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 June 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(Commission File Number 1-11965)
ICG COMMUNICATIONS, INC.
(Commission File Number 1-11052)
ICG HOLDINGS (CANADA), INC.
(Commission File Number 33-96540)
ICG HOLDINGS, INC.
(Exact names of Registrants as Specified in their Charters)
- - - --------------------------------------------------------------------------------
Delaware 84-1342022
Canada Not Applicable
Colorado 84-1158866
(State or other jurisdiction of (I.R.S. employer
incorporation) 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 August 12, 1997 were
33,213,071, 31,822,756 and 1,918, respectively. ICG Holdings (Canada), Inc. owns
all of the issued and outstanding shares of ICG Holdings, Inc.
TABLE OF CONTENTS
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . 3
Consolidated Balance Sheets as of December 31, 1996 and June 30,
1997(unaudited). . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations (unaudited) for the Six
Months Ended June 30, 1996 and 1997 . . . . . . . . . . 5
Consolidated Statement of Stockholders' Deficit (unaudited) for
the Six Months Ended June 30, 1997 . . . . . . . . . . . 6
Consolidated Statements of Cash Flows (unaudited) for the Six
Months Ended June 30, 1996 and 1997 . . . . . . . . . . 7
Notes to Consolidated Financial Statements (unaudited). . . . 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . 17
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . 27
ITEM 2. CHANGES IN SECURITIES . . . . . . . . . . . . . . . . . . 27
ITEM 3. DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS. . . 27
ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . 27
Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . 27
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 27
2
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and June 30, 1997 (unaudited)
December 31, June 30,
1996 1997
------------------ ----------------
Assets (in thousands)
Current assets:
Cash and cash equivalents $ 359,934 382,220
Short-term investments 32,601 12,000
Receivables:
Trade, net of allowance of $2,515 and $4,086 at
December 31, 1996 and June 30, 1997, respectively 41,131 40,616
Revenue earned, but unbilled 6,053 6,735
Other 1,440 2,302
------------------ ----------------
48,624 49,653
Inventory 2,845 3,815
Prepaid expenses and deposits 5,019 7,827
Notes receivable 200 -
------------------ ----------------
Total current assets 449,223 455,515
------------------ ----------------
Property and equipment 460,477 593,553
Less accumulated depreciation (56,545) (78,155)
------------------ ----------------
Net property and equipment 403,932 515,398
------------------ ----------------
Investments 5,170 5,170
Long-term notes receivable, net 623 480
Restricted cash (note 4) 13,333 12,700
Other assets, net of accumulated amortization:
Goodwill 31,881 31,061
Deferred financing costs 21,963 24,193
Transmission and other licenses 8,526 8,355
Other 9,482 7,855
------------------ ----------------
71,852 71,464
================== ================
$ 944,133 1,060,727
================== ================
(Continued)
3
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
December 31, June 30,
1996 1997
------------------ -------------------
Liabilities and Stockholders' Deficit (in thousands)
Current liabilities:
Accounts payable $ 24,813 28,127
Accrued liabilities 37,309 56,206
Current portion of long-term debt (note 2) 817 1,744
Current portion of capital lease obligations 24,683 6,719
------------------ -------------------
Total current liabilities 87,622 92,796
Long-term debt, net of discount, less current portion (note 2) 690,358 836,994
Capital lease obligations, less current portion 71,146 67,620
------------------ -------------------
Total liabilities 849,126 997,410
------------------ -------------------
Minority interests 1,967 304
Redeemable preferred stock of subsidiary ($164.8 million and
$281.0 million liquidation value at December 31, 1996 and
June 30, 1997, respectively) (note 2) 159,120 271,652
Stockholders' deficit:
Common stock (note 3) 8,088 555
Additional paid-in capital 294,472 303,797
Accumulated deficit (368,640) (512,991)
------------------ -------------------
Total stockholders' deficit (66,080) (208,639)
------------------ -------------------
Commitments and contingencies (note 4)
$ 944,133 1,060,727
================== ===================
See accompanying notes to consolidated financial statements.
4
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (unaudited)
Six Months Ended June 30, 1996 and 1997
Three months ended June 30, Six months ended June 30,
--------------------------------- -------------------------------
1996 1997 1996 1997
-------------- --------------- ------------- --------------
(in thousands, except per share data)
Revenue:
Telecom services $ 24,371 41,243 42,006 79,523
Network services 14,679 15,640 28,652 33,627
Satellite services 5,596 7,883 9,932 14,666
-------------- --------------- ------------- -------------
Total revenue 44,646 64,766 80,590 127,816
Operating costs and expenses:
Operating costs 35,307 59,693 63,478 119,265
Selling, general and administrative expenses 20,546 38,864 36,700 72,243
Depreciation and amortization 9,055 13,075 16,497 23,957
-------------- --------------- ------------- -------------
Total operating costs and expenses 64,908 111,632 116,675 215,465
Operating loss (20,262) (46,866) (36,085) (87,649)
Other income (expense):
Interest expense (32,940) (28,341) (47,157) (53,481)
Interest income 5,957 6,768 8,682 11,902
Other, net (466) (15) (2,020) (254)
-------------- --------------- ------------- -------------
(27,449) (21,588) (40,495) (41,833)
-------------- --------------- ------------- -------------
Loss before income taxes, minority interest and
share of losses (47,711) (68,454) (76,580) (129,482)
Income tax benefit - - 4,482 -
-------------- --------------- ------------- -------------
Loss before minority interest and shares of losses (47,711) (68,454) (72,098) (129,482)
Minority interest in share of losses, net of accretion and
preferred dividends on subsidiary preferred stock (16,561) (9,116) (18,531) (14,869)
Share of losses of joint venture and investment (449) - (1,031) -
-------------- ------------- ------------- -------------
Net loss (64,721) (77,570) (91,660) (144,351)
============== =============== ============= =============
Loss per share (note 3):
Loss per share $ (2.43) (2.42) (3.50) (4.51)
============== =============== ============= =============
Weighted average number of shares outstanding 26,580 32,042 26,192 31,990
============== =============== ============= =============
See accompanying notes to consolidated financial statements.
5
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Deficit (unaudited)
Six Months Ended June 30, 1997
Additional Total
Common stock paid-in Accumulated stockholders'
Shares Amount capital deficit deficit
------------- --------------- -------------- ---------------- -----------------
(in thousands)
Balances at January 1, 1997 31,895 $ 8,088 294,472 (368,640) (66,080)
Shares issued for cash in connection with
the exercise of options and warrants 87 1 668 - 669
Shares issued for cash in connection with
the employee stock purchase plan 50 1 589 - 590
Shares issued as contribution to 401(k)plan 28 - 533 - 533
Exchange of Holdings-Canada common shares
for ICG common stock - (7,535) 7,535 - -
Net loss - - - (144,351) (144,351)
============= =============== ============== ================ =================
Balances at June 30, 1997 32,060 $ 555 303,797 (512,991) (208,639)
============= =============== ============== ================ =================
See accompanying notes to consolidated financial statements.
6
ICG COMMUNICATIONS, INC. AND SUBISIDIARIES
Consolidated Statements of Cash Flows (unaudited)
Six Months Ended June 30, 1996 and 1997
Six months ended June 30,
---------------------------------------
1996 1997
------------------- -----------------
(in thousands)
Cash flows from operating activities:
Net loss $ (91,660) (144,351)
Adjustments to reconcile net loss to net cash used by operating activities:
Share of losses of joint venture and investment 1,031 -
Minority interest in share of losses, net of accretion and non-cash
preferred dividends on subsidiary preferred stock 18,531 14,869
Depreciation and amortization 16,497 23,957
Compensation expense related to issuance of stock options 26 -
Interest expense deferred and included in long-term debt 30,510 48,532
Amortization of deferred financing costs included in interest expense 1,759 1,370
Contribution to 401(k) plan through issuance of common shares 451 533
Deferred income tax benefit (4,482) -
Loss on sale of certain Satellite Services assets 891 -
Gain on sale of certain other assets - (319)
Increase in operating assets, excluding the effects of business
acquisitions:
Receivables (2,502) (1,029)
Inventory (827) (970)
Prepaid expenses and deposits (2,600) (2,808)
Increase (decrease) in operating liabilities, excluding the effects of
business acquisitions:
Accounts payable and accrued liabilities (58) 22,211
------------------- -----------------
Net cash used by operating activities (32,433) (38,005)
------------------- -----------------
Cash flows from investing activities:
Decrease in notes receivable 1,546 343
Increase in advances to affiliates (359) -
Investments in and advances to joint venture (2,316) -
Payments for business acquisitions, net of cash acquired (6,567) -
Purchase of long-term investment 40 -
Sale of short-term investments 2,979 20,601
Decrease in restricted cash - 633
Acquisition of property, equipment and other assets, net (56,847) (132,529)
Proceeds from the sale of certain Satellite Services assets 447 -
------------------- -----------------
Net cash used by investing activities (61,077) (110,952)
------------------- -----------------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,614 1,259
Proceeds from issuance of subsidiary preferred stock, net of issuance costs 144,000 96,000
Repurchase of redeemable preferred stock of subsidiary and payment of
accrued dividend (32,629) -
Repurchase of redeemable warrants (2,671) -
Proceeds from issuance of long-term debt 300,034 99,908
Deferred long-term debt issuance costs (9,265) (3,554)
Principal payments on short-term debt (17,500) -
Principal payments on long-term debt (1,429) (879)
Principal payments on capital lease obligations (5,643) (21,491)
------------------- -----------------
Net cash provided by financing activities 376,511 171,243
------------------- -----------------
Net increase in cash and cash equivalents 283,001 22,286
Cash and cash equivalents, beginning of period 231,163 359,934
=================== =================
Cash and cash equivalents, end of period $ 514,164 382,220
=================== =================
(Continued)
7
ICG COMMUNICATIONS, INC. AND SUBISIDIARIES
Consolidated Statements of Cash Flows, Continued
Six months ended June 30,
----------------------------------------
1996 1997
------------------- -----------------
(in thousands)
Supplemental disclosure of cash flow information:
Cash paid for interest $ 14,888 3,579
=================== =================
Supplemental schedule of non-cash financing and investing activities:
Common shares issued in connection with business combinations and
repayment of debt or conversion of liabilities to equity $ 19,023 -
=================== =================
See accompanying notes to consolidated financial statements.
8
ICG COMMUNICATIONS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and June 30, 1997 (unaudited)
(1) Nature of Business and Reference to Other Reports
ICG Communications, Inc. ("ICG"), a Delaware corporation, was
incorporated on April 11, 1996, for the purpose of becoming the
new publicly-traded U.S. parent company of ICG Holdings (Canada),
Inc. ("Holdings-Canada"), a Canadian federal corporation
(formerly known as IntelCom Group Inc.), ICG Holdings, Inc.
("Holdings"), a Colorado corporation (formerly known as IntelCom
Group (U.S.A), Inc.), and its subsidiaries (collectively, the
"Company"). The Company's principal business activity is
telecommunications services, including Telecom Services, Network
Services and Satellite Services. Telecom Services consists of the
Company's competitive local exchange carrier operations which
provide services to long distance carriers and resellers, as well
as business end users. Network Services supplies information
technology services and selected networking products, focusing on
network design, installation, maintenance and support for a
variety of end users, including Fortune 1000 firms and other
large businesses and telecommunications companies. Satellite
Services provides satellite voice and data services to major
cruise ship lines, the commercial shipping industry, yachts, the
U.S. Navy and offshore oil platforms. Although the Company does
not have a formal plan, it is considering the disposition of its
Satellite Services operations to better focus on its core Telecom
Services unit.
(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 six months ended June
30, 1997 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1997.
(b) Reclassifications
Certain 1996 amounts have been reclassified to conform with the
1997 presentation.
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 June 30, 1997 is
summarized as follows (in thousands):
December 31, 1996 June 30, 1997
--------------------- -----------------
11 5/8% Senior discount notes, net of discount (a) $ - 103,437
12 1/2% Senior discount notes, net of discount 325,530 345,875
13 1/2% Senior discount notes, net of discount 355,955 380,615
Convertible subordinated notes 65 65
Note payable with interest at the 90-day commercial
paper rate plus 4 3/4% (10 3/10% at June 30, 1997), due 2001,
secured by certain telecommunications equipment 5,815 5,300
Note payable with interest at 11%, due monthly
through fiscal 1999, secured by equipment 2,625 2,288
Mortgage payable with interest at 8 1/2%, due
monthly through 2009, secured by building 1,177 1,154
Other 8 4
--------------------- -----------------
691,175 838,738
Less current portion (817) (1,744)
--------------------- -----------------
$ 690,358 836,994
===================== =================
Redeemable preferred stock of subsidiary at December 31, 1996 and
June 30, 1997 is summarized as follows (in thousands):
December 31, 1996 June 30, 1997
--------------------- ------------------
14% Exchangeable preferred stock mandatorily
redeemable 2008 (a) $ - 100,317
14 1/4% Exchangeable preferred stock mandatorily
redeemable 2007 159,120 171,335
-------------------- ------------------
$ 159,120 271,652
===================== ==================
(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 issuance costs are
being accreted over ten years until maturity at March 15, 2007.
10
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Long-term Debt and Redeemable Preferred Stock of Subsidiary (continued)
The accretion of the discount and debt issuance costs is included
in interest expense in the accompanying consolidated financial
statements. The indenture to the 11 5/8% Notes contains certain
covenants which provide for limitations on indebtedness,
dividends, asset sales and certain other transactions, and
effectively prohibits the payment of interest and dividends.
The 14% Preferred Stock consists of 100,000 shares of 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 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 June 30, 1997 represents the issued
and outstanding Common Stock of ICG and Class A common shares of
Holdings-Canada (not owned by ICG) which are exchangeable at any
time, on a one-for-one basis, for ICG Common Stock. The following
table sets forth the number of shares outstanding for ICG and
Holdings-Canada on a separate company basis as of June 30, 1997:
Shares
Shares owned by not owned
ICG by ICG
----------------- ----------------
ICG Common Stock, $.01 par value, 100,000,000
shares authorized; 31,087,825 and 32,046,134 shares
issued and outstanding at December 31, 1996 and June 30,
1997, respectively - 32,046,134
Holdings-Canada Class A common shares, no par value,
100,000,000 shares authorized; 31,795,270 and 31,822,756 shares
issued and outstanding at December 31, 1996 and June 30, 1997,
respectively:
Class A common shares, exchangeable on a one-for-one
basis for ICG Common Stock at any time - 13,986
Class A common shares owned by ICG 31,808,770 -
----------------
Total shares outstanding 32,060,120
================
(b) Stock Options
In order to continue to provide non-cash incentives and retain
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 Stock Option Committee of the Company's Board of
Directors to $10.375, the closing price of the Company's Common
Stock on the Nasdaq National Market on April 16, 1997.
Approximately 568,000 options, with original exercise prices
ranging from $15.875 to $26.25, have been repriced. There was no
effect on the Company's consolidated financial statements as a
result of the repricing of options.
11
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) Stockholders' Deficit (continued)
(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 Holdings-Canada common
shares outstanding for the three months and six months ended June
30, 1996, and ICG Common Stock and Holdings-Canada Class A common
shares (not owned by ICG) outstanding for the three months and
six months ended June 30, 1997. Common stock equivalents, which
include options, warrants and convertible subordinated notes, are
not included in the loss per share calculation as their effect is
anti-dilutive.
(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 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 $12.7 million as of June 30, 1997.
In July 1997, the Company and CPS reached a verbal agreement to
cancel all terms of the November 1995 contract. Final documents
to effect the cancellation are pending.
The legal ability of CPS, as a municipally-owned utility, to
enter into the original contract with the Company was challenged
by SBC Communications, Inc. ("SBC") before the San Antonio City
Council as being in violation of a May 1995 Texas state law. In
response, the Company filed a petition with the FCC and requested
a declaratory ruling that the federal Telecommunications Act of
1996 (the "Telecommunications Act") preempted the Texas state law
to the extent that the Telecommunications Act precluded
implementation of the agreement between CPS and the Company, and
also filed a declaratory ruling request with a Texas state court.
All of these actions have been or will be withdrawn as a result
of the verbal agreement to cancel the November 1995 contract. The
Company also filed a civil suit against SBC in federal district
court that was previously dismissed.
In February 1996, the Company entered into a 20-year agreement
with WorldCom, Inc. ("WorldCom"), for the right to use fiber
along a 330-mile fiber optic network in Ohio. Network
construction was completed by the Company and WorldCom as of June
30, 1997. The Company's total cost of construction was $8.8
million.
In March 1996, the Company and Southern California Edison Company
(ASCE) 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 is entitled
to receive an annual fee for ten years, certain fixed quarterly
payments, a quarterly payment equal to a percentage of certain
network revenue, and certain other installation and fiber
connection fees. The aggregate fixed payments remaining under the
agreement totaled approximately $145.4 million at June 30, 1997.
The agreement has been accounted for as a capital lease in the
accompanying consolidated balance sheets at June 30, 1997.
12
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4) Commitments and Contingencies (continued)
In March 1996, the Company entered into a long-term agreement
with a subsidiary of The Southern Company ("Southern") and
Alabama Power Company ("Alabama Power") for the right to use 22
miles of existing fiber and 122 miles of additional Alabama Power
rights of way and facilities to reach the three major business
centers in Birmingham. Southern will, in conjunction with the
Company, construct the network and provide maintenance services
with respect to the fiber installed. Southern also will provide
consulting services to the Company relating to the build-out of
the network and potential enhancements to the Company's products
and services. Under the agreement, the Company is required to pay
Southern a quarterly fee based on specified percentages of the
Company's revenue for services provided through this network. The
Company's estimated costs to complete the network are
approximately $1.5 million. Network construction is expected to
be completed in the third quarter of 1997.
In May 1997, the Company entered into a second long-term
agreement with Southern that will permit the Company to construct
a 100-mile fiber optic network in the Atlanta metropolitan area.
The Company paid $5.5 million upon execution of the agreement and
is responsible for reimbursement to Southern for costs of network
design, construction, installation, maintenance and repair.
Additionally, the Company is also required to pay Southern a
quarterly fee based on specified percentages of the Company's
revenue derived from services provided over this network. Network
construction on the initial build is expected to begin in the
third quarter of 1997 and to be completed in the first half of
1998. The Company estimates costs to complete the initial phase
of this network to be approximately $9.0 million.
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 and a
138-mile long-haul link to Canton, Ohio. Network construction was
completed in June 1997.
In January 1997, the Company announced a strategic alliance with
Central and Southwest Corporation ("CSW"), named CSW/ICG
ChoiceCom, L.P. ("ChoiceCom"), which is expected to develop and
market telecommunications services in certain cities in Texas.
CSW holds 100% of the partnership interest in ChoiceCom and the
Company expects to receive an option to purchase a 50% interest
at any time prior to July 1, 2003. Subsequent to July 1, 1999, if
the Company has not exercised its option, CSW will have the right
to sell 51% or 100% of the partnership interest in ChoiceCom to
the Company. Additionally, the Company has committed to loan
$15.0 million to ChoiceCom over the near term.
In June 1997, the Company entered into an indefeasible right of
use ("IRU") agreement with Qwest Communications Corporation
("Qwest") for approximately 1,800 miles of fiber optic network
and additional broadband capacity in California, Colorado, Ohio
and the Southeast. Network construction is ongoing and is
expected to be complete by December 1998. The Company is
responsible for payment on the construction as segments of the
network are completed, with total costs anticipated to be
approximately $45.0 million. Additionally, the Company has
committed to purchase $6.0 million in network capacity from Qwest
prior to the end of 1998.
(b) Company Headquarters
The Company has acquired property for its new headquarters and
has commenced construction of an office building that the Company
expects will accommodate most of the Company's Colorado
operations. The total cost of the project is expected to be
approximately $44.0 million, of which $19.6 million has been
incurred as of June 30, 1997 and is included in construction in
progress. The Company has signed a letter of intent to sell the
completed building to a third party and lease back the office
space under a long-term operating lease. A final agreement is
expected to be reached in the near future. The
13
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4) Commitments and Contingencies (continued)
Company anticipates that the building will be completed near the
end of 1997.
(c) Purchase and Other Commitments
The Company is obligated to purchase, at fair market value, all
of the shares of Maritime Telecommunications Network, Inc.
("MTN"), a 64% owned subsidiary of the Company, that are owned by
the minority shareholders, upon demand of the minority
shareholders, if a transaction has not been effected which
converts the minority shares into publicly traded securities or
cash by January 3, 1998.
The Company has entered into various equipment purchase
agreements with certain of its vendors. Under these agreements,
if the Company does not meet a minimum purchase level in any
given year, the vendor may discontinue for that year certain
discounts, allowances and incentives otherwise provided to the
Company. In addition, the agreements may be terminated by either
the Company or the vendor upon prior written notice.
Additionally, the Company has entered into certain commitments to
purchase capital assets with an aggregate purchase price of
approximately $31.8 million at June 30, 1997.
(d) Litigation
On April 4, 1997, certain shareholders of the Company's majority
owned subsidiary, Zycom Corporation ("Zycom"), an Alberta, Canada
corporation, filed a shareholder derivative suit and class action
complaint for unspecified damages, purportedly on behalf of all
of the minority shareholders of Zycom, in the District Court of
Harris County, Texas (Cause No. 97-17777) against the Company,
Zycom and certain of their subsidiaries. This complaint alleges
that the Company and certain of its subsidiaries breached certain
duties owed to the plaintiffs. The Company is vigorously
defending the claims. 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 Company's
financial condition, results of operations or cash flows.
(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.
14
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) Summarized Financial Information of ICG Holdings, Inc. (continued)
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 June 30, 1997, and for the three
months and six months ended June 30, 1996 and 1997 is as follows (in
thousands):
Condensed Balance Sheet Information
December 31, 1996 June 30, 1997
------------------------ ---------------------
Current assets $ 449,059 455,353
Property and equipment, net 403,932 515,398
Other non-current assets, net 88,183 87,115
Current liabilities 87,423 91,278
Long-term debt, less current portion 690,293 836,929
Due to parent 11,485 14,461
Other long-term liabilities 73,113 67,620
Preferred stock 159,120 271,652
Stockholder's deficit (80,260) 224,378
Condensed Statement of Operations Information
Three months ended June 30, Six months ended June 30,
----------------------------------- ---------------------------------
1996 1997 1996 1997
----------------- -------------- --------------- ---------------
Total revenue 44,646 64,766 80,590 127,816
Total operating costs and expenses 62,900 111,553 114,313 215,234
Operating loss (18,254) (46,787) (33,723) (87,418)
Net loss (64,207) (77,490) (89,298) (144,119)
15
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) Condensed Financial Information of ICG Holdings (Canada), Inc.
Condensed financial information for Holdings-Canada only as of December
31, 1996 and June 30, 1997, and for the three months and six months
ended June 30, 1996 and 1997 is as follows (in thousands):
Condensed Balance Sheet Information
December 31, 1996 June 30, 1997
------------------------ ---------------------
Current Assets $ 165 162
Advances to subsidiaries 11,485 14,461
Other non-current assets, net 2,793 2,699
Current liabilities 199 1,518
Long-term debt, less current portion 65 65
Due to parent 1,566 3,228
Share of losses of subsidiary 80,260 224,378
Shareholders' deficit (67,647) (211,866)
Condensed Statement of Operations Information
Three months ended June 30, Six months ended June 30,
---------------------------------- -----------------------------------------
1996 1997 1996 1997
--------------- ----------------- ------------------ -------------------
Total revenue $ - - - -
Total operating costs and expenses 2,009 47 2,362 100
Operating loss (2,009) (47) (2,362) (100)
Losses from subsidiaries (64,207) (77,490) (89,298) (144,119)
Net loss attributable to common
shareholders (66,216) (77,537) (91,660) (144,219)
(7) Condensed Financial Information of ICG Communications, Inc. (Parent
company)
The sole asset of ICG is its investment in Holdings-Canada. Certain
corporate expenses of the parent company are included in ICG's
statement of operations and were approximately $0.1 million for the
three months and six months ended June 30, 1997. ICG has no operations
other than those of Holdings-Canada and its subsidiaries.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion includes certain forward-looking statements
which are affected by important factors including, but not limited to,
dependence on increased traffic on the Company's facilities, the successful
implementation of the Company's strategy of offering an integrated
telecommunications package of local, long distance, data and value added
services, continued development of the Company's network infrastructure and
actions of competitors and regulatory authorities that could cause actual
results to differ materially from the forward-looking statements. The 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 four
regional clusters covering major metropolitan statistical areas in California,
Colorado, the Ohio Valley and the Southeast. Network Services consist of
information technology services and selected networking products, focusing on
network design, installation, maintenance and support. Satellite Services
consist of maritime and international satellite transmission services and
provide private data networks utilizing VSATs. Although the Company does not
have a formal plan, it is considering the disposition of its Satellite Services
operations to better focus its efforts on its core Telecom Services unit. 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 $237.9 million for the 12-month
period ended June 30, 1997. The Company's rapid growth is the result of the
initial installation, acquisition and subsequent expansion of its fiber optic
networks and the expansion of its communication service offerings.
Prior to fiscal 1996, the majority of the Company's revenue had been
derived from Network Services. However, the Company's Network Services revenue
(as well as Satellite Service revenue) will continue to represent a diminishing
percentage of the Company's consolidated revenue as the Company continues to
emphasize its core Telecom Services. In March 1996, the Company completed the
sale of four of its teleports which were used in the Company's Satellite
Services operations.
The Telecommunications Act and 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 competitive local dial tone. The Company is marketing and selling
competitive local dial tone services in major metropolitan areas in the
following regions: California, which began service in late January 1997,
followed by Ohio in February 1997, Colorado in March 1997 and the Southeast in
May 1997. During the six months ended June 30, 1997, the Company sold
approximately 60,300 local access lines, of which approximately 20,100 were in
service at that date. The Company has 17 high capacity digital voice switches
and 15 data communications switches in operation to support its services, and
plans to install additional switches as demand warrants. As a complement to its
local exchange services, the Company has begun marketing bundled offerings which
include long distance, data and enhanced telecommunications services. To
facilitate the expansion of these services, the Company has entered into
agreements with Lucent Technologies, Inc., Northern Telecom, Inc. and Cascade
Communications, Inc. to purchase a full range of switching systems, fiber optic
cable, network electronics, software and services.
The Company will continue to expand its network through construction,
leased facilities, strategic joint ventures and potentially through
acquisitions. The Company recently announced an agreement with a subsidiary of
Southern that will permit the Company to construct a 100-mile fiber optic
network in the Atlanta metropolitan area. In addition, the Company is expanding
its geographic focus to include Texas (and may also expand to Arkansas,
Louisiana and Oklahoma) through its strategic alliance with CSW that will
develop and market telecommunications services, including local service, in
these markets. In June 1997, the Company entered into an IRU agreement with
Qwest for
17
approximately 1,800 miles of fiber optic network and additional broadband
capacity in California, Colorado, Ohio and the Southeast. The new capacity will
connect major networks in California and will be used for the transmission of
local, long distance and data communications services in the Company's markets.
Telecom Services revenue has increased from $14.9 million for fiscal
1994 to $146.5 million for the 12-month period ended June 30, 1997. The Company
has experienced declining prices and increasing price competition for access and
high capacity services which, to date, have been more than offset by increasing
network usage. The Company expects to continue to experience declining prices
and increasing price competition for the foreseeable future.
In conjunction with the increase in its service offerings, the Company
will need to spend significant amounts on sales, marketing, customer service,
engineering and corporate personnel prior to the generation of appreciable
revenue. This will have an adverse effect on operating margins until such time
as sufficient volumes of customers' telecommunications traffic are attained. As
the Company's customer base grows, the Company anticipates that operating
margins will improve as incremental revenue will exceed incremental operating
expenses. The preceding forward-looking statement is dependent upon the
successful implementation of the Company's local dial tone, data and long
distance services strategy, continued development of the Company's network
infrastructure, increased traffic on the Company's facilities, any or all of
which may not occur, and upon actions of competitors and regulatory authorities.
Currently, the Company is experiencing negative operating margins from
its switched services while its networks are in the development and construction
phases and while the Company relies on ILEC networks to carry a significant
portion of its customers' switched traffic. The Company expects overall
operating margins from switched services to improve as local exchange services
become a relatively larger portion of its business mix. In addition, the Company
believes that the unbundling of ILEC services and the implementation of local
telephone number portability, which are mandated by the Telecommunications Act,
will reduce the Company's costs of providing switched services and facilitate
the marketing of local and other services.
The Company believes that the provisions of the Telecommunications Act,
including the opening of the local telephone services market to competition,
will facilitate the Company's plan to provide a full array of local, long
distance and data communications services. In order to fully implement its
strategy, the Company must make significant capital expenditures to provide
additional switching capacity, network infrastructure and electronic components.
The Company must also make significant investments and expenditures to develop,
train and manage its marketing and sales personnel. The Company has limited
experience providing such services and there can be no assurance that the
Company will be successful.
The continued development, construction and expansion of the Company's
business requires significant capital, a large portion of which is expended
before related revenue is generated. The Company has experienced, and expects to
continue to experience, negative cash flow and significant losses while it
expands its operations to provide a wide range of telecommunications services
and establishes a sufficient revenue-generating customer base. There can be no
assurance that the Company will be able to establish or retain such a customer
base.
18
Results of Operations
The following table provides a breakdown of revenue and operating costs
for Telecom Services, Network Services and Satellite Services, and certain other
financial data for the Company for the periods indicated. The table also shows
certain revenue, expenses, operating loss and EBITDA as a percentage of the
Company's total revenue.
Three months ended June 30, Six months ended June 30,
---------------------------------------------------- ----------------------------------------------
1996 1997 1996 1997
-------------------------- ------------------------- --------------------- -----------------------
$ % $ % $ % $ %
-------------- ---------- --------------- --------- ------------- ------- ----------- -----------
(unaudited)
Statement of Operations Data: (in thousands)
Revenue:
Telecom services 24,371 55 41,243 64 42,006 52 79,523 62
Network services 14,679 33 15,640 24 28,652 36 33,627 26
Satellite services 5,596 12 7,883 12 9,932 12 14,666 12
-------------- ----------- --------------- --------- ------------- -------- ------------- --------
Total revenue 44,646 100 64,766 100 80,590 100 127,816 100
Operating costs:
Telecom services 22,323 42,444 37,517 83,894
Network services 10,569 12,883 21,627 27,418
Satellite services 2,415 4,366 4,334 7,953
-------------- ----------- --------------- --------- -------------- ------- ------------- --------
Total operating costs 35,307 79 59,693 92 63,478 79 119,265 93
Selling, general and
administrative 20,546 46 38,864 60 36,700 46 72,243 57
Depreciation and amortization 9,055 20 13,075 20 16,497 20 23,957 19
-------------- ----------- --------------- -------- -------------- -------- ------------- --------
Operating loss (20,262) (45) (46,866) (72) (36,085) (45) (87,649) (69)
Other Data:
EBITDA (1) (11,207) (25) (33,791) (52) (19,588) (24) (63,692) (50)
Net cash used by operating
activities (15,411) (22,236) (32,433) (38,005)
Net cash used by investing
activities (10,377) (52,387) (61,077) (110,952)
Net cash (used) provided by
financing activities (400,467) (1,445) 376,511 171,243
Capital expenditures (2) 29,882 70,984 106,315 132,529
June 30, September 30, December 31, March 31, June 30,
1996 1996 1996 1997 1997
------------- -------------- ------------- -------------- --------------
(unaudited)
Statistical Data (3):
Full time employees 1,173 1,323 1,424 1,606 1,854
Telecom services:
Access lines in service - - - 5,371 20,108
Buildings connected:
On-net 384 478 522 545 560
Hybrid (4) 1,493 1,589 1,547 1,550 1,704
------------- -------------- ------------- -------------- --------------
Total buildings connected 1,877 2,067 2,069 2,095 2,264
Customer circuits in service
(VGEs) 551,881 630,697 748,528 816,238 917,656
Operational switches:
Voice 13 14 14 16 17
Data - - 1 10 15
------------- -------------- ------------- -------------- --------------
Total operational
switches 13 14 15 26 32
Switched minutes of use
(millions) 475 563 607 682 742
Fiber route miles (5):
Operational 886 2,143 2,385 2,483 2,898
Under construction - - - - 1,117
Fiber strand miles (6):
Operational 45,098 70,067 75,490 83,334 101,788
Under construction - - - - 19,159
Wireless miles (7) 483 491 506 511 511
Satellite services:
VSATs 659 835 860 875 895
C-Band installations (8) 48 48 54 57 57
L-Band installations (9) 53 109 204 355 671
19
- - - ----------
<FN>
(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 determined using GAAP are also presented in Other Data.
See the Company's Consolidated Financial Statements contained
elsewhere in this report.
(2) Capital expenditures include assets acquired under capital leases.
(3) Amounts presented are for three-month periods ended, or as of the end
of the period presented.
(4) Hybrid buildings are buildings connected to the Company's network via
another carrier's facilities.
(5) Fiber route miles refers to the number of miles of fiber optic cable,
including leased fiber. As of June 30, 1997, the Company had 2,898
fiber route miles, of which 406 fiber route miles were leased under
operating leases. Fiber route miles under construction represents
fiber under construction which is expected to be operational within
six months.
(6) 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 June 30, 1997, the
Company had 101,788 fiber strand miles, of which 15,165 fiber strand
miles were leased under operating leases. Fiber strand miles under
construction represents fiber under construction which is expected to
be operational within six months.
(7) Wireless miles represents the total distance of the digital microwave
paths between Company transmitters which are used in the Company's
networks.
(8) C-Band installations service cruise ships, U.S. Navy vessels and
offshore oil platform installations.
(9) L-Band installations service smaller maritime installations, and both
mobile and fixed land-based units.
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996
Revenue. Revenue for the three months ended June 30, 1997 increased
$20.1 million, or 45%, from the three months ended June 30, 1996. Telecom
Services revenue increased 69% to $41.2 million due to an increase in network
usage for both switched and special access services, offset in part by a decline
in average unit pricing. Switched services revenue increased from $10.4 million
(43% of Telecom Services revenue) for the three months ended June 30, 1996 to
$20.9 million (51% of Telecom Services revenue) for the three months ended June
30, 1997. Switched access (terminating long distance) represented approximately
95% of the Company's switched services revenue component for the three months
ended June 30, 1997. Special access revenue increased from $9.7 million (40% of
Telecom Services revenue) for the three months ended June 30, 1996 to $13.5
million (32% of Telecom Services revenue) for the three months ended June 30,
1997. Also included in Telecom Services revenue for the three months ended June
30, 1997 is $6.8 million generated by Zycom, compared to $4.3 million for the
same period in 1996. Substantially all of the increase in Zycom revenue for the
three months ended June 30, 1997 as compared to the same period in 1996 relates
to changes in the classification of certain operating costs as a result of the
Company entering into long-term contracts with its major customers. These costs
were netted against revenue during the 1996 period due to the uncertainty of
renewal of short-term customer contracts. At June 30, 1997, the Company had
20,108 access lines in service compared to zero at June 30, 1996. Special access
network usage reflected in voice grade equivalents ("VGEs") increased 66% from
552,000 VGEs at June 30, 1996, to 918,000 VGEs at June 30, 1997. At June 30,
1997 the Company had 2,264 buildings connected to its networks compared to 1,877
buildings connected at June 30, 1996. Additionally, switched minutes of use
increased 56% from 475 million minutes during the three months ended June 30,
1996 to 742 million minutes during the three months ended June 30, 1997. Revenue
from long distance and data services did not generate a material portion of
total revenue during either period. Network Services revenue increased 7% to
$15.6 million for the three months ended June 30, 1997 as compared to $14.7
million for the three months ended June 30, 1996 due to additional projects from
new and existing customers. Satellite Services revenue increased 41% to $7.9
million for the
20
three months ended June 30, 1997. This increase is primarily due to the
operations of Maritime Cellular Tele-Network, Inc. ("MCN"), a wholly owned
subsidiary of the Company acquired in March 1996, which comprised $1.6 million
of total Satellite Services revenue for the three months ended June 30, 1997
compared to $0.7 million during the same period in 1996. The remaining increase
can be attributed to the general growth of Maritime Telecommunications Network,
Inc. ("MTN") and its increased sales of C-Band equipment to offshore oil and gas
customers.
Operating costs. Total operating costs for the three months ended June
30, 1997 increased $24.4 million, or 69% from the three months ended June 30,
1996. Telecom Services operating costs consist of payments to ILECs for the use
of network facilities to support hybrid and switched access services, network
operating costs, right of way fees and other costs. Telecom Services operating
costs increased from $22.3 million, or 92% of Telecom Services revenue, for the
three months ended June 30, 1996, to $42.4 million, or 103% of Telecom Services
revenue, for the three months ended June 30, 1997. Telecom Services operating
costs consist of payments to ILECs for the use of network facilities to support
hybrid and switched access services, network operating costs, right of way fees
and other costs. The increase in operating costs in absolute dollars is
attributable to the increase in switched access services and the addition of
engineering and operations personnel dedicated to the development of local
exchange services. The increase in operating costs as a percentage of total
revenue is due primarily to the increase in switched access services revenue,
which generates negative margins as a result of the higher costs associated with
utilizing ILEC network facilities, and the investment in the development of
local exchange services without the benefit of corresponding revenue in the same
period. The Company expects that its Telecom Services ratio of operating costs
to revenue will begin to improve as the Company provides a greater volume of
higher margin services, principally local exchange services, carries more
traffic on its own facilities rather than the ILEC facilities, and obtains the
right to use unbundled ILEC facilities on satisfactory terms, any or all of
which may not occur. Network Services operating costs increased 22% to $12.9
million and increased as a percentage of Network Services revenue from 72% for
the three months ended June 30, 1996 to 82% for the three months ended June 30,
1997. The increase is due to a substantially lower margin earned on equipment
sales (which constituted a larger portion of 1997 revenue) relative to other
services and certain indirect project costs included in operating costs during
the three months ended June 30, 1997 which were treated as selling, general and
administrative expenses during the comparable period in 1996. Network Services
operating costs include the cost of equipment sold, direct hourly labor and
other indirect project costs. Satellite Services operating costs increased to
$4.4 million for the three months ended June 30, 1997, from $2.4 million for the
three months ended June 30, 1996. Satellite Services operating costs as a
percentage of revenue also increased from 43% for the three months ended June
30, 1996 to 55% for the three months ended June 30, 1997. This increase is due
to an increase in MCN's sales in the current three-month period as well as the
increased volume of equipment sales, both of which provide lower margins than
other maritime services. Satellite Services operating costs consist primarily of
transponder lease costs and the cost of equipment sold.
Selling, general and administrative expenses. Selling, general and
administrative ("SG&A") expenses for the three months ended June 30, 1997
increased $18.3 million, or 89%, compared to the three months ended June 30,
1996. This increase was principally due to the continued rapid expansion of the
Company's Telecom Services networks and related significant additions to the
Company's management information systems, customer service, marketing and sales
staffs dedicated to the expansion of the Company's networks and implementation
of the Company's expanded services strategy, primarily the development of the
Company's CLEC operations. SG&A expenses as a percentage of total revenue
increased from 46% for the three months ended June 30, 1996 to 60% for the three
months ended June 30, 1997. There is typically a period of higher administrative
and marketing expense prior to the generation of appreciable revenue from newly
developed networks or services. The Company expects SG&A expenses for Telecom
Services to increase 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.
Depreciation and amortization. Depreciation and amortization increased
$4.0 million, or 44%, for the three months ended June 30, 1997, compared to the
three months ended June 30, 1996, due to increased investment in depreciable
assets resulting from the continued expansion of the Company's networks and
services. The Company reports high levels of depreciation expense relative to
revenue during the early years of operation of a new 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.
21
Interest expense. Interest expense decreased $4.6 million, from $32.9
million for the three months ended June 30, 1996, to $28.3 million for the three
months ended June 30, 1997, which included $26.6 million of non-cash interest.
This decrease is primarily attributable to a charge of approximately $11.5
million recorded during the three months ended June 30, 1996 for payments made
to noteholders for consent to amend the indenture governing the 13 1/2% Notes,
necessary to permit the offering of the 12 1/2% Notes and the 14 1/4% Preferred
Stock in April 1996. Partially offsetting this decrease is an increase in
interest expense related to the issuance of the 11 5/8% Notes in March 1997.
Interest income. Interest income increased $0.8 million, from $6.0
million for the three months ended June 30, 1996, to $6.8 million for the three
months ended June 30, 1997. The increase is attributable to the increase in cash
from the proceeds of the issuance of the 11 5/8% Notes and 14% Preferred Stock
in March 1997 and the 12 1/2% Notes and 14 1/4% Exchangeable Preferred Stock
Mandatorily Redeemable 2007 (the "14 1/4% Preferred Stock") in April 1996. The
Company expects interest income to decrease over time as cash and cash
equivalents decline.
Other, net. Other, net fluctuated from $0.5 million net expense in the
three months ended June 30, 1996 to substantially zero for the three months
ended June 30, 1997. Other expense recorded in the three-month periods ended
June 30, 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 decreased
$7.4 million, from $16.6 million for the three months ended June 30, 1996 to
$9.1 million for the three months ended June 30, 1997. The decrease is due
primarily to a charge of $12.3 million recorded during the three months ended
June 30, 1996 for the excess of the redemption price over the carrying amount of
the 12% redeemable preferred stock of Holdings ("12% Redeemable Preferred
Stock") redeemed in April 1996. Offsetting this decrease is an increase related
to the issuance of the 14% Preferred Stock in March 1997. Minority interest in
share of losses, net of accretion and preferred dividends on subsidiary
preferred stock recorded during the current three-month period consists of the
accretion of issue costs ($0.3 million) and the accrual of the preferred stock
dividends ($9.5 million) associated with the 14% Preferred Stock and the 14 1/4%
Preferred Stock, offset by minority interest in losses of subsidiaries of $0.7
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 six months
ended June 30, 1997, as compared to the $0.4 million loss recorded during the
comparable period in 1996.
Net loss. Net loss increased $12.8 million, or 20%, due to the
increases in operating costs, SG&A expenses, depreciation and amortization noted
above.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Revenue. Revenue for the six months ended June 30, 1997 increased $47.2
million, or 59%, from the six months ended June 30, 1996. Telecom Services
revenue increased 89% to $79.5 million due to an increase in network usage for
both switched and special access services, offset in part by a decline in
average unit pricing. Switched services revenue increased from $18.4 million
(44% of Telecom Services revenue) for the six months ended June 30, 1996 to
$39.5 million (50% of Telecom Services revenue) for the six months ended June
30, 1997. Switched access (terminating long distance) revenue represented
approximately 97% of the Company's switched services revenue component for the
six months ended June 30, 1997. Special access revenue increased from $18.2
million (43% of Telecom Services revenue) for the six months ended June 30, 1996
to $25.6 million (32% of Telecom Services revenue) for the six months ended June
30, 1997. Also included in Telecom Services revenue for the six months ended
June 30, 1997 is $14.4 million generated by Zycom, compared to $5.4 million for
the same period in 1996. Substantially all of the increase in Zycom revenue for
the six months ended June 30, 1997 as compared to the same period in 1996
relates to changes in the classification of certain operating costs as a result
of the Company entering into long-term contracts with its major customers. These
costs were netted against revenue during the 1996 period due to the uncertainty
of renewal of short-term customer contracts. At June 30, 1997, the Company had
20,108 access lines in service compared to zero at June 30, 1996. Special access
network usage reflected in voice grade equivalents ("VGEs") increased 66% from
approximately 552,000 VGEs at June 30, 1996, to approximately 918,000 VGEs at
June 30, 1997. At June 30, 1997, the Company had 2,264 buildings connected to
its networks compared to 1,877 buildings connected
22
at June 30, 1996. Additionally, switched minutes of use increased 70% from 837
million minutes during the six months ended June 30, 1996 to 1,424 million
minutes during the six months ended June 30, 1997. Revenue from long distance
and data services did not generate a material portion of total revenue during
either period. Network Services revenue increased 17% to $33.6 million for the
six months ended June 30, 1997 as compared to $28.7 million for the six months
ended June 30, 1996. The increase is partly 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 new and existing customers. Satellite
Services revenue increased 48% to $14.7 million for the six months ended June
30, 1997. This increase is primarily due to the operations of MCN, which
comprised $2.8 million of total Satellite Services revenue for the six months
ended June 30, 1997 compared to $0.7 million during the same period in 1996. The
remaining increase can be attributed to the general growth of MTN and its
increased sales of C-Band equipment to offshore oil and gas customers.
Operating costs. Total operating costs for the six months ended June
30, 1997 increased $55.8 million, or 88% from the six months ended June 30,
1996. Telecom Services operating costs increased from $37.5 million, or 89% of
Telecom Services revenue, for the six months ended June 30, 1996, to $83.9
million, or 106% of Telecom Services revenue, for the six months ended June 30,
1997. The increase in operating costs in absolute dollars is attributable to the
increase in switched access services and the addition of engineering and
operations personnel dedicated to the development of local exchange services.
The increase in operating costs as a percentage of total revenue is due
primarily to the increase in switched access services revenue, and the
investment in the development of local exchange services without the benefit of
substantial corresponding revenue in the same period. Network Services operating
costs increased 27% to $27.4 million and increased as a percentage of revenue
from 76% for the six months ended June 30, 1996 to 82% for the six months ended
June 30, 1997. The increase is due to a substantially lower margin earned on
equipment sales (which constituted a larger portion of 1997 revenue) relative to
other services and certain indirect project costs included in operating costs
during the six months ended June 30, 1997 which were treated as SG&A expenses
during the comparable period in 1996. Satellite Services operating costs
increased to $8.0 million for the six months ended June 30, 1997, from $4.3
million for the six months ended June 30, 1996. Satellite Services operating
costs as a percentage of revenue also increased from 44% for the six months
ended June 30, 1996 to 54% for the six months ended June 30, 1997. This increase
is due to an increase in MCN's sales in the current six-month period as well as
the increased volume of equipment sales, both of which provide lower margins
than other maritime services.
Selling, general and administrative expenses. Selling, general and
administrative ("SG&A") expenses for the six months ended June 30, 1997
increased $35.5 million, or 97%, compared to the six months ended June 30, 1996.
This increase was principally due to the continued rapid expansion of the
Company's Telecom Services networks and related significant additions to the
Company's management information systems, customer service, marketing and sales
staffs dedicated to the expansion of the Company's networks and implementation
of the Company's expanded services strategy, primarily the development of the
Company's CLEC operations. SG&A expenses as a percentage of total revenue
increased from 46% for the six months ended June 30, 1996 to 57% for the six
months ended June 30, 1997.
Depreciation and amortization. Depreciation and amortization increased
$7.5 million, or 45%, for the six months ended June 30, 1997, compared to the
six months ended June 30, 1996, due to increased investment in depreciable
assets resulting from the continued expansion of the Company's networks and
services.
Interest expense. Interest expense increased $6.3 million, from $47.2
million for the six months ended June 30, 1996, to $53.5 million for the six
months ended June 30, 1997, which included $49.9 million of non-cash interest.
This increase was primarily attributable to an increase in long-term debt,
primarily the 11 5/8% Notes and the 12 1/2% Senior Discount Notes due 2006 ("12
1/2% Notes") issued in March 1997 and April 1996, respectively. In addition, the
Company's interest expense increased, and will continue to increase, because the
principal amount of its indebtedness increases until Holdings' senior
indebtedness begins to pay interest in cash.
Interest income. Interest income increased $3.2 million, from $8.7
million for the six months ended June 30, 1996, to $11.9 million for the six
months ended June 30, 1997. The increase is attributable to the increase in cash
from the proceeds of the issuances of the 11 5/8% Notes and 14% Preferred Stock
in March 1997 and the 12 1/2% Notes and 14 1/4% Exchangeable Preferred Stock
Mandatorily Redeemable 2007 (the "14 1/4" Preferred Stock") in April 1996.
23
Other, net. Other, net fluctuated from $2.0 million net expense in the
six months ended June 30, 1996 to $0.3 million net expense in the six months
ended June 30, 1997. Other expense recorded in the six-month periods ended June
30, 1996 and 1997 includes net losses recognized on the disposal of assets. In
addition, for the six-month period ending June 30, 1997, the Company recorded
$0.3 million in litigation settlement costs associated with its Zycom
subsidiary.
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 decreased
$3.6 million, from $18.5 million for the six months ended June 30, 1996 to $14.9
million for the six months ended June 30, 1997. The decrease is due primarily to
a charge of $12.3 million recorded during the six months ended June 30, 1996 for
the excess of the redemption price over the carrying amount of the 12%
redeemable preferred stock of Holdings ("12% Redeemable Preferred Stock")
redeemed in April 1996. Offsetting this decrease is an increase related to the
issuance of the 14 1/4% Preferred Stock in April 1996 and 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
six-month period consists of the accretion of issue costs ($0.5 million) and the
accrual of the preferred stock dividends ($16.1 million) associated with the 14%
Preferred Stock and the 14 1/4% Preferred Stock, offset by minority interest in
losses of subsidiaries of $1.7 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 six months
ended June 30, 1997, as compared to the $1.0 million loss recorded during the
comparable period in 1996.
Net loss. Net loss increased $52.7 million, or 57%, due to the
increases in operating costs, SG&A expenses, depreciation and amortization and
interest expense noted above.
Liquidity and Capital Resources
The Company's growth has been funded through a combination of equity,
debt and lease financing. As of June 30, 1997, the Company had current assets of
$455.5 million, including $394.2 million of cash, cash equivalents and
short-term investments, which exceeded current liabilities of $92.8 million,
providing working capital of $362.7 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 $32.4 million and $38.0 million
for the six months ended June 30, 1996 and 1997, respectively. Cash used by
operations is primarily due to net losses, which are partially offset by
non-cash expenses, such as depreciation expense, deferred interest expense,
preferred dividends on subsidiary preferred stock and changes in working capital
items.
The Company expects to continue to generate negative cash flow from
operating activities while it emphasizes development, construction and expansion
of its Telecom Services business. Consequently, it does not anticipate that cash
provided by operations will be sufficient to fund operating activities, the
future expansion of existing networks or the construction and acquisition of new
networks in the near term.
Cash Used By Investing Activities
Cash used by investing activities was $61.1 million and $111.0 million
for the six months ended June 30, 1996 and 1997, respectively. Cash used by
investing activities includes cash expended for the acquisition of property,
equipment and other assets, of $56.8 million and $132.5 million for the six
months ended June 30, 1996 and 1997, respectively. The Company will continue to
use cash in investing activities in 1997 and subsequent periods for the
construction of new networks and the expansion of existing networks. The Company
acquired assets under capital leases of $49.5 million for the six months ended
June 30, 1996, which consisted primarily of fiber optic networks included in the
Company's agreement with SCE.
24
Cash Provided By Financing Activities
Financing activities provided $376.5 million and $171.2 million in the
six months ended June 30, 1996 and 1997, respectively. Cash provided by
financing activities primarily includes cash received in connection with the
offering of the 12 1/2% Notes and the 14 1/4% Preferred Stock in April 1996 and
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 losses have been obtained through
public and private offerings of Holdings-Canada common shares, the Senior Notes,
the 14% Preferred Stock and the 14/14% Preferred Stock, units consisting of
senior notes and warrants, redeemable preferred stock, convertible subordinated
notes, convertible preferred shares of Holdings-Canada, capital lease financings
and various working capital sources, including credit facilities.
On March 11, 1997, Holdings completed 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.
As of June 30, 1997, an aggregate of approximately $74.3 million of
capitalized lease obligations and an aggregate accreted value of approximately
$833.7 million were outstanding under the 11 5/8% Notes, 12 1/2% Notes and the
13 1/2% Notes. The 11 5/8% Notes require payments of interest to be made in cash
commencing on March 15, 2002 and mature on March 15, 2007. The 12 1/2% Notes
require payments of interest to be made in cash commencing on November 1, 2001
and mature on May 1, 2006. The 13 1/2% Notes require payments of interest to be
made in cash commencing on March 15, 2001 and mature on September 15, 2005. In
addition, the 14% Preferred Stock and 14 1/4% Preferred Stock require payment of
dividends to be made in cash commencing June 15, 2002 and August 1, 2001,
respectively. As of June 30, 1997, the Company had $8.8 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. With respect to
indebtedness currently outstanding, the Company has interest payment obligations
of approximately $113.3 million in 2001, $158.0 million in 2002 and $168.1
million in 2003. With respect to preferred stock currently outstanding, the
Company has cash dividend obligations of approximately $21.5 million in 2001,
$57.0 million in 2002 and $70.9 million in 2003. Accordingly, the Company may
have to refinance a substantial amount of indebtedness and obtain substantial
additional funds prior to March 2001. The Company's ability to do so will depend
on, among other things, its financial condition at the time, restrictions in the
instruments governing its indebtedness, and other factors, including market
conditions, beyond the control of the Company. There can be no assurance that
the Company will be able to refinance such indebtedness, including such
capitalized leases, or obtain such additional funds, and if the Company is
unable to effect such refinancings or obtain additional funds, the Company's
ability to make principal and interest payments on its indebtedness or make
payments of cash dividends on, or the mandatory redemption of, its preferred
stock, would be adversely affected.
Capital Expenditures
The Company expects to continue to generate negative cash flow from
operating activities while it emphasizes
25
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 $29.9 million
and $71.0 million for the three months ended June 30, 1996 and 1997,
respectively, and $106.3 million and $132.5 million for the six months ended
June 30, 1996 and 1997, respectively. The Company anticipates that the expansion
of existing networks, construction of new networks and further development of
the Company's products and services will require capital expenditures of
approximately $120.0 million during the second half of 1997 and approximately
$250.0 million during 1998. To facilitate the expansion of its services and
networks, the Company has entered into equipment purchase agreements with
various vendors under which the Company must purchase a substantial amount of
equipment and other assets, including a full range of switching systems, fiber
optic cable, network electronics, software and services. Actual capital
expenditures will depend on numerous factors, including certain factors beyond
the Company's control. These factors include the nature of future expansion and
acquisition opportunities, economic conditions, competition, regulatory
developments and the availability of equity, debt and lease financing.
General
The Company's operations have required and will continue to require
significant capital expenditures for development, construction, expansion and
acquisition of telecommunications assets. Significant amounts of capital are
required to be invested before revenue is generated, which results in initial
negative cash flow. Additionally, the Company anticipates the continued funding
of operating losses until such time when positive cash flows from operations are
achieved.
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.
26
PART II
ITEM 1. LEGAL PROCEEDINGS
See Note 4 (d) to the Company's Consolidated Financial Statements
for the six months ended June 30, 1997 contained elsewhere in this
Quarterly Report.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of ICG Communications, Inc. was
held on June 17, 1997 (the "Meeting"). At the Meeting, two matters
were considered and acted upon: (1) the election of two directors
to serve until the 2000 Annual Meeting of Stockholders and until
their successors have been duly elected and qualified; and (2) the
ratification of the appointment of KPMG Peat Marwick LLP as
independent auditors of ICG Communications, Inc. and its
subsidiaries for the fiscal year ending December 31, 1997.
Indicated below are the total votes cast in favor of each
director nominee and the total votes withheld:
Votes
---------------------------
For Withheld
--------- ---------------
Kathryn Proffitt Haycock 24,827,151 106,879
Harry R. Herbst 24,829,551 104,479
In connection with the vote on the ratification of the appointment
of the independent auditors, 24,895,986 votes were cast in favor of
the appointment, and 24,398 votes were cast in opposition thereto.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits.
(10.1) Consulting Agreement, dated as of May 12, 1997,
between ICG Communications, Inc. and Jay E. Ricks.
(10.2) Employment Agreement, dated as of April 22, 1997,
between ICG Communications, Inc. and Don Teague.
(27.1) Financial Data Schedule.
(B) Reports on Form 8-K.
None.
27
INDEX TO EXHIBITS
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBIT 10.1
Consulting Agreement, dated as of May 12, 1997, between
ICG Communications, Inc. and Jay E. Ricks.
EXHIBIT 10.2
Employment Agreement, dated as of April 22, 1997, between
ICG Communications, Inc. and Don Teague.
EXHIBIT 27.1
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 August 13, 1997.
ICG COMMUNICATIONS, INC.
Date: August 13, 1997 By:/s/ James D. Grenfell
-------------------------------------
James D. Grenfell, Executive Vice
President and Chief Financial Officer
Date: August 13, 1997 By:/s/ Richard Bambach
-------------------------------------
Richard Bambach, Vice President and
Corporate Controller
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 August 13, 1997.
ICG HOLDINGS (CANADA), INC.
Date: August 13, 1997 By:/s/ James D. Grenfell
-------------------------------------
James D. Grenfell, Executive Vice
President and Chief Financial Officer
Date: August 13, 1997 By:/s/ Richard Bambach
--------------------------------------
Richard Bambach, Vice President and
Corporate Controller
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 August 13, 1997.
ICG HOLDINGS, INC.
Date: August 13, 1997 By:/s/ James D. Grenfell
-------------------------------------
James D. Grenfell, Executive Vice
President, Chief Financial Officer
and Director
Date: August 13, 1997 By:/s/ Richard Bambach
-------------------------------------
Richard Bambach, Vice President and
Corporate Controller