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, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(Commission File Number 1-11965)
ICG COMMUNICATIONS, INC.
(Commission File Number 1-11052)
ICG HOLDINGS (CANADA), INC.
(Commission File Number 33-96540)
ICG HOLDINGS, INC.
(Exact name of Registrants as Specified in their Charters)
- ----------------------------------- --------------------------------------------
Delaware 84-1342022
Canada Not Applicable
Colorado 84-1158866
(State or other jurisdiction of
incorporation) (I.R.S. employer identification number)
- ----------------------------------- --------------------------------------------
9605 East Maroon Circle Not applicable
Englewood, Colorado 80112
1710-1177 West Hastings Street c/o ICG Communications, Inc.
Vancouver, BC V6E 2L3 9605 East Maroon Circle
P.O. Box 6742
Englewood, Colorado 80155-6742
9605 East Maroon Circle Not applicable Englewood, Colorado 80112 (Address of
principal executive offices) (Address of U.S. agent for service)
- --------------------------------------------------------------------------------
Registrants' telephone numbers, including area codes: (800) 650-5960 or (303)
572-5960
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No
The number of Registrants' outstanding common shares as of April 29, 1997 were
31,804,671, 31,795,270 and 1,918, respectively. ICG Holdings (Canada), Inc.
owns all of the issued and outstanding shares of ICG Holdings, Inc.
TABLE OF CONTENTS
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . 3
Consolidated Balance Sheets as of December 31, 1996
and March 31, 1997 (unaudited) . . . . . . . . . 3
Consolidated Statements of Operations (unaudited) for
the Three Months Ended March 31, 1996 and 1997. . 5
Consolidated Statement of Stockholders' Deficit
(unaudited) for the Three Months Ended March 31, 1997 6
Consolidated Statements of Cash Flows (unaudited) for
the Three Months Ended March 31, 1996 and 1997 . 7
Notes to Consolidated Financial Statements (unaudited) 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . 16
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . 24
ITEM 2. CHANGES IN SECURITIES . . . . . . . . . . . . . . . 24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS 24
ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . 24
Exhibits . . . . . . . . . . . . . . . . . . . . . 24
Reports on Form 8-K . . . . . . . . . . . . . . . . 24
2
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and March 31, 1997 (unaudited)
December 31, March 31,
1996 1997
------------------ ----------------
Assets (in thousands)
Current assets:
Cash and cash equivalents $ 359,934 459,288
Short-term investments 32,601 31,747
Receivables:
Trade, net of allowance of $2,515
and $4,006 at December 31, 1996
and March 31, 1997, respectively 41,131 34,071
Revenue earned, but unbilled 6,053 7,329
Joint venture and affiliate - 113
Other 1,440 1,358
------------------ ----------------
48,624 42,871
Inventory 2,845 2,595
Prepaid expenses and deposits 5,019 4,661
Notes receivable 200 200
------------------ ----------------
Total current assets 449,223 541,362
------------------ ----------------
Property and equipment 460,477 522,980
Less accumulated depreciation (56,545) (66,255)
------------------ ----------------
Net property and equipment 403,932 456,725
------------------ ----------------
Investments 5,170 5,170
Long-term notes receivable, net 623 552
Restricted cash (note 4) 13,333 12,932
Other assets, net of accumulated amortization:
Goodwill 31,881 31,454
Deferred financing costs 21,963 24,861
Transmission and other licenses 8,526 8,441
Other 9,482 8,184
------------------ ----------------
71,852 72,940
================== ================
$ 944,133 1,089,681
================== ================
3 (Continued)
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
December 31, March 31,
1996 1997
------------------ -------------------
Liabilities and Stockholders' Deficit (in thousands)
Current liabilities:
Accounts payable $ 24,813 19,839
Accrued liabilities 37,309 47,820
Current portion of long-term debt
(note 2) 817 1,727
Current portion of capital lease
obligations 24,683 6,728
--------------- -------------------
Total current liabilities 87,622 76,114
Long-term debt, net of discount, less
current portion (note 2) 690,358 811,560
Capital lease obligations, less current
portion 71,146 70,916
---------------- -------------------
Total liabilities 849,126 958,590
---------------- -------------------
Minority interests 1,967 930
Redeemable preferred stock of subsidiary
($164.8 million and $271.4 million
liquidation value at December 31, 1996
and March 31, 1997, respectively)(note 2) 159,120 261,909
Stockholders' deficit:
Common stock (note 3) 8,088 5,282
Additional paid-in capital 294,472 298,391
Accumulated deficit (368,640) (435,421)
-------------- ------------------
Total stockholders' deficit (66,080) (131,748)
-------------- ------------------
Commitments and contingencies (note 4)
$ 944,133 1,089,681
============== =================
See accompanying notes to consolidated financial
statements.
4
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (unaudited)
Three Months Ended March 31, 1996 and 1997
Three months ended March 31,
-----------------------------------------
1996 1997
------------------- -----------------
(in thousands, except per share data)
Revenue:
Telecom services $ 17,635 38,280
Network services 13,973 17,987
Satellite services 4,336 6,783
------------------- -----------------
Total revenue 35,944 63,050
Operating costs and expenses:
Operating costs 28,171 59,572
Selling, general and administrative
expenses 16,154 33,379
Depreciation and amortization 7,442 10,882
------------------- -----------------
Total operating costs and
expenses 51,767 103,833
Operating loss (15,823) (40,783)
Other income (expense):
Interest expense (14,217) (25,140)
Interest income 2,725 5,134
Other, net (1,554) (239)
------------------- -----------------
(13,046) (20,245)
------------------- -----------------
Loss before income taxes, minority
interest and share of losses (28,869) (61,028)
Income tax benefit 4,482 -
------------------ -----------------
Loss before minority interest and
shares of losses (24,387) (61,028)
Minorty interest in share of losses,
net of accretion and preferred
dividends on subsidiary preferred stock (1,970) (5,753)
Share of losses of joint venture and
investment (582) -
=================== =================
Net loss $ (26,939) (66,781)
=================== =================
Loss per share (note 3):
Loss per share $ (1.04) (2.09)
=================== =================
Weighted average number of shares
outstanding 25,803 31,938
=================== =================
See accompanying notes to consolidated financial
statements.
5
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Deficit (unaudited)
Three Months Ended March 31, 1997
Additional Total
Common stock paid-in Accumlated stockholders'
Shares Amount capital deficit deficit
-------- ------- --------- ----------- -------------
(in thousands)
Balances at
January 1, 1997 31,895 $ 8,088 294,472 (368,640) (66,080)
Shares issued for cash
in connection with the
exercise of options and
warrants 23 - 249 - 249
Shares issued for cash in
connection with the
employee stock purchase
plan 22 - 330 - 330
Shares issued as contribution
to 401(k) plan 28 - 534 - 534
Exchange of Holdings-Canada
common shares for ICG common
stock - (2,806) 2,806 - -
Net loss - - - (66,781) (66,781)
======== ========= ======== ======== ===========
Balances at March 31, 1997 31,968 $ 5,282 298,391 (435,421) (131,748)
======== ========= ======== ======== ===========
See accompanying notes to consolidated
financial statements.
6
ICG COMMUNICATIONS, INC. AND SUBISIDIARIES
Consolidated Statements of Cash Flows (unaudited)
Three Months Ended March 31, 1996 and 1997
Three months ended March 31,
---------------------------------------
1996 1997
------------------- ----------------
(in thousands)
Cash flows from operating activities:
Net loss $ (26,939) (66,781)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Share of losses of joint venture
and investment 582 -
Minority interest in share of losses,
net of accretion and non-cash
preferred dividends on subsidiary
preferred stock 1,970 5,753
Depreciation and amortization 7,442 10,882
Compensation expense related to issuance
of stock options 14 -
Interest expense deferred and included
in long-term debt and non-cash
interest expense 11,911 22,621
Amortization of deferred financing
costs included in interest expense 162 643
Contribution to 401(k) plan through
issuance of common shares 171 534
Deferred income tax benefit (4,482) -
Loss on sale of certain Satellite
Services assets 891 -
Gain on sale of certain other assets - (319)
(Increase) decrease in operating assets,
excluding the effects of business
acquisitions:
Receivables (1,975) 5,753
Inventory (90) 250
Prepaid expenses and deposits (606) 358
Increase(decrease)in operating liabilities,
excluding the effects of
business acquisitions:
Accounts payable and accrued
Liabilities (6,073) 5,537
--------------- -----------------
Net cash used by operating
activities (17,022) (14,769)
--------------- -----------------
Cash flows from investing activities:
Decrease in notes receivable 1,524 71
Increase in advances to affiliates (358) -
Investments in and advances to joint
venture (1,951) -
Payments for business acquisitions,
net of cash acquired (2,680) -
Purchase of long-term investment (3,960) -
(Purchase) sale of short-term
investments (14,573) 854
Decrease in restricted cash - 401
Acquisition of property, equipment
and other assets, net (29,149) (59,891)
Proceeds from the sale of certain
Satellite Services assets 447 -
-------------- -----------------
Net cash used by investing
activities (50,700) (58,565)
-------------- -----------------
Cash flows from financing activities:
Proceeds from issuance of common stock 665 579
Proceeds from issuance of subsidiary
preferred stock, net of issue costs - 96,000
Proceeds from issuance of long-term debt - 99,908
Deferred long-term debt issuance costs - (3,543)
Principal payments on short-term debt (17,500) -
Principal payments on long-term debt (551) (417)
Principal payments on capital lease
obligations (6,570) (19,839)
--------------- -----------------
Net cash (used) provided by
financing activities (23,956) 172,688
--------------- -----------------
Net(decrease)increase in cash and
cash equivalents (91,678) 99,354
Cash and cash equivalents,
beginning of period 231,163 359,934
=============== =================
Cash and cash equivalents, end of period $ 139,485 459,288
=============== =================
(Continued)
7
ICG COMMUNICATIONS, INC. AND SUBISIDIARIES
Consolidated Statements of Cash Flows, Continued
Three months ended March 31,
----------------------------------------
1996 1997
------------------- -----------------
(in thousands)
Supplemental disclosure of
cash flow information:
Cash paid for interest $ 2,144 1,876
=================== =================
Supplemental schedule of non-cash
financing and investing activities:
Common shares issued in connection
with business combinations and
repayment of debt $ 9,409 -
=================== =================
Assets acquired under capital
leases $ 47,284 1,654
=================== =================
See accompanying notes to consolidated financial
statements.
8
ICG COMMUNICATIONS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and March 31, 1997 (unaudited)
(1) Nature of Business and Reference to Other Reports
ICG Communications, Inc. ("ICG"), a Delaware corporation, was incorporated
on April 11, 1996, for the purpose of becoming the new publicly-traded U.S.
parent company of ICG Holdings (Canada), Inc. ("Holdings-Canada"), a
Canadian federal corporation (formerly known as IntelCom Group Inc.), ICG
Holdings, Inc. ("Holdings"), a Colorado corporation (formerly known as
IntelCom Group (U.S.A), Inc.), and its subsidiaries (collectively, the
"Company"). The Company's principal business activity is telecommunications
services, including Telecom Services, Network Services and Satellite
Services. Telecom Services consists of the Company's competitive local
exchange carrier operations which provide services to long distance
carriers and resellers, as well as business end users. Network Services
supplies information technology services and selected networking products,
focusing on network design, installation, maintenance and support for a
variety of end users, including Fortune 1000 firms and other large
businesses and telecommunications companies. Satellite Services provides
satellite voice and data services to major cruise ship lines, the
commercial shipping industry, yachts, the U.S. Navy and offshore oil
platforms.
(a) Reference to Annual and Transition Reports
These financial statements should be read in conjunction with the
Annual Report on Form 10-K for the year ended September 30, 1996 and
the Transition Report on Form 10-K for the three months ended December
31, 1996, as certain information and note disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant
to the rules and regulations of the United States Securities and
Exchange Commission. The interim financial statements reflect all
adjustments which are, in the opinion of management, necessary for a
fair presentation of financial position, results of operations and
cash flows as of and for the interim periods presented. Such
adjustments are of a normal recurring nature. Operating results for
the three months ended March 31, 1997, are not necessarily indicative
of the results that may be expected for the year ending December 31,
1997.
(b) Reclassifications
Certain 1996 amounts have been reclassified to conform with the 1997
presentation.
9
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Long-term Debt and Redeemable Preferred Stock of Subsidiary
Long-term debt at December 31, 1996 and March 31, 1997 is summarized as
follows (in thousands):
December 31, 1996 March 31, 1997
-------------------- -----------------
11 5/8% Senior discount notes,
net of discount (a) $ - 100,545
12 1/2% Senior discount notes, net
of discount 325,530 335,493
13 1/2% Senior discount notes, net
of discount 355,955 367,976
Convertible subordinated notes 65 65
Note payable with interest at the
90-day commercial paper rate plus
4 3/4% (10 3/8% at March 31, 1997),
due 2001, secured by certain
telecommunications equipment 5,815 5,594
Note payable with interest at 11%, due
monthly through fiscal 1999, secured
by equipment 2,625 2,442
Mortgage payable with interest at 8 1/2%,
due monthly through 2009, secured by
building 1,177 1,165
Other 8 7
---------------- -----------------
691,175 813,287
Less current portion (817) (1,727)
================ =================
$ 690,358 811,560
================ ==================
Redeemable preferred stock of subsidiary at December 31, 1996 and March 31,
1997 is summarized as follows (in thousands):
December 31,1996 March 31, 1997
------------------ ------------------
14% Exchangeable preferred stock
mandatorily redeemable 2008(a) $ - 96,787
14 1/4% Exchangeable preferred
stock mandatorily redeemable 2007 159,120 165,122
================ ===================
$ 159,120 261,909
================= ===================
(a) Private Placement
On March 11, 1997, Holdings completed a private placement (the
"Private Placement") of 11 5/8% Senior Discount Notes (the "11 5/8%
Notes") and 14% Exchangeable Preferred Stock (the "14% Preferred
Stock") for gross proceeds of $99.9 million and $100.0 million,
respectively. Net proceeds from the private placement, after costs of
approximately $7.5 million, were approximately $192.4 million.
The 11 5/8% Notes are unsecured senior obligations of Holdings
(guaranteed by ICG) that mature on March 15, 2007, at a maturity value
of $176.0 million. Interest will accrue at 11 5/8% per annum beginning
March 15, 2002, and is payable each March 15 and September 15,
commencing September 15, 2002.
The 11 5/8% Notes were originally recorded at approximately $99.9
million. The discount on the 11 5/8% Notes and the debt issue costs
are being accreted over ten years until maturity at March 15, 2007.
The accretion of the discount and debt issue costs is included in
interest expense in the accompanying consolidated financial
statements.
The 14% Preferred Stock consists of 100,000 shares of Holdings
Preferred Stock that bear a cumulative dividend at the rate of 14% per
annum. The dividend is payable quarterly in arrears each March 15,
June
10
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Long-term Debt and Redeemable Preferred Stock of Subsidiary (continued)
15, September 15, and December 15, commencing June 15, 1997. Through March
15, 2002, the dividend is payable at the option of Holdings in cash or
additional shares of Holdings Preferred Stock. Holdings may exchange the
14% Preferred Stock into 14% Senior Subordinated Exchange Debentures at any
time after the exchange is permitted by certain indenture restrictions. The
14% Preferred Stock is subject to mandatory redemption on March 15, 2008.
(3) Stockholders' Deficit
(a) Common Stock
Common stock outstanding at March 31, 1997 represents the issued and
outstanding Common Stock of ICG and Class A common shares of
Holdings-Canada (owned by third parties) which are exchangeable at any
time, on a one-for-one basis, for ICG Common Stock. The following
table sets forth the number of shares outstanding for ICG and
Holdings-Canada on a separate company basis as of March 31, 1997:
Shares owned Shares owned
by ICG by third parties
----------- ------------------
ICG Common Stock, $.01 par value,
100,000,000 shares authorized;
31,087,825 and 31,316,840 shares
issued and outstanding at December
31, 1996 and March 31, 1997,
respectively - 31,316,840
Holdings-Canada Class A common shares,
no par value, 100,000,000 shares
authorized;31,795,270 shares issued
and outstanding at December 31, 1996
and March 31, 1997:
Class A common shares, exchangeable
on a one-for-one basis for ICG
Common Stock at any time - 651,074
Class A common shares owned by ICG 31,144,196 -
----------------
Total shares outstanding 31,967,914
================
(b) Stock Options
In order to continue to provide non-cash incentives to key employees,
all employee stock options outstanding on April 16, 1997 with exercise
prices at or in excess of $15.875 were repriced by the Company's Board
of Directors to $10.375, the closing price of the Company's Common
Stock on April 16, 1997. Approximately 0.6 million options, with
original exercise prices ranging from $15.875 to $26.25, have been
repriced. There will be no effect on the Company's consolidated
financial statements as a result of the repricing of options.
(c) Loss Per Share
Loss per share is calculated by dividing the net loss by the weighted
average number of shares outstanding. Weighted average number of
shares outstanding represents outstanding Holdings-Canada common
shares for the three months ended March 31, 1996, and outstanding ICG
Common Stock and Holdings-Canada Class A common shares (owned by third
parties) for the three months ended March 31, 1997. Common stock
equivalents, which include options, warrants and convertible
subordinated notes and preferred stock, are not included in the loss
per share calculation as their effect is anti-dilutive.
11
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4) Commitments and Contingencies
(a) Network Construction
In November 1995, the Company signed an agreement with City Public
Service of San Antonio ("CPS") to license excess fiber optic
facilities on a new 300-mile fiber network being built by the
municipally-owned electric and gas utility to provide for its
communications needs in the greater metropolitan area. Pursuant to
this agreement, the Company has provided a $12.0 million irrevocable
letter of credit to secure payment of the Company's portion of the
construction costs. The letter of credit is secured by cash collateral
of $12.9 million as of March 31, 1997.
The legal ability of CPS, as a municipally-owned utility, to enter
into this contract with the Company has been challenged by SBC
Communications, Inc. ("SBC") before the San Antonio City Council as
being in violation of a May 1995 Texas state law.
The Company has filed a petition with the FCC requesting a declaratory
ruling that the federal Telecommunications Act of 1996 (the
"Telecommunications Act") preempts the Texas state law to the extent
that the Telecommunications Act precludes implementation of the
agreement between CPS and the Company, and has also filed a
declaratory ruling request with a Texas state court. Both of these
actions are pending. The Company also filed a civil suit against SBC
in federal district court that has been dismissed.
In February 1996, the Company entered into a 20-year agreement with
WorldCom, Inc. ("WorldCom"), under which the Company will pay
approximately $8.8 million for the right to use fiber along a 330-mile
fiber optic network in Ohio. The network is being constructed by
WorldCom in conjunction with the Company. An aggregate of
approximately $2.7 million has been paid by the Company through March
31, 1997, with the balance due upon the completion of specified
segments of the network.
In March 1996, the Company and Southern California Edison Company
("SCE") jointly entered into a 25-year agreement under which the
Company will license 1,258 miles of fiber optic cable in Southern
California, and can install up to 500 additional miles of fiber optic
cable. This network, which will be maintained and operated primarily
by the Company, stretches from Los Angeles to southern Orange County.
Under the terms of this agreement, SCE will be 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 $149.1 million at March 31, 1997. The agreement has been
accounted for as a capital lease in the accompanying consolidated
balance sheets at March 31, 1997.
In March 1996, the Company entered into a long-term agreement with a
subsidiary of The Southern Company ("Southern"), and Alabama Power
Company ("Alabama Power") for the right to use 22 miles of existing
fiber and 122 miles of additional Alabama Power rights of way and
facilities to reach the three major business centers in Birmingham.
Southern will, in conjunction with the Company, construct the network
and provide maintenance services with respect to the fiber installed.
Southern also will provide consulting services to the Company relating
to the build-out of the network and potential enhancements to the
Company=s products and services. Under the agreement, the Company also
is required to pay Southern a quarterly fee based on specified
percentages of the Company's revenue for services provided through
this network. The Company's estimated costs to complete the network
are approximately $4.0 million, of which $2.5 million has been
incurred as of March 31, 1997.
In July 1996, the Company entered into a 20-year agreement with
subsidiaries of American Electric Power ("AEP") to jointly build a
45-mile network addition in metropolitan Columbus, plus a 138-mile
12
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4) Commitments and Contingencies (continued)
long-haul link to Canton, Ohio. The Company's estimated costs to
complete the construction are approximately $4.7 million, of which
$1.3 million has been incurred as of March 31, 1997.
In January 1997, the Company announced a joint venture with Central
and Southwest Corporation ("CSW") which will develop and market
telecommunications services in Texas and Oklahoma (and may expand to
Arkansas and Louisiana). Each party has a 50% equity interest and is
required to make additional pro rata capital contributions as
prescribed in the joint venture agreement. The Company estimates its
contributions to be approximately $24.2 million in 1997, with
aggregate contributions of approximately $49.7 million over the next
five years. The joint venture is accounted for under the equity method
of accounting.
(b) Company Headquarters
The Company has acquired property for its new headquarters and has
commenced construction of an office building that the Company expects
will accommodate all of the Company's Colorado operations. The total
cost of the project is expected to be approximately $44.0 million, of
which $13.0 million has been incurred as of March 31, 1997 and is
included in construction in progress. The Company has signed a letter
of intent to sell the completed building to a third party and lease
back the office space under a long-term operating lease. A final
agreement is expected to be reached in the near future. The Company
anticipates that the building will be completed near the end of 1997.
(c) Other Commitments
The Company is obligated to purchase, at fair value, all of the shares
of Maritime Telecommunications Network, Inc. ("MTN"), a 64% owned
subsidiary of the Company, that are owned by the minority
shareholders, if MTN has not completed a public offering by January 3,
1998.
The Company has entered into various equipment purchase agreements
with certain of its vendors. Under these agreements, if the Company
does not meet a minimum purchase level in any given year, the vendor
may discontinue for that year certain discounts, allowances and
incentives otherwise provided to the Company. In addition, the
agreements may be terminated by either the Company or the vendor upon
prior written notice.
Additionally, the Company has entered into certain commitments to
purchase assets with an aggregate purchase price of approximately
$46.9 million at March 31, 1997.
(d) Litigation
In January 1997, the Company and its wholly owned subsidiary, ICG
Holdings (Canada), Inc., filed a declaratory judgment action in the
United States District Court for the District of Colorado (Civil
Action No. 97-Z-118) against the minority shareholders of the
Company's majority owned subsidiary, Zycom Corporation ("Zycom"), an
Alberta, Canada corporation, seeking a number of rulings from the
Court, including that the Company has not violated the federal
securities laws. The action was filed by the Company as a result of
demands made by the minority shareholders that the Company purchase
their shares of Zycom for a price in excess of the value of the
shares, and allegations that the Company violated certain sections of
the Securities Act of 1933 and the Securities Exchange Act of 1934. In
response to the Company's filing of this action, the defendants filed
affidavits in which they stated that they do not intend to bring
claims under the federal securities laws. Given this statement by
these defendants, which the Company believes is a vindication of its
position that there was no violation of the
13
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4) Commitments and Contingencies (continued)
federal securities laws, the Company is filing a notice discontinuing
without prejudice this action.
On April 4, 1997, certain shareholders of Zycom, not individually
named in the Company's declaratory judgment action, filed a
shareholder derivative suit and class action complaint for
unspecified damages, purportedly on behalf of all of the minority
shareholders of Zycom, in the District Court of Harris County, Texas
(Cause No. 97-17777) against the Company, Zycom and certain of their
subsidiaries. This complaint is based entirely on Texas state law and
does not allege any federal securities law violations. The Company has
not yet been served in this action. Management of the Company believes
the Texas complaint to be a direct response to the Colorado
declaratory judgment action, that it is without merit and will defend
it vigorously. Management believes these proceedings will not have a
material adverse effect on the Company's financial condition, results
of operations or cash flows.
The Company is a party to certain other litigation which has arisen in
the ordinary course of business. In the opinion of management and
legal counsel, the ultimate resolution of these matters will not have
a significant effect on the financial condition, results of operations
or cash flows of the Company.
(5) Summarized Financial Information of ICG Holdings, Inc.
The 11 5/8% Notes issued by Holdings during 1997 are guaranteed by ICG. The
12 1/2% Senior Discount Notes (the "12 1/2% Notes") and the 13 1/2% Senior
Discount Notes (the "13 1/2% Notes") (collectively with the 11 5/8% Notes,
the "Senior Notes") issued by Holdings during 1996 and 1995, respectively,
are guaranteed by ICG and Holdings-Canada.
The separate complete financial statements of Holdings have not been
included herein because such disclosure is not considered to be material to
the holders of the Senior Notes. However, summarized combined financial
information for Holdings and subsidiaries and affiliates as of December 31,
1996 and March 31, 1997, and for the three months ended March 31, 1996 and
1997 is as follows (in thousands):
Condensed Balance Sheet Information
December 31, 1996 March 31, 1997
----------------- ------------------
Current assets $ 449,059 541,200
Property and equipment, net 403,932 456,725
Other non-current assets, net 88,183 88,848
Current liabilities 87,423 75,425
Long-term debt, less current portion 690,293 811,495
Due to parent 11,485 12,987
Other long-term liabilities 73,113 71,846
Preferred stock 159,120 261,909
Stockholder's deficit (80,260) (146,889)
14
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) Summarized Financial Information of ICG Holdings, Inc. (continued)
Condensed Statement of Operations Information
Three months ended March 31,
------------------------------------
1996 1997
---------------- -------------------
Total revenue $ 35,944 63,050
Total operating costs and expenses 51,413 103,681
Operating loss (15,469) (40,631)
Net loss (25,091) (66,629)
(6) Condensed Financial Information of ICG Holdings (Canada), Inc.
Condensed financial information for Holdings-Canada only as of December
31, 1996 and March 31, 1997, and for the three months ended March 31,
1996 and 1997 is as follows (in thousands):
Condensed Balance Sheet Information
December 31, 1996 March 31, 1997
-------------------- ----------------
Current assets $ 165 162
Advances to subsidiaries 11,485 12,987
Other non-current assets, net 2,793 2,746
Current liabilities 199 689
Long-term debt, less current portion 65 65
Due to parent 1,566 2,581
Share of losses of subsidiary 80,260 146,889
Shareholders' deficit (67,647) (134,329)
Condensed Statement of Operations Information
Three months ended March 31,
-------------------------------------
1996 1997
----------------- ------------------
Total revenue - -
Total operating costs and expenses 353 53
Operating loss (353) (53)
Losses from subsidiaries (25,091) (66,629)
Net loss attributable to common
shareholders (25,444) (66,682)
(7) Condensed Financial Information of ICG Communications, Inc. (Parent
company)
The sole asset of ICG is its investment in Holdings-Canada. ICG has no
operations other than those of Holdings-Canada and its subsidiaries.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion includes certain forward-looking statements which
are affected by important factors including, but not limited to, dependence on
increased traffic on the Company's facilities, the successful implementation of
the Company's local dial tone and long distance strategies and actions of
competitors and regulatory authorities that could cause actual results to differ
materially from the forward-looking statements. The terms "fiscal" and "fiscal
year" refer to ICG's fiscal year ending September 30. The Company changed its
fiscal year end to December 31 from September 30, effective January 1, 1997. All
dollar amounts are in U.S. dollars.
Company Overview
The Company provides Telecom Services, Network Services and Satellite
Services. Telecom Services consist primarily of the Company's competitive local
exchange carrier ("CLEC") operations. CLECs seek to provide an alternative to
the incumbent local exchange carriers ("ILECs") for a full range of
telecommunications services. The Company is one of the largest providers of
competitive local telephone services in the United States, based on estimates of
the industry's 1996 revenue. As a CLEC, the Company operates networks in three
regional clusters covering major metropolitan statistical areas in California,
Colorado, and the Ohio Valley, and in three markets in the Southeast. The
Company is expanding its geographic focus to include Texas and Oklahoma (and may
also expand to Arkansas and Louisiana) through its recently announced joint
venture with CSW that will develop and market telecommunications services,
including local exchange telephone service, in these markets. Network Services
consist of information technology services and selected networking products,
focusing on network design, installation, maintenance and support. Satellite
Services consist of maritime and international satellite transmission services
and provides private data networks utilizing VSATs (very small aperture
terminals). As a leading participant in the rapidly growing competitive local
telecommunications industry, the Company has experienced significant growth,
with total revenue increasing from $59.1 million for fiscal 1994 to $217.8
million for the 12-month period ended March 31, 1997. The Company's rapid growth
is primarily the result of the initial installation, acquisition and subsequent
expansion of its fiber optic networks and the expansion of its communication
service offerings.
Prior to fiscal 1996, the majority of the Company's revenue had been
derived from Network Services. However, the Company's Network Services revenue
(as well as Satellite Services revenue) will continue to represent a diminishing
percentage of the Company's consolidated revenue as the Company continues to
emphasize its Telecom Services. In March 1996, the Company completed the sale of
four of its teleports which were used in the Company's Satellite Services
operations.
The Telecommunications Act and several pro-competitive state regulatory
initiatives have substantially changed the telecommunications regulatory
environment in the United States. Due to these regulatory changes, the Company
is now permitted to offer all interstate and intrastate telephone services,
including local dial tone, and is developing a full set of complementary
services, such as long distance and data transmission services. The Company
began marketing and selling competitive local dial tone services in three of its
primary markets: California, launched statewide in late January 1997, followed
by Ohio in February 1997 and Colorado in March 1997. During the three months
ended March 31, 1997, the Company sold 17,491 local access lines, of which 5,371
were in service at March 31, 1997. The Company has 15 high capacity digital
telephony switches (and one additional switch located in Phoenix which will be
operational through April 1997, after which it will be relocated) and 10 data
communications switches in operation to support its services, and plans to
install additional telephony and data switches as demand warrants. To facilitate
the expansion of its services, the Company has entered into agreements with
Lucent Technologies, Inc., Northern Telecom, Inc. and Cascade Communications,
Inc., to purchase a full range of switching systems, fiber optic cable, network
electronics, software and services. The Company will continue to expand its
network through construction, leased facilities and strategic joint ventures.
The Company's operating networks have grown from 323 fiber route miles at
the end of fiscal 1994 to 2,483 fiber route miles at March 31, 1997. Telecom
Services revenue has increased from $14.9 million for fiscal 1994 to $129.6
million for the 12-month period ended March 31, 1997. The Company has
experienced declining access unit prices and increasing price competition which
have been more than offset by increasing network usage. The Company expects to
continue to experience declining access unit prices and increasing price
competition for the foreseeable future.
16
In conjunction with the increase in its service offerings, the Company is
required to invest significant amounts on sales, marketing, customer service and
engineering personnel prior to the generation of appreciable revenue. This will
have an adverse effect on operating margins until such time as sufficient
volumes of customers are attained. As the Company's customer base grows, the
Company anticipates that operating margins will improve as incremental revenue
will exceed incremental operating expenses. The preceding forward-looking
statement is dependent upon the successful implementation of the Company's local
dial tone, data transmission and long distance strategies, increased traffic on
the Company's facilities and actions of competitors and regulatory authorities,
any or all of which may not occur.
The Company expects to continue to experience negative operating margins
from the provision of switched access services while its networks are in the
development and construction phases, during which the Company relies on ILEC
networks to carry a significant portion of its customers' switched traffic. The
Company expects to realize improved operating margins from switched services on
a given network when (i) increased volumes of traffic are attained and build-out
enables such traffic to be carried on the Company's own network instead of ILEC
facilities, and (ii) higher margin enhanced services are provided to customers
on the Company's network. In addition, the Company believes that the unbundling
of ILEC services and the implementation of local telephone number portability,
which are mandated by the Telecommunications Act, will reduce the Company's
costs of providing switched services and facilitate the marketing of such
services. However, the Company's switched access services strategy has not yet
been profitable and may not become profitable due to, among other factors, lack
of customer demand, competition from other CLECs and downward pricing pressure
from the ILECs.
The Company believes that the provisions of the Telecommunications Act,
including the opening of the local telephone services market to competition, the
unbundling of ILEC services and the implementation of local telephone number
portability, will facilitate the Company's plan to provide a full array of
local, long distance and data communications services. In order to fully
implement its strategy, the Company must make significant capital expenditures
to provide additional switching capacity, network infrastructure and electronic
components. The Company must also make significant investments and expenditures
to develop, train and manage its marketing and sales personnel. The Company has
limited experience providing such services and there can be no assurance that
the Company will be successful.
The continued development, construction and expansion of the Company's
business requires significant capital, a large portion of which is expended
before any revenue is generated. The Company has experienced, and expects to
continue to experience, negative cash flow and significant losses while it
expands its operations to provide a wide range of telecommunications services
and establishes a sufficient revenue-generating customer base. There can be no
assurance that the Company will be able to establish or retain such a customer
base. When constructing and relying principally on its own facilities, the
Company has experienced a period of up to 18 months from initial design of a
network to revenue generation for that network. However, using leased ILEC
facilities to provide initial customer service and the Company's new agreements
to use utilities' existing fiber, the Company has experienced initial revenue
generation within nine months after commencing network design.
17
Results of Operations
The following table provides a breakdown of revenue and operating costs for
Telecom Services, Network Services and Satellite Services, and certain other
financial data for the Company for the periods indicated. The table also shows
certain revenue, expenses, operating loss and EBITDA as a percentage of the
Company's total revenue.
Three months ended March 31,
-----------------------------------------------
1996 1997
---------------------- ------------------------
$ % $ %
--------- ------------ ---------- -------------
(unaudited)
(in thousands)
Statement of Operations Data:
Revenue:
Telecom services 17,635 49 38,280 61
Network services 13,973 39 17,987 28
Satellite services 4,336 12 6,783 11
-------- --------- ----------- ------------
Total revenue 35,944 100 63,050 100
Operating costs:
Telecom services 15,194 41,450
Network services 11,058 14,535
Satellite services 1,919 3,587
-------- ---------- --------- -------------
Total operating costs 28,171 78 59,572 95
Selling, general and
administrative 16,154 45 33,379 53
Depreciation and amortization 7,442 21 10,882 17
-------- ----------- --------- -------------
Operating loss (15,823) (44) (40,783) (65)
Other Data:
EBITDA (1) (8,381) (23) (29,901) (47)
Net cash used by operating
activities (17,022) (14,769)
Net cash used by investing
activities (50,700) (58,565)
Net cash (used) provided by
financing activities (23,956) 172,688
Capital expenditures 76,433 61,545
March 31, June 30, Sept. 30, Dec. 31, March 31,
1996 1996 1996 1996 1997
---------- --------- --------- --------- ----------
(unaudited)
Statistical Data (2):
Full time employees 1,061 1,173 1,323 1,424 1,606
Telecom services:
Buildings connected:
On-net 327 384 478 522 545
Off-net 1,401 1,493 1,589 1,547 1,550
---------- -------- -------- --------- ----------
Total buildings
connected 1,728 1,877 2,067 2,069 2,095
Customer circuits in
service (VGEs) 510,755 551,881 630,697 748,528 816,238
Switches operational:
Telephony 13 13 14 14 16
Frame relay - - - 1 10
---------- ---------- -------- -------- ----------
Total switches
operational 13 13 14 15 26
Switched minutes of use
(in millions) 362 475 563 607 682
Fiber route miles (3):
Operational 780 886 2,143 2,385 2,483
Under construction - - - - 639
Fiber strand miles (4):
Operational 36,310 45,098 70,067 75,490 83,334
Under construction - - - - 28,310
Wireless miles (5) 582 483 491 506 511
Satellite services:
VSATs 658 659 835 860 875
C-Band installations (6) 36 48 48 54 57
L-Band installations (7) 3 53 109 204 355
18
(Continued)
(1) EBITDA consists of operating loss plus depreciation and amortization.
EBITDA is provided because it is a measure commonly used in the
telecommunications industry. It is presented to enhance an understanding of
the Company's operating results and is not intended to represent cash flow
or results of operations in accordance with generally accepted accounting
principles ("GAAP") for the periods indicated. Net cash flows from
operating, investing and financing activities as calculated in accordance
with GAAP are also presented in Other Data. See the Company's Consolidated
Financial Statements contained elsewhere in this report.
(2) Amounts presented are for three-month periods ended, or as of the end of
the period presented.
(3) Fiber route miles refers to the number of miles of fiber optic cable,
including leased fiber. As of March 31, 1997, the Company had 2,483 fiber
route miles, of which 359 fiber route miles were leased under operating
leases. Fiber route miles under construction represents fiber under
construction and fiber which is expected to be operational within six
months.
(4) Fiber strand miles refers to the number of fiber route miles, including
leased fiber, along a telecommunications path multiplied by the number of
fiber strands along that path. As of March 31, 1997, the Company had 83,334
fiber strand miles, of which 7,080 fiber strand miles were leased under
operating leases. Fiber strand miles under construction represents fiber
under construction and fiber which is expected to be operational within six
months.
(5) Wireless miles represents the total distance of the digital microwave paths
between Company transmitters which are used in the Company's networks.
(6) C-Band installations service cruise ships, U.S. Navy vessels and offshore
oil platform installations.
(7) L-Band installations service smaller maritime installations, and both
mobile and fixed land-based units.
Three Months Ended March 31, 1997, Compared to Three Months Ended March 31, 1996
Revenue. Revenue for the three months ended March 31, 1997 increased $27.1
million, or 75%, from the three months ended March 31, 1996. Telecom Services
revenue increased 117% to $38.3 million due to an increase in network usage for
both special and switched access services, offset in part by a decline in
average access rates. Switched services revenue increased from $9.1 million (52%
of Telecom Services revenue) for the three months ended March 31, 1996 to $26.2
million (68% of Telecom Services revenue) for the three months ended March 31,
1997, of which $7.6 million relates to revenue from Zycom, compared to $1.1
million for the three months ended March 31, 1996. Substantially all of the
increase in Zycom revenue for the three months ended March 31, 1997 as compared
to the same period in 1996 relates to changes in the classification of certain
operating costs (which were netted against revenue during the 1996 period) as a
result of the Company entering into long-term contracts with its major
customers. Network usage reflected in VGEs increased 60% from 510,755 VGEs at
March 31, 1996, to 816,238 VGEs at March 31, 1997. Additionally, switched
minutes of use increased 88% from 362 million minutes during the three months
ended March 31, 1996 to 682 million minutes during the three months ended March
31, 1997. Network Services revenue increased 29% to $18.0 million for the three
months ended March 31, 1997 as compared to $14.0 million for the three months
ended March 31, 1996. The increase is attributable to an equipment sale to a
single customer for approximately $1.5 million in excess of a similar sale
during the comparable period in 1996. The remaining increase in Network Services
revenue is due to additional projects from existing customers and increased
business networking requirements. Satellite Services revenue increased 57% to
$6.8 million for the three months ended March 31, 1997. This increase is
primarily due to the operations of Maritime Cellular Tele-Network, Inc. ("MCN"),
a 90% owned subsidiary of the Company acquired in March 1996, which comprised
$1.2 million of total Satellite Services revenue for the three months ended
March 31, 1997 and provided substantially no revenue due to the date of
acquisition during the same period in 1996. The remaining increase can be
attributed to the general growth of MTN and its increased sales of C-Band
equipment to offshore oil and gas customers.
Operating costs. Total operating costs for the three months ended March
31, 1997 increased $31.4 million, or 112% from the three months ended March 31,
1996. Telecom Services operating costs increased from $15.2 million, or 86% of
Telecom Services revenue, for the three months ended March 31, 1996, to $41.5
million, or 108% of Telecom Services revenue, for the three months ended March
31, 1997. Telecom Services operating costs consist of payments to
19
ILECs for the use of network facilities to support off-net and switched access
services, network operating costs, right of way fees and other costs. The
increase in operating costs in absolute dollars is attributable to the increase
in switched access services and the addition of engineering personnel dedicated
to the development of local exchange services. The increase in operating costs
as a percentage of total revenue is due primarily to the increase in switched
access services revenue, which generates negative margins as a result of the
higher costs associated with utilizing ILEC network facilities, and the
investment in the development of local exchange services without the benefit of
corresponding revenue in the same period. The Company expects that its Telecom
Services ratio of operating costs to revenue will continue to increase until the
Company provides a greater volume of higher margin services, principally local
exchange services, carries more traffic on its own facilities rather than the
ILEC facilities, and obtains the right to use unbundled ILEC facilities on
satisfactory terms, any or all of which may not occur. Network Services
operating costs increased 31% to $14.5 million and increased as a percentage of
revenue from 79% for the three months ended March 31, 1996, to 81% for the three
months ended March 31, 1997. The increase is due to a substantially lower margin
earned on equipment sales relative to other services. Network Services operating
costs include the cost of equipment sold, direct hourly labor and other indirect
project costs. Satellite Services operating costs increased to $3.6 million for
the three months ended March 31, 1997, from $1.9 million for the three months
ended March 31, 1996. Satellite Services operating costs as a percentage of
revenue also increased from 44% for the three months ended March 31, 1996, to
53% for the three months ended March 31, 1997. This increase is due to the
addition of MCN's operating costs in the current three-month period as well as
the increased volume of equipment sales, both of which provide lower margins
than other maritime services. Satellite Services operating costs consist
primarily of transponder lease costs and the cost of equipment sold.
Selling, general and administrative expenses. Selling, general and
administrative ("SG&A") expenses for the three months ended March 31, 1997
increased $17.2 million, or 107%, compared to the three months ended March 31,
1996. This increase was principally due to the continued rapid expansion of the
Company's Telecom Services networks and related significant additions to the
Company's management information systems, customer service, marketing and sales
staffs dedicated to the expansion of the Company's networks and implementation
of the Company's expanded services strategy, primarily the development of local
telephone services. SG&A expenses as a percentage of total revenue increased
from 45% for the three months ended March 31, 1996, to 53% for the three months
ended March 31, 1997. There is typically a period of higher administrative and
marketing expense prior to the generation of appreciable revenue from newly
developed networks or services. The Company expects SG&A expenses for Telecom
Services to increase with or above revenue over the near term as a result of
hiring new staff to facilitate the marketing and development of local dial tone,
long distance and data transmission services to business and end user customers.
Depreciation and amortization. Depreciation and amortization increased $3.4
million, or 46%, for the three months ended March 31, 1997, compared to the
three months ended March 31, 1996, due to increased investment in depreciable
assets resulting from the continued expansion of the Company's networks and
services. The Company reports high levels of depreciation expense relative to
revenue during the early years of operation of a new network because the full
cost of a network is depreciated using the straight-line method despite the low
rate of capacity utilization in the early stages of network operation.
Interest expense. Interest expense increased $10.9 million, from $14.2
million for the three months ended March 31, 1996, to $25.1 million for the
three months ended March 31, 1997, which included $23.3 million of non-cash
interest. This increase was attributable to an increase in long-term debt,
primarily the 11 5/8% Notes and the 12 1/2% Notes issued in March 1997 and April
1996, respectively, and an increase in capitalized lease obligations to finance
certain equipment.
Interest income. Interest income increased $2.4 million, from $2.7 million
for the three months ended March 31, 1996, to $5.1 million for the three months
ended March 31, 1997. The increase is attributable to the increase in cash from
the proceeds of the issuances of the 11 5/8% Notes and 14% Preferred Stock in
March 1997 and the 12 1/2% Notes and 14 1/4% Exchangeable Preferred Stock (the
"14 1/4% Preferred Stock") in April 1996.
Other, net. Other, net fluctuated from $1.6 million net expense in the
three months ended March 31, 1996 to $0.2 million net expense in the three
months ended March 31, 1997. Other expense recorded in the three-month periods
ended March 31, 1996 and 1997 represents losses recognized on the disposal of
assets.
Minority interest in share of losses, net of accretion and preferred
dividends on subsidiary preferred stock. Minority interest in share of losses,
net of accretion and preferred dividends on subsidiary preferred stock increased
$3.8
20
million, from $2.0 million for the three months ended March 31, 1996 to $5.8
million for the three months ended March 31, 1997. The increase is due primarily
to the issuance of the 14 1/4% Preferred Stock in April 1996 and the issuance of
the 14% Preferred Stock in March 1997. Minority interest in share of losses, net
of accretion and preferred dividends on subsidiary preferred stock recorded
during the current three-month period consists of the accretion of issue costs
($0.2 million) and the accrual of the preferred stock dividend ($6.6 million)
associated with the 14% Preferred Stock and the 14 1/4% Preferred Stock, offset
by minority interest in losses of subsidiaries of $1.0 million.
Share of losses in joint venture and investment. Effective October 1, 1996,
the Company sold its 50% interest in the Phoenix network joint venture. As a
result, no share of losses in joint venture was recorded during the three months
ended March 31, 1997, as compared to the $0.6 million recorded during the
comparable period in 1996. Future results will include the Company's share of
losses from the joint venture with CSW.
Liquidity and Capital Resources
The Company's growth has been funded through a combination of equity, debt
and lease financing. As of March 31, 1997, the Company had current assets of
$541.4 million, including $491.0 million of cash, cash equivalents and
short-term investments, which exceeded current liabilities of $76.1 million,
providing working capital of $465.3 million. The Company invests excess funds in
short-term, interest-bearing investment-grade securities until such funds are
used to fund the capital investments and operating needs of the Company's
business. The Company's investment objectives are safety, liquidity and yield,
in that order.
Cash Used By Operating Activities
The Company's operating activities used $17.0 million and $14.8 million for
the three months ended March 31, 1996 and 1997, respectively. Cash used by
operations is primarily due to net losses, which are partially offset by
non-cash expenses, such as depreciation expense, deferred interest expense,
preferred dividends on subsidiary preferred stock and changes in working capital
items.
The Company expects to continue to generate negative cash flow from
operating activities while it emphasizes development, construction and expansion
of its Telecom Services business. Consequently, it does not anticipate that cash
provided by operations will be sufficient to fund future expansion of existing
networks or the construction and acquisition of new networks in the near term.
Cash Used By Investing Activities
The Company's investing activities used $50.7 million and $58.6 million for
the three months ended March 31, 1996 and 1997, respectively. Cash used by
investing activities includes cash expended for the acquisition of property,
equipment and other assets, net of proceeds from the sale of such assets, of
$29.1 million and $59.9 million for the three months ended March 31, 1996 and
1997, respectively. The Company will continue to use cash in 1997 for the
construction of new networks and the expansion of existing networks. The Company
acquired assets under capitalized leases of $47.3 million and $1.7 million for
the three months ended March 31, 1996 and 1997, respectively. Assets acquired
under capitalized leases during the three months ended March 31, 1996 primarily
consisted of fiber optic networks included in the Company's agreement with SCE.
The Company expects to make investments of approximately $24.2 million in
1997 in its joint venture with CSW and estimates making additional investments
therein of approximately $25.5 million through 2002. The Company is obligated to
purchase, at fair value, all of the shares of MTN that are owned by the minority
shareholder, if MTN has not completed a public offering by January 3, 1998.
Cash (Used) Provided By Financing Activities
Financing activities used $24.0 million and provided $172.7 million in the
three months ended March 31, 1996 and 1997, respectively. The significant change
in cash provided by financing activities in the three months ended March 31,
1997, compared to cash used by financing activities in the three months end
March 31, 1996, is due to the completion of the Private Placement of the 11 5/8%
Notes and the 14% Preferred Stock in March 1997. Historically, the funds to
finance the Company's business acquisitions, capital expenditures, working
capital requirements and operating
21
losses have been obtained through public and private offerings of
Holdings-Canada common shares, the 12 1/2% Notes and 14 1/4% Preferred Stock,
units consisting of the 13 1/2% Notes and warrants, redeemable preferred stock,
convertible subordinated notes, convertible preferred shares of Holdings-Canada,
capital lease financings and various working capital sources, including credit
facilities.
On March 11, 1997, Holdings completed the Private Placement of 11 5/8%
Notes and 100,000 shares of 14% Preferred Stock for net proceeds of
approximately $192.4 million. The net proceeds of the Private Placement will
improve the Company's operating and financial flexibility over the near term.
The Company believes its liquidity improved because (a) the 11 5/8% Notes do not
require the payment of cash interest until 2002 and (b) Holdings has the option
to pay dividends on the 14% Preferred Stock in additional shares of 14%
Preferred Stock prior to 2002 and the Preferred Stock is not mandatorily
redeemable until 2008.
The 11 5/8% Notes are unsecured senior obligations of Holdings (guaranteed
by ICG) that mature on March 15, 2007. Interest will accrue at 11 5/8% per annum
beginning March 15, 2002, and is payable each March 15 and September 15,
commencing September 15, 2002. Dividends on the 14% Preferred Stock are
cumulative at a rate of 14% per annum and are payable quarterly in arrears each
March 15, June 15, September 15 and December 15, commencing June 15, 1997. The
14% Preferred Stock has a liquidation preference of $1,000 per share, plus
accrued and unpaid dividends, and is mandatorily redeemable in 2008. The
Preferred Stock is exchangeable, at the option of Holdings, into 14% senior
subordinated exchange debentures of Holdings due 2008, at any time after the
exchange is permitted under certain indenture restrictions.
Additionally, as of March 31, 1997, an aggregate of approximately $77.6
million of capitalized lease obligations and an aggregate accreted value of
approximately $707.5 million were outstanding under the 12 1/2% Notes and the 13
1/2% Notes. The 12 1/2% Notes require payments of interest to be made in cash
commencing on November 1, 2001 and mature on May 1, 2006. The 13 1/2% Notes
require payments of interest to be made in cash commencing on March 15, 2001 and
mature on September 15, 2005. In addition, the 14 1/4% Preferred Stock requires
payment of dividends to be made in cash commencing August 1, 2001. As of March
31, 1997, the Company had $9.3 million of other indebtedness outstanding. The
Company may also have additional payment obligations prior to such time, the
amount of which cannot presently be determined. The Company's cash on hand and
amounts expected to be available through vendor financing arrangements will
provide sufficient funds necessary for the Company to expand its Telecom
Services business as currently planned and to fund its operating deficits
through 1997 and into 1998. Accordingly, the Company may have to refinance a
substantial amount of indebtedness and obtain substantial additional funds prior
to March 2001. The Company's ability to do so will depend on, among other
things, its financial condition at the time, restrictions in the instruments
governing its indebtedness, and other factors, including market conditions,
beyond the control of the Company. There can be no assurance that the Company
will be able to refinance such indebtedness, including such capitalized leases,
or obtain such additional funds, and if the Company is unable to effect such
refinancings or obtain additional funds, the Company's ability to make principal
and interest payments on its indebtedness or make payments of cash dividends on,
or the mandatory redemption of, its preferred stock, would be adversely
affected.
Capital Expenditures
The Company expects to continue to generate negative cash flow from
operating activities while it emphasizes development, construction and expansion
of its business and until the Company establishes a sufficient
revenue-generating customer base. The Company's capital expenditures (including
assets acquired under capital leases) were $76.4 million and $61.5 million for
the three months ended March 31, 1996 and 1997, respectively. The Company
anticipates that the expansion of existing networks, construction of new
networks and further development of the Company's products and services will
require capital expenditures of approximately $188.5 million and $240.0 million
during 1997 and 1998, respectively, and continued significant capital
expenditures thereafter. To facilitate the expansion of its switched services
strategy and entrance into data communications, the Company has entered into
equipment purchase agreements with various vendors under which the Company must
purchase a substantial amount of equipment and other assets, including a full
range of switching systems, fiber optic cable, network electronics, software and
services. Actual capital expenditures will depend on numerous factors beyond the
Company's control. These factors include the nature of future expansion and
acquisition opportunities, economic conditions, competition, regulatory
developments and the availability of equity, debt and lease financing.
22
General
The Company's operations have required and will continue to require
significant capital expenditures for development, construction, expansion and
acquisitions. Significant amounts of capital are required to be invested before
revenue is generated, which results in initial negative cash flow.
In view of the anticipated negative cash flow from operating activities,
the continuing development of the Company's products and services, the expansion
of existing networks and the construction, leasing and licensing of new
networks, the Company will require additional amounts of cash in the future from
outside sources. Management believes that the Company's cash on hand and amounts
expected to be available through vendor financing arrangements will provide
sufficient funds necessary for the Company to expand its Telecom Services
business as currently planned and to fund its operating deficits through 1997
and into 1998. Additional sources of cash may include public and private equity
and debt financings, sales of non-strategic assets, capitalized leases and other
financing arrangements. The Company may require additional amounts of equity
capital in the near term. In the past, the Company has been able to secure
sufficient amounts of financing to meet its capital expenditure needs. There can
be no assurance that additional financing will be available to the Company or,
if available, that it can be obtained on terms acceptable to the Company.
The failure to obtain sufficient amounts of financing could result in the
delay or abandonment of some or all of the Company's development and expansion
plans, which could have a material adverse effect on the Company's business. In
addition, the inability to fund operating deficits with the proceeds of
financings until the Company establishes a sufficient revenue generating
customer base could have a material adverse effect on the Company's liquidity.
New Accounting Standard
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" ("SFAS 128") which revises the calculation and
presentation provisions of Accounting Principles Board Opinion 15 and related
interpretations. SFAS 128 is effective for the Company's fiscal year ending
December 31, 1997 and retroactive application is required. The Company believes
the adoption of SFAS 128 will have no effect on its reported loss per share.
23
PART II
ITEM 1. LEGAL PROCEEDINGS
See Note 4 (d) to the Company's Consolidated Financial Statements for
the three months ended March 31, 1997 contained elsewhere in this
Quarterly Report.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits.
(10) Amendment, dated as of March 26, 1997, between ICG
Communications, Inc. and J. Shelby Bryan, to Employment
Agreement, dated as of May 30, 1995, between IntelCom Group
Inc. and J. Shelby Bryan.
(27) Financial Data Schedule.
(B) Reports on Form 8-K. The following reports on Form 8-K were filed
by the Registrants during the three months ended March 31, 1997:
(i) Current Report on Form 8-K dated February 20, 1997,
regarding the announcement of earnings information and
results of operations for the transition period from October
1, 1996 through December 31, 1996.
(ii) Current Report on Form 8-K dated February 24, 1997,
regarding the announcement of an offering of Senior Discount
Notes and Exchangeable Preferred Stock by ICG Holdings, Inc.
24
INDEX TO EXHIBITS
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
EXHIBIT 10
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Amendment, dated as of March 26, 1997, between ICG Communications, Inc. and
J. Shelby Bryan, to Employment Agreement, dated as of May 30, 1995, between
IntelCom Group Inc. and J. Shelby Bryan.
- --------------------------------------------------------------------------------
EXHIBIT 27
- --------------------------------------------------------------------------------
Financial Data Schedule.
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 April 30, 1997.
ICG HOLDINGS, INC.
Date: April 30, 1997 By: /s/ James D. Grenfell
-----------------------------------
James D. Grenfell, Executive Vice
President, Chief Financial Officer,
Treasurer and Director
Date: April 30, 1997 By: /s/ Richard Bambach
-----------------------------------
Richard Bambach, Vice President and
Corporate Controller