as compared to the $0.6 million loss recorded
during the comparable period in 1996.
Net loss. Net loss increased $22.2 million, or 39%, due to the increases
--------
in operating costs, SG&A expenses, depreciation and amortization, interest
expense and minority interest in share of losses, net of accretion and preferred
dividends on subsidiary preferred stock noted above.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
Revenue. Revenue for the nine months ended September 30, 1997 increased
-------
$61.9 million, or 46%, from the nine months ended September 30, 1996. Telecom
Services revenue increased 66% to $123.2 million due to an increase in network
usage for both switched and special access services, offset in part by a decline
in average unit pricing. Switched services revenue increased from $31.6 million
(43% of Telecom Services revenue) for the nine months ended
22
September 30, 1996 to $61.7 million (50% of Telecom Services revenue) for the
nine months ended September 30, 1997. Switched access (terminating long
distance) revenue represented approximately 93% of the Company's switched
services revenue component for the nine months ended September 30, 1997,
compared to 100% for the nine months ended September 30, 1997. Special access
revenue increased from $28.5 million (39% of Telecom Services revenue) for the
nine months ended September 30, 1996 to $39.9 million (32% of Telecom Services
revenue) for the nine months ended September 30, 1997. Also included in Telecom
Services revenue for the nine months ended September 30, 1997 is $21.6 million
generated by Zycom, compared to $14.0 million for the same period in 1996. The
increase in Zycom revenue for the nine months ended September 30, 1997 as
compared to the same period in 1996 relates to changes in the classification of
certain operating costs as a result of the Company entering into long-term
contracts with its major customers. These costs were netted against revenue
during the 1996 period due to the uncertainty of renewal of short-term customer
contracts. At September 30, 1997, the Company had 50,551 access lines in service
compared to zero at September 30, 1996. Special access network usage reflected
in voice grade equivalents ("VGEs") increased 60% from approximately 631,000
VGEs at September 30, 1996, to approximately 1,007,000 VGEs at September 30,
1997. At September 30, 1997, the Company had 2,316 buildings connected to its
networks compared to 2,067 buildings connected at September 30, 1996.
Additionally, switched minutes of use increased 57% from 1.4 billion minutes
during the nine months ended September 30, 1996 to 2.2 billion minutes during
the nine months ended September 30, 1997. Revenue from long distance and data
services did not generate a material portion of total revenue during either
period. Network Services revenue increased 13% to $50.1 million for the nine
months ended September 30, 1997 as compared to $44.4 million for the nine months
ended September 30, 1996. The increase in Network Services revenue is due to
additional projects from new and existing customers. Satellite Services revenue
increased $7.2 million, or 47%, to $22.3 million for the nine months ended
September 30, 1997. This increase is primarily due to the operations of MCN,
which comprised $4.4 million of total Satellite Services revenue for the nine
months ended September 30, 1997 compared to $1.0 million during the same period
in 1996. The remaining increase can be attributed to the general growth of MTN
and its increased sales of C-Band equipment to offshore oil and gas customers.
Operating costs. Total operating costs for the nine months ended September
---------------
30, 1997 increased $70.9 million, or 66% from the nine months ended September
30, 1996. Telecom Services operating costs increased from $66.8 million, or 90%
of Telecom Services revenue, for the nine months ended September 30, 1996, to
$126.2 million, or 103% of Telecom Services revenue, for the nine months ended
September 30, 1997. The increase in operating costs in absolute dollars is
attributable to the increase in switched access services and the addition of
engineering and operations personnel dedicated to the development of local
exchange services. The increase in operating costs as a percentage of total
revenue is due primarily to the increase in switched access services revenue,
and the investment in the development of local exchange services without the
benefit of substantial corresponding revenue in the same period. Network
Services operating costs increased 18% to $40.6 million and increased as a
percentage of Network Services revenue from 75% for the nine months ended
September 30, 1996 to 81% for the nine months ended September 30, 1997. The
increase is due to a substantially lower margin earned on equipment sales (which
constituted a larger portion of 1997 revenue) relative to other services and
certain indirect project costs included in operating costs during the nine
months ended September 30, 1997 which were treated as SG&A expenses during the
comparable period in 1996. Satellite Services operating costs increased to
$12.2 million for the nine months ended September 30, 1997, from $7.1 million
for the nine months ended September 30, 1996. Satellite Services operating costs
as a percentage of Satellite Services revenue also increased from 47% for the
nine months ended September 30, 1996 to 55% for the nine months ended September
30, 1997. This increase is due to an increase in MCN's sales in the current
nine-month period as well as the increased volume of equipment sales, both of
which provide lower margins than other maritime services.
Selling, general and administrative expenses. Selling, general and
--------------------------------------------
administrative ("SG&A") expenses for the nine months ended September 30, 1997
increased $53.8 million, or 93%, compared to the nine months ended September 30,
1996. This increase was principally due to the continued rapid expansion of the
Company's Telecom Services networks and related significant additions to the
Company's management information systems, customer service, marketing and sales
staffs dedicated to the expansion of the Company's networks and implementation
of the Company's expanded services strategy, primarily the development of local
and long distance telephone services. SG&A expenses as a percentage of total
revenue increased from 44% for the nine months ended September 30, 1996 to 57%
for the nine months ended September 30, 1997.
Depreciation and amortization. Depreciation and amortization increased
-----------------------------
$12.2 million, or 48%, for the nine months ended September 30, 1997, compared to
the nine months ended September 30, 1996, due to increased investment in
depreciable assets resulting from the continued expansion of the Company's
networks and services.
23
Net loss on disposal of long-lived assets. Net loss on disposal of long-
-----------------------------------------
lived assets decreased from $4.1 million for the nine months ended September 30,
1996 to $1.0 million for the nine months ended September 30, 1997. Net loss on
disposal of long-lived assets for the nine months ended September 30, 1996
includes the loss recorded on the sale of four of the Company's teleports used
in its Satellite Services operations ($1.1 million), the loss recorded on the
disposal of other operating assets ($2.6 million) and a write-down in an
investment ($0.4 million). For the nine months ended September 30, 1997, net
loss on disposal of long-lived assets primarily relates to losses recorded on
the disposal of the Company's investment in its Melbourne network.
Provision for impairment of long-lived assets. Provision for impairment of
---------------------------------------------
long-lived assets for the nine months ended September 30, 1996 includes
valuation allowances for the amounts receivable for advances made to the Phoenix
network joint venture included in long-term note receivable ($5.8 million), the
investments in the Melbourne network ($2.7 million) and the Satellite Services
Mexico subsidiary ($0.1 million) and the note receivable from NovoComm, Inc.
($1.3 million).
Interest expense. Interest expense increased $11.8 million, from $70.5
----------------
million for the nine months ended September 30, 1996, to $82.3 million for the
nine months ended September 30, 1997, which included $77.0 million of non-cash
interest. This increase was primarily attributable to an increase in long-term
debt, primarily the 11 5/8% Notes and the 12 1/2% Senior Discount Notes due 2006
("12 1/2% Notes") issued in March 1997 and April 1996, respectively. In
addition, the Company's interest expense increased, and will continue to
increase, because the principal amount of its indebtedness increases until
Holdings' senior indebtedness begins to pay interest in cash.
Interest income. Interest income increased $1.7 million, from $15.6
---------------
million for the nine months ended September 30, 1996, to $17.3 million for the
nine months ended September 30, 1997. The increase is attributable to the
increase in cash from the proceeds of the issuances of the 11 5/8% Notes and 14%
Preferred Stock in March 1997 and the 12 1/2% Notes and 14 1/4% Exchangeable
Preferred Stock Mandatorily Redeemable 2007 (the "14 1/4% Preferred Stock") in
April 1996.
Other, net. Other, net decreased from $3.9 million net expense in the nine
----------
months ended September 30, 1996 to $0.3 million net expense in the nine months
ended September 30, 1997. Other expense recorded in the nine-month period ended
September 30, 1996 consists primarily of the write-off of deferred financing
costs associated with the conversion or repayment of debt and litigation
settlement costs. For the nine-month period ended September 30, 1997, other,
net consists primarily of litigation settlement costs.
Minority interest in share of losses, net of accretion and preferred
--------------------------------------------------------------------
dividends on subsidiary preferred securities. Minority interest in share of
- --------------------------------------------
losses, net of accretion and preferred dividends on subsidiary preferred
securities increased $2.9 million, from $22.1 million for the nine months ended
September 30, 1996 to $25.0 million for the nine months ended September 30,
1997. The increase is due primarily to the issuance of the 14 1/4% Preferred
Stock in April 1996 and the 14% Preferred Stock in March 1997. Offsetting this
increase is $12.3 million recorded during the nine months ended September 30,
1996 for the excess of the redemption price over the carrying amount of the 12%
redeemable preferred stock of Holdings ("12% Redeemable Preferred Stock")
redeemed in April 1996. Minority interest in share of losses, net of accretion
and preferred dividends on subsidiary preferred securities recorded during the
current nine-month period consists of the accretion of issue costs ($0.6
million) and the accrual of the preferred security dividends ($26.3 million)
associated with the 14% Preferred Stock and the 14 1/4% Preferred Stock, offset
by minority interest in losses of subsidiaries of $1.9 million.
Share of losses in joint venture and investment. Effective October 1,
-----------------------------------------------
1996, the Company sold its 50% interest in the Phoenix network joint venture.
As a result, no share of losses in joint venture was recorded during the nine
months ended September 30, 1997, as compared to the $1.6 million loss recorded
during the comparable period in 1996.
Net loss. Net loss increased $74.9 million, or 50%, due to the increases
--------
in operating costs, SG&A expenses, depreciation and amortization, interest
expense and minority interest in share of losses, net of accretion and preferred
dividends on subsidiary preferred stock noted above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's growth has been funded through a combination of equity, debt
and lease financing. As of September 30, 1997, the Company had current assets
of $469.8 million, including $388.2 million of cash, cash equivalents and short-
term investments available for sale, which exceeded current liabilities of $93.0
million, providing
24
working capital of $376.8 million. The Company invests excess funds in short-
term, interest-bearing investment-grade securities until such funds are used to
fund the capital investments and operating needs of the Company's business. The
Company's short-term investment objectives are safety, liquidity and yield, in
that order.
CASH USED BY OPERATING ACTIVITIES
The Company's operating activities used $38.8 million and $71.2 million for
the nine months ended September 30, 1996 and 1997, respectively. Cash used by
operations is primarily due to net losses, which are partially offset by non-
cash expenses, such as depreciation and amortization expense, deferred interest
expense, preferred dividends on subsidiary preferred stock and changes in
working capital items.
The Company expects to continue to generate negative cash flow from
operating activities while it emphasizes development, construction and expansion
of its Telecom Services business. Consequently, it does not anticipate that
cash provided by operations will be sufficient to fund operating activities, the
future expansion of existing networks or the construction and acquisition of new
networks in the near term.
CASH USED BY INVESTING ACTIVITIES
Cash used by investing activities was $110.0 million and $304.5 million for
the nine months ended September 30, 1996 and 1997, respectively. Cash used by
investing activities includes cash expended for the acquisition of property,
equipment and other assets, of $97.0 million and $204.2 million for the nine
months ended September 30, 1996 and 1997, respectively. The Company will
continue to use cash in investing activities in 1997 and subsequent periods for
the construction of new networks and the expansion of existing networks. The
Company acquired assets under capital leases of $54.9 million for the nine
months ended September 30, 1996, which consisted primarily of fiber optic
networks included in the Company's agreement with SCE.
CASH PROVIDED BY FINANCING ACTIVITIES
Financing activities provided $368.6 million and $283.2 million in the nine
months ended September 30, 1996 and 1997, respectively. Cash provided by
financing activities primarily includes cash received in connection with the
private placement of the 12 1/2% Notes and the 14 1/4% Preferred Stock in April
1996, the 11 5/8% Notes and the 14% Preferred Stock in March 1997 and the 6
3/4% Preferred Securities in September 1997. Historically, the funds to finance
the Company's business acquisitions, capital expenditures, working capital
requirements and operating losses have been obtained through public and
private offerings of Holdings-Canada common shares, the Senior Notes, units
consisting of senior notes and warrants, redeemable preferred stock, convertible
subordinated notes, convertible preferred shares of Holdings-Canada, capital
lease financings and various working capital sources, including credit
facilities.
On March 11, 1997, Holdings completed a private placement of 11 5/8% Notes
and 100,000 shares of 14% Preferred Stock for net proceeds of approximately
$192.4 million. The Company believes the net proceeds of the private placement
will improve its operating and financial flexibility over the near term because
(a) the 11 5/8% Notes do not require the payment of cash interest until 2002 and
(b) Holdings has the option to pay dividends on the 14% Preferred Stock in
additional shares of 14% Preferred Stock prior to 2002 and the Preferred Stock
is not mandatorily redeemable until 2008.
The 11 5/8% Notes are unsecured senior obligations of Holdings (guaranteed
by ICG) that mature on March 15, 2007. Interest will accrue at 11 5/8% per
annum beginning March 15, 2002, and is payable each March 15 and September 15,
commencing September 15, 2002. Dividends on the 14% Preferred Stock are
cumulative at a rate of 14% per annum and are payable quarterly in arrears each
March 15, June 15, September 15 and December 15, commencing June 15, 1997. The
14% Preferred Stock has a liquidation preference of $1,000 per share, plus
accrued and unpaid dividends, and is mandatorily redeemable in 2008. The 14%
Preferred Stock is exchangeable, at the option of Holdings, into 14% senior
subordinated exchange debentures of Holdings due 2008, at any time after the
exchange is permitted under certain indenture restrictions.
On September 24, 1997, Funding completed a private placement of 2,300,000 6
3/4% Preferred Securities for net proceeds, after underwriting costs, of
approximately $111.6 million. Dividends on the 6 3/4% Preferred Securities are
payable quarterly in arrears each February 15, May 15, August 15, and November
15, commencing November 15, 1997. The dividend is payable in cash through
November 15, 2000, and in cash or shares of ICG common stock, at the
25
option of Funding, thereafter. The 6 3/4% Preferred Securities have a
liquidation preference of $50 per security, plus accrued and unpaid dividends,
and are mandatorily redeemable in 2009. The 6 3/4% Preferred Securities are
exchangeable at any time prior to November 15, 2009 into shares of ICG common
stock at a rate of 2.0812 shares of ICG common stock per preferred security, or
$24.025 per share.
As of September 30, 1997, an aggregate of approximately $72.6 million of
capitalized lease obligations and an aggregate accreted value of approximately
$859.9 million were outstanding under the 11 5/8% Notes, 12 1/2% Notes and the
13 1/2% Notes. The 11 5/8% Notes require payments of interest to be made in
cash commencing on March 15, 2002 and mature on March 15, 2007. The 12 1/2%
Notes require payments of interest to be made in cash commencing on November 1,
2001 and mature on May 1, 2006. The 13 1/2% Notes require payments of interest
to be made in cash commencing on March 15, 2001 and mature on September 15,
2005. The 6 3/4% Preferred Securities require payments of dividends to be made
in cash commencing November 15, 1997 through November 15, 2000. In addition,
the 14% Preferred Stock and 14 1/4% Preferred Stock require payment of dividends
to be made in cash commencing June 15, 2002 and August 1, 2001, respectively.
As of September 30, 1997, the Company had $8.4 million of other indebtedness
outstanding. The Company may also have additional payment obligations prior to
such time, the amount of which cannot presently be determined. The Company's
cash on hand and amounts expected to be available through vendor financing
arrangements will provide sufficient funds necessary for the Company to expand
its Telecom Services business as currently planned and to fund its operating
deficits through 1997 and 1998. With respect to indebtedness currently
outstanding, the Company has interest payment obligations of approximately
$113.3 million in 2001, $158.0 million in 2002 and $168.1 million in 2003. With
respect to preferred securities and preferred stock currently outstanding, the
Company has cash dividend obligations of approximately $1.3 million in 1997,
$8.9 million in each of 1998, 1999, and 2000, $21.5 million in 2001, $57.0
million in 2002 and $70.9 million in 2003. Accordingly, the Company may have to
refinance a substantial amount of indebtedness and obtain substantial additional
funds prior to March 2001. The Company's ability to do so will depend on, among
other things, its financial condition at the time, restrictions in the
instruments governing its indebtedness, and other factors, including market
conditions, beyond the control of the Company. There can be no assurance that
the Company will be able to refinance such indebtedness, including such
capitalized leases, or obtain such additional funds, and if the Company is
unable to effect such refinancings or obtain additional funds, the Company's
ability to make principal and interest payments on its indebtedness or make
payments of cash dividends on, or the mandatory redemption of, its preferred
securities and preferred stock, would be adversely affected.
CAPITAL EXPENDITURES
The Company expects to continue to generate negative cash flow from
operating activities while it emphasizes development, construction and expansion
of its business and until the Company establishes a sufficient revenue-
generating customer base. The Company's capital expenditures (including assets
acquired under capital leases) were $39.5 million and $71.6 million for the
three months ended September 30, 1996 and 1997, respectively, and $151.9 million
and $204.2 million for the nine months ended September 30, 1996 and 1997,
respectively. The Company anticipates that the expansion of existing networks,
construction of new networks and further development of the Company's products
and services will require capital expenditures of approximately $66.0 million
during the last quarter of 1997 and approximately $300.0 million during 1998.
To facilitate the expansion of its services and networks, the Company has
entered into equipment purchase agreements with various vendors under which the
Company must purchase a substantial amount of equipment and other assets,
including a full range of switching systems, fiber optic cable, network
electronics, software and services. Actual capital expenditures will depend on
numerous factors, including certain factors beyond the Company's control. These
factors include the nature of future expansion and acquisition opportunities,
economic conditions, competition, regulatory developments and the availability
of equity, debt and lease financing.
GENERAL
The Company's operations have required and will continue to require
significant capital expenditures for development, construction, expansion and
acquisition of telecommunications assets. Significant amounts of capital are
required to be invested before revenue is generated, which results in initial
negative cash flows. In addition to the Company's planned capital expenditures,
it has other cash commitments as described in the footnotes to the Company's
unaudited Consolidated Financial Statements for the nine months ended September
30, 1997 included elsewhere herein.
In view of the anticipated negative cash flow from operating activities,
the continuing development of the Company's products and services, the expansion
of existing networks and the construction, leasing and licensing of new
26
networks, the Company will require additional amounts of cash in the future from
outside sources. Management believes that the Company's cash on hand and
amounts expected to be available through vendor financing arrangements will
provide sufficient funds necessary for the Company to expand its Telecom
Services business as currently planned and to fund its operating deficits
through 1997 and 1998. Additional sources of cash may include public and private
equity and debt financings, sales of non-strategic assets, capitalized leases
and other financing arrangements. The Company may require additional amounts of
equity capital in the near term. In the past, the Company has been able to
secure sufficient amounts of financing to meet its capital expenditure needs.
There can be no assurance that additional financing will be available to the
Company or, if available, that it can be obtained on terms acceptable to the
Company.
The failure to obtain sufficient amounts of financing could result in the
delay or abandonment of some or all of the Company's development and expansion
plans, which could have a material adverse effect on the Company's business. In
addition, the inability to fund operating deficits with the proceeds of
financings until the Company establishes a sufficient revenue generating
customer base could have a material adverse effect on the Company's liquidity.
NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" ("SFAS 128") which revises the calculation and
presentation provisions of Accounting Principles Board Opinion 15 and related
interpretations. SFAS 128 is effective for the Company's fiscal year ending
December 31, 1997 and retroactive application is required. The Company believes
the adoption of SFAS 128 will have no effect on its reported loss per share.
27
PART II
ITEM 1. LEGAL PROCEEDINGS
-----------------
See Note 5 (d) to the Company's unaudited Consolidated Financial
Statements for the nine months ended September 30, 1997 contained
elsewhere in this Quarterly Report.
ITEM 2. CHANGES IN SECURITIES
---------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
ITEM 5. OTHER INFORMATION
-----------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(A) EXHIBITS
--------
(10.1) Amendment No. 2 to the ICG Communications, Inc. 1996
Stock Option Plan.
(10.2) Employment Agreement, dated October 17, 1997, between
Communications Buying Group, Inc. and Robert Daly.
(27.1) Financial Data Schedule.
(B) REPORTS ON FORM 8-K. The following reports on Form 8-K were filed
-------------------
by the Registrants during the three months ended September 30,
1997:
ICG COMMUNICATIONS, INC.
ICG HOLDINGS (CANADA), INC.
ICG HOLDINGS, INC.: Current Report on Form 8-K, dated
September 18, 1997, announcing the
offering of approximately $100.0
million of Exchangeable Limited
Liability Company Preferred
Securities by ICG Funding, LLC.
Current Report on Form 8-K, dated
September 29, 1997, announcing the
completed private placement of
$115.0 million of Exchangeable
Limited Liability Company Preferred
Securities.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on November 5, 1997.
ICG HOLDINGS, INC.
Date: November 5, 1997 By: /s/ James D. Grenfell
_______________________________________
James D. Grenfell, Executive Vice
President and Chief Financial Officer
Date: November 5, 1997 By: /s/ Richard Bambach
_______________________________________
Richard Bambach, Vice President and
Corporate Controller
31
INDEX TO EXHIBITS
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
32