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 March 31, 2000
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) CO.
(Commission File Number 33-96540)
ICG HOLDINGS, INC.
(Exact names of registrants as specified in their charters)
- --------------------------------------------------------------------------------
Delaware 84-1342022
Nova Scotia Not Applicable
Colorado 84-1158866
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
- --------------------------------------------------------------------------------
161 Inverness Drive West Not applicable
Englewood, Colorado 80112
161 Inverness Drive West c/o ICG Communications, Inc.
Englewood, Colorado 80112 161 Inverness Drive West
Englewood, Colorado 80112
161 Inverness Drive West Not applicable
Englewood, Colorado 80112
(Address of principal executive offices) (Address of U.S. agent for service)
- --------------------------------------------------------------------------------
Registrants' telephone numbers, including area codes: (888) 424-1144 or
(303) 414-5000
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 May 10, 2000
were 48,642,985, 31,931,588 and 1,918, respectively. ICG Canadian Acquisition,
Inc., a wholly owned subsidiary of ICG Communications, Inc., owns all of the
issued and outstanding common shares of ICG Holdings (Canada) Co. ICG Holdings
(Canada) Co. 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, 1999
and March 31, 2000 (unaudited)................................3
Consolidated Statements of Operations for the Three
Months Ended March 31, 1999 and 2000 (unaudited)..............5
Consolidated Statement of Stockholders' Deficit for
the Three Months Ended March 31, 2000 (unaudited).............6
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1999 and 2000 (unaudited)..............7
Notes to Consolidated Financial Statements (unaudited)...........9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ......................................24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ....................................................34
PART II ......................................................................36
ITEM 1. LEGAL PROCEEDINGS...............................................36
ITEM 2. CHANGES IN SECURITIES...........................................36
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ................................36
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS ..........36
ITEM 5. OTHER INFORMATION ..............................................36
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ...............................36
Exhibits .......................................................36
Reports on Form 8-K ............................................37
2
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and March 31, 2000 (unaudited)
December 31, March 31,
1999 2000
------------- -------------
Assets (in thousands)
Current assets:
Cash and cash equivalents $ 103,288 40,699
Short-term investments available for
sale 22,219 31,115
Receivables:
Trade, net of allowance of $78,682
and $57,160 at December 31, 1999
and March 31, 2000, respectively
(note 6) 167,273 152,022
Other 1,458 4,489
------------- -------------
168,731 156,511
Prepaid expenses, deposits and
inventory 11,388 10,670
------------- -------------
Total current assets 305,626 238,995
------------- -------------
Property and equipment 1,805,378 2,017,958
Less accumulated depreciation (279,698) (336,090)
------------- -------------
Net property and equipment 1,525,680 1,681,868
------------- -------------
Restricted cash 12,537 11,457
Investments (note 4) 28,939 2,402
Other assets, net of accumulated
amortization:
Goodwill 95,187 87,281
Deferred financing costs 35,884 35,275
Other, net 16,768 18,059
------------- -------------
147,839 140,615
------------- -------------
Total assets (note 7) $2,020,621 2,075,337
============= =============
(Continued)
3
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (unaudited), Continued
December 31, March 31,
1999 2000
------------- -------------
Liabilities and Stockholders' Deficit (in thousands)
Current liabilities:
Accounts payable $ 112,291 56,544
Payable pursuant to IRU agreements 135,322 157,618
Accrued liabilities 85,709 91,284
Deferred revenue (note 6) 25,175 45,098
Deferred gain on sale (note 3) 5,475 -
Current portion of capital lease
obligations 8,090 11,256
Current portion of long-term debt
(note 5) 796 796
Current liabilities of discontinued
operations (note 3) 529 436
------------- -------------
Total current liabilities 373,387 363,032
------------- -------------
Capital lease obligations, less current
portion 63,348 72,884
Long-term debt, net of discount, less
current portion (note 5) 1,905,901 2,052,761
Other long-term liabilities 2,526 2,958
------------- -------------
Total liabilities 2,345,162 2,491,635
------------- -------------
Redeemable preferred stock of subsidiary
($397.9 and $412.0 million liquidation
value at December 31, 1999 and March
31, 2000, respectively) (note 5) 390,895 405,203
Company-obligated mandatorily redeemable
preferred securities of subsidiary
limited liability company which holds
solely Company preferred stock
($133.4 million liquidation value at
March 31, 2000) 128,428 128,524
Stockholders' deficit:
Common stock, $.01 par value,
100,000,000 shares authorized;
47,761,337 and 48,595,120 shares
issued and outstanding at December
31, 1999 and March 31, 2000,
respectively 478 486
Additional paid-in capital 599,282 612,418
Accumulated deficit (1,443,624) (1,565,258)
Accumulated other comprehensive income - 2,329
------------- -------------
Total stockholders' deficit (843,864) (950,025)
------------- -------------
Commitments and contingencies (note 6)
Total liabilities and stockholders'
deficit $2,020,621 2,075,337
============= =============
See accompanying notes to consolidated financial statements.
4
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended March 31, 1999 and 2000 (unaudited)
Three months ended
March 31,
------------------------
1999 2000
----------- -----------
(in thousands, except
per share data)
Revenue (note 7) $ 104,331 157,224
Operating costs and expenses:
Operating costs 53,649 82,902
Selling, general and administrative
expenses 42,808 55,089
Depreciation and amortization (note 7) 36,375 64,599
Other (933) 432
----------- -----------
Total operating costs and expenses 131,899 203,022
----------- -----------
Operating loss (note 7) (27,568) (45,798)
Other income (expense):
Interest expense (note 7) (47,438) (62,634)
Interest income 4,104 3,277
Other (expense) income, net,
including unrealized gain on
marketable trading securities in 1999
and realized gain on sale of
available for sale securities in 2000 (500) 158
----------- -----------
(43,834) (59,199)
----------- -----------
Loss from continuing operations before
preferred dividends and extraordinary
gain (71,402) (104,997)
Accretion and preferred dividends on
preferred securities of subsidiaries (14,804) (16,637)
----------- -----------
Loss from continuing operations before
extraordinary gain (86,206) (121,634)
Loss from discontinued operations (111) -
----------- -----------
Loss before extraordinary gain (86,317) (121,634)
Extraordinary gain on sales of
operations of NETCOM, net of income
taxes of $6.4 million (note 3) 193,029 -
----------- -----------
Net (loss) income $ 106,712 (121,634)
=========== ===========
Other comprehensive income:
Unrealized gain on available for sale
securities $ - 2,329
----------- -----------
Comprehensive (loss) income $ 106,712 (119,305)
=========== ===========
Net (loss) earnings per share - basic and diluted:
Loss from continuing operations $ (1.85) (2.52)
Loss from discontinued operations - -
Extraordinary gain on sales of
operations of NETCOM 4.14 -
----------- -----------
Net (loss) earnings per share - basic
and diluted $ 2.29 (2.52)
=========== ===========
Weighted average number of shares
outstanding - basic and diluted 46,538 48,189
=========== ===========
See accompanying notes to consolidated financial statements.
5
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Deficit
Three Months Ended March 31, 1999 (unaudited)
Accumulated
Common stock Additional other Total
----------------- paid-in Accumulated comprehensive stockholders'
Shares Amount capital deficit income deficit
------- -------- ----------- ------------- --------------- ---------------
(in thousands)
Balances at January 1, 2000 47,761 $ 478 599,282 (1,443,624) - (843,864)
Shares issued for cash in
connection with the
exercise of options and
warrants 709 7 11,138 - - 11,145
Shares issued for cash in
connection with the
employee stock purchase plan 54 - 757 - - 757
Shares issued as contribution
to 401(k) plan 71 1 1,241 - - 1,242
Unrealized holding gain
on available for sale
securities, arising
during the period, net
of tax - - - - 2,810 2,810
Reclassification
adjustment, realized
gain on available for
sale securities - - - - (481) (481)
Net loss - - - (121,634) - (121,634)
------- -------- ----------- ------------- --------------- ---------------
Balances at March 31, 2000 48,595 486 612,418 (1,565,258) 2,329 (950,025)
======= ======== =========== ============= =============== ===============
See accompanying notes to consolidated financial statements.
6
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and 2000 (unaudited)
Three months ended
March 31,
----------------------
1999 2000
---------- ----------
(in thousands)
Cash flows from operating activities:
Net (loss) income $ 106,712 (121,634)
Loss from discontinued operations 111 -
Extraordinary (gain) loss on sales of operations (193,029) -
Adjustments to reconcile net (loss) income to net
cash used by operating activities:
Recognition of deferred gain (3,805) (6,239)
Accretion and preferred dividends on preferred
securities of subsidiaries 14,804 16,637
Depreciation and amortization 36,375 64,599
Provision for uncollectible accounts 3,604 3,830
Deferred compensation - 432
Interest expense deferred and included in
long-term debt 46,283 52,064
Interest expense deferred and included in
capital lease obligations 1,406 1,351
Amortization of deferred financing costs
included in interest expense 1,082 501
Interest expense capitalized on assets under
construction (3,168) (1,477)
Contribution to 401(k) plan through issuance
of common stock 2,077 1,242
Net loss (gain) on disposal of long-lived
assets (933) -
Unrealized gain on marketable trading
securities in 1999 and realized gain on
sale of available for sale securities in 2000 (439) (481)
Other noncash expenses - 301
Change in operating assets and liabilities,
excluding the effects of dispositions and
noncash transactions:
Receivables (48,225) 8,390
Prepaid expenses, deposits and inventory (2,537) 1,705
Accounts payable and accrued liabilities (9,892) (50,460)
Deferred revenue 1,669 22,005
---------- ----------
Net cash used by operating activities (47,905) (7,234)
---------- ----------
Cash flows from investing activities:
Acquisition of property, equipment and other
assets (99,151) (141,299)
Payments for construction of corporate
headquarters - (1,699)
Proceeds from sale of available for sale
securities - 2,201
Proceeds from sales of operations of NETCOM, net
of cash included in sale 252,881 -
Proceeds from disposition of property, equipment
and other assets 4,300 -
Proceeds from sales of short-term investments
available for sale 5,340 19,399
Decrease in restricted cash 1,385 1,080
Purchase of investments (27,466) (1,150)
Purchase of minority interest in subsidiary (4,189) -
---------- ----------
Net cash (used) provided by investing
activities 133,100 (121,468)
---------- ----------
(Continued)
7
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited), Continued
Three months ended
March 31,
----------------------
1999 2000
---------- ----------
(in thousands)
Cash flows from financing activities:
Proceeds from issuance of common stock:
Exercise of options and warrants $ 2,769 11,145
Employee stock purchase plan 1,388 757
Proceeds from issuance of long-term debt - 95,000
Principal payments on capital lease obligations (1,793) (3,061)
Payments on IRU agreement - (35,198)
Principal payments on long-term debt (589) (205)
Payments of preferred dividends (2,231) (2,231)
---------- ----------
Net cash (used) provided by financing
activities (456) 66,207
---------- ----------
Net increase (decrease) in cash and cash
equivalents 84,739 (62,495)
Net cash used by discontinued operations (3,356) (94)
Cash and cash equivalents, beginning of period 210,307 103,288
---------- ----------
Cash and cash equivalents, end of period $ 291,690 40,699
========== ==========
Supplemental disclosure of cash flows information
of continuing operations:
Cash paid for interest $ 1,835 7,132
========== ==========
Cash paid for income taxes $ 409 220
========== ==========
Supplemental schedule of noncash investing and
financing activities of continuing operations:
Acquisition of corporate headquarters assets
through the issuance of long-term debt and
conversion of security deposit (note 5) $ 33,719 -
========== ==========
Assets acquired pursuant to IRU agreement $ - 57,494
Assets acquired under capital leases 3,760 14,415
---------- ----------
Total (note 6) $ 3,760 71,909
========== ==========
See accompanying notes to consolidated financial statements.
8
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and March 31, 2000 (unaudited)
(1) Organization and Nature of Business
ICG Communications, Inc., a Delaware corporation ("ICG" or "the Company"),
was incorporated on April 11, 1996 and is the publicly-traded U.S. parent
company of ICG Funding, LLC, a special purpose Delaware limited liability
company and wholly owned subsidiary of ICG ("ICG Funding"), ICG Holdings
(Canada) Co., a Nova Scotia unlimited liability company
("Holdings-Canada"), ICG Holdings, Inc., a Colorado corporation
("Holdings"), and ICG Services, Inc., a Delaware corporation ("ICG
Services"), and their subsidiaries. ICG and its subsidiaries are
collectively referred to as the "Company."
The Company's principal business activity is telecommunications services
("Telecom Services") which consists primarily of the Company's operations
as a facilities-based communications provider including the provision of
services such as network facilities and data management to Internet service
provider ("ISP") customers and voice and data communications services to
business customers such as local, long distance and enhanced telephony. The
Company also provides interexchange services such as special access and
switched access services to long distance carriers and other customers. The
Company began marketing competitive local dial-tone services to business
customers in early 1997, subsequent to the passage of the
Telecommunications Act of 1996, which permitted competitive interstate and
intrastate telephone services and began offering network services to ISPs
and other telecommunications providers in February 1999.
During 1999, the Company sold the retail customer ISP business of NETCOM,
retaining the national Tier 1 data network assets. Additionally, during
1999, the Company also sold ICG Fiber Optic Technologies, Inc. and Fiber
Optic Technologies of the Northwest, Inc., which provided information
technology services and selected networking products, as well as ICG
Satellite Services, Inc. and Maritime Telecommunications Network, Inc.,
which provided satellite voice, data and video services to major cruise
ship lines, the U.S. Navy, the offshore oil and gas industry and integrated
communications providers. (See note 3, "Discontinued Operations".)
(2) Significant Accounting Policies
(a) Basis of Presentation
The Company's financial statements should be read in conjunction with
ICG's Annual Report on Form 10-K for the year ended December 31, 1999,
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 three months
ended March 31, 2000 are not necessarily indicative of the results that
may be expected for the fiscal year ending December 31, 2000.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
(b) Recent Accounting Pronouncements
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44 "Accounting for Certain Transactions
involving Stock Compensation - and interpretation of APB Opinion No. 25
("FIN 44"). This opinion provides guidance on the accounting for
certain stock option transactions and subsequent amendments to sock
option transactions. FIN 44 is effective July 1, 2000, but certain
conclusions cover specific events that occur after either December 15,
9
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Significant Accounting Policies (continued)
1998 or January 12, 2000. To the extent that FIN 44 covers events
occurring during the period from December 15, 1998 and January 12,
2000, but before January 1, 2000, the effects of applying this
Interpretation are to be recognized on a prospective basis. The Company
has not yet assessed the impact, if any, that FIN 44 might have on its
financial position or results of operations.
In December 1999, the SEC released Staff Accounting Bulletin ("SAB")
No. 101, "Revenue Recognition in Financial Statements", which provides
guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. Subsequently, the SEC released
SAB 101A, which delayed the implementations date of SAB 101 for
registrants with fiscal years beginning between December 16, 1999 and
March 15, 2000. The Company has not yet assessed the impact, if any,
that SAB 101 might have on its financial position or results of
operations.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments and
hedging activities. As amended by SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of Effective
Date of FASB Statement No. 133", SFAS 133 is effective for all fiscal
years beginning after June 15, 2000. The Company will adopt SFAS 133
effective at the beginning of its fiscal year end 2001. The Company
does not believe that the adoption of SFAS 133 will have a material
effect on the Company's financial position or results of operations.
(c) Reclassifications
Certain 1999 amounts have been reclassified to conform with the 2000
presentation.
(3) Discontinued Operations
Loss from discontinued operations consists of the following:
Three months ended
March 31,
---------------------
1999 2000
--------- ----------
(in thousands)
Network Services (a) $ (412) -
Satellite Services (b) 301 -
--------- ----------
Loss from discontinued
operations $ (111) -
========= ==========
(a) Network Services
On July 15, 1999, the Company's board of directors adopted a formal
plan to dispose of the Company's investments in its wholly-owned
subsidiaries, ICG Fiber Optic Technologies, Inc. and Fiber Optic
Technologies of the Northwest, Inc. (collectively, "Network Services").
Accordingly, the Company's consolidated financial statements reflect
the operations of Network Services as discontinued for all periods
presented. On October 22, 1999, the Company completed the sale of all
of the capital stock of Network Services to ACS Communications, Inc.
for total proceeds of $23.9 million in cash.
10
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) Discontinued Operations (continued)
(b) Satellite Services
On July 15, 1999, the Company's board of directors adopted a formal
plan to dispose of the Company's investments in ICG Satellite
Services, Inc. and Maritime Telecommunications Network, Inc.
(collectively, "Satellite Services"). Accordingly, the Company's
consolidated financial statements reflect the operations of Satellite
Services as discontinued for all periods presented. On November 30,
1999, the Company completed the sale of all of the capital stock of
Satellite Services to ATC Teleports, Inc. for total proceeds of $98.1
million in cash.
(c) NETCOM
On February 17, 1999, the Company sold certain of the operating assets
and liabilities of NETCOM to MindSpring Enterprises, Inc., an ISP
located in Atlanta, Georgia and predecessor to EarthLink, Inc.
("MindSpring"). Total proceeds from the sale were $245.0 million,
consisting of $215.0 million in cash and 376,116 shares of common stock
of MindSpring, valued at approximately $79.76 per share at the time of
the transaction. Assets and liabilities sold to MindSpring included
those directly related to the domestic operations of NETCOM's Internet
dial-up, dedicated access and Web site hosting services. In conjunction
with the sale to MindSpring, the Company entered into an agreement to
lease to MindSpring for a one-year period the capacity of certain
network operating assets formerly owned by NETCOM and retained by the
Company (the "MindSpring Capacity Agreement"). The MindSpring Capacity
Agreement was amended during the first quarter of 2000 to extend the
terms of the agreement through May 2000. MindSpring utilized the
Company's network capacity under this agreement to provide Internet
access to the dial-up services customers formerly owned by NETCOM. In
addition, the Company received for a one-year period 50% of the gross
revenue earned by MindSpring from the dedicated access customers
formerly owned by NETCOM. The carrying value of the assets retained by
the Company was approximately $21.7 million, including approximately
$17.5 million of network equipment, on February 17, 1999. The Company
also retained approximately $11.3 million of accrued liabilities and
capital lease obligations.
On March 16, 1999, the Company sold all of the capital stock of
NETCOM's international operations for total proceeds of approximately
$41.1 million. MetroNET Communications Corp., a Canadian entity, and
Providence Equity Partners, located in Providence, Rhode Island
("Providence"), together purchased the 80% interest in NETCOM Canada
Inc. owned by NETCOM for approximately $28.9 million in cash.
Additionally, Providence purchased all of the capital stock of NETCOM
Internet Access Services Limited, NETCOM's operations in the United
Kingdom, for approximately $12.2 million in cash.
During the three months ended March 31, 1999, the Company recorded a
combined gain on the sales of the operations of NETCOM of approximately
$193.0 million, net of income taxes of approximately $6.4 million. The
gain and related income taxes were adjusted during the nine months
ended December 31, 1999 to record actual results. Offsetting the gain
on the sales during the three months ended March 31, 1999 is
approximately $16.6 million of net losses from operations of NETCOM
from November 3, 1998 (the date on which the Company's board of
directors adopted the formal plan to dispose of the operations of
NETCOM) through the dates of the sales. Additionally, since the Company
expected to generate operating costs in excess of revenue under the
MindSpring Capacity Agreement and the terms of the sale agreement were
dependent upon and negotiated in conjunction with the terms of the
network capacity agreement, the Company deferred approximately $35.5
million of the proceeds from the sale agreement to be applied on a
periodic basis to the network capacity agreement. The deferred proceeds
were recognized in the Company's statement of operations as the Company
incurred cash operating losses under the network capacity agreement.
Accordingly, the Company did not recognize any revenue, operating costs
11
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) Discontinued Operations (continued)
or selling, general and administrative expenses from services provided
to MindSpring for the term of the agreement. Any incremental revenue or
costs generated by other customers, or by other services provided to
MindSpring, was recognized in the Company's consolidated statement of
operations as incurred. During the three months ended March 31, 2000,
$6.2 million in losses related to the MindSpring customers were offset
against the deferred amount. As of March 31, 2000, all amounts deferred
in relation to the MindSpring Capacity Agreement have been offset by
losses incurred under the agreement. The Company, through NetAhead, is
currently utilizing the retained network operating assets to provide
wholesale capacity and other enhanced network services on an ongoing
basis to MindSpring under an extension of the original network capacity
agreement as well as to other ISPs and telecommunications providers.
Operating results from such services have been included in the
Company's statement of operations as incurred. Since the operations
sold were acquired by ICG in a transaction accounted for as a pooling
of interests, the gain on the sales of the operations of NETCOM is
classified as an extraordinary item in the Company's consolidated
statement of operations.
(4) Investments
On February 22, 2000, the Company purchased 61,845 shares of restricted
Series D Preferred Stock ("Cyras Preferred Stock") of Cyras Systems, Inc.,
("Cyras"), for approximately $1.0 million. Cyras is a manufacturer of
telecommunications equipment. Dividends on the Cyras Preferred Stock are 8%
per annum, noncumulative and payable in cash or any Cyras assets legally
available and as declared by the board of directors of Cyras. The Cyras
Preferred Stock is automatically convertible into shares of common stock of
Cyras upon the initial public offering of the common stock of Cyras or upon
the election to convert by more than 66% of all of the preferred
stockholders of Cyras.
On March 30, 1999, the Company purchased, for approximately $10.0 million
in cash, 454,545 shares of restricted Series D-1 Preferred Stock (the
"NorthPoint Preferred Stock") of NorthPoint Communications Holdings, Inc.,
a Delaware corporation and competitive local exchange carrier ("CLEC")
based in San Francisco, California ("NorthPoint") which was converted into
555,555 shares of Class B Common Stock of NorthPoint (the "NorthPoint Class
B Shares") on May 5, 1999. The NorthPoint Class B Shares were then
converted on March 30, 2000 on a one-for-one basis into a voting class of
common stock of NorthPoint. The Company accounted for its investment in
NorthPoint under the cost method of accounting until the NorthPoint Class B
Shares were converted into voting and tradable common stock of NorthPoint,
after which the investment was classified as an available for sale
security. During the three months ended March 31, 2000, the Company sold
95,555 of the NorthPoint shares for proceeds of approximately $2.2 million.
A gain of approximately $0.5 million was recognized on the sale. All shares
remaining at March 31, 2000 are classified as available for sale with
unrealized gains on the investment of $2.3 million recorded as a component
of stockholders' equity.
12
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) Long-term Debt and Redeemable Preferred Stock of Subsidiary
Long-term debt is summarized as follows:
December 31, March 31,
1999 2000
------------- -------------
(in thousands)
Senior Facility due on scheduled
maturity dates, secured by
substantially all of the assets of
ICG Equipment and NetAhead with
weighted average interest rates ranging
from 9.26% to 9.65% for the three months
ended March 31, 2000 $ 79,625 174,438
9 7/8% Senior discount notes of ICG
Services, net of discount 293,925 301,064
10% Senior discount notes of ICG
Services, net of discount 361,290 370,213
11 5/8% Senior discount notes of
Holdings, net of discount 137,185 141,079
12 1/2% Senior discount notes of
Holdings, net of discount 468,344 482,682
13 1/2% Senior discount notes of
Holdings, net of discount 532,252 550,022
Mortgage payable with interest at 8
1/2%, due monthly into 2009,
secured by building 999 982
Mortgage loan payable with
adjustable rate of interest
(15.21% at March 31, 2000), due
monthly into 2013, secured by
corporate headquarters 33,077 33,077
------------- -------------
1,906,697 2,053,557
Less current portion (796) (796)
------------- -------------
$ 1,905,901 2,052,761
============= =============
(a) Senior Facility
During the quarter ended March 31, 2000, the Company borrowed the
remaining $95.0 million available under the $100.0 million term loan.
The $100.0 million outstanding under the $100.0 million term loan
bears interest at a weighted average interest rate of 9.26% for the
three months ended March 31, 2000.
Redeemable preferred stock of subsidiary is summarized as follows:
December 31, March 31,
1999 2000
-------------- ------------
(in thousands)
14% Exchangeable preferred stock of
Holdings, mandatorily redeemable
in 2008 $ 144,144 149,384
14 1/4% Exchangeable preferred
stock of Holdings, mandatorily
redeemable in 2007 246,751 255,819
-------------- ------------
$ 390,895 405,203
============== ============
13
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) Commitments and Contingencies
(a) Network Capacity and Construction
In January 2000, Qwest Communications Corporation ("Qwest") and the
Company signed an agreement, whereby the Company will provide, for
$126.5 million over the initial 6-year term of the agreement, an
indefeasible right of use ("IRU") for designated portions of the
Company's local fiber optic network. The Company will recognize
revenue ratably over the term of the agreement, as the network
capacity is available for use. Payments will be received in
installments through June 18, 2000. The agreement was amended in March
2000 to include additional capacity for proceeds of $53.8 million to
be received in installments through September 18, 2000. Qwest may, at
its option, extend the initial term of the agreement for an additional
four-year period and an additional 10-year period for incremental
payment at the time of the option exercises. In the event that the
Company fails to deliver any of the network capacity by March 31,
2001, Qwest is entitled to cancel any undelivered network capacity
segments and receive immediate refund of any amounts already paid to
the Company for such segments.
In June 1999, the Company signed a minimum 10-year agreement to lease
certain portions of its fiber optic network to Qwest for $32.0
million, which was received in full by the Company in June 1999. The
Company has accounted for the agreement as a sales-type lease and is
recognizing revenue and operating costs in its consolidated financial
statements on a percentage of completion basis as the network
build-out is completed and is available for use. On March 23, 2000,
the final network facilities to be included under the agreement were
identified and made available for use allowing the Company to
recognize all remaining revenue under the agreement except amounts
deferred related to maintenance services. For the three months ended
March 31, 2000, the Company included $11.5 million and $1.1 million in
revenue and operating costs, respectively, in its consolidated
financial statements related to the agreement, including revenue
attributed to maintenance services, which is recognized ratably over
the term of the agreement. Approximately $2.4 million of the total
proceeds received related to maintenance services remain in deferred
revenue in the Company's consolidated balance sheet at March 31, 2000.
In March 1996, the Company and Southern California Edison Company
("SCE") 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 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 $124.4 million at
March 31, 2000. The agreement has been accounted for as a capital
lease in the accompanying consolidated balance sheets.
(b) Telecommunications and Line Purchase Commitments
In November 1999, the Company entered into a one-year agreement with
Covad Communications Company, ("Covad"), to purchase digital subscriber
line ("DSL") services from Covad. Under the agreement, the Company is
required to purchase a minimum amount of DSL services before designated
intervals over the one-year period.
Effective September 1998, the Company entered into two service
agreements with three-year terms with WorldCom Network Services, Inc.
("WorldCom"). Under the Telecom Services Agreement, WorldCom provides,
at designated rates, switched telecommunications services and other
related services to the Company, including termination services,
toll-free origination, switched access, dedicated access and travel
card services. Under the Carrier Digital Services Agreement, WorldCom
provides the Company, at designated rates, with the installation
14
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) Commitments and Contingencies (continued)
and operation of dedicated digital telecommunications interexchange
services, local access and other related services, which the Company
believes expedites service availability to its customers. Both
agreements require that the Company provide WorldCom with certain
minimum monthly revenue, which if not met, would require payment by
the Company for the difference between the minimum commitment and the
actual monthly revenue. Additionally, both agreements limit the
Company's ability to utilize vendors other than WorldCom for certain
telecommunications services specified in the agreements. The Company
has successfully achieved all minimum revenue commitments to WorldCom
under these agreements through March 31, 2000.
(c) Other Commitments
During the first quarter of 2000, the Company signed a letter of intent
with Cisco Systems, Inc. for financing of certain future capital
expenditures. The Company believes that this proposed financing
agreement will better enable the Company to fund its scheduled network
expansion through the purchase of Cisco equipment. The proposed Cisco
credit facility will provide the Company with up to $180.0 million of
capital lease financing with a three-year repayment term. During the
first quarter of 2000, $50.0 million of the capital lease financing
with Cisco was finalized and $11.5 million was drawn down under the
facility.
The Company has entered into various other 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 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 $386.9 million at March 31, 2000.
(d) Transport and Termination Charges
The Company has recorded revenue of approximately $30.8 million and
$35.5 million for the three months ended March 31, 1999 and 2000,
respectively, for reciprocal compensation relating to the transport and
termination of local traffic to ISPs from customers of incumbent local
exchange carriers ("ILECs") pursuant to various interconnection
agreements. During the period, some of the ILECs have not paid all of
the bills they have received from the Company and have disputed these
charges based on the belief that such calls are not local traffic as
defined by the various agreements and not subject to payment of
transport and termination charges under state and federal laws and
public policies. In addition, some ILECs, while paying a portion of
reciprocal compensation due to ICG for ISP-bound traffic, have disputed
other portions of the charges.
The resolution of these disputes have been, and will continue to be,
based on rulings by state public utility commissions and/or by the
Federal Communications Commission ("FCC"), or through negotiations
between the parties. The Company has aggressively participated in state
and federal regulatory and judicial proceedings that address the
obligation of the ILECs to pay the Company reciprocal compensation for
ISP-bound traffic under the Company's interconnection agreements.
Subsequent to the issuance of favorable state regulatory rulings
by the Colorado, Ohio and California state commissions, the
15
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) Commitments and Contingencies (continued)
Company has received payments from US West, Pacific Bell and
GTE-California for certain amounts owed for reciprocal compensation
totaling $52.4 million through March 31, 2000.
Additionally, through March 31, 2000, Southwestern Bell Telephone
Company ("SWBT") has remitted payment to the Company of $5.4 million
for reciprocal compensation owed to the Company for traffic from SWBT
customers in Texas to ISPs served by the Company. On December 29, 1999,
SWBT initiated commercial arbitration to determine whether the terms of
the Company's current interconnection agreement with SWBT require that
the rates that the Company has been billing SWBT for reciprocal
compensation be reduced to rates established by the Texas PUC in a 1998
consolidated arbitration with SWBT involving AT&T Corporation, MCI
Communications Corporation and other parties. Due to subsequent
procedural developments, this issue will be decided by the Texas PUC,
rather than in commercial arbitration; the Texas PUC proceeding is
pending.
On September 16, 1999, the CPUC rendered a decision against
MFS/Worldcom, a CLEC ("MFS"), in an arbitration between Pacific Bell
and MFS. The California PUC ruled that MFS should not be permitted to
charge reciprocal compensation rates for the tandem switching and
common transport rate elements. Although the California PUC's ruling
did not involve the Company, the Company made a decision effective for
the three months beginning on September 30, 1999 and thereafter to
suspend the revenue recognition for the tandem switching and common
transport rate elements for services provided in California and in all
other states where the Company operates and such rate elements are
included in the Company's interconnection agreement with the ILEC.
Additionally, the Company recorded a provision of $45.2 million during
the three months September 30, 1999 for accounts receivable related to
these elements recognized in periods through June 30, 1999, which the
Company believes may be uncollectible. The Company ceased recording
revenue for the tandem and transport elements of local reciprocal
compensation until the cash is received effective June 30, 1999. The
Company continues to bill Pacific Bell for the tandem switching and
common transport rate elements, and will pursue collection of its
accounts receivable, despite any provision. On February 4, 2000, the
California PUC initiated a new proceeding to examine, on a prospective
basis, compensation for ISP-bound traffic, including the tandem and
transport rate elements issue.
On February 25, 1999, the FCC issued a decision that ISP-bound traffic
is largely jurisdictionally interstate traffic. The decision relies on
the long-standing federal policy that ISP traffic, although
jurisdictionally interstate, is treated as though it is local traffic
for pricing purposes. The decision also emphasizes that because there
currently are no federal rules governing intercarrier compensation for
ISP traffic, the determination as to whether such traffic is subject to
reciprocal compensation under the terms of interconnection agreements
is properly made by the state commissions and that carriers are bound
by their interconnection agreements and state commission decisions
regarding the payment of reciprocal compensation for ISP traffic. The
FCC has initiated a rulemaking proceeding regarding the adoption of
prospective federal rules for intercarrier compensation for ISP
traffic. In its notice of rulemaking, the FCC expresses its preference
that compensation rates for this traffic continue to be set by
negotiations between carriers, with disputes resolved by arbitrations
conducted by state commissions, pursuant to the Telecommunications Act.
On March 24, 2000, the United States Court of Appeals for the District
of Columbia Circuit vacated and remanded the FCC's February 25, 1999
decision. The Company does not believe that the Circuit Court's
decision will adversely affect favorable state regulatory and judicial
decisions awarding reciprocal compensation for ISP traffic. The
decision does, however, create some uncertainty with respect to the
timing of future regulatory decisions, and there can be no assurance
that future FCC or state commission rulings will be favorable to the
Company.
16
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) Commitments and Contingencies (continued)
The Company has also recorded revenue of approximately $5.2 million and
$5.5 million for the three months ended March 31, 1999 and 2000,
respectively, related to other transport and termination charges to the
ILECs, pursuant to the Company's interconnection agreements with these
ILECs. Included in the Company's net trade receivables at March 31,
2000 are approximately $55.0 million, for all receivables related to
reciprocal compensation and other transport and termination charges.
As the Company's interconnection agreements expire or are extended,
rates for transport and termination charges are being and will continue
to be renegotiated and/or arbitrated. Rates for transport and
termination also may be impacted by ongoing state and federal
regulatory proceedings addressing intercarrier compensation for
Internet traffic on a prospective basis. In addition to the FCC's
pending rulemaking proceeding and the District of Columbia Court of
Appeals recent remand, of the states in which ICG currently operates,
the Ohio, Texas and California commissions currently are conducting
proceedings on prospective compensation.
The Company has negotiated and/or arbitrated new or extended
interconnection agreements with BellSouth, Ameritech, GTE-California
and Pacific Bell. The Company has completed arbitration proceedings
with BellSouth before the state commissions in Alabama, North Carolina,
Georgia, Kentucky, Florida and Tennessee and with Ameritech before the
Ohio commission. Final decisions issued by the Alabama, North Carolina,
Kentucky and Georgia commissions awarded the Company reciprocal
compensation for ISP traffic in new agreements to be executed by the
parties, including the tandem and transport rate element. The
arbitration decisions of the Florida and Ohio commissions declined to
rule on the merits of whether the Company should be paid reciprocal
compensation for ISP traffic. The Florida decision ruled that the
compensation provisions of the parties' current interconnection
agreement would continue to apply, subject to true up, until the
completion of the FCC's rulemaking on future compensation. The Ohio
commission deferred ruling on the merits until completion of the Ohio
commission's generic proceeding on prospective compensation, and
ordered that in the interim period until completion of the generic
proceeding, bill and keep procedures should be followed, subject to
true up once the commission proceeding is concluded. Arbitration
proceedings with US West before the Colorado commission and with SWBT
before the Texas commission are pending.
Subsequent to completion of the arbitration proceedings with BellSouth,
the Company signed a three-year agreement with BellSouth that, among
other issues, addresses the payment of reciprocal compensation for
Internet traffic. BellSouth agreed to pay past monies due to the
Company for local reciprocal compensation for the period beginning when
ISP traffic was first received by the Company from BellSouth and ending
December 31, 1999, and the parties also agreed to the payment of
reciprocal compensation for Internet and voice traffic for the period
from January 1, 2000 through December 31, 2002 at per-minute rates that
gradually reduce over the three year period. The agreement is
applicable to all nine states in the BellSouth operating territory.
While the Company intends to pursue the collection of all receivables
related to transport and termination charges and believes that future
revenue from transport and termination charges recognized under the
Company's interconnection agreements will be realized, there can be no
assurance that future regulatory and judicial rulings will be favorable
to the Company, or that different pricing plans for transport and
termination charges between carriers will not be adopted when the
Company's interconnection agreements continue to be renegotiated or
arbitrated, or as a result of FCC or state commission proceedings on
future compensation methods. In fact, the Company believes that
different pricing plans will continue to be considered and adopted, and
although the Company expects that revenue from transport and
termination charges likely will decrease as a percentage of total
revenue from local services in subsequent periods, the Company's local
termination services still will be required by the ILECs and
17
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) Commitments and Contingencies (continued)
must be provided under the Telecommunications Act, and likely will
result in increasing volume in minutes due to the growth of the
Internet and related services markets. The Company expects to negotiate
and/or arbitrate reasonable compensation and collection terms for local
termination services, although there is no assurance that such
compensation will remain consistent with current levels.
(e) Litigation
On April 4, 1997, certain shareholders of Zycom 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 (Case 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 plaintiffs were denied class
certification by the trial court and the Court of Appeals affirmed the
trial court's decision. In April 2000, the Company reached a tentative
settlement arrangement with the plaintiffs. Under the terms of the
proposed settlement, the Company would be completely released from all
claims of the plaintiffs. The settlement would not have a material
adverse effect on the Company's financial condition, results of
operations or cash flows. If the parties are unable to finalize a
settlement, an expedited trial will take place and the Company will
vigorously defend against the plaintiffs' claims.
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 material adverse
effect on the Company's financial condition, results of operations or
cash flows.
(7) Business Units
The Company conducts transactions with external customers through the
operations of its Telecom Services business unit. Administrative services
are provided to Telecom Services by Corporate Services. Corporate Services
consists of the operating activities of ICG Communications, Inc., ICG
Funding, LLC, ICG Canadian Acquisition, Inc., ICG Holdings (Canada) Co.,
ICG Holdings, Inc., ICG Services, Inc., ICG Tevis, Inc., ICG Corporate
Headquarters, L.L.C., ICG 161, L.P. and ICG Mountain View, Inc., which
primarily hold securities and real estate properties and provide certain
legal, accounting and finance, personnel and other administrative support
services to Telecom Services.
Direct and certain indirect costs incurred by Corporate Services on behalf
of Telecom Services are allocated to Telecom Services based on the nature
of the underlying costs. Transactions between Telecom Services and
Corporate Services for services performed in the normal course of business
are recorded at amounts which are intended to approximate fair value.
Set forth below are revenue, EBITDA (before nonrecurring and noncash
charges), which represents the measure of operating performance used by
management to evaluate operating results, depreciation and amortization,
operating loss, interest expense, capital expenditures of continuing
operations and total assets for Telecom Services and Corporate Services. As
described in note 3, the operating results of the Company reflect the
operations of Network Services, Satellite Services, Zycom and NETCOM as
discontinued for all periods presented.
18
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) Business Units (continued)
Three months ended
March 31,
----------------------
1999 2000
---------- ----------
(in thousands)
Revenue:
Telecom Services $ 104,331 157,224
Corporate Services - -
---------- ----------
Total revenue $ 104,331 157,224
========== ==========
EBITDA (before nonrecurring and
noncash charges) (a):
Telecom Services $ 12,257 25,093
Corporate Services (4,383) (5,860)
---------- ----------
Total EBITDA (before
nonrecurring and
noncash charges) $ 7,874 19,233
========== ==========
Depreciation and amortization (b):
Telecom Services $ 35,229 64,324
Corporate Services 1,146 275
---------- ----------
Total depreciation and
amortization $ 36,375 64,599
========== ==========
Operating loss:
Telecom Services $ 21,885 39,231
Corporate Services 5,683 6,567
---------- ----------
Total operating loss $ 27,568 45,798
========== ==========
Interest expense (b):
Telecom Services $ - 4,975
Corporate Services 47,438 57,659
---------- ----------
Total interest expense $ 47,438 62,634
========== ==========
Extraordinary (loss) gain:
Telecom Services $ 193,029 -
Corporate Services - -
---------- ----------
Total extraordinary (loss) gain $ 193,029 -
========== ==========
Capital expenditures of continuing
operations (c):
Telecom Services $ 102,911 213,208
Corporate Services - -
---------- ----------
Total capital expenditures
of continuing operations $ 102,911 213,208
========== ==========
December 31, March 31,
1999 2000
------------- -------------
(in thousands)
Total assets:
Telecom Services (d) $ 1,845,171 1,989,189
Corporate Services (d) 261,085 157,677
Eliminations (85,635) (71,529)
------------- -------------
Total assets $ 2,020,621 2,075,337
============= =============
19
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) Business Units (continued)
(a) EBITDA (before nonrecurring and noncash charges) consists of loss from
continuing operations before interest, income taxes, depreciation and
amortization, provision for impairment of long-lived assets, net loss
(gain) on disposal of long-lived assets, other expense, net and
accretion and preferred dividends on preferred securities of
subsidiaries, or, revenue less operating costs and selling, general
and administrative expenses. EBITDA (before nonrecurring and noncash
charges) is presented as the Company's measure of operating
performance because it is a measure commonly used in the
telecommunications industry. EBITDA (before nonrecurring and noncash
charges) 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 for the periods indicated. EBITDA (before nonrecurring and
noncash charges) is not a measurement under generally accepted
accounting principles and is not necessarily comparable with similarly
titled measures of other companies.
(b) Although not included in EBITDA (before nonrecurring and noncash
charges), which represents the measure of operating performance used
by management to evaluate operating results, the Company has
supplementally provided depreciation and amortization and interest
expense for each of the Company's business units and Corporate
Services. Interest expense excludes amounts charged for interest on
outstanding cash advances and expense allocations among the business
units and Corporate Services.
(c) Capital expenditures include assets acquired with cash, under capital
leases and pursuant to IRU agreement and excludes payments for
construction of the Company's corporate headquarters of $1.7 million
during the three months ended March 31, 2000 and corporate
headquarters assets acquired through the issuance of long-term debt of
$33.7 million during the three months ended March 31, 1999.
(d) Total assets of Telecom Services and Corporate Services excludes
investments in consolidated subsidiaries which eliminate in
consolidation.
(8) Summarized Financial Information of ICG Holdings, Inc.
The 11 5/8% Senior Discount Notes due 2007 (the "11 5/8% Notes") issued by
Holdings during 1997 are guaranteed by ICG. The 12 1/2% Senior Discount
Notes due 2006 (the "12 1/2% Notes") and the 13 1/2% Senior Discount Notes
due 2005 (the "13 1/2% Notes") issued by Holdings during 1996 and 1995,
respectively, are guaranteed by ICG and Holdings-Canada.
The separate financial statements of Holdings have not been included herein
because such disclosure is not considered to be material to the holders of
the 11 5/8% Notes, the 12 1/2% Notes and the 13 1/2% Notes. However,
summarized combined financial information for Holdings and its subsidiaries
is as follows:
20
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) Summarized Financial Information of ICG Holdings, Inc. (continued)
Summarized Consolidated Balance Sheet Information
December 31, March 31,
1999 2000
------------ ------------
(in thousands)
----------------------------
Current assets $ 263,870 193,763
Property and equipment, net 675,613 736,724
Other non-current assets, net 128,489 105,551
------------ ------------
Total assets $1,067,972 1,036,038
============ ============
Current liabilities 148,042 175,785
Long-term debt, less current
portion 1,138,734 1,174,719
Capital lease obligations, less
current portion 57,564 57,220
Other long-term liabilities 1,233 3,649
Due to parent 256,348 271,252
Due to ICG Services 128,893 121,691
Redeemable preferred stock 390,895 405,203
Stockholder's deficit (1,053,737) (1,173,481)
------------ ------------
Total liabilities and
stockholders' deficit $1,067,972 1,036,038
============ ============
Summarized Consolidated Statement of Operations Information
Three months ended March 31,
--------------------------
1999 2000
------------ ------------
(in thousands)
Total revenue $ 105,733 152,877
Total operating costs and
expenses 138,105 206,659
------------ ------------
Operating loss $ (32,372) (53,782)
============ ============
Loss from continuing operations $ (67,370) (119,744)
============ ============
Net loss $ (82,250) (119,744)
============ ============
21
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) Condensed Financial Information of ICG Holdings (Canada) Co.
Condensed financial information for Holdings-Canada only is as follows:
Condensed Balance Sheet Information
December 31, March 31,
1999 2000
-------------- -------------
(in thousands)
------------------------------
Current assets $ 82 82
Advances to subsidiaries 256,348 271,252
Non-current assets, net - 255,931
-------------- -------------
Total assets $ 256,430 527,265
============== =============
Current liabilities 73 73
Long-term debt, less
current portion - -
Due to parent 246,609 517,444
Share of losses of
subsidiaries 1,053,737 1,173,481
Shareholders' deficit (1,043,989) (1,163,733)
-------------- -------------
Total liabilities and
shareholders' deficit $ 256,430 527,265
============== =============
Condensed Statement of Operations Information
Three months ended
March 31,
-------------------------
1999 2000
------------ -----------
Total revenue $ - -
Total operating costs and
expenses 603 -
------------ -----------
Operating loss $ (603) -
============ ===========
Losses of subsidiaries (82,250) (119,744)
Net loss attributable to
common shareholders $ (82,853) (119,744)
============ ===========
(10) Condensed Financial Information of ICG Communications, Inc.(Parent company)
The primary assets of ICG are its investments in ICG Services, ICG Funding
and Holdings-Canada, including advances to those subsidiaries. Certain
corporate expenses of the parent company are included in ICG's statement of
operations and were approximately $0.5 million for both the three months
ended March 31, 1999 and 2000. ICG has no operations other than those of
ICG Services, ICG Funding and Holdings-Canada and their subsidiaries.
(11) Events Subsequent to March 31, 2000
On April 10, 2000, the Company sold 75,000 shares of 8% Series A-1, A-2 and
A-3 Convertible Preferred Stock of ICG (the "Convertible Preferred Stock")
and 10,000,000 warrants to purchase ICG Common Stock to affiliates of
Liberty Media Corporation ("Liberty Media"), Hicks, Muse, Tate & Furst
Incorporated ("Hicks Muse") and Gleacher Capital Partners ("Gleacher
Capital") (collectively, "the Investors"). The sale of the Convertible
Preferred Stock resulted in proceeds to the Company of $750.0 million
22
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) Events Subsequent to March 31, 2000 (continued)
(before cash fees and expenses of approximately $36.0 million). Each share
of Convertible Preferred Stock has an initial liquidation preference of
$10,000 per share and bears cumulative dividend rate of 8% per annum,
compounded quarterly. Dividends accrete to the liquidation preference on a
quarterly basis for five years and are payable in cash or additional
liquidation preference accretion thereafter. In the event of a change in
control of the Company, as defined in the agreement, occurring prior to
five years from the date of issuance of the Convertible Preferred Stock,
the Company is, in most instances, required to make a special dividend
payment to the Convertible Preferred Stockholders equal to the difference
between the fully accreted liquidation preference of the Convertible
Preferred Stock five years from the date of issuance and the existing
liquidation preference on the date of the change in control. In addition,
the Company has the right, but not the obligation, to offer to repurchase
the Convertible Preferred Stock at 101% of the liquidation preference on
the date of the change in control (after giving effect to the special
dividend, if applicable).
The Convertible Preferred Stock is immediately convertible into shares of
ICG Common Stock at a conversion rate of $28.00 per share, subject to
adjustment and will have voting rights with the common stockholders on an
as-converted basis. The holders of the Series A-1 and A-2 Convertible
Preferred Stock collectively will be entitled to elect up to three
directors to the Company's Board of Directors. Additionally, certain
material transactions outside the ordinary course of business will require
an affirmative vote of at least one of the three directors elected by the
holders of the Series A-1 and A-2 Convertible Preferred Stock. The Company
may redeem the Convertible Preferred Stock at any time after five years
from the date of issuance through 15 years from the date of issuance, at
which time the Convertible Preferred Stock is mandatorily redeemable. The
warrants to purchase ICG Common Stock are immediately convertible into
shares of ICG Common Stock at a conversion rate of $34.00 per share
and expire in five years from the date of issuance. The affiliates of
Liberty Media, Hicks Muse and Gleacher Capital purchased $500.0 million,
$230.0 million and $20.0 million, respectively, in Convertible Preferred
Stock and received a ratable portion of the total 10,000,000 warrants.
Separately, on February 28, 2000, ICG Tevis, Inc., a subsidiary of the
Company, agreed to purchase, subject to regulatory approvals, 1,000,000
shares of common stock of Teligent, Inc., a fixed wireless broadband
communications provider ("Teligent"), from a subsidiary of Teligent in
exchange for 2,996,076 shares of ICG Common Stock.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion includes certain forward-looking statements and
information that is based on the beliefs of management as well as assumptions
made by and information currently available to the Company. When used in this
document, the words "anticipate", "believe", "estimate" and "expect" and similar
expressions, as they relate to the Company or its management, are intended to
identify forward-looking statements. Such statements reflect the current views
of the Company with respect to future events and are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described in this document. These
forward-looking statements are affected by important factors, including, but not
limited to, the ability of the Company to obtain adequate financing to fund
expansion, the 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 enhanced telephony
and network services, the 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 of operations for the three months ended March 31, 1999 and 2000
represent the consolidated operating results of the Company. See the unaudited
consolidated financial statements of the Company for the three months ended
March 31, 2000 included elsewhere herein. The Company's consolidated financial
statements reflect the operations of Network Services, Satellite Services, Zycom
and NETCOM as discontinued for all periods presented. The terms "fiscal" and
"fiscal year" refer to the Company's fiscal year ending December 31. All dollar
amounts are in U.S. dollars.
Company Overview
ICG Communications, Inc. ("ICG" or the "Company") is a facilities-based
communications provider and, based on revenue and customer lines in service, is
one of the largest competitive communications companies in the United States.
The Company primarily offers voice and data services directly to small- to
medium-sized business customers and offers network facilities and data
management to ISP customers. In addition, the Company offers special access and
switched access services to long-distance companies and other customers.
The Company began marketing and selling local dial-tone services in major
metropolitan areas in early 1997 subsequent to passage of the Telecommunications
Act, which permitted competitive interstate and intrastate telephone services
including local dial tone. During the first quarter of 2000, the Company offered
competitive telephone services in 31 states within the United States. In early
1998, the Company acquired NETCOM On-Line Communication Services, Inc.
("NETCOM"), which provided the Company with a Tier 1 national data network that
enabled the Company to launch its business of providing network infrastructure
to ISPs. By March 31, 2000, the company had 904,629 customer lines and data
access ports in service, approximately 12,000 business customers and
approximately 500 ISP customers.
At March 31, 2000 the Company's Tier 1 nationwide data network included
public and private peering locations, 227 POPs, 16 frame relay switches and
high-performance routers connecting a backbone of 24 ATM switches and 18,000
miles of leased long-haul fiber lines. In addition, at March 31, 2000, the
Company had 35 voice switches, 4,807 miles of local fiber and connections to
8,792 buildings.
As of March 31, 2000, the Company had approximately 650,000 data access
ports in service. The Company provides data access and transport services to
ISPs that in many cases rely on the Company to provide network ownership and
management. The Company's current product offerings to the ISP market include
dial-up products such as primary rate interface ("PRI"), remote access service
("RAS") and Internet remote access service ("IRAS"), as well as broadband access
services including T-1 and T-3 connections and DSL.
As of March 31, 2000, the Company had approximately 250,000 business
customer lines in service. Voice and data communication services offered to
business customers include local, long distance and enhanced telephony services
through its Internet protocol, circuit switch and regional fiber optic networks.
In regional markets, the Company is a cost-efficient alternative to the area's
incumbent local telephone company for businesses.
The Company also provides interexchange services to long-distance carriers
24
and other customers including "special access" services that connect end-users
to long-distance carrier's facilities, connect a long-distance carrier's
facilities to the local telephone company central office and connect facilities
of the same or different long-distance carrier.
During the first quarter of 2000, the Company realized significant growth
as demonstrated by a 51% increase in revenue over the first quarter of 1999 and
a more than doubling of the number of lines in service compared to March 31,
1999. The Company's business continues to grow as a result of increased Internet
demand, new technologies and increased market share for customers traditionally
served by incumbent telephone companies. The Company's year 2000 business plan
calls for accelerated network expansion into 22 new major metropolitan areas.
The Company will also invest in developing and delivering new products and
services to add to its portfolio of offerings to each market segment.
To better focus its efforts on its core business operations, the Company
disposed of certain assets which management believed did not complement its
overall business strategy. During the year ended December 31, 1999, the Company
sold non-core assets and related securities for net cash proceeds of
approximately $405 million, including the sale of the Company's retail ISP
customer business and its Network Services and Satellite Services divisions (see
note 3, "Discontinued Operations" in the unaudited consolidated financial
statements of the Company for the three months ended March 31, 2000 included
elsewhere herein). The Company also centralized its provisioning process with
two new provisioning centers that replaced 30 regional centers and is in the
process of installing new, comprehensive operating support systems ("OSS") from
Telcordia for provisioning service and from Saville for customer billing.
In conjunction with the increase in its service offerings, the Company has
and will continue to need to spend significant amounts of capital on equipment,
sales, marketing, customer service, engineering and support personnel prior to
the generation of corresponding revenue. EBITDA losses, EBITDA (before
nonrecurring and noncash charges) losses and operating and net losses have
generally increased immediately preceding and during periods of relatively rapid
network expansion and development of new services. The Company reported positive
EBITDA (before nonrecurring and noncash charges) of $19.2 million for the
quarter ended March 31, 2000. As the Company provides a greater volume of higher
margin services, carries more traffic on its own facilities rather than ILEC
facilities and obtains the right to use unbundled ILEC facilities, while
experiencing decelerating increases in personnel and other selling, general and
administrative expenses supporting its operations, any or all of which may not
occur, the Company anticipates that EBITDA performance will improve.
Results of Operations
The following table provides certain statement of operations data and
certain other financial data for the Company for the periods indicated. The
table also presents revenue, operating costs and expenses, operating loss,
EBITDA and EBITDA (before nonrecurring and noncash charges) as a percentage of
the Company's total revenue.
25
Three months ended March 31,
--------------------------------------------
1999 2000
-------------------- ---------------------
$ % $ %
--------- -------- --------- ---------
(unaudited)
Statement of Operations Data: (in thousands)
Revenue 104,331 100 157,224 100
Operating costs 53,649 51 82,902 53
Selling, general and
administrative 42,808 41 55,089 35
Depreciation and
amortization 36,375 35 64,599 41
Other expense (income), net (933) (1) 432 -
--------- -------- --------- ---------
Operating loss (27,568) (26) (45,798) (29)
Other Data:
Net cash used by operating
activities (47,905) (7,234)
Net cash (used) provided
by investing activities 133,100 (121,468)
Net cash (used) provided
by financing activities (456) 66,207
EBITDA (1) 8,807 8 18,801 12
EBITDA (before nonrecurring
and noncash charges) (1) 7,874 8 19,233 12
Capital expenditures of
continuing operations (2) 102,911 213,208
Capital expenditures of
discontinued operations (2) 2,805 -
March 31, June 30, September 30, December 31, March 31,
1999 1999 1999 1999 2000
------------- ------------- ------------- ------------- -------------
(unaudited)
Statistical Data (3):
Full time employees 2,665 2,753 3,054 2,853 2,930
Telecom services:
Access lines in
service (4) 418,610 494,405 584,827 730,975 904,629
Buildings connected:
On-net 789 874 939 963 1,046
Hybrid (5) 5,337 5,915 6,476 7,115 7,746
------------- ------------- ------------- ------------- -------------
Total buildings
connected 6,126 6,789 7,415 8,078 8,792
Operational switches:
Circuit 29 29 29 31 35
ATM - - - 24 24
Frame Relay 17 16 16 16 16
------------- ------------- ------------- ------------- -------------
Total operational
switches 46 45 45 71 75
Regional fiber route
miles (6):
Operational 4,351 4,406 4,449 4,596 4,807
Under construction - - - - 368
Regional fiber strand
miles (7):
Operational 155,788 164,416 167,067 174,644 177,103
Under construction - - - - 17,813
Long-haul broadband
route miles - - - 18,000 18,000
Collocations with ILECs 111 126 139 147 183
(1) EBITDA consists of earnings (loss) from continuing operations before
interest, income taxes, depreciation and amortization, other expense, net
and accretion and preferred dividends on preferred securities of
subsidiaries, or, operating loss plus depreciation and amortization. EBITDA
(before nonrecurring and noncash charges) represents EBITDA before certain
nonrecurring charges such as the net loss (gain) on disposal of long-lived
assets and other, net operating costs and expenses, including deferred
compensation. EBITDA and EBITDA (before nonrecurring and noncash charges)
26
are provided because they are measures commonly used in the
telecommunications industry. EBITDA and EBITDA (before nonrecurring and
noncash charges) are presented to enhance an understanding of the Company's
operating results and are not intended to represent cash flows or results
of operations in accordance with generally accepted accounting principles
("GAAP") for the periods indicated. EBITDA and EBITDA (before nonrecurring
and noncash charges) are not measurements under GAAP and are not
necessarily comparable with similarly titled measures of other companies.
Net cash flows from operating, investing and financing activities of
continuing operations as determined using GAAP are also presented in Other
Data.
(2) Capital expenditures include assets acquired with cash, under capital
leases, pursuant to IRU agreement and through the issuance of debt or
warrants and excludes payments for construction of the Company's corporate
headquarters of $1.7 million during the three months ended March 31, 2000
and corporate headquarters assets acquired through the issuance of
long-term debt of $33.7 million during the three months ended March 31,
1999. Capital expenditures of discontinued operations includes the capital
expenditures of Network Services, Satellite Services, Zycom and NETCOM
combined for all periods presented.
(3) Amounts presented are for three-month periods ended, or as of the end of
the period presented.
(4) Access lines in service at March 31, 2000 includes approximately 90% of
lines provisioned through the Company's switch with the remainder
provisioned through resale and other agreements with various local exchange
carriers. Resale lines are used primarily to obtain customers. Although the
Company plans to continue to migrate lines from resale to higher margin
on-switch lines, there is no assurance 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) Regional fiber route miles refers to the number of miles of regional fiber
optic cable, including leased fiber. As of March 31, 2000, the Company had
4,807 regional fiber route miles, of which 48 regional fiber route miles
were leased under operating leases. Regional fiber route miles under
construction represents fiber under construction which is expected to be
operational within six months.
(7) Regional fiber strand miles refers to the number of regional fiber route
miles, including leased fiber, along a telecommunications path multiplied
by the number of fiber strands along that path. As of March 31, 2000, the
Company had 177,103 regional fiber strand miles, of which 856 regional
fiber strand miles were leased under operating leases. Regional fiber
strand miles under construction represents fiber under construction which
is expected to be operational within six months.
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
Revenue. Total revenue of $157.2 million for the three months ended March
31, 2000 increased $52.9 million, or 51%, from the three months ended March 31,
1999. Local services revenue increased from $67.4 million (or 65% of total
revenue) for the three months ended March 31, 1999 to $102.6 million (or 65% of
total revenue) for the three months ended March 31, 2000, primarily due to an
increase in the local access lines at March 31, 1999 as compared to those in
service at March 31, 2000. In addition, local access revenue includes revenue of
approximately $30.8 million and $35.5 million for the three months ended March
31, 1999 and 2000, respectively, for reciprocal compensation relating to the
transport and termination of local traffic to ISPs from customers of ILECs
pursuant to various interconnection agreements. Certain of these agreements are
subject to renegotiation over the next several months. While management believes
that these agreements will be replaced by agreements offering the Company some
form of compensation for ISP traffic, the renegotiated agreements may reflect
rates for reciprocal compensation which are lower than the rates under the
current contracts. See "Liquidity - Transport and Termination Charges." Local
access revenue during the three months ended March 31, 2000 also includes
approximately $4.3 million in revenue for the period from February 18, 2000
through March 31, 2000 from the MindSpring Capacity Agreement which prior to
February 17, 2000 had been offset against the deferred gain on the sale of
NETCOM assets. Special access revenue increased from $22.6 million (or 22% of
total revenue) for the three months ended March 31, 1999 to $39.8 million (or
25% of total revenue) for the three months ended March 31, 2000. The increase in
special access revenue is due to increased sales as well as $11.5 million of
27
revenue recognized during the three months ended March 31, 2000 under the
Company's fiber optic lease agreement with a major interexchange carrier.
Switched access (primarily terminating long distance) and SS7 revenue increased
to $10.5 million for the three months ended March 31, 2000, compared to $9.2
million for the three months ended March 31, 1999. The Company has selectively
raised prices on its wholesale switched services products in order to improve
margins. Revenue from long distance services decreased from $5.1 million for the
three months ended March 31, 1999 to $4.3 million for the three months ended
March 31, 2000. The Company's long distance revenue for the three months ended
March 31, 2000 was impacted by planned attrition of resale access lines which
had high long distance service penetration rates.
Operating costs. Total operating costs increased $29.3 million, or 55%,
from $53.6 million for the three months ended March 31, 1999 to $82.9 million
for the three months ended March 31, 2000. Operating costs increased as a
percentage of revenue from 51% for the three months ended March 31, 1999 to 53%
for the three months ended March 31, 2000. Operating costs consist of payments
to ILECs for the use of network facilities to support local, special and
switched access services, network operating costs, right of way fees and other
costs. The increase in operating costs in absolute dollars and as a percentage
of revenue is attributable to the increase in volume of local and special access
services, the increase in network operating costs which include engineering and
operations personnel dedicated to the provision of local exchange services, the
expansion of ICG service offerings into cities where network capacity and switch
facility access is being leased from ILECs and the recognition of approximately
$9.4 million of operating expenses for the period from February 18, 2000 through
March 31, 2000 from the MindSpring Capacity Agreement which prior to February
17, 2000 had been offset against the deferred gain on the sale of NETCOM assets.
The Company expects the ratio of operating costs to revenue will improve as the
Company provides a greater volume of higher margin services, principally RAS and
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.
Selling, general and administrative expenses. Total selling, general and
administrative ("SG&A") expenses increased $12.3 million, or 29%, from $42.8
million for the three months ended March 31, 1999 to $55.1 million for the three
months ended March 31, 2000. Total SG&A expenses decreased as a percentage of
revenue from 41% for the three months ended March 31, 1999 to 35% for the three
months ended March 31, 2000. SG&A expenses related to the Company's
communication services ("Telecom Services") increased from $38.4 million, or 37%
of revenue, for the three months ended March 31, 1999 to $49.2 million, or 31%
of revenue, for the three months ended March 31, 2000. The increase in absolute
dollars is principally due to an increase in average staff levels resulting in
increased salary and benefits expense as well as the recognition of
approximately $1.0 million of SG&A expenses for the period from February 18,
2000 through March 31, 2000 from the MindSpring Capacity Agreement which prior
to February 17, 2000 had been offset against the deferred gain on the sale of
NETCOM assets. As the Company benefits from the revenue generated by newly
developed services requiring substantial administrative and marketing expense
prior to initial service offerings, principally local exchange services, SG&A
expenses have been declining as a percentage of revenue. From time to time, the
Company will experience increases in SG&A expenses as the Company prepares for
offerings of newly developed services, such as RAS. Corporate Services SG&A
expenses increased $1.5 million, from $4.4 million for the three months ended
March 31, 1999 to $5.9 million for the three months ended March 31, 2000,
primarily due to increased salary costs.
Depreciation and amortization. Depreciation and amortization increased
$28.2 million, or 78%, for the three months ended March 31, 2000, compared to
the three months ended March 31, 1999, primarily due to increased investment in
depreciable assets resulting from the continued expansion of the Company's
networks and services as well as a reduction in the overall weighted-average
useful life of depreciable assets in service. The Company expects that
depreciation and amortization will continue to increase as the Company continues
to invest in the expansion and upgrade of its regional fiber and nationwide data
networks.
Interest expense. Interest expense increased $15.2 million, from $47.4
million for the three months ended March 31, 1999, to $62.6 million for the
three months ended March 31, 2000, which includes $53.9 million of noncash
interest. The Company's interest expense increased and will continue to
increase, because the principal amount of its indebtedness increases until the
Company's fixed rate senior indebtedness begins to pay interest in cash,
beginning in 2001. Additionally, interest expense increased due to the increase
in long-term debt associated with the senior secured financing facility (the
"Senior Facility") completed in August 1999.
28
Interest income. Interest income decreased $0.8 million, from $4.1 million
for the three months ended March 31, 1999, to $3.3 million for the three months
ended March 31, 2000. The decrease is attributable to the decrease in cash, cash
equivalents and short-term investments as the Company funds operating losses and
continues to invest available cash balances in telecommunications equipment and
other assets.
Other (expense) income, net, including unrealized gain on marketable
trading securities in 1999 and realized gain on sale of available for sale
securities in 2000. Other (expense) income, net fluctuated from a loss of $0.5
million for the three months ended March 31, 1999 to income of $0.2 million for
the three months ended March 31, 2000. For the three months ended March 31,
1999, other (expense) income, net primarily includes litigation settlement
costs, offset by an unrealized gain on the common stock of MindSpring which the
Company received as partial consideration for the sale of the retail ISP
operations of NETCOM. For the three months ended March 31, 2000, other (expense)
income primarily consists of a realized gain on the sale of a portion of the
NorthPoint common stock partially offset by other nonoperating expenses.
Accretion and preferred dividends on preferred securities of subsidiaries.
Accretion and preferred dividends on preferred securities of subsidiaries
increased $1.8 million, from $14.8 million for the three months ended March 31,
1999 to $16.6 million for the three months ended March 31, 2000. The increase is
due primarily to the periodic payment of dividends on the 14% Exchangeable
Preferred Stock Mandatorily Redeemable 2008 (the "14% Preferred Stock") and the
14 1/4% Exchangeable Preferred Stock Mandatorily Redeemable 2007 (the "14 1/4%
Preferred Stock") in additional shares of 14% Preferred Stock and 14 1/4% of
Preferred Stock. Accretion and preferred dividends on preferred securities of
subsidiaries recorded during the three months ended March 31, 2000 consists of
the accretion of issuance costs $0.3 million and the accrual of the preferred
securities dividends $16.3 million associated with the 6 3/4% Exchangeable
Limited Liability Company Preferred Securities Mandatorily Redeemable 2009 (the
"6 3/4% Preferred Securities"), the 14% Preferred Stock and the 14 1/4%
Preferred Stock.
Loss from continuing operations. Loss from continuing operations increased
$35.4 million, or 41%, from $86.2 million for the three months ended March 31,
1999 to $121.6 million for the three months ended March 31, 2000 due primarily
to the increases in depreciation and amortization and interest expense,
partially offset by an increase in operating margin, as noted above.
Loss from discontinued operations. For the three months ended March 31,
1999, loss from discontinued operations was $0.1 million and consists of the
combined net loss of Network Services, Satellite Services, Zycom and NETCOM for
the three-month period. Zycom terminated its normal operations on October 22,
1998 and, accordingly, the Company reported no loss from discontinued operations
of Zycom for the three months ended March 31, 1999 or 2000. Since the Company
reported a gain on the disposition of NETCOM, the Company deferred the net
losses from operations of NETCOM from November 3, 1998 (the date on which the
Company's board of directors adopted the formal plan to dispose of the
operations of NETCOM) through the dates of the sales and, accordingly, the
Company reported no loss from discontinued operations of NETCOM for the three
months ended March 31, 1999.
Extraordinary (loss) gain on sales of operations of NETCOM. The Company
reported an extraordinary gain on the sales of the operations of NETCOM during
the three months ended March 31, 1999 of $193.0 million, net of income taxes of
$6.4 million. The gain and related income taxes were adjusted during the nine
months ended December 31, 1999 to reflect actual results. Offsetting the gain on
the sales during the three months ended March 31, 1999 is approximately $16.6
million of net losses of operations of NETCOM from November 3, 1998 through the
dates of the sales. Additionally, $35.5 million of the proceeds from the sale of
certain of the domestic operating assets and liabilities of NETCOM to MindSpring
were deferred. The deferred proceeds were recognized on a periodic basis over
the term of the MindSpring Capacity Agreement.
Liquidity and Capital Resources
The Company's growth to date has been funded through a combination of
equity, debt and lease financing and non-core asset sales. The Company has also
incurred losses from continuing operations since inception and, as of March 31,
2000, had a working capital deficit of $124.0 million. As of March 31, 2000, the
Company had approximately $71.8 million of cash and short term investments and
approximately $25.0 million of credit available under the Senior Facility.
The Company has entered into several financing agreements subsequent to
and during the three months ended March 31, 2000 to provide additional capital
to support the Company's operating losses and planned capital expansion,
29
including:
i) On April 10, 2000 the Company completed the sale of 75,000 shares
of 8% Series A-1, A-2 and A-3 Convertible Preferred Stock and
warrants (see note 11, "Events Subsequent to March 31, 2000" in
the unaudited consolidated financial statements of the Company
for the three months ended March 31, 2000 included elsewhere
herein) to affiliates of Liberty Media Corporation, Hicks, Muse,
Tate & Furst Incorporated and Gleacher Capital Partners. The
transaction resulted in proceeds to the Company of $750.0 million
(before cash expenses and fees of approximately $36.0 million).
ii) During the three months ended March 31, 2000, the Company signed
letters of intent with two major vendors, Cisco Systems, Inc. and
Lucent Technologies, Inc., to provide financing for the
acquisition of equipment. The proposed Cisco credit facility will
provide the Company with up to $180.0 million of capital lease
financing and is expected to close in the second quarter of 2000.
Given the closing of the equity transaction described in (i)
above, the Company has postponed finalizing the arrangements with
Lucent.
Management believes that with the completion of the preferred stock
transaction noted above, additional financing including bank financing, vendor
financing, or the issuance of high yield debt will be available to fund
operations and achieve the Company's targeted future growth through early 2001.
While the Company believes that it could obtain requisite additional financing,
there can be no assurance that such financing would be available on a timely
basis or on acceptable terms.
Net Cash Used By Operating Activities
The Company's operating activities used $47.9 million and $7.2 million for
the three months ended March 31, 1999 and 2000, respectively. Net cash used by
operating activities is primarily due to losses from continuing operations,
decreases in accounts payable and accrued liabilities and changes in accounts
receivable balances which are partially offset by changes in working capital
items and noncash expenses, such as depreciation and amortization, deferred
interest expense and accretion and preferred dividends on subsidiary preferred
securities.
Net Cash (Used) Provided By Investing Activities
Investing activities provided $133.1 million and used $121.5 million in
the three months ended March 31, 1999 and 2000, respectively. Net cash (used)
provided by investing activities includes cash expended for the acquisition of
property, equipment and other assets of $99.2 million and $141.3 million for the
three months ended March 31, 1999 and 2000, respectively. For the three months
ended March 31, 2000, net cash (used) provided by investing activities included
proceeds from the sale of short-term investments available for sale. Included in
net cash (used) provided by investing activities for the three months ended
March 31, 1999 is the purchase of long-term investments of $27.5 million, offset
by proceeds from the sales of the operations of NETCOM of $252.9 million. The
Company will continue to use cash in 2000 and subsequent periods for the
construction of new networks, the expansion of existing networks and,
potentially, for acquisitions. The Company acquired assets under capital leases
of $14.4 million during the three months ended March 31, 2000.
Net Cash (Used) Provided By Financing Activities
Financing activities used $0.5 million and provided $66.2 million in the
three months ended March 31, 1999 and 2000, respectively. Net cash (used)
provided by financing activities for the three months ended March 31, 1999 and
2000 include proceeds from the issuance of common stock in conjunction with the
exercise of options and warrants and the Company's employee stock purchase plan,
offset by principal payments on long-term debt and capital leases and payments
of preferred dividends on preferred securities of subsidiaries. Net cash
provided by financing activities for the three months ended March 31, 2000 also
includes $95.0 million in proceeds from the issuance of long-term debt partially
offset by $35.2 million of payments made on the IRU agreement.
On August 12, 1999, ICG Equipment and NetAhead entered into a $200.0
million senior secured financing facility (the "Senior Facility") consisting of
a $75.0 million term loan, a $100.0 million term loan and a $25.0 million
revolving line of credit. As of March 31, 2000, $174.4 million was outstanding
30
under the loans at weighted average interest rates ranging from 9.26% to 9.65%
for the three months ended March 31, 2000. Quarterly repayments on the debt
commence at various dates beginning September 30, 1999 with remaining
outstanding balances maturing on June 30, 2005 for the $100.0 million term loan
and the $25.0 million line of credit and March 31, 2006 for the $75.0 million
term loan.
As of March 31, 2000, the Company had an aggregate accreted value of
approximately $1.8 billion outstanding under the 13 1/2% Senior Discount Notes
due 2005 (the "13 1/2 % Notes"), the 12 1/2% Senior Discount Notes due 2006 (the
"12 1/2 % Notes"), the 11 5/8% Senior Discount Notes due 2007 (the "11 5/8 %
Notes"), the 10% Notes and the 9 7/8% Notes. The 13 1/2% Notes require payments
of interest to be made in cash commencing March 15, 2001 and mature on September
15, 2005. The 12 1/2% Notes require payments of interest to be made in cash
commencing November 1, 2001 and mature on May 1, 2006. The 11 5/8% Notes require
payments of interest to be made in cash commencing September 15, 2002 and mature
on March 15, 2007. The 10% Notes require payments of interest in cash commencing
August 15, 2003 and mature on February 15, 2008. The 9 7/8% Notes require
payments of interest in cash commencing November 1, 2003 and mature on May 1,
2008. With respect to fixed rate senior indebtedness outstanding on March 31,
2000, the Company has cash interest payment obligations of approximately $113.3
million in 2001, $158.0 million in 2002, $212.6 million in 2003 and $257.2
million in 2004.
As of March 31, 2000, an aggregate amount of $533.7 million was
outstanding under the 6 3/4% Preferred Securities, the 14% Preferred Stock and
the 14 1/4% Preferred Stock. The 6 3/4% Preferred Securities require payments of
dividends to be made in cash through November 15, 2000. In addition, the 14%
Preferred Stock and 14 1/4% Preferred Stock require payments of dividends to be
made in cash commencing June 15, 2002 and August 1, 2001, respectively. With
respect to preferred securities currently outstanding, the Company has cash
dividend obligations of approximately $6.7 million remaining in 2000 for which
the Company has restricted cash balances available for such dividend payments,
$10.7 million in 2001 and $35.4 million in 2002 and each year thereafter through
2007.
Capital Expenditures
The Company's capital expenditures of continuing operations (excluding the
acquisition of corporate headquarters assets acquired through the issuance of
long-term debt of $33.7 million during the three months ended March 31, 1999 and
payments for construction of the Company's corporate headquarters of $1.7
million during the three months ended March 31, 2000 and including assets
acquired with cash, under capital leases and pursuant to IRU agreement) were
$102.9 million and $213.2 million for the three months ended March 31, 1999 and
2000, 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 $800.0
million during the remainder of 2000. In the event that the Company's efforts to
acquire new customers and deploy new services are more successful then planned,
the Company may be required to expand capital resources earlier in the year than
expected to accommodate customer demands.
During the first quarter of 2000, the Company entered into a letter of
intent with Cisco Systems, Inc. The Company believes that this financing
agreement will better enable the Company to fund its scheduled network expansion
through the purchase of Cisco equipment. The Cisco credit facility provides for
up to $180.0 million of capital lease financing with a three-year repayment
term. The Company anticipates that the Cisco transaction will close during the
second quarter of 2000. There is no assurance, however, that this transaction
will close during that time period, or at all.
To facilitate the expansion of its services and networks, the Company has
entered into equipment purchase agreements with various vendors under which the
Company has committed to purchase a substantial amount of equipment and other
assets, including a full range of switching systems, fiber optic cable, network
electronics, software and services. If the Company fails to meet the minimum
purchase level in any given year, the vendor may discontinue certain discounts,
allowances and incentives otherwise provided to the Company. Further, the
Company's ability to make capital expenditures to meet its business plan will
depend on numerous factors, including certain factors beyond the Company's
control. These factors include, but are not limited to, economic conditions,
competition, regulatory developments and the availability of equity, debt and
lease financing.
31
Other Cash Commitments and Capital Requirements
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 three months ended March 31,
2000 included elsewhere herein.
In view of the continuing development of the Company's products and
services, the expansion of existing networks and the construction, leasing and
licensing of new networks, the Company will require additional amounts of cash
in the future from outside sources. Changes in the Company's business plan may
require additional sources of cash which may be obtained through public and
private equity and debt financings, credit facilities and other financing
arrangements. In the past, the Company has been able to secure sufficient
amounts of financing to meet its capital needs. There can be no assurance,
however, 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.
Transport and Termination Charges
The Company has recorded revenue of approximately $30.8 million and $35.5
million for the three months ended March 31, 1999 and 2000, respectively, for
reciprocal compensation relating to the transport and termination of local
traffic to ISPs from customers of incumbent local exchange carriers ("ILECs")
pursuant to various interconnection agreements. During the period, some of the
ILECs have not paid all of the bills they have received from the Company and
have disputed these charges based on the belief that such calls are not local
traffic as defined by the various agreements and not subject to payment of
transport and termination charges under state and federal laws and public
policies. In addition, some ILECs, while paying a portion of reciprocal
compensation due to ICG for ISP-bound traffic, have disputed other portions of
the charges.
The resolution of these disputes have been, and will continue to be, based
on rulings by state public utility commissions and/or by the Federal
Communications Commission ("FCC"), or through negotiations between the parties.
The Company has aggressively participated in state and federal regulatory and
judicial proceedings that address the obligation of the ILECs to pay the Company
reciprocal compensation for ISP-bound traffic under the Company's
interconnection agreements. Subsequent to the issuance of favorable state
regulatory rulings by the Colorado, Ohio and California state commissions, the
Company has received payments from US West, Pacific Bell and GTE-California for
amounts owed for reciprocal compensation totaling $52.4 million through March
31, 2000.
Additionally, through March 31, 2000, Southwestern Bell Telephone Company
("SWBT") has remitted payment to the Company of $5.4 million for reciprocal
compensation owed to the Company for traffic from SWBT customers in Texas to
ISPs served by the Company. On December 29, 1999, SWBT initiated commercial
arbitration to determine whether the terms of the Company's current
interconnection agreement with SWBT require that the rates that the Company has
been billing SWBT for reciprocal compensation be reduced to rates established by
the Texas PUC in a 1998 consolidated arbitration with SWBT involving AT&T
Corporation, MCI Communications Corporation and other parties. Due to subsequent
procedural developments, this issue will be decided by the Texas PUC, rather
than in commercial arbitration; the Texas PUC proceeding is pending.
On September 16, 1999, the CPUC rendered a decision against MFS/Worldcom,
a CLEC ("MFS"), in an arbitration between Pacific Bell and MFS. The California
PUC ruled that MFS should not be permitted to charge reciprocal compensation
rates for the tandem switching and common transport rate elements. Although the
California PUC's ruling did not involve the Company, the Company made a decision
effective for the three months beginning on September 30, 1999 and thereafter to
suspend the revenue recognition for the tandem switching and common transport
rate elements for services provided in California and in all other states where
32
the Company operates and such rate elements are included in the Company's
interconnection agreement with the ILEC. Additionally, the Company recorded a
provision of $45.2 million during the three months September 30, 1999 for
accounts receivable related to these elements recognized in periods through June
30, 1999, which the Company believes may be uncollectible. The Company ceased
recording revenue for the tandem and transport elements of local reciprocal
compensation until the cash is received effective June 30, 1999. The Company
continues to bill Pacific Bell for the tandem switching and common transport
rate elements, and will pursue collection of its accounts receivable, despite
any provision. On February 4, 2000, the California PUC initiated a new
proceeding to examine, on a prospective basis, compensation for ISP-bound
traffic, including the tandem and transport rate elements issue.
On February 25, 1999, the FCC issued a decision that ISP-bound traffic is
largely jurisdictionally interstate traffic. The decision relies on the
long-standing federal policy that ISP traffic, although jurisdictionally
interstate, is treated as though it is local traffic for pricing purposes. The
decision also emphasizes that because there currently are no federal rules
governing intercarrier compensation for ISP traffic, the determination as to
whether such traffic is subject to reciprocal compensation under the terms of
interconnection agreements is properly made by the state commissions and that
carriers are bound by their interconnection agreements and state commission
decisions regarding the payment of reciprocal compensation for ISP traffic. The
FCC has initiated a rulemaking proceeding regarding the adoption of prospective
federal rules for intercarrier compensation for ISP traffic. In its notice of
rulemaking, the FCC expresses its preference that compensation rates for this
traffic continue to be set by negotiations between carriers, with disputes
resolved by arbitrations conducted by state commissions, pursuant to the
Telecommunications Act. On March 24, 2000, the United States Court of Appeals
for the District of Columbia Circuit vacated and remanded the FCC's February 25,
1999 decision. The Company does not believe that the Circuit Court's decision
will adversely affect favorable state regulatory and judicial decisions awarding
reciprocal compensation for ISP traffic. The decision does, however, create some
uncertainty with respect to the timing of future regulatory decisions, and there
can be no assurance that future FCC or state commission rulings will be
favorable to the Company.
The Company has also recorded revenue of approximately $5.2 million and
$5.5 million for the three months ended March 31, 1999 and 2000, respectively,
related to other transport and termination charges to the ILECs, pursuant to the
Company's interconnection agreements with these ILECs. Included in the Company's
net trade receivables at March 31, 2000 are approximately $55.0 million, for all
receivables related to reciprocal compensation and other transport and
termination charges.
As the Company's interconnection agreements expire or are extended, rates
for transport and termination charges are being and will continue to be
renegotiated and/or arbitrated. Rates for transport and termination also may be
impacted by ongoing state and federal regulatory proceedings addressing
intercarrier compensation for Internet traffic on a prospective basis. In
addition to the FCC's pending rulemaking proceeding and the District of Columbia
Court of Appeals recent remand, of the states in which ICG currently operates,
the Ohio, Texas and California commissions currently are conducting proceedings
on prospective compensation.
The Company has negotiated and/or arbitrated new or extended
interconnection agreements with BellSouth, Ameritech, GTE-California and Pacific
Bell. The Company has completed arbitration proceedings with Bell South before
the state commissions in Alabama, North Carolina, Georgia, Kentucky, Florida and
Tennessee and with Ameritech before the Ohio commission. Final decisions issued
by the Alabama, North Carolina, Kentucky and Georgia commissions awarded the
Company reciprocal compensation for ISP traffic in new agreements to be executed
by the parties, including the tandem and transport rate element. The arbitration
decisions of the Florida and Ohio commissions declined to rule on the merits of
whether the Company should be paid reciprocal compensation for ISP traffic. The
Florida decision ruled that the compensation provisions of the parties' current
interconnection agreement would continue to apply, subject to true up, until the
completion of the FCC's rulemaking on future compensation. The Ohio commission
deferred ruling on the merits until completion of the Ohio commission's generic
proceeding on prospective compensation, and ordered that in the interim period
until completion of the generic proceeding, bill and keep procedures should be
followed, subject to true up once the commission proceeding is concluded.
Arbitration proceedings with US West before the Colorado commission and with
SWBT before the Texas commission are pending.
Subsequent to completion of the arbitration proceedings with BellSouth,
the Company signed a three-year agreement with BellSouth that, among other
issues, addresses the payment of reciprocal compensation for Internet traffic.
BellSouth agreed to pay past monies due to the Company for local reciprocal
compensation for the period beginning when ISP traffic was first received by the
Company from BellSouth and ending December 31, 1999, and the parties also agreed
33
to the payment of reciprocal compensation for Internet and voice traffic for the
period from January 1, 2000 through December 31, 2002 at per-minute rates that
gradually reduce over the three year period. The agreement is applicable to all
nine states in the BellSouth operating territory.
While the Company intends to pursue the collection of all receivables
related to transport and termination charges and believes that future revenue
from transport and termination charges recognized under the Company's
interconnection agreements will be realized, there can be no assurance that
future regulatory and judicial rulings will be favorable to the Company, or that
different pricing plans for transport and termination charges between carriers
will not be adopted when the Company's interconnection agreements continue to be
renegotiated or arbitrated, or as a result of FCC or state commission
proceedings on future compensation methods. In fact, the Company believes that
different pricing plans will continue to be considered and adopted, and although
the Company expects that revenue from transport and termination charges likely
will decrease as a percentage of total revenue from local services in subsequent
periods, the Company's local termination services still will be required by the
ILECs and must be provided under the Telecommunications Act, and likely will
result in increasing volume in minutes due to the growth of the Internet and
related services markets. The Company expects to negotiate and/or arbitrate
reasonable compensation and collection terms for local termination services,
although there is no assurance that such compensation will remain consistent
with current levels.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial position and cash flows are subject to a variety
of risks in the normal course of business, which include market risks associated
with movements in interest rates and equity prices. The Company routinely
assesses these risks and has established policies and business practices to
protect against the adverse effects of these and other potential exposures. The
Company does not, in the normal course of business, use derivative financial
instruments for trading or speculative purposes.
Interest Rate Risk
The Company's exposure to market risk associated with changes in interest
rates relates primarily to the Company's investments in marketable securities
and its senior indebtedness.
The Company invests primarily in high grade short-term investments which
consist of money market instruments, commercial paper, certificates of deposit,
government obligations and corporate bonds, all of which are considered to be
available for sale and generally have maturities of one year or less. The
Company's short-term investment objectives are safety, liquidity and yield, in
that order. As of March 31, 2000, the Company had approximately $61.2 million in
cash, cash equivalents, and short-term investments available for sale (excluding
the $10.6 million available for sale investment in NorthPoint common stock as
discussed below) at a weighted average fixed interest rate of 5.61% for the
three months ended March 31, 2000. A hypothetical 10% fluctuation in market
rates of interest would not cause a material change in the fair value of the
Company's investment in marketable securities at March 31, 2000 and,
accordingly, would not cause a material impact on the Company's financial
position, results of operations or cash flows.
At March 31, 2000, the Company's indebtedness included $1.8 billion under
the 13 1/2% Notes, 12 1/2% Notes, 11 5/8% Notes, 10% Notes and 9 7/8% Notes and
$533.7 million under the 14 1/4% Preferred Stock, 14% Preferred Stock and 6 3/4%
Preferred Securities. These instruments contain fixed annual interest and
dividend rates. Accordingly, any change in market interest rates would have no
impact on the Company's financial position, results of operations or cash flows.
Future increases in interest rates could increase the cost of any new borrowings
by the Company. The Company does not hedge against future changes in market
rates of interest.
On August 12, 1999, the Company entered into the Senior Facility,
consisting of two term loans and a revolving line of credit. All components of
the Senior Facility bear variable annual rates of interest, based on the change
in LIBOR, the Royal Bank of Canada prime rate and the federal funds rate.
Consequently, additional borrowings under the Senior Facility and increases in
LIBOR, the Royal Bank of Canada prime rate and the federal funds rate will
increase the Company's indebtedness and may increase the Company's interest
expense in future periods. Additionally, under the terms of the Senior Facility,
the Company is required to hedge the interest rate risk on $100.0 million of the
Senior Facility if LIBOR exceeds 9.0% for 15 consecutive days. As of March 31,
2000, the Company had $174.4 million outstanding under the Senior Facility. A
34
hypothetical change in annual interest rate of 1% per annum would result in a
change in interest expense of approximately $0.4 million for the three months
ended March 31, 2000.
Equity Price Risk
On March 30, 1999, the Company purchased, for approximately $10.0 million
in cash, 454,545 shares of NorthPoint Preferred Stock which was converted into
555,555 shares of Class B Common Stock of NorthPoint (the "NorthPoint Class B
Shares") on May 5, 1999. The NorthPoint Class B Shares were converted on March
30, 2000 on a one-for-one basis into a voting class of common stock of
NorthPoint. On March 30 and 31, 2000, the Company sold 95,555 of the NorthPoint
common shares for proceeds of approximately $2.2 million. The remaining
investment is stated at fair market value and is included in short-term
investments available for sale at March 31, 2000. Accordingly, the Company will
be subject to the effects of fluctuations in the fair value of the common stock
of NorthPoint until such time as the Company liquidates its investment in
NorthPoint. Although changes in the fair market value of the common stock of
NorthPoint may affect the fair market value of the Company's investment in
NorthPoint and cause unrealized gains or losses, such gains or losses will not
be realized until the securities are sold.
The Company also has investments in International ThinkLink Corporation,
Cyras Systems, Inc., and Centennial Strategic Partners VI, L.P. totaling $2.4
million at March 31, 2000. Changes in the fair market value of these investments
would not cause a material impact on the Company's financial position, results
of operations or cash flows.
Market Price Risk
The fair value of the Company's Senior Discount Notes outstanding was
$1,567.1 million as of March 31, 2000 compared to the carrying value of $1,845.1
million. A hypothetical 10% fluctuation in market rates of interest would not
cause a material change in the fair value of the Company's Senior Discount Notes
at March 31, 2000.
35
PART II
ITEM 1. LEGAL PROCEEDINGS
See Note 6 (e) to the Company's unaudited consolidated financial
statements for the three months ended March 31, 2000 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 SECURITIES HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits.
(10) Material Contracts.
10.1 Employment Agreement dated as of December 22, 1999
by and between ICG Communications, Inc. and William
S. Beans, Jr.
10.2 Employment Agreement dated as of March 23, 2000 by and
between ICG Communications, Inc. and W. Terrell
Wingfield, Jr.
10.3 Deferred Compensation Agreement dated as of March 31,
2000 by and between ICG Communications, Inc. and J.
Shelby Bryan.
10.4 Certificate of Designation of the Powers, Preferences
and Relative, Participating, Optional and Other Special
Rights of 8% Series A-1 Convertible Preferred Stock Due
2015, 8% Series A-2 Convertible Preferred Stock Due
2015 and 8% Series A-3 Convertible Preferred Stock Due
2015, and Qualifications, Limitations and Restrictions
Thereof, Filed on April 7, 2000 with the Delaware
Secretary of State.
10.5 Registration Rights Agreement dated as of April 7,
2000, by and between ICG Communications, Inc. and
Liberty Media Corporation, HMTF Bridge ICG, LLC, HM4
ICG Qualified Fund, LLC, HM4 ICG Private Fund, LLC, HM
PG-IV ICG, LLC, HM 4-SBS ICG Coinvestors, LLC, HM 4-EQ
ICG Coinvestors, LLC and Gleacher/ICG Investors LLC.
10.6 Amendment to the Preferred Stock and Warrant Purchase
Agreement dated as of April 10, 2000 between ICG
Communications, Inc. and Liberty Media Corporation,
HMTF Bridge ICG, LLC, HM4 ICG Qualified Fund, LLC, HM4
ICG Private Fund, LLC, HM PG-IV ICG, LLC, HM 4-SBS ICG
Coinvestors, LLC, HM 4-EQ ICG Coinvestors, LLC and
Gleacher/ICG Investors LLC.
36
10.7 Form of Common Stock Warrant Agreement dated April 10,
2000.
10.8 Amendment to Employment Agreement dated as of April 13,
2000 by and between ICG Communications, Inc. and
William S. Beans, Jr.
(27) Financial Data Schedule.
27.1: Financial Data Schedule of ICG Communications, Inc. for
the Three Months Ended March 31, 2000.
(B) Reports on Form 8-K. The following reports on Form 8-K were filed
by the registrants during the three months ended March 31, 2000:
ICG Communications, Inc.
ICG Holdings (Canada) Co.
ICG Holdings, Inc.
(i) Current Report on Form 8-K dated March 7, 2000, regarding the
announcement of earnings information and results of
operations for the quarter and year ended December 31, 1999.
(ii) Current Report on Form 8-K dated March 8, 2000, regarding the
announcement of ICG's definitive preferred stock and warrant
purchase agreement with HMTF Bridge ICG, LLC, Liberty Media
Corporation, and Gleacher/ICG Investors LLC.
37
INDEX TO EXHIBITS
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
INDEX TO EXHIBITS
10.1 Employment Agreement dated as of December 22, 1999 by and between ICG
Communications, Inc. and William S. Beans, Jr.
10.2 Employment Agreement dated as of March 23, 2000 by and between ICG
Communications, Inc. and W. Terrell Wingfield, Jr.
10.3 Deferred Compensation Agreement dated as of March 31, 2000 by and
between ICG Communications, Inc. and J. Shelby Bryan.
10.4 Certificate of Designation of the Powers, Preferences and Relative,
Participating, Optional and Other Special Rights of 8% Series A-1
Convertible Preferred Stock Due 2015, 8% Series A-2 Convertible
Preferred Stock Due 2015 and 8% Series A-3 Convertible Preferred Stock
Due 2015, and Qualifications, Limitations and Restrictions Thereof,
Filed on April 7, 2000 with the Delaware Secretary of State.
10.5 Registration Rights Agreement dated as of April 7, 2000, by and between
ICG Communications, Inc. and Liberty Media Corporation, HMTF Bridge
ICG, LLC, HM4 ICG Qualified Fund, LLC, HM4 ICG Private Fund, LLC, HM
PG-IV ICG, LLC, HM 4-SBS ICG Coinvestors, LLC, HM 4-EQ ICG Coinvestors,
LLC and Gleacher/ICG Investors LLC.
10.6 Amendment to the Preferred Stock and Warrant Purchase Agreement dated
as of April 10, 2000 between ICG Communications, Inc. and Liberty Media
Corporation, HMTF Bridge ICG, LLC, HM4 ICG Qualified Fund, LLC, HM4 ICG
Private Fund, LLC, HM PG-IV ICG, LLC, HM 4-SBS ICG Coinvestors, LLC, HM
4-EQ ICG Coinvestors, LLC and Gleacher/ICG Investors LLC.
10.7 Form of Common Stock Warrant Agreement dated April 10, 2000.
10.8 Amendment to Employment Agreement dated as of April 13, 2000 by and
between ICG Communications, Inc. and William S. Beans, Jr.
27.1: Financial Data Schedule of ICG Communications, Inc. for the Three
Months Ended March 31, 2000.
EXHIBIT 10.1
Employment Agreement dated as of December 22, 1999 by and between
ICG Communications, Inc. and William S. Beans, Jr.
EXHIBIT 10.2
Employment Agreement dated as of March 23, 2000 by and between
ICG Communications, Inc. and W. Terrell Wingfield, Jr.
EXHIBIT 10.3
Deferred Compensation Agreement dated as of March 31, 2000 by and
between ICG Communications, Inc. and J. Shelby Bryan.
EXHIBIT 10.4
Certificate of Designation of the Powers, Preferences and
Relative, Participating, Optional and Other Special Rights of 8%
Series A-1 Convertible Preferred Stock Due 2015, 8% Series A-2
Convertible Preferred Stock Due 2015 and 8% Series A-3
Convertible Preferred Stock Due 2015, and Qualifications,
Limitations and Restrictions Thereof, Filed on April 7, 2000 with
the Delaware Secretary of State.
EXHIBIT 10.5
Registration Rights Agreement dated as of April 7, 2000, by and
between ICG Communications, Inc. and Liberty Media Corporation,
HMTF Bridge ICG, LLC, HM4 ICG Qualified Fund, LLC, HM4 ICG
Private Fund, LLC, HM PG-IV ICG, LLC, HM 4-SBS ICG Coinvestors,
LLC, HM 4-EQ ICG Coinvestors, LLC and Gleacher/ICG Investors LLC.
EXHIBIT 10.6
Amendment to the Preferred Stock and Warrant Purchase Agreement
dated as of April 10, 2000 between ICG Communications, Inc. and
Liberty Media Corporation, HMTF Bridge ICG, LLC, HM4 ICG
Qualified Fund, LLC, HM4 ICG Private Fund, LLC, HM PG-IV ICG,
LLC, HM 4-SBS ICG Coinvestors, LLC, HM 4-EQ ICG Coinvestors, LLC
and Gleacher/ICG Investors LLC.
EXHIBIT 10.7
Form of Common Stock Warrant Agreement dated April 10, 2000.
EXHIBIT 10.8
Amendment to Employment Agreement dated as of April 13, 2000 by
and between ICG Communications, Inc. and William S. Beans, Jr.
EXHIBIT 27.1
Financial Data Schedule of ICG Communications, Inc. for the Three
Months Ended March 31, 2000.
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 May 11, 2000.
ICG COMMUNICATIONS, INC.
Date: May 11, 2000 By: /s/ Harry R. Herbst
--------------------------------
Harry R. Herbst, Executive Vice
President, Chief Financial Officer and
Director (Principal Financial Officer)
Date: May 11, 2000 By: /s/ John V. Colgan
--------------------------------
John V. Colgan, Senior Vice
President of Finance and Controller
(Principal Accounting Officer)
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 May 11, 2000.
ICG HOLDINGS (CANADA) CO.
Date: May 11, 2000 By: /s/ Harry R. Herbst
--------------------------------
Harry R. Herbst, Executive Vice
President, Chief Financial Officer and
Director (Principal Financial Officer)
Date: May 11, 2000 By: /s/ John V. Colgan
--------------------------------
John V. Colgan, Senior Vice
President of Finance and Controller
(Principal Accounting Officer)
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 May 11, 2000.
ICG HOLDINGS, INC.
Date: May 11, 2000 By: /s/ Harry R. Herbst
--------------------------------
Harry R. Herbst, Executive Vice
President, Chief Financial Officer and
Director (Principal Financial Officer)
Date: May 11, 2000 By: /s/ John V. Colgan
--------------------------------
John V. Colgan, Senior Vice
President of Finance and Controller
(Principal Accounting Officer)