FORM 10-K.--ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 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 333-40495)
ICG FUNDING, LLC
(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
Delaware 84-1434980
Canada Not applicable
Colorado 84-1158866
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
- ---------------------------------------- ---------------------------------------
161 Inverness Drive West,
Englewood, Colorado 80112 Not applicable
161 Inverness Drive West,
Englewood, Colorado 80112 Not applicable
1710-1177 West Hastings Street c/o ICG Communications, Inc.
Vancouver, BC V6E 2L3 161 Inverness Drive West
P.O. Box 6742
Englewood, Colorado 80155-6742
161 Inverness Drive West Not applicable
Englewood, Colorado 80112
(Address of principal executive offices) (Address of U.S. agent for service)
- --------------------------------------------------------------------------------
Registrants' telephone numbers, including area codes: (888) 424-1144 or
(303) 414-5000
Securities registered pursuant to Section 12(b) of the Act:
- --------------------------------------------------------------------------------
Name of each exchange
Title of each class on which registered
- ---------------------------------------- ---------------------------------------
Common Stock, $.01 par value Nasdaq National Market
(44,621,254 shares outstanding on
March 26, 1998)
Not applicable Not applicable
Class A Common Shares, no par value Not applicable
(31,822,756 shares outstanding on
March 26, 1998)
Not applicable Not applicable
- ---------------------------------------- ---------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
- --------------------------------------------------------------------------------
Title of class
- --------------------------------------------------------------------------------
Not applicable
Not applicable
Not applicable
Not applicable
- --------------------------------------------------------------------------------
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. [X]Yes [ ]No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
On March 26, 1998 the aggregate market value of ICG Communications, Inc. Common
Stock held by non-affiliates (using the closing price of $41.75 on March 26,
1998) was approximately $1,862,937,355.
ICG Communications, Inc. owns all of the issued and outstanding common
securities of ICG Funding, LLC.
On March 26, 1998, the aggregate market value of ICG Holdings (Canada), Inc.
Class A Common Shares held by non-affiliates (using the closing price of ICG
Communications, Inc. Common Stock of $41.75 on March 26, 1998), was
approximately $991,145.
ICG Holdings (Canada), Inc. owns all of the issued and outstanding shares of
Common Stock of ICG Holdings, Inc.
3
TABLE OF CONTENTS
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . 5
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Recent Developments . . . . . . . . . . . . . . . . . . . . . . 6
Telecom Services . . . . . . . . . . . . . . . . . . . . . . . 8
Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Telecom Services Networks . . . . . . . . . . . . . . . . . . 10
Services. . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Industry. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Network Services . . . . . . . . . . . . . . . . . . . . . . . 16
Satellite Services . . . . . . . . . . . . . . . . . . . . . . 17
Customers And Marketing . . . . . . . . . . . . . . . . . . . . 18
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . 27
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . 27
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . 28
ITEM 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . 53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES . . . . . . . . . . 54
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANTS. . . . . 55
Executive Officers of ICG . . . . . . . . . . . . . . . . . . . 56
Directors of ICG . . . . . . . . . . . . . . . . . . . . . . . 57
Directors and Executive Officers of ICG Funding,
Holdings-Canada and Holdings. . . . . . . . . . . . . . . . . . 58
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . 60
Director Compensation . . . . . . . . . . . . . . . . . . . . . 60
Compensation Committee Interlocks and Insider Participation . . 60
Board Compensation Committee Report on Executive Compensation . 60
Executive Compensation . . . . . . . . . . . . . . . . . . . . 62
Summary Compensation Table. . . . . . . . . . . . . . . . . . 63
Option/SAR Grants in Last Fiscal Year . . . . . . . . . . . . 65
Aggregated Option Exercises in Last Fiscal Year End
Option Values . . . . . . . . . . . . . . . . . . . . . . . . 66
Ten-Year Option/SAR Repricings. . . . . . . . . . . . . . . . 66
Executive Employment Contracts . . . . . . . . . . . . . . . . 68
4
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . 70
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . 72
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORT ON
FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . 74
Financial Statements. . . . . . . . . . . . . . . . . . . . . . 74
Report on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . 83
Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Financial Statement Schedule . . . . . . . . . . . . . . . . . 83
FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . F-1
FINANCIAL STATEMENT SCHEDULE. . . . . . . . . . . . . . . . . . . . S-1
5
PART I
Unless the context otherwise requires, the term "Company" or"ICG" means the
combined business operations of ICG Communications, Inc. ("ICG") and its
subsidiaries, including ICG Funding, LLC ("ICG Funding"), ICG Holdings (Canada),
Inc. ("Holdings-Canada") and ICG Holdings, Inc. ("Holdings"); the terms "fiscal"
and "fiscal year" refer to ICG's fiscal year ending December 31 for 1997 and
September 30 for years prior to 1997. 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.
ITEM 1. BUSINESS
Overview
The Company is one of the nation's leading integrated communications
providers ("ICPs") of competitive communications services, based on estimates of
the industry's 1997 revenue. ICPs seek to provide an alternative to incumbent
local exchange carriers ("ILECs"), long distance carriers, Internet service
providers ("ISPs") and other communications service providers for a full range
of communications services in the increasingly deregulated telecommunications
industry. Through its competitive local exchange carrier ("CLEC") operations,
the Company operates networks in four regional clusters covering major
metropolitan statistical areas in California, Colorado, Ohio and the Southeast.
The Company also provides a wide range of network systems integration services,
maritime and international satellite transmission services, and subsequent to
January 21, 1998, a variety of Internet connectivity and other value-added
Internet services. As a leading participant in the rapidly growing competitive
local telecommunications industry, the Company has experienced significant
growth, with total revenue increasing from approximately $111.6 million for
fiscal 1995 to approximately $273.4 million for fiscal 1997.
The Federal Telecommunications Act of 1996 (the "Telecommunications Act")
and 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 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 fiscal 1997, the Company sold approximately
178,000 local access lines, of which approximately 141,000 were in service as of
December 31, 1997. As a complement to its local exchange service, the Company
has begun marketing bundled service offerings which include long distance,
enhanced telecommunications services and data services. The Company has 19
operating high capacity digital voice switches and 15 data communications
switches, and plans to install additional switches as demand warrants.
In developing its telecommunications service offerings, the Company
continues to invest significant resources to expand its network. This expansion
is being undertaken through a combination of constructing owned facilities,
entering into long-term agreements with other telecommunications carriers,
establishing strategic alliances with utility companies and through mergers and
acquisitions. See "-Recent Developments."
6
Recent Developments
Merger with NETCOM On-Line Communication Services, Inc. On January 21,
1998, the Company completed a merger with NETCOM On-Line Communication Services,
Inc. ("NETCOM") ("NETCOM Merger"). Located in San Jose, California, NETCOM is a
provider of Internet connectivity and World Wide Web ("Web") site hosting
services and other value-added services. For calendar years 1995, 1996 and 1997,
NETCOM reported revenue of approximately $52.4 million, $120.5 million and
$160.7 million, respectively, and EBITDA losses of approximately $(6.3) million,
$(20.3) million and $(1.7) million, respectively. The Company will account for
the business combination under the pooling of interests method of accounting.
At the effective time of the NETCOM Merger, each outstanding share of
NETCOM common stock, $.01 par value, became automatically convertible into
shares of ICG common stock at an exchange ratio of 0.8628 shares of ICG common
stock per NETCOM common share. As a result of this transaction, the Company
expects to issue an estimated 10.2 million shares of ICG common stock for the
NETCOM common shares outstanding on January 21, 1998. Cash will be paid in lieu
of any fractional shares.
The Company believes that the NETCOM Merger will create a full-service
business communications company providing a single source for a complete range
of voice, data, Internet, Web site hosting and other communications services
over an extensive fiber optic network. Currently, approximately one-half of
NETCOM's customers are located in the Company's existing network territory. It
is anticipated that the NETCOM Merger will enable the combined entity to better
utilize ICG's fiber and frame relay networks by providing NETCOM with extensive
network infrastructure for the on-net transportation of its Internet traffic.
Announcement of New Service Offerings. In March 1998, the Company announced
its plans to offer long distance service via Internet protocol ("IP") technology
at rates as low as 5.9 cents per minute. This service will be offered in 166
cities across the nation, covering 90% of the U.S. long distance market, by the
end of fiscal 1998. ICG and NETCOM will begin to market this service over the
Internet and through its inbound telemarketing center in the second quarter of
1998. The Company also plans to offer by the end of fiscal 1998 competitively
priced high-speed data transmission services via digital subscriber line ("DSL")
technology to all business and end user customers within its existing regional
clusters. DSL technology utilizes the existing twisted copper pair connection to
the business or end user, giving the customer significantly greater bandwidth
when connecting to the Internet.
Acquisition of Communications Buying Group, Inc. On October 17, 1997, the
Company purchased approximately 91% of the outstanding capital stock of
Communications Buying Group, Inc. ("CBG"), an Ohio based local exchange and
centrex reseller (the "CBG Acquisition"). The Company paid total consideration
of approximately $46.5 million, plus the assumption of certain liabilities.
Separately, on October 17, 1997, the Company sold approximately $16.0 million of
common stock, $.01 par value ("Common Stock"), to certain shareholders of CBG.
The Company purchased the remaining approximately 9% interest of CBG on March
24, 1998 for approximately $2.9 million in cash.
7
CBG focuses its sales and marketing efforts on small to medium-sized
businesses in certain cities in Ohio and provides a one-stop solution for the
local and long distance needs of its customers. For calendar years 1996 and
1997, CBG's revenue was approximately $21.4 million and $33.8 million,
respectively, and EBITDA losses were approximately $(1.0) million and $(3.2)
million, respectively.
The Company believes that the business strategy of CBG is closely aligned
with the Company's business strategy and that it can successfully leverage the
services offered by CBG to enhance the Company's offering of similar services in
its existing Ohio markets, including all those currently served by CBG. As of
December 31, 1997, the acquisition of CBG has more than doubled the Company's
sales presence in Ohio to approximately 91 people. In addition, the Company
believes that its ability to migrate, over time, a portion of CBG's existing
customer base to its fiber optic facilities offers significant cost savings. The
Company believes that the transaction has significantly furthered its goal of
becoming the dominant alternative to the ILEC in Ohio.
Network Expansion. The Company continues to expand its network footprint
through several strategic initiatives with utility companies and other
telecommunication carriers. In January 1997, the Company announced an agreement
with a subsidiary of The Southern Company ("Southern") that will permit the
Company to construct a 100-mile fiber optic network in the Atlanta metropolitan
area. In June 1997, the Company entered into an indefeasible right of use
("IRU") agreement with Qwest Communications Corporation for approximately 1,800
miles of fiber optic network and additional broadband capacity in California,
Colorado, Ohio and the Southeast. The Company expects this new capacity will be
used for the transmission of local, long distance and data communications
services in and between the Company's markets.
CSW Strategic Alliance. In January 1997, the Company announced a strategic
alliance with Central and South West Corporation ("CSW") which was formed for
the purpose of developing and marketing telecommunications services in Austin,
Corpus Christi, Dallas, Houston and San Antonio, Texas. The venture entity, a
limited partnership named CSW/ICG ChoiceCom, L.P. ("ChoiceCom"), is based in
Austin, Texas. CSW holds 100% of the interest in ChoiceCom and the Company has
an option to purchase a 50% interest at any time prior to July 1, 2003.
Subsequent to July 1, 1999, if the Company has not exercised its purchase
option, CSW will have the right to sell, at a price pursuant to the terms of the
limited partnership agreement, either 51% or 100% of the partnership interest in
ChoiceCom to the Company. CSW and the Company each have two representatives on
the Management Committee of the general partner of ChoiceCom. ChoiceCom is
currently offering local exchange, long distance and long haul services in
Austin, Corpus Christi, Dallas, Houston and San Antonio, Texas and other
selected areas of Texas and may offer these services as well as data
communications and other services in Arkansas, Louisiana and Oklahoma.
Financings. In March 1997, the Company raised net proceeds of $192.4
million from the sale of 11 5/8% Senior Discount Notes due 2007 (the "11 5/8%
Notes") of Holdings and 14% Exchangeable Preferred Stock Mandatorily Redeemable
2008 (the "14% Preferred Stock") of Holdings. Cash interest on the 11 5/8% Notes
accrues at 11 5/8% per annum beginning March 15, 2002 and is payable each March
15 and September 15, commencing September 15, 2002. The 14% Preferred Stock
accrues dividends quarterly at a rate of 14% per annum. Dividends are payable
quarterly in cash or, on or prior to March 15, 2002, at the sole option of
Holdings, in additional shares of 14% Preferred Stock. The 11 5/8% Notes and the
14% Preferred Stock have been registered under the Securities Act.
8
In September and October 1997, the Company's new wholly owned subsidiary,
ICG Funding, LLC, a Delaware limited liability company, completed a private
placement of $132.25 million of Exchangeable Limited Liability Company Preferred
Securities (the "6 3/4% Preferred Securities"). The 6 3/4% Preferred Securities
are mandatorily redeemable November 15, 2009 at the liquidation preference of
$50.00 per security, plus accrued and unpaid dividends. Dividends on the 6 3/4%
Preferred Securities are cumulative at the rate of 6 3/4% per annum and are
payable in cash through November 15, 2000 and, thereafter, in cash or shares of
Common Stock at the option of ICG Funding. The 6 3/4% Preferred Securities are
exchangeable, at the option of the holder, into Common Stock at an exchange
price of $24.025 per share, subject to adjustment. ICG Funding may, at its
option, redeem the 6 3/4% Preferred Securities at any time on or after November
18, 2000. Prior to that time, ICG Funding may redeem the 6 3/4% Preferred
Securities if the current market value of Common Stock equals or exceeds the
exchange price, for at least 20 days of any consecutive 30-day trading period,
by 170% prior to November 16, 1998; by 160% from November 16, 1998 through
November 15, 1999; and by 150% from November 16, 1999 through November 15, 2000.
The 6 3/4% Preferred Securities and the Common Stock issuable upon exchange of
such securities have been registered under the Securities Act.
In February 1998, the Company raised proceeds, net of underwriting costs,
of approximately $291.6 million from the sale of 10% Senior Discount Notes due
2008 (the "10% Notes") of ICG Services, Inc., a Delaware corporation and newly
formed, wholly owned, unrestricted subsidiary of ICG ("ICG Services"). Cash
interest on the 10% Notes accrues at 10% per annum beginning February 15, 2003
and is payable each February 15 and August 15, commencing August 15, 2003. The
10% Notes will be redeemable at the option of ICG Services, in whole or in part,
on or after February 15, 2003. ICG Services is obligated to register the 10%
Notes under the Securities Act.
ICG Equipment, Inc. In January 1998, the Company formed ICG Equipment,
Inc., a Colorado corporation and wholly owned subsidiary of ICG Services ("ICG
Equipment"). Holdings' subsidiaries intend to enter into arrangements with ICG
Equipment to purchase or lease telecommunications equipment, software and
capacity and related services. The equipment and services provided to Holdings'
subsidiaries will be utilized to upgrade and expand its network infrastructure
to take full advantage of the opportunities and cost savings available as a
result of the acquisitions made by ICG Services. Any such arrangements will be
on an arm's length basis and on comparable terms that Holdings' subsidiaries
would be able to obtain from a third party.
Telecom Services
The Company operates local exchange networks in the following markets
within its four regional clusters: California (Sacramento, San Diego and
portions of the Los Angeles and San Francisco metropolitan areas); Colorado
(Denver, Colorado Springs and Boulder); Ohio (Akron, Cleveland, Columbus, and
Dayton) and the Southeast (Birmingham, Charlotte, Louisville, and Nashville).
The Company plans to build a network in Atlanta, Georgia in conjunction with
Southern. Through its strategic alliance with CSW, the Company is offering
services in Austin, Corpus Christi, Dallas, Houston and San Antonio, Texas and
other selected areas of Texas, and may offer services in Arkansas, Louisiana and
Oklahoma in the future. See "-Recent Developments." The Company will continue to
expand its network through construction, leased facilities and strategic
alliances and through acquisitions. The Company's operating networks have grown
from 627 fiber route miles at the end of fiscal 1995 to 3,043 fiber route miles
as of December 31, 1997. Telecom Services revenue has increased from
approximately $32.3 million for fiscal 1995 to approximately $177.7 million for
fiscal 1997.
9
The Company's new subsidiary, NETCOM, is a leading provider of high quality
Internet solutions to individuals and small and medium-sized businesses in the
United States and also provides the same high quality Internet solutions in
Canada and the United Kingdom. NETCOM offers a broad spectrum of Internet
solutions designed to enhance customer productivity through the integration and
application of technologies by providing a comprehensive software platform to
interface with the Web, premium quality Internet access and support services and
on-line tools to automate Web site creation and development. These offerings
have led to significant growth, with revenue increasing from approximately $2.4
million for 1993 to approximately $160.7 million for the calendar year ended
December 31, 1997. In January 1997, NETCOM announced plans to migrate its
customer focus away from high volume, low margin consumer customers to higher
margin products for small and medium-sized business customers.
Strategy
The Company's objective is to be a premier provider of high quality
communications services to its targeted business, carrier and end user
customers. The key elements of this strategy are:
Increase Revenue and Margins through Bundled Services to Business End
Users. The Company believes that customers are increasingly demanding a broad,
full service approach to providing telecommunications services. By offering
integrated technology-based communications solutions, management believes the
Company will be better able to capture business from
telecommunications-intensive commercial accounts. To this end, the Company plans
to complement its competitive local and long distance telecommunications
offerings with its recently announced IP telephony service and the Internet
products developed by NETCOM, and cross-market these combined products through
ICG's direct sales force. Additionally, NETCOM intends to market ICG's
telecommunications products to its small and medium-sized business customer base
over the Internet. Management believes a targeted business end user strategy can
better leverage ICG's network footprint and telecommunications investment.
10
Concentrate Networks in Regional Clusters. The Company believes that by
focusing on regional clusters it will be able to more effectively service its
customers' needs and efficiently market, operate and control its networks and
expanded service offerings. As a result, the Company has concentrated its
networks in regional clusters serving major metropolitan areas in California,
Colorado, Ohio and the Southeast. The Company is expanding its network footprint
to include certain cities in Texas through a strategic alliance with CSW and
intends to further expand its network footprint to include Atlanta, Georgia
through its agreement with Southern. In addition, NETCOM may be able to realize
extensive cost synergies by focusing future growth within ICG's existing
footprint. For example, a significant portion of NETCOM's customer base is
located in California. To the extent feasible, NETCOM will route its Internet
traffic over ICG's California network. NETCOM plans to continue to operate and
grow its business in the United States outside of ICG's network footprint and in
Canada and the United Kingdom. See "-Recent Developments."
Network Connectivity. Significant amounts of telecommunications traffic are
carried within the Company's regional clusters. Management believes that
integrating these clusters through the connection of individual networks will
provide significant benefits, including cost advantages. These cost advantages
would result from the Company's ability to carry regional traffic on-net,
thereby improving operating margins by reducing payments to other carriers for
the use of their facilities. Accordingly, the Company is in the process of
connecting networks within each of its California, Colorado and Ohio clusters
with intrastate fiber optic cable.
Alliances with Utilities. The Company has established strategic alliances
with utility companies to take advantage of their existing fiber optic
infrastructures and customer relationships. This approach affords the Company
the opportunity to license or lease fiber optic facilities on a long-term basis,
which is more timely and cost effective than constructing facilities. In
addition, utilities possess conduit and other facilities that enable the Company
to more easily install additional fiber to extend existing networks in a given
market. Finally, management expects these strategic alliances to combine the
Company's expertise in providing high quality telecommunications services with
the utility's name recognition and customer relationships in marketing
telecommunications products and services to the utility's customer base.
Integrate Investments and Expand. The Company expects to acquire
telecommunications, Internet and related businesses that complement ICG's
business strategy to offer a wide array of telecommunications, Internet and
related services, primarily to business customers. Acquisition targets could
include U.S. and foreign CLECs, ISPs and long distance companies, among others.
The Company intends to make future acquisitions primarily through the use of
Common Stock, cash on hand and the proceeds from securities offerings.
Telecom Services Networks
The Company's networks are generally comprised of fiber optic cables,
switching facilities, advanced electronics, transmission equipment and related
wiring and equipment. The Company typically designs a ring architecture with a
view toward making the network accessible to the largest concentration of
telecommunication intensive businesses in a given market.
11
The Company's networks are generally configured in redundant synchronous
optical network ("SONET") rings that offer the advantage of uninterrupted
service in the event of a fiber cut or equipment failure, resulting in limited
outages and increased network reliability. The Company generally markets its
services at prices below those charged by the ILEC. Management believes these
factors combine to create a more reliable and cost effective alternative to ILEC
networks and services.
The Company's networks are constructed to access long distance carriers as
well as areas of significant end user telecommunications traffic in a cost
efficient manner. The construction period of a new network varies depending upon
the scope of the activities, such as the number of backbone route miles to be
installed, the initial number of buildings targeted for connection to the
network backbone and the general deployment of the network infrastructure.
Construction is planned to allow revenue-generating operations to commence prior
to the completion of the entire network backbone. When constructing and relying
principally on its own facilities, the Company has experienced a period of 12 to
18 months from initial design of a network to revenue generation for such
network. Based upon its experience of using ILEC facilities to provide initial
customer service and the Company's agreements to use utilities' existing fiber,
the Company has experienced revenue generation within nine months after
commencing network design. After installing the initial network backbone,
extensions to additional buildings and expansions to other regions of a
metropolitan area are evaluated, based on detailed assessments of market
potential. The Company is currently expanding all of its existing networks to
reduce its reliance on the ILECs and evaluating development of new networks both
inside and outside its existing regional clusters.
The Company's network monitoring center in Denver monitors and manages the
Company's transport networks and provides high-level monitoring of the Company's
local exchange switches. Additionally, the Company contracts with Lucent
Technologies, Inc. for detailed performance monitoring of its local exchange
switches. Centralized electronic monitoring and control of the Company's
networks allows the Company to avoid duplication of this function in each city,
thereby reducing costs.
Switched services involve the transmission of voice, video or data to long
distance carrier-specified or end user-specified termination sites. By contrast,
the special access services provided by the Company and other CLECs involve a
fixed communications link or "pipe," usually between an end user and a specific
long distance carrier's point of presence ("POP"). With a switch and
interconnection to various carriers' networks, it is possible for the Company to
direct a long distance carrier's traffic to any end user regardless of whether
the end user is physically connected to the Company's owned or leased network.
In addition, a switch is required in order for the Company to provide the full
range of local telephone services. The Company is marketing and selling
competitive local dial tone services in California, Colorado, Ohio and the
Southeast. See "-Regulation-State Regulation."
NETCOM owns and operates a data communications network consisting of 17
hubs containing frame relay switches and high-performance routers connecting a
backbone of leased Asynchronous Transfer Mode ("ATM") switches and leased
high-speed dedicated data lines in the United States, Canada and the United
Kingdom. NETCOM maintains 247 POPs in the United States and Canada and also
offers virtual local access numbers in Canada and the United Kingdom. The design
and architecture of the physical network permits NETCOM to offer highly
flexible, reliable high-speed services to its customers and support significant
subscriber growth. The NETCOM infrastructure is monitored by network operations
centers ("NOCs") in San Jose, California, Dallas, Texas, Toronto, Canada and
London, England.
12
Services
The Company's competitive local exchange services include local dial tone,
long distance, data services, special access and interstate and intrastate
switched access services. Competitive local dial tone services consist of basic
local exchange lines and trunks for business, related line features (such as
voice mail, Direct Inward Dialing (DID), hunting and custom calling features),
local calling, and intraLATA, also called local toll, calling. The Company
believes that having a full complement of communications services, including
local and long distance services, will strengthen its overall market position
and help the Company to better penetrate the local exchange marketplace. The
Company has also developed long distance services, including calling and debit
cards, to complement its local exchange services family of products. The Company
recently announced plans to offer a bundled service of local, long distance and
data services, including Internet services, delivered over a T-1 connection.
This service will be offered primarily to ICG's larger business customers.
The Company announced its initial offering of long distance services in May
1997. The target customers for such services are the Company's existing and end
user customers. The Company's existing switches have facilitated the entry into
this business and reduced its cost of obtaining long distance transmission
capacity. However, the Company has been reliant on other carriers to provide
transmission and termination of long distance traffic. Therefore, the Company
has entered into transmission agreements, which typically provide for
transmission on a per minute basis, with long distance carriers to fulfill such
needs. To reduce its cost of services, the Company may lease point-to-point
circuits on a monthly or longer term fixed cost basis where it anticipates high
traffic volume.
The Company recently announced its plans to offer IP long distance services
priced as low as 5.9 cents per minute in 166 markets by the end of 1998. The
Company plans to carry the IP traffic over NETCOM's data backbone network and
terminate a large portion of the traffic via NETCOM's 238 POPs in the United
States, thereby eliminating terminating access charges. If a call cannot be
terminated over ICG's facilities, it will be billed at a rate of 7.6 cents per
minute. The Company expects to begin offering this service during the second
quarter of 1998, initially targeting NETCOM's existing customer base of over
500,000 customers. The Company plans to market this product via the Internet and
through the Company's inbound telemarketing center.
The Company also announced that it will offer DSL services with speeds
ranging from 144kbps to 9mbps to offer its customers high-speed Internet access.
The Company plans to lease unbundled local loops from the ILEC in the respective
market and install its DSL equipment in the ILEC central office and the
customer's premises. This service will be offered primarily to the small
business and work-at-home markets, which historically have been a large
percentage of NETCOM's customer base.
13
To complement its telecommunications services offerings, the Company
announced its initial offering of data communications services in California,
Colorado and Ohio during the first quarter of 1997. These services targeted the
Company's existing customers and other businesses with substantial data
communications requirements. Although to date, the Company has not generated
substantial revenue from such services, the Company expects that its new service
offerings, including its IP telephony strategy and DSL technology, and NETCOM's
extensive experience providing data transmission services, will allow the
Company to significantly enhance its presence within the data communications
market during fiscal 1998.
Private line services are generally used to connect the separate locations
of a single business outside of local access and transport area ("LATA").
Special access services are generally used to connect end user customers to a
long distance telephone carrier's facilities, to connect long distance carrier's
facilities to the local telephone company's central offices, and to connect
different facilities of the same long distance carrier or facilities of
different long distance carriers all within the same local calling area or LATA.
As part of its initial "carrier's carrier" strategy, the Company targeted the
transport between long distance company facilities and the local telephone
company central offices, and, for high volume customers, between the long
distance company and the end user customer's office. In order to leverage its
significant network investment, the Company has markets its services directly to
end user business customers.
The Company's interstate and intrastate switched access services include
the transport and switching of calls between the long distance carrier's
facilities and either the local telephone company central offices or end users.
By performing the switching services, the Company can reduce the long distance
carriers' local access costs, which constitute their major operating expense.
The Company has experienced negative operating margins from the provision of
wholesale switched services because it relies on ILEC networks to terminate and
originate customers' switched traffic. The Company has recently raised prices on
its wholesale switched services product in order to improve margins and is
de-emphasizing its wholesale switched services to free up switch port capacity
for its higher margin dial tone product. In addition, as the Company provides a
greater portion of the local segment of a call, the Company expects to
experience improved operating margins.
The Company's Signaling System 7 ("SS7") services provide signaling
connections between long distance and local exchange carriers, and between long
distance carriers' networks. SS7, known as look-ahead routing, is used by local
exchange companies, long distance carriers, wireless carriers and others to
signal between network elements, creating faster call set-up, resulting in a
more efficient use of network resources. SS7 is now the standard method for
telecommunications signaling worldwide. The Company has deployed signal transfer
points ("STPs") throughout its networks to efficiently route SS7 data across the
United States. SS7 is also the enabling technology for advanced intelligence
network platforms, a set of services and signaling options that carriers can use
to create new services or customer options. Carriers purchase connections into
the Company's SS7 network, and also purchase connections to other carriers
(local and long distance) on a monthly recurring basis.
14
In August 1996, the Company acquired the SS7 business of Pace Network
Services, Inc., a division of Pace Alternative Communications, Inc. The Company
has also developed a nationwide SS7 service with Southern New England Telephone
("SNET"), one of the nation's ten largest local exchange carriers. The Company
believes that, together with SNET, it is one of the largest independent
suppliers of SS7 services. The Company's STPs are integrated with two SNET
"gateway" STPs in Connecticut.
NETCOM. Through its merger with NETCOM, the Company currently provides
Internet solutions principally through dial-up, direct access and Web site
hosting services. Direct access and Web site hosting services provide higher
revenue per customer and higher margins than dial-up services. NETCOM also
receives revenue from value-added services such as security, anti-virus and data
storage.
Dial-Up Services. NETCOM's dial-up customers receive an integrated Internet
solution consisting of high quality access, software and 24 hours a day, seven
days a week, automated customer support. NETCOM dial-up customers connect
directly to the Internet via NETCOM's network which provides high speed,
reliable access. All NETCOM dial-up accounts allow access to the Internet's
resources, including E-mail, the Web and USENET newsgroups. In addition, NETCOM
dial-up customers can receive a one megabyte ("Mb") personal Web page, access to
a daily customized newspage via E-mail, and access to on-line financial,
corporate and market information and analytical tools. Enhanced services
available to dial-up customers include features such as additional E-mail
addresses, enhanced support offerings, software and virus updates, access to
research libraries, domain name service, monthly back-up, 10 Mb data storage,
750 Mb per month data transfer capability and premium service and technology
support.
NETCOM customers can quickly register using NETCOMplete software, available
for both Windows and Macintosh platforms via compact disk, and set up a NETCOM
account by following a sequence of simple, on-screen steps. All of the software
needed to connect and access the Internet is automatically installed and
configured, eliminating the need for complex set up procedures. NETCOMplete also
provides an easy-to-use interface as well as software from leading industry
participants, bookmark managers, off-line browsers and additional software that
enhances a customer's Internet experience. Revenue from dial-up services
increased from $102.9 million for the calendar year ended December 31, 1996 to
$133.7 million for the calendar year ended December 31, 1997, representing
approximately 85% and 83%, respectively, of total NETCOM revenue for such
periods.
Direct Access Services. NETCOM offers a full suite of high-speed dedicated
Internet connection and service products which provide its small and
medium-sized business customers with direct access to the full range of Internet
applications. These Internet services are offered to businesses over leased
lines at various speeds, including 56 Kbps, T-1 and T-3 levels, depending upon
the customer's needs. Through its direct access product line, NETCOM offers
Internet access services including domain name and Internet protocol address,
router configurations, on-line usage statistics and security consultation. There
are generally no usage charges for any of NETCOM's dedicated customers, and
E-mail service and USENET news feed are provided at no additional charge. Direct
network connection requires the customer to obtain a leased line from ICG or
another local telephone company. NETCOM provides an Internet connection based on
frame relay technology provided by local telephone carriers. Revenue from direct
access services increased from $16.3 million for the calendar year ended
December 31, 1996 to $19.5 million for the calendar year ended December 31,
1997, representing approximately 14% and 12%, respectively, of total NETCOM
revenue for such periods.
15
Web Site Hosting Services. NETCOM offers Web site hosting services to its
small and medium-sized business customers as well as to individuals. Web site
hosting services include client domain name registration, hosting and site
maintenance. Services provided are fully scalable but would, in a typical
package, include domain name registration, 10 E-mail addresses, access to
NETCOM's on-line business center, CGI scripting (which enables visitors to the
Web site to leave their names and addresses), weekly back-up service, 50 Mb of
data storage, 1,000 Mb per month of data transfers, traffic logs and Web
statistics and premium service and technology support. Revenue from Web site
hosting services increased from $1.3 million for the calendar year ended
December 31, 1996 to $6.3 million for the calendar year ended December 31, 1997,
representing approximately 1% and 4%, respectively, of total NETCOM revenue for
such periods.
Value-Added Services. As part of its dial-up, direct access and Web site
hosting services, NETCOM offers its small and medium-sized business customers
value-added business connectivity solutions package designed to address their
needs of increased security, reliability, access speed and customer service. The
Company believes that businesses are willing to pay premium prices for these
premium services. One such feature is Automatic Reconnect which automatically
re-routes customers' traffic to an alternate Integrated Services Digital Network
("ISDN") line so that in the event of certain kinds of service interruptions
customers may remain connected. In order to provide a secure, private connection
among multiple specific locations, NETCOM's SecureConnect product performs a
security assessment and then implements, monitors and troubleshoots a flexible
security solution to provide secure communication between central offices,
branch offices and off-site employees without jeopardizing the integrity of the
internal network. Another value-added service NETCOM offers is 24 hours a day,
seven days a week support. For larger customers, NETCOM offers flexible,
high-speed dedicated line service that is scalable to grow as traffic increases.
Other value-added services offered include password protected Web sites, usage
statistics, anti-virus software and additional domain names.
Zycom. The Company owns a 70% interest in Zycom Corporation ("Zycom") which
operates an 800/888/900 number service bureau and a switch platform in the
United States supplying information providers and commercial accounts with
audiotext and customer support services.
Industry
The Company operates in the local telephone services market as an ICP. The
Company is competing in the local, long distance and data communications
markets, and subsequent to January 21, 1998, the Internet services market, to
provide "full service" to its end user and carrier customers. The Company
believes it can maximize revenue and profit opportunities by leveraging its
extensive network facilities in providing multiple communications services to
its customers.
16
Local telephone service competition was made possible by the
Telecommunications Act and by deregulatory actions at the state level. Prior to
passage of the Telecommunications Act, firms like the Company were generally
confined to providing private line and special access services. These firms,
including the Company, installed fiber optic cable connecting long distance
telephone carriers' POPs within a metropolitan area and, in some cases,
connecting end users (primarily large businesses and government entities) with
long distance carrier POPs. The greater capacity and economies of scale inherent
in fiber optic cable enabled competitive access providers to offer customers
less expensive and higher quality special access and private line services than
the ILECs.
The Telecommunications Act, subsequent FCC decisions and many state
legislative and regulatory initiatives have substantially changed the
telecommunications regulatory environment in the United States. Due to these
regulatory changes, CLECs are now legally able to offer all communications
services, including local dial tone and all interstate and intrastate switched
services, effectively opening up the local telephone market to full competition.
Because of these changes in state and federal regulations, CLECs have expanded
their services from providing competitive access and private line services to
providing all local exchange services to become true competitors to the ILECs.
See "-Regulation."
The Internet access services market is one of the fastest growing segments
of the telecommunications services market. According to industry research
analysts, the market for consumer and business Internet connectivity and
enhanced services exceeded $3 billion in 1996, and is estimated to reach $18
billion in revenue by the year 2000, reflecting a compounded annual growth rate
of approximately 50%. Business connectivity and value-added services are
estimated to represent in excess of 50% of the overall market. The use of the
Internet by small and medium-sized businesses in particular is expected to grow
substantially from its current low levels of market penetration.
ISPs provide customers with a variety of services to meet their
Internet-related needs. Internet services include the following categories: (i)
access services (dial-up, direct access and Web site hosting); (ii) value-added
services (security services, anti-virus and data storage); and (iii) content
services (information creation, aggregation and delivery). Some ISPs offer all
of these services while others specialize in only one or two. As the market
continues to segment in these three areas, there are opportunities for both the
specialists who can provide superior service in one area, as well as
full-service providers who can bundle services and offer discounts. There were
over 4,300 ISPs in the United States and Canada as of October 31, 1997 compared
to just over 3,000 as of October 31, 1996. There have been some large
acquisitions of ISPs as CLECs and others attempt to enter the industry. Because
of low barriers to entry, there are local and regional ISPs entering the market,
which has caused the level of competition to intensify.
The availability of an expansive variety of compelling business and
consumer applications over the Internet has attracted a large number of consumer
and business users. The total number of connections to ISP networks, according
to International Data Corporation, was 17 million as of November 1997, and is
predicted to reach over 30 million by the year 2000. Market trends contributing
to the overall growth in connectivity include advancements in technologies
required to navigate the Internet, the availability of Internet connectivity,
and the rich consumer and business content available. The Company believes that
ongoing development of access to and applications of the Internet will continue
to attract a valuable consumer audience for businesses.
Network Services
Through the Company's wholly owned subsidiary, ICG Fiber Optic
Technologies, Inc. ("FOTI"), the Company 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.
Revenue from Network Services was approximately $65.6 million for fiscal 1997.
17
The Company provides network infrastructures, systems and support services,
including the design, engineering and installation of local and wide area
networks, ("LANs/WANs") for its customers. These networks (within end user
offices, buildings or campuses) may include fiber optic, twisted-pair, coaxial
and other network technologies. The Company specializes in turnkey network
installations including cabling and electronics that address specific
environments. The Company also provides professional network support services.
These services include network move, add and change services and ongoing
maintenance and support services. Network Services revenue is expected to
constitute a smaller portion of the Company's future revenue as Telecom Services
revenue increases.
The Company offers these network integration and support services through
offices located within four regions. The regional headquarters are located in
Dallas, Denver, Portland (Oregon) and San Francisco.
Satellite Services
The Company's Satellite Services operations provide satellite voice and
data services to major cruise lines, commercial shipping vessels, yachts, the
U.S. Navy and offshore oil platforms. The Company also owns a teleport facility
which provides international voice and data transmission services. Revenue for
Satellite Services operations was approximately $30.0 million for fiscal 1997.
The Company intends to dispose of its Satellite Services operations to better
focus its efforts on its core Telecom services unit, although it has not entered
into a formal arrangement for such disposition.
MTN. In January 1995, the Company and an unaffiliated entity formed
Maritime Telecommunications Network, Inc. ("MTN") which purchased the assets of
a business providing digital wireless communications through satellites to the
maritime cruise industry, U.S. Navy vessels and offshore oil platforms utilizing
an experimental radio frequency license issued by the FCC. MTN provides private
communications networks to various cruise lines allowing for the transmission of
data communications and allowing passengers to make calls from their cabins to
anywhere in the world. MTN additionally provides its communications services to
seismic vessels, to commercial shipping vessels and to the U.S. Navy in
conjunction with a major long distance provider, which serves as the long
distance carrier, while MTN provides the shipboard communications equipment. The
Company believes that the radio spectrum employed under its experimental license
and a recent grant of Special Temporary Authority ("STA"), which uses C-band
radio frequencies, enables it to provide a higher quality maritime service than
is available through the radio frequencies currently allocated to other maritime
service providers.
18
In April 1996, the FCC issued a waiver allowing MTN to apply for a
permanent FCC license to utilize the same C-band frequencies as are being used
under the experimental license. MTN's application is pending. The Company's
experimental license was renewed for an additional two-year period on November
21, 1997. Additionally, in January 1997, the FCC granted an STA which enables
MTN to conduct operations as proposed in the pending application for a permanent
license, for six-month periods. MTN filed for six-month renewals for the STA on
July 25, 1997 and January 27, 1998 and the Company has received verbal grants of
the six-month extensions. There can be no assurance that the Company will be
granted a permanent license, that the experimental license and STA currently
being used will continue to be renewed for future terms or that any license
granted by the FCC will not require substantial payments from the Company. See
"-Regulation."
MCN. In March 1996, the Company acquired a 90% equity interest in MarineSat
Communications Network, Inc. ("MCN") (formally Maritime Cellular TeleNetwork,
Inc.), a Florida-based provider of cellular and satellite communications for
commercial ships, private vessels and land-based mobile units. This acquisition
expands the Company's business from C-band satellite services for cruise ships
and naval vessels to cover land-based units and smaller ships. In April 1997,
the Company received the remaining 10% equity interest in MCN as a partial
consideration for the sale of another of its subsidiaries.
Nova-Net. In May 1994, the Company acquired Nova-Net Communications, Inc.
("Nova-Net"), which provides private data networks utilizing very small aperture
terminals ("VSATs") and specializes in data collection and in monitoring and
control of customer production and transmission facilities in various
industries, including oil and gas, electric and water utilities and
environmental monitoring industries. Nova-Net designs, builds and manages
private data networks that enable a variety of companies to transmit critical
sensor and flow readings to key monitoring points from multiple locations.
Nova-Net manages networks 24 hours a day, seven days a week through its network
control center in Englewood, Colorado.
Teleport. The teleport in Holmdel, New Jersey, acquired as part of the
Company's acquisition of MTN, is located 20 miles south of Newark and
specializes in international digital voice and data communications services with
full fiber interconnect to the local telephone company facilities in New York
City. Teleport services are also provided to the maritime industry, including
support of the Company's cruise ship, U.S. Navy and offshore oil platform
telephone and data services business. In addition, the Company markets the
resale of services from the four teleports it sold in 1996.
Customers And Marketing
The Company's primary marketing strategies for Telecom Services are to
offer a broad range of local and long distance communications services,
including data communications, to the Company's business customers at
cost-effective rates. Wholesale customers typically re-market the Company's
services to the retailer's end user, under the retailer's brand name. The
Company markets its services in regional clusters, which it believes is the most
effective and efficient way to penetrate its markets.
19
The Company markets its Telecom Services products through direct sales to
end users and wholesale accounts, and direct mail, to a limited extent. Telecom
Services revenue from major long distance carriers and resellers constituted
approximately 78%, 71%, 69% and 64% of the Company's Telecom Services revenue in
fiscal 1995 and 1996, the three-month period ended December 31, 1996 and fiscal
1997, respectively. The balance of the Company's Telecom Services revenue was
derived from end users. The Company anticipates revenue from end users will
increase in the future as it continues to expand its bundled service offerings,
increases its sales and marketing teams and focuses more on the end user segment
of the market. In support of this strategy, the Company has substantially
increased its direct sales and marketing staff. The Company's sales force has
grown from 143 people at December 31, 1996 to approximately 356 people
(including sales management, technical sales support and administrative support)
at December 31, 1997. Telecom service agreements with its customers typically
provide for terms of one to five years, fixed prices and early termination
penalties.
The Company has telecommunications sales offices in: Irvine, Los Angeles,
Oakland, Sacramento and San Diego, California; Denver and Colorado Springs,
Colorado; Cleveland, Columbus and Dayton, Ohio; Birmingham, Alabama; Louisville,
Kentucky; Charlotte, North Carolina; and Nashville, Tennessee. The Company's
marketing staff is located in Denver, Colorado.
NETCOM's primary focus is on providing high quality Internet solutions to
individuals and to small and medium-sized businesses. In order to achieve this
objective, NETCOM engages in marketing and advertising activities, alliances
with key strategic partners, seminars in targeted regional markets, and
distribution via both direct and indirect channels. NETCOM's current marketing
efforts emphasize its strategy of focusing on providing premium services to
businesses and individuals through integrated product offerings. The campaign
incorporates the theme of productivity and efficiency and includes an emphasis
on the full range of NETCOM solutions. NETCOM's current marketing and
distribution channels include original equipment manufacturer arrangements,
agreements with value-added resellers, retail distribution, direct marketing
efforts, including trade shows and telesales, and the Web.
The Company markets its network systems integration products and services
through a direct sales force located in the Rocky Mountains, Pacific Northwest,
Texas and California regions. The Company also has entered into resale
agreements with manufacturers of network integration products and services.
The Company offers satellite private line transmission services from its
teleport to business customers that can benefit from the Company's international
and domestic transmission capabilities. The Company also markets voice and data
communications to the maritime industry, including cruise ships, U.S. Navy
vessels, commercial vessels, private yachts, offshore oil platforms and mobile
land-based units.
Competition
The Company operates in an increasingly competitive environment dominated
by the ILECs, mainly the Regional Bell Operating Companies ("RBOCs") and GTE
which are among the Company's current competitors. Also included among the
Company's current competitors are other ILECs, other CLECs, network systems
integration service providers, microwave and satellite service providers,
teleport operators, wireless telecommunications providers and private networks
built by large end users. Potential competitors (using similar or different
technologies) include cable television companies, utilities, ILECs outside their
current local service areas, and the local access operations of long distance
carriers. Consolidation of telecommunications companies, including mergers
20
between certain of the RBOCs, and the formation of strategic alliances within
the telecommunications industry, as well as the development of new technologies,
could give rise to increased competition. One of the primary purposes of the
Telecommunications Act is to promote competition, particularly in the local
telephone market. Since enactment of the Telecommunications Act, several
telecommunications companies have indicated their intention to aggressively
expand their ability to address many segments of the telecommunications
industry, including segments in which the Company participates and expects to
participate. For example, AT&T Corp. ("AT&T"), MCI Communications Corp. ("MCI"),
Time Warner Communications, Inc., Texas Utilities Company and other large
companies are entering the local markets, as competitors of the Company. This
may result in more participants than can ultimately be successful in a given
market.
Telecom Services. The bases of competition in competitive local
telecommunications services are generally price, service, reliability,
transmission speed and availability. The Company believes that its expertise in
developing and operating highly reliable, advanced digital networks which offer
substantial transmission capacity at competitive prices enables the Company to
compete effectively against the ILECs and other CLECs.
In every market in which the Company operates telecom service networks, the
ILECs (which are the historical monopoly providers of local telephone services)
are the primary competitors. The ILECs have long-standing relationships with
their customers and provide those customers with various transmission and
switching services. The ILECs also have the potential to subsidize access and
switched services with revenue from a variety of businesses and historically
have benefited from certain state and federal regulations that have favored the
ILECs over the Company. In certain markets where the Company operates, other
CLECs also operate or have announced plans to enter the market. Some of those
CLECs are affiliated with major long distance companies. Current competitors
also include network systems integration services providers, wireless
telecommunications providers and private networks built by large end users.
Additional competition may emerge from cable television operators and electric
utilities. Many of the Company's actual and potential competitors have greater
financial, technical and marketing resources than the Company.
21
The Company's networks compete most directly with the RBOCs and GTE. In
general, the provision of interstate access services by the RBOCs and GTE,
including the rates charged for such services, is regulated by the FCC, and the
provision of intrastate access and local services, including the rates charged
for such services, is regulated by the individual state regulatory commissions.
See "-Regulation." In the past, FCC policies have constrained the ability of the
RBOCs and GTE to decrease their prices for interstate access services, based on
their status as dominant carriers. Although FCC regulatory approval for price
reductions (beyond certain parameters) still must be obtained, the FCC has
allowed all recently proposed access reductions to become effective and has
granted the RBOCs flexibility in pricing their interstate access services on a
central office by central office basis. This pricing flexibility resulted in
certain RBOCs lowering their prices in high density zones, the probable arena of
competition with the Company. In addition, the FCC has granted waivers of its
access charge pricing rules to the RBOCs to allow them to further reduce certain
access prices. In May 1997, the FCC released a decision amending and reforming
many of its access charge rules and sought further comment on additional issues.
In addition, the FCC released a separate decision in May 1997 reforming its
rules on universal service subsidies pursuant to the requirements of the
Telecommunications Act. As a whole, the FCC's decision reforming the access
charge rules is not likely to have a material adverse impact on the Company's
access services offerings, because the decision required relatively small
decreases in total access prices charged by the ILECs. The major impact of the
FCC's decision was to shift access cost recovery by the ILECs to flat-based
charges from usage-sensitive (minute-of-use) charges. The continued lowering of
access rates and increased pricing flexibility for the RBOCs and GTE may
adversely affect the Company's ability to compete for certain services. If the
RBOCs and GTE continue to lower access rates, there would be downward pressure
on certain special access and switched access rates charged by CLECs, which
pressure may adversely affect the Company's profitability. See "-Regulation." In
addition, the Telecommunications Act and its implementation by the states and
the FCC allows the RBOCs to seek permission to provide a broader range of
services and likely will enable the RBOCs and GTE to more effectively compete
against long distance carriers, which are the Company's primary customers for
telecom services.
In addition, the long distance and data transmission businesses are
extremely competitive and prices have declined substantially in recent years and
are expected to continue to decline.
Network Services. The bases of competition in the network services market
are primarily technological capability and experience, value-added services and
price. In this market, the Company competes with a variety of local and regional
system integrators.
Satellite Services. In the delivery of domestic and international satellite
services, the Company competes with other full service teleports in the
northeast region of the United States. The bases of competition are primarily
reliability, price and transmission quality. Most of the Company's satellite
competitors focus on the domestic video market. Competition is expected
principally from a number of domestic and foreign telecommunications carriers,
many of which have substantially greater financial and other resources than the
Company. In the maritime telecommunications market, MTN competes primarily with
COMSAT Corporation ("COMSAT") in providing similar telecommunications services.
COMSAT has FCC licenses that are similar to MTN's, it owns its own satellites
and it is the sole U.S. point of control for access to Intelsat satellites.
22
Internet Services. Beginning January 21, 1998, the Company also faces
competition within the Internet services market. The market for Internet access
and related services is highly competitive. There are no substantial barriers to
entry and the Company anticipates that competition will continue to intensify as
the use of the Internet grows. The tremendous growth and potential market size
of the Internet access market has attracted many new start-ups as well as
existing businesses from different industries. Current and prospective
competitors include, in addition to other national, regional and local ISPs,
long distance and local exchange telecommunications companies, cable television,
direct broadcast satellite, wireless communications providers, and on-line
service providers.
Regulation
The Company's services are subject to significant federal, state and local
regulation. The Company operates in an industry that is undergoing substantial
change as a result of the passage of the Telecommunications Act.
The Telecommunications Act opened the local and long distance markets to
additional competition and changed the division of oversight between federal and
state regulators. Under previous law, state regulators had authority over those
services that originated and terminated within the state ("intrastate") and
federal regulators had jurisdiction over services that originated within one
state and terminated in another state ("interstate"). State and federal
regulators now share responsibility to some extent for implementing and
enforcing the pro-competitive policies and the provisions for the
Telecommunications Act.
The Telecommunications Act generally requires ILECs to negotiate agreements
to provide interconnection and nondiscriminatory access to their networks on
more favorable terms than were previously available in the past. However, such
new agreements are subject to negotiations with each ILEC which may involve
considerable delays and may not necessarily be obtained on terms and conditions
that are desirable to the Company. In such instances, the Company may petition
the proper state regulatory agency to arbitrate disputed issues. Ultimately, the
terms of an arbitrated agreement are subject to review by the federal courts.
There can be no assurance that the Company will be able to negotiate acceptable
interconnection agreements or that, if state regulatory authorities impose terms
and conditions on the parties in arbitration, such terms will be acceptable to
the Company.
On August 8, 1996, in two separate decisions (the "First Report and Order"
and the "Second Report and Order"), the FCC adopted rules and policies
implementing the local competition provisions of the Telecommunications Act. The
FCC, among other things, adopted national guidelines with respect to the
unbundling of ILECs' network elements, resale of ILEC services, the pricing of
interconnection services and unbundled elements, and other local competition
issues. Numerous parties appealed both of the FCC's orders to the Eighth Circuit
Court, and in October 1996 the Eighth Circuit Court stayed the implementation of
many of the rules in the First Report and Order. On July 18, 1997, the Eighth
Circuit Court issued a decision on the First Report and Order which upheld
certain of the FCC's rules and reversed the FCC's rules on other issues,
including the pricing rules. On August 22, 1997, the Eighth Circuit Court issued
its decision on the Second Report and Order, which concluded that the FCC had
exceeded its jurisdiction in issuing certain rules on dialing parity.
23
Separate petitions for rehearing of the July 18 decision were filed with
the Eighth Circuit Court by a group of interexchange carriers, two groups of
ILECs and a group of CLECs. On October 14, 1997, the Eighth Circuit Court
granted the ILEC petitions for rehearing, and denied the CLEC and IXC petitions.
The Court's decision on rehearing vacated an additional FCC rule that addressed
the ability of new entrants to purchase ILEC network elements at cost-based
rates on a bundled rather than an unbundled basis.
The FCC and other parties filed petitions for certiorari seeking review by
the U.S. Supreme Court of the Eighth Circuit Court's decision, and the U.S.
Supreme Court has granted the petitions for certiorari and agreed to review the
case. It is anticipated that the case will be argued before the U.S. Supreme
Court in the fall of 1998, with a final decision issued in 1999. The Eighth
Circuit Court's ruling remains in effect pending final action by the U.S.
Supreme Court.
On December 31, 1997, the United States District Court for the Northern
District of Texas, in a case brought by SBC Communications, Inc., issued a
decision holding that Sections 271 through 275 of the Telecommunications Act are
unconstitutional. The decision addresses the restrictions contained in Sections
271 through 275 of the Telecommunications Act on the lines of businesses in
which the RBOCs may engage, including establishing the conditions that the RBOCs
must satisfy before they may provide interLATA long distance telecommunications
services in their local telephone service areas. On February 11, 1998, a stay of
the decision was issued by the United States District Court for the Northern
District of Texas, which stay will remain in effect pending appeal of the
decision by the Fifth Circuit Court of Appeals.
Federal Regulation. The Company generally operates as a regulated carrier
with fewer regulatory obligations than the ILECs. The Company must comply with
the requirements of the Telecommunications Act, such as offering service on a
non-discriminatory basis at just and reasonable rates. The FCC treats the
Company as a non-dominant carrier. The FCC has established different levels of
regulation for dominant and non-dominant carriers. Of domestic common carriers,
only GTE and the RBOCs are classified as dominant carriers for the provision of
access services, and all other providers of domestic common carrier services are
classified as non-dominant. Under the FCC's streamlined regulation of
non-dominant carriers, the Company must file tariffs with the FCC for
international services on an ongoing basis. The Company's provision of
international long distance services requires prior authorization by the FCC
pursuant to Section 214 of the Telecommunications Act, which the Company has
obtained. The FCC recently eliminated the requirement that non-dominant
interstate access carriers must file tariffs. The Company is not subject to
price cap or rate of return regulation, nor is it currently required to obtain
FCC authorization for the installation or operation of its fiber optic network
facilities used for services in the United States. The Company may install and
operate non-radio facilities for the transmission of domestic interstate
communications without prior FCC authorization. The Company's use of digital
microwave radio frequencies and satellite earth stations in connection with
certain of its telecommunications services is subject to FCC radio frequency
licensing regulation. See "-Federal Regulation of Microwave and Satellite Radio
Frequencies."
24
State Regulation. In general, state regulatory agencies have regulatory
jurisdiction over the Company when Company facilities and services are used to
provide local and other intrastate services. Under the Telecommunications Act,
states cannot effectively prohibit any entity from providing telecommunications
services, but the states continue to have general authority to set criteria for
reviewing applications to provide intrastate services (including local
services). State regulators will continue to set the requirements for providers
of local and intrastate services, including quality of services criteria.
However, state regulators can no longer allow (or require) restrictions on the
resale of telecommunications services. State regulators also can regulate the
rates charged by CLECs for intrastate and local services and can set prices for
interconnection by CLECs with the ILEC networks. The Company's provision of
local dial tone and intrastate switched and dedicated services are classified as
intrastate and therefore subject to state regulation. The Company expects that
it will offer more intrastate services as its business and product lines expand.
To provide intrastate service (particularly local dial tone service), the
Company generally must obtain a Certificate of Public Convenience and Necessity
("CPCN") from the state regulatory agency prior to offering service. In most
states, the Company also is required to file tariffs setting forth the terms,
conditions and prices for services that are classified as intrastate, and to
update or amend its tariffs as rates change or new products are added. The
Company may also be subject to various reporting and record-keeping
requirements.
The Company currently holds CPCNs (or their equivalents) from the states of
Alabama, California, Colorado, Florida, Georgia, Indiana, Kentucky, North
Carolina, Ohio, Oklahoma, Tennessee and Texas. The Company has authority to
provide local and intrastate long distance services in each of these states.
Local Government Authorizations. Under the Telecommunications Act, local
authorities retain jurisdiction under applicable state law to control the
Company's access to municipally owned or controlled rights of way and to require
the Company to obtain street opening and construction permits to install and
expand its fiber optic network. In addition, many municipalities require the
Company to obtain licenses or franchises (which generally have terms of 10 to 20
years) and to pay license or franchise fees, often based on a percentage of
gross revenue, in order to provide telecommunications services, although in
certain states including California and Colorado, such fees may be imposed under
current state law. Certain municipalities in Colorado, however, are continuing
to charge franchise fees pending enforcement by the Colorado courts. There is no
assurance that certain cities that do not impose fees will not seek to impose
fees, nor is there any assurance that, following the expiration of existing
franchises, fees will remain at their current levels. In many markets, the ILECs
have been excused from paying such franchise fees or pay fees that are
materially lower than those required to be paid by the Company for access to
public rights of way. However, under the Telecommunications Act, while
municipalities may still regulate use of their streets and rights of way,
municipalities may not prohibit or effectively prohibit any entity from
providing any telecommunications services. In addition, the Telecommunications
Act requires that local governmental authorities treat telecommunications
carriers in a non-discriminatory and competitively neutral manner. If any of the
Company's existing franchise or license agreements are terminated prior to their
expiration dates or not renewed, and the Company is forced to remove its fiber
from the streets or abandon its network in place, such termination could have a
material adverse effect on the Company.
25
Federal Regulation of Microwave and Satellite Radio Frequencies. The FCC
continues to regulate radio frequency use by both private and common carriers
under the Telecommunications Act. Unlike common carriers, private carriers
contract with select customers to provide services tailored to the customer's
specific needs. The FCC does not currently regulate private carriers (other than
their use of radio frequencies) and has preempted the states from regulating
private carriers. The Company offers certain services as a private carrier.
The Company is required to obtain authorization from the FCC for its use of
radio frequencies to provide satellite and wireless services. The Company holds
a number of point-to-point microwave radio licenses that are used to provide
telecommunications services in California. Additionally, the Company holds a
number of satellite earth station licenses in connection with its operation of
satellite-based networks. The Company also provides maritime communications
services pursuant to an experimental license and a grant of a STA. In April
1996, the FCC issued a waiver to the Company which may allow it to obtain a
permanent FCC license to provide these services using the same radio frequencies
currently being used under the experimental license and STA. The Company has
filed an application for a permanent license under the terms of the FCC's waiver
decision, and the application is pending. The STA was granted on January 30,
1997 and enables the Company to conduct operations pursuant to such application
during the FCC's review. Applications for six-month extensions of the STA were
filed on July 25, 1997 and on January 27, 1998 and verbal grants of the
extensions have been issued by the FCC. There can be no assurance that the
Company will be granted a permanent license, that the experimental license and
STA currently being used will continue to be renewed for future terms or that
any license granted by the FCC will not require substantial payments from the
Company.
Regulation of Internet Services. The Company is currently providing
Internet access services through its recently acquired subsidiary, NETCOM, in
part through data transmissions over public telephone lines. These transmissions
are governed by regulatory policies establishing charges and terms for wire-line
communications. Although the Company is not currently subject to direct
regulation by the FCC or any other governmental agency (other than regulations
applicable to businesses generally), due to the increasingly widespread use of
the Internet, it is possible that additional laws and regulations may be adopted
with respect to the Internet, covering issues such as content, user privacy,
pricing, libel, intellectual property protection and infringement, and
technology export and other controls. It also is possible that the Company could
become subject to regulation by the FCC or another regulatory agency as a
provider of basic telecommunications services. The FCC is currently reviewing
its regulatory positions on whether to impose common carrier regulation on the
network transport and communications facilities aspects of an enhanced or
information service package. Such changes in the regulatory structure and
environment affecting the Internet access market, including regulatory changes
that directly or indirectly affect telecommunications costs or increase the
likelihood of competition from the RBOCs or other telecommunications companies,
could have an adverse effect on the Company's business. For example, the FCC is
considering whether ISPs should be required to pay access charges to local
telephone companies for each minute that dial-access users spend connected to
ISPs through telephone company switches, and is also considering whether ISPs
should be required to make monetary contributions to federal universal service
funds. In addition, some telephone companies are seeking similar relief through
state regulatory agencies. Such rules, if adopted at either the federal or state
level, would have a material adverse effect on the Company. The Company cannot
predict the impact, if any that future regulation or regulatory changes may have
on its business.
26
Certain states have deemed the provision of Internet services to be taxable
and in such states, NETCOM collects such taxes from its customers. Other states
have not yet announced a policy in this regard or have affirmatively decided
that such services are not taxable. If such states retroactively subject the
provision of Internet services to sales tax or if customers are unwilling to pay
sales tax that may be assessed in the future, such events could have a material
adverse effect on the Company.
The Company believes it is entitled to receive reciprocal compensation from
ILECs for the transport and termination of local traffic to ISPs from customers
of the ILECs, pursuant to various interconnection agreements. These ILECs have
not paid most of the bills they have received from the Company and have disputed
substantially all of these charges, arguing that ISP traffic is not local
traffic as defined by the various agreements and under state and federal laws
and public policies. To date, there have been favorable rulings from 15 states
and public utilities commissions and no unfavorable final rulings by any state
public utilities commission or the FCC that would indicate that calls placed by
end users to ISPs would not qualify as local traffic subject to the payment of
reciprocal compensation. While the Company believes that future regulatory
rulings on this issue will continue to treat such calls as local, there can be
no assurance that such future rulings will continue to be favorable.
Employees
On December 31, 1997, the Company employed a total of 2,219 individuals on
a full time basis. There are 48 employees in the Company's Oregon network
systems integration services office who are represented by collective bargaining
agreements which expire on May 31, 1998 and December 31, 2000. The Company
believes that its relations with its employees are good.
27
ITEM 2. PROPERTIES
The Company's physical properties include owned and leased space for
offices, storage and equipment rooms and collocation sites. Additional space may
be purchased or leased by the Company as networks are expanded. The Company owns
a 30,000 square-foot building located in the Denver metropolitan area which
houses a portion of the Company's Telecom Services business. The Company leases
approximately 176,000 square feet of office space for operations located in the
Denver metropolitan area and approximately 262,000 square feet in other areas of
the United States.
As of December 31, 1997, the Company had acquired property for and had
partially constructed its new headquarters in Englewood, Colorado, which is
planned to accommodate most of the Company's Colorado operations. In January
1998, the Company sold the substantially completed building to a third party and
entered into an agreement to lease back the approximately 265,000 square foot
facility under a long-term operating lease.
ITEM 3. LEGAL PROCEEDINGS
On April 4, 1997, certain shareholders of Zycom filed a shareholder
derivative suit and class action complaint for unspecified damages, purportedly
on behalf of all 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 various statutory and common law
claims. The Company is vigorously defending the claims. While it is not possible
to predict the outcome of this litigation, management believes these proceedings
will not have a material adverse effect on the Company's financial condition,
results of operations or cash flows.
A putative class action lawsuit was filed on July 15, 1997 in Superior
Court of California, Orange County, alleging unfair business practice and
related causes of action against NETCOM in connection with its offers of free
trial periods and cancellation procedures and claiming damages of at least $10.0
million. The case is in the preliminary stages, the complaint has been answered
and plaintiff has served initial requests for discovery. NETCOM believes it has
meritorious defenses to such claims and intends to vigorously defend the action.
The Federal Trade Commission ("FTC") is conducting an inquiry regarding the
advertising, marketing, subscription and billing practices of NETCOM. NETCOM
believes that it has made reasonable efforts to comply with applicable laws. If
the FTC were to conclude that NETCOM violated any applicable law, it could seek
relief in the form of equitable relief, civil monetary penalties or other
remedies.
The Company is a party to certain other litigation which has arisen in the
ordinary course of business. In the opinion of management, the ultimate
resolution of these matters will not have a material adverse effect on the
Company's financial condition, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ICG Common Stock, $.01 par value per share, has been quoted on the Nasdaq
National Market ("Nasdaq") since March 25, 1997 under the symbol "ICGX" and was
previously listed on the American Stock Exchange ("AMEX"), from August 5, 1996
to March 24, 1997 under the symbol "ICG." Prior to August 5, 1996,
Holdings-Canada's common shares had been listed on the AMEX under the symbol
"ITR" from January 14, 1993 through February 28, 1996, and under the symbol
"ICG" thereafter through August 2, 1996. Holdings-Canada Class A Common Shares
ceased trading on the AMEX at the close of trading on August 2, 1996.
Holdings-Canada Class A Common Shares, which were listed on the Vancouver Stock
Exchange ("VSE") under the symbol "IHC.A," ceased trading on the VSE at the
close of trading on March 12, 1997.
The following table sets forth, for the fiscal periods indicated, the high
and low sales prices of the Holdings-Canada Class A Common Shares as reported on
the AMEX through August 2, 1996, and the VSE through March 12, 1997, and the
high and low sales prices of the ICG Common Stock as reported on the AMEX from
August 5, 1996 through March 24, 1997 and on the Nasdaq from March 25, 1997
through the date indicated below. The table also sets forth the average of the
monetary exchange rates on the last day of each such relevant fiscal period.
American Stock
Exchange/Nasdaq National Vancouver Exchange
Market (1) Stock Exchange (1) Rate
-------------------------- ------------------------------
High Low High Low (C$/$)
----------- ----------- ------------- ------------- -------------
Fiscal Year Ended September 30, 1996
First Quarter $ 12.75 $ 8.63 C$ - C$ - 1.36
Second Quarter 17.88 10.25 - - 1.36
Third Quarter 27.38 17.13 17.50 17.50 1.36
Fourth Quarter 25.88 18.50 - - 1.36
Three Months Ended December 31, 1996 (2) $ 22.25 $ 14.00 C$ 28.35 C$ 28.35 1.37
Fiscal Year Ended December 31, 1997 (2)
First Quarter $ 18.13 $ 10.38 C$ - C$ - 1.38
Second Quarter 21.13 8.63 N/A N/A N/A
Third Quarter 24.63 17.75 N/A N/A N/A
Fourth Quarter 28.63 19.75 N/A N/A N/A
Fiscal Year Ended December 31, 1998
Through March 26, 1998 $ 43.63 $ 24.25 C$ N/A C$ N/A N/A
(Continued)
29
(1) Effective at the close of trading on August 2, 1996, Holdings-Canada's
Class A Common Shares ceased trading on the AMEX and the ICG Common Stock
commenced trading on the AMEX on August 5, 1996. Effective March 25, 1997,
the ICG Common Stock ceased trading on the AMEX and commenced trading on
the Nasdaq. ICG Common Stock has never traded on the VSE. The Class A
Common Shares traded on the VSE through March 12, 1997 and all information
reported on the above table from August 5, 1996 to March 12, 1997 with
respect to the VSE relates only to the Class A Common Shares.
(2) The Company changed its fiscal year end to December 31 from September 30,
effective January 1, 1997.
See the cover page of this Annual Report for a recent bid price and related
number of shares outstanding of Common Stock. On March 26, 1998, there were 284
holders of record.
The Company has never declared or paid dividends on the Common Stock and
does not intend to pay cash dividends on the Common Stock in the foreseeable
future. The Company intends to retain future earnings, if any, to finance the
development and expansion of its business. In addition, the payment of any
dividends on the Common Stock is effectively prohibited by the restrictions
contained in the Company's indentures and in the Second Amended and Restated
Articles of Incorporation of Holdings, which prohibits Holdings from making any
material payment to the Company. Certain of the Company's debt facilities
contain covenants which also may restrict the Company's ability to pay cash
dividends.
In September and October 1997, the Company's new wholly owned subsidiary,
ICG Funding, LLC, a Delaware limited liability company, completed a private
placement of $132.25 million of 6 3/4% Preferred Securities. The 6 3/4%
Preferred Securities are mandatorily redeemable November 15, 2009 at the
liquidation preference of $50.00 per security, plus accrued and unpaid
dividends. Dividends on the 6 3/4% Preferred Securities are cumulative at the
rate of 6 3/4% per annum and are payable in cash through November 15, 2000 and,
thereafter, in cash or shares of Common Stock at the option of ICG Funding. The
6 3/4% Preferred Securities are exchangeable, at the option of the holder, into
Common Stock at an exchange price of $24.025 per share, subject to adjustment.
ICG Funding may, at its option, redeem the 6 3/4% Preferred Securities at any
time on or after November 18, 2000. Prior to that time, ICG Funding may redeem
the 6 3/4% Preferred Securities if the current market value of Common Stock
equals or exceeds the exchange price, for at least 20 days of any consecutive
30-day trading period, by 170% prior to November 16, 1998; by 160% from November
16, 1998 through November 15, 1999; and by 150% from November 16, 1999 through
November 15, 2000. The 6 3/4% Preferred Securities and the Common Stock issuable
upon exchange of such securities have been registered under the Securities Act.
The 6 3/4% Preferred Securities are guaranteed by ICG on a full and
unconditional basis.
In October 1997, the Company sold 687,221 shares of Common Stock (the "CBG
Shares") to certain shareholders of CBG in connection with the acquisition of
CBG for a purchase price of approximately $16.0 million. The sale of the CBG
Shares was exempt from registration under Rule 4 (2) under the Securities Act
because the offers and sales were made to a limited number of investors in a
private transaction. Resale of the CBG Shares was subsequently registered on a
Form S-3 registration statement which was declared effective on October 31,
1997.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for each fiscal year in the four-year period
ended September 30, 1996, the three months ended December 31, 1996 and the
fiscal year ended December 31, 1997 has been derived from the audited
Consolidated Financial Statements of the Company. The information set forth
below should be read in conjunction with the Consolidated Financial Statements
of the Company and the notes thereto included elsewhere in this Annual Report.
The Company's development and expansion activities, including acquisitions,
during the periods shown below materially affect the comparability of this data
from one period to another. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
30
Three Months Fiscal
Ended Year Ended
Fiscal Years Ended September 30, December 31, December 31,
-----------------------------------------------------------
1993 1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------ ------------
Statement of Operations Data: (in thousands, except per share amounts)
Revenue:
Telecom services (1) $ 4,803 14,854 32,330 87,681 34,787 177,690
Network services 21,006 36,019 58,778 60,116 15,981 65,678
Satellite services(2) 3,520 8,121 20,502 21,297 6,188 29,986
Other 147 118 - - - -
------------ ------------ ------------ ------------ ------------ ------------
Total revenue 29,476 59,112 111,610 169,094 56,956 273,354
------------ ------------ ------------ ------------ ------------ ------------
Operating costs 18,961 38,165 78,846 135,253 49,929 246,418
Selling, general and
administrative expenses 10,702 28,015 62,954 76,725 24,253 150,767
Depreciation and amortization 3,473 8,198 16,624 30,368 9,825 57,081
Net loss (gain) on disposal of
long-lived assets - - 241 5,128 (772) 671
Provision for impairment of
long-lived assets - - 7,000 9,994 - 11,950
------------ ------------ ------------ ------------ ------------ ------------
Total operating costs and
expenses 33,136 74,378 165,665 257,468 83,235 466,887
Operating loss (3,660) (15,266) (54,055) (88,374) (26,279) (193,533)
Interest expense (2,523) (8,481) (24,368) (85,714) (24,454) (117,545)
Other income, net 325 925 3,639 15,423 5,898 21,247
------------ ------------ ------------ ------------ ------------ ------------
Loss before income taxes,
minority interest, share of
losses and cumulative effect
of change in accounting (5,858) (22,822) (74,784) (158,665) (44,835) (289,831)
Income tax benefit 1,552 - - 5,131 - -
------------ ------------ ------------ ------------ ------------ ------------
Loss before minority interest,
share of losses and
cumulative effect of
change in accounting (4,306) (22,822) (74,784) (153,534) (44,835) (289,831)
Minority interests, including
preferred dividends on
preferred securities (303) 435 (1,123) (25,306) (4,988) (37,812)
Share of losses of joint
venture and investment - (1,481) (741) (1,814) - -
------------ ------------ ------------ ------------ ------------ ------------
Loss before cumulative effect
of change in accounting (4,609) (23,868) (76,648) (180,654) (49,823) (327,643)
Cumulative effect of change in
accounting (1) - - - (3,453) - -
------------ ------------ ------------ ------------ ------------ ------------
Net loss $ (4,609) (23,868) (76,648) (184,107) (49,823) (327,643)
============ ============ ============ ============ ============ ============
Loss per share - basic and
diluted $ (0.39) (1.56) (3.25) (6.83) (1.56) (10.11)
============ ============ ============ ============ ============ ============
Weighted average number of
shares of Common Stock
outstanding - basic and
diluted (3) 11,671 15,342 23,604 26,955 31,840 32,399
============ ============ ============ ============ ============ ============
Other Data:
EBITDA (4) $ (187) (7,068) (30,190) (42,884) (17,226) (123,831)
Net cash used by operating
activities (2,839) (7,532) (42,798) (43,357) (8,636) (126,954)
Net cash used by investing
activities (13,401) (51,452) (71,583) (135,204) (82,342) (429,867)
Net cash provided (used) by
financing activities 30,382 49,428 377,772 360,227 (170) 315,721
Capital expenditures (5) 20,685 54,921 88,736 177,307 70,297 269,593
(Continued)
31
At September 30, At December 31,
----------------------------------------------------------- ----------------------------
1993 1994 1995 1996 1996 1997
----------- ----------- ------------- ----------- ----------- ------------
Balance Sheet Data: (in thousands)
Cash, cash equivalents and
short-term investments
available for sale 15,581 6,025 269,416 457,914 392,535 217,015
Working capital (deficit) 7,990 (8,563) 249,089 446,164 361,601 210,876
Property and equipment, net 52,203 118,875 202,004 336,137 403,676 632,167
Total assets 95,196 201,991 583,553 939,351 944,133 1,107,664
Current portion of long-term
debt and capital lease
obligations 7,657 23,118 27,310 8,282 25,500 7,421
Long-term debt and capital
lease obligations, less
current portion 37,116 104,461 405,535 739,827 761,504 957,507
Redeemable preferred securities
of subsidiaries - - 14,986 153,318 159,120 420,171
Common stock and additional
paid-in capital 56,402 97,806 217,245 299,229 302,560 326,965
Accumulated deficit (21,650) (58,024) (134,710) (318,817) (368,640) (696,283)
Stockholders' equity (deficit) 34,753 39,782 82,535 (19,588) (66,080) (369,318)
(1) During fiscal 1996, the Company changed its method of accounting for
long-term telecom services contracts to recognize revenue as services are
provided. Other than the cumulative effect of adopting this new method of
accounting, the effect of this change in accounting for the periods
presented was not significant. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations Accounting Change."
(2) Revenue from Satellite Services is generated through the Company's
satellite (voice and data) operations and, after January 1995, also
includes revenue from maritime communications operations. The Company
completed the sale of four of its teleports in March 1996, and has reported
results of operations from these assets through December 31, 1995.
(3) Weighted average number of shares outstanding for fiscal years 1993, 1994
and 1995 represents Holdings-Canada common shares outstanding. Weighted
average number of shares outstanding for fiscal 1996, the three months
ended December 31, 1996 and fiscal 1997 represents Holdings-Canada common
shares outstanding for the period October 1, 1995 through August 2, 1996,
and represents ICG Common Stock and Holdings-Canada Class A common shares
(not owned by ICG) outstanding for the periods subsequent to August 5,
1996.
(4) EBITDA consists of revenue less operating costs and selling, general and
administrative expenses. EBITDA is provided because it is a measure
commonly used in the telecommunications industry. EBITDA is presented to
enhance an understanding of the Company's operating results and is not
intended to represent cash flows or results of operations in accordance
with generally accepted accounting principles ("GAAP") for the periods
indicated. EBITDA is not a measurement under GAAP and is not necessarily
comparable with similarly titled measures of other companies. Net cash
flows from operating, investing and financing activities as determined
using GAAP are also presented in Other Data.
(5) Capital expenditures includes assets acquired under capital leases and
through the issuance of debt or warrants, and excludes payments for
construction of the Company's new headquarters which the Company sold in
January 1998 and leased back under a long-term operating lease.
32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion includes certain forward-looking statements which
are affected by important factors including, but not limited to, dependence on
increased traffic on the Company's facilities, the successful implementation of
the Company's strategy of offering an integrated telecommunications package of
local, long distance, data and value-added services, continued development of
the Company's network infrastructure and actions of competitors and regulatory
authorities that could cause actual results to differ materially from the
forward-looking statements. The results for the 12 months ended December 31,
1996 and the three months ended December 31, 1995 have been derived from the
Company's Consolidated Financial Statements included elsewhere herein and the
Company's unaudited Consolidated Financial Statements included in the Company's
Forms 10-Q filed with the SEC. 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 is one of the nation's leading competitive ICPs, based on
estimates of the industry's 1997 revenue. ICPs seek to provide an alternative to
ILECs, long distance carriers, ISPs and other communications service providers
for a full range of communications services in the increasingly deregulated
telecommunications industry. Through its CLEC operations, the Company operates
networks in four regional clusters covering major metropolitan statistical areas
in California, Colorado, Ohio and the Southeast. The Company also provides a
wide range of network systems integration services, maritime and international
satellite transmission services and subsequent to January 21, 1998, a variety of
Internet connectivity and other value-added Internet services. Network Services
consist of information technology services and selected networking products,
focusing on network design, installation, maintenance and support. Satellite
Services consist of satellite voice and data services to major cruise lines,
commercial shipping vessels, yachts, the U.S. Navy and offshore oil platforms.
The Company intends to dispose of its Satellite Services operations to better
focus its efforts on its core Telecom Services unit, although it has not entered
into a formal arrangement for such disposition. As a leading participant in the
rapidly growing competitive local telecommunications industry, the Company has
experienced significant growth, with total revenue increasing from approximately
$111.6 million for fiscal 1995 to approximately $273.4 million for fiscal 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, including revenue generated by its newly
acquired subsidiary, NETCOM. In March 1996, the Company completed the sale of
four of its teleports which were used in the Company's Satellite Services
operations.
33
The Telecommunications Act and 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 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 fiscal 1997, the Company sold
178,470 local access lines, of which 141,035 were in service as of December 31,
1997. In addition, the Company's operating networks have grown from 627 fiber
route miles at the end of fiscal 1995 to 3,043 fiber route miles as of December
31, 1997. The Company has 19 operating high capacity digital voice switches and
15 data communications switches, and plans to install additional switches as
demand warrants. As a complement to its local exchange services, the Company has
begun marketing bundled service offerings which include long distance, enhanced
telecommunications services and data services and plans to intensify the
offerings of such services in the near term.
The Company will continue to expand its network through construction,
leased facilities, strategic alliances and mergers and acquisitions. For
example, in January 1998, the Company completed its merger with NETCOM, a
provider of Internet connectivity and Web site hosting services and other
value-added services, located in San Jose, California. For calendar years 1995,
1996 and 1997, NETCOM reported revenue of $52.4 million, $120.5 million and
$160.7 million, respectively, and EBITDA losses of $(6.3) million, $(20.3)
million and $(1.7) million, respectively. The Company will account for the
business combination under the pooling of interests method of accounting and
accordingly, the Company's financial statements will be restated to reflect the
operations of NETCOM and the Company on a combined basis for all historical
periods. Also, in two transactions occurring October 1997 and March 1998, the
Company purchased 100% of the capital stock of CBG, an Ohio based local exchange
and centrex reseller which had, at December 31, 1997, 48,256 local access lines
in service, principally pursuant to various resale and other agreements with
Ameritech, the ILEC in the markets it serves. Further, for the calendar years
1995, 1996 and 1997, CBG's revenue was approximately $15.4 million, $21.4
million and $33.8 million, respectively, and EBITDA losses were approximately
$(1.3) million, $(1.0) million and $(3.2) million, respectively. The operations
of CBG have been included in the Company's operations for the period subsequent
to October 17, 1997, the acquisition closing date. In May 1997, the Company
entered into an agreement with a subsidiary of Southern permitting the Company
to construct a 100-mile fiber optic network in the Atlanta metropolitan area. In
addition, the Company expanded its geographic focus to include Texas (and may
also expand to Arkansas, Louisiana and Oklahoma) through its strategic alliance
with CSW that will develop and market telecommunications services, including
local service, in these markets. In June 1997, the Company entered into an IRU
agreement with Qwest for approximately 1,800 miles of fiber optic network and
additional broadband capacity in California, Colorado, Ohio and the Southeast.
This new capacity will be used for the transmission of local, long distance and
communications services in and between the Company's markets.
Telecom Services revenue has increased from $32.3 million for fiscal 1995
to $177.7 million for fiscal 1997. The Company has experienced declining prices
and increasing price competition for access services which, to date, have been
more than offset by increasing network usage. The Company expects to continue to
experience declining prices and increasing price competition for the foreseeable
future.
34
In conjunction with the increase in its service offerings, the Company has
and will continue to need to spend significant amounts on sales, marketing,
customer service, engineering and support personnel prior to the generation of
corresponding revenue. This has and will continue to 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 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 has experienced and may continue to experience
negative operating margins from its wholesale switched services while its
networks are in the development and construction phases and while the Company
relies on ILEC networks to carry a significant portion of its customers'
switched traffic. The Company expects overall operating margins from switched
services to improve as local dial tone, local toll, long distance and data
communications services become a relatively larger portion of its business mix
and the Company de-emphasizes its wholesale switched services. In addition, the
Company believes that the unbundling of ILEC services and the implementation of
local telephone number portability, which are mandated by the Telecommunications
Act, will reduce the Company's costs of providing switched services and
facilitate the marketing of local and other services. The Company has recently
raised prices on its wholesale switched services product in order to improve
margins and free up switch port capacity for its higher margin dial tone
product.
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 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 flows over the near term 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.
35
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
Fiscal Years Ended September 30, Ended December 31,
-------------------------------------- ------------------------------------------
1995 1996 1995 1996
------------------ ------------------- ------------------- ----------------------
$ % $ % $ % $ %
--------- -------- ---------- -------- ---------- --------- ----------- ---------
Statement of Operations Data: (Dollars in thousands)
Revenue:
Telecom services (1) 32,330 29 87,681 52 13,513 38 34,787 61
Network services 58,778 53 60,116 36 15,718 45 15,981 28
Satellite services 20,502 18 21,297 12 6,168 17 6,188 11
--------- -------- ---------- -------- ---------- --------- ----------- ---------
Total revenue 111,610 100 169,094 100 35,399 100 56,956 100
Operating costs:
Telecom services 21,825 78,705 11,882 34,463
Network services 45,928 46,256 11,998 12,287
Satellite services 11,093 10,292 3,230 3,179
--------- -------- ---------- -------- ---------- --------- ----------- ---------
Total operating costs 78,846 71 135,253 80 27,110 76 49,929 88
Selling, general and administrative 62,954 56 76,725 45 18,628 53 24,253 42
Depreciation and amortization 16,624 15 30,368 18 4,919 14 9,825 17
Net loss (gain) on disposal of
long-lived assets 241 * 5,128 3 1,030 3 (772) (1)
Provision for impairment of
long-lived assets 7,000 6 9,994 6 - - - -
--------- -------- ---------- -------- ---------- --------- ----------- ---------
Operating loss (54,055) (48) (88,374) (52) (16,288) (46) (26,279) (46)
Other Data:
EBITDA(2) (30,190) (27) (42,884) (25) (10,339) (29) (17,226) (30)
Net cash used by operating activities (42,798) (43,357) (4,598) (8,636)
Net cash used by investing activities (71,583) (135,204) (25,242) (82,342)
Net cash (used) provided by
financing activities 377,772 360,227 (8,413) (170)
Capital expenditures 88,736 177,307 26,882 70,297
*Less than 0.5%
35
Twelve Months Ended Fiscal Year Ended
December 31, December 31,
------------------- ------------------
1996 1997
------------------- ------------------
$ % $ %
--------- --------- ---------- --------
Statement of Operations Data: (Dollars in thousands)
Revenue:
Telecom services (1) 108,955 57 177,690 65
Network services 60,379 32 65,678 24
Satellite services 21,317 11 29,986 11
--------- -------- ---------- --------
Total revenue 190,651 100 273,354 100
Operating costs:
Telecom services 101,286 175,829
Network services 46,545 53,911
Satellite services 10,241 16,678
--------- -------- ---------- --------
Total operating costs 158,072 83 246,418 90
Selling, general and administrative 82,350 43 150,767 55
Depreciation and amortization 35,274 19 57,081 21
Net loss (gain) on disposal of
long-lived assets 3,326 2 671 *
Provision for impairment of
long-lived assets 9,994 5 11,950 5
--------- -------- ---------- --------
Operating loss (98,365) (52) (193,533) (71)
Other Data:
EBITDA(2) (49,771) (26) (123,831) (45)
Net cash used by operating
activities (47,395) (126,954)
Net cash used by investing
activities (192,304) (429,867)
Net cash (used) provided by
financing activities 368,470 315,721
Capital expenditures 220,722 269,593
*Less than 0.5%
36
(1) During fiscal 1996, the Company changed its method of accounting for
long-term telecom services contracts to recognize revenue as services are
provided. See "-Accounting Changes." Other than the cumulative effect of
adopting this new method of accounting, the effect of this change in
accounting for the periods presented was not significant.
(2) See note 4 under "Selected Financial Data" for the definition of EBITDA.
Fiscal 1997 Compared to 12 Months Ended December 31, 1996
Revenue. Revenue for fiscal 1997 increased $82.7 million or 43% from the 12
months ended December 31, 1996. Telecom Services revenue increased 63% to $177.7
million due to an increase in network usage for both switched and special access
services, offset in part by a decline in average unit pricing. Switched services
revenue increased from $48.1 million (44% of Telecom Services revenue) for the
12 months ended December 31, 1996 to $93.9 million (53% of Telecom Services
revenue) for fiscal 1997. Switched access (terminating long distance) revenue
represented approximately 77% of the Company's switched services revenue
component for fiscal 1997, compared to 100% for the 12 months ended December 31,
1996. Special access revenue increased from $39.4 million (36% of Telecom
Services revenue) for the 12 months ended December 31, 1996 to $55.4 million
(31% of Telecom Services revenue) for fiscal 1997. Also included in Telecom
Services revenue for fiscal 1997 is $28.3 million generated by Zycom, compared
to $21.5 million for the same 12-month period in 1996. The increase in Zycom
revenue for fiscal 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 through April 1996 due to the uncertainty of renewal
of short-term customer contracts. At December 31, 1997, the Company had 141,035
access lines in service compared to zero at December 31, 1996. Special access
network usage reflected in voice grade equivalents ("VGEs") increased 49% from
748,528 VGEs at December 31, 1996, to 1,111,697 VGEs at December 31, 1997. At
December 31, 1997, the Company had 2,321 buildings connected to its networks
compared to 2,069 buildings connected at December 31, 1996. Additionally,
switched minutes of use increased 43% from approximately 2.0 billion minutes
during the 12 months ended December 31, 1996 to approximately 2.9 billion
minutes during fiscal 1997. Revenue from long distance and data services did not
generate a material portion of total revenue during either period. Network
Services revenue increased 9% to $65.7 million for fiscal 1997 as compared to
$60.4 million for the 12 months ended December 31, 1996. The increase in Network
Services revenue is due to a single equipment sale during fiscal 1997 for $3.2
million as well as general increases in volume. Satellite Services revenue
increased $8.7 million, or 41%, to $30.0 million for fiscal 1997, compared to
the 12 months ended December 31, 1996. This increase is primarily due to the
operations of MCN, which comprised $6.3 million of total Satellite Services
revenue for fiscal 1997 compared to $1.8 million during the same 12-month 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.
37
Operating costs. Total operating costs for fiscal 1997 increased $88.3
million, or 56%, from the 12 months ended December 31, 1996. Telecom Services
operating costs increased from $101.3 million, or 93% of Telecom Services
revenue, for the 12 months ended December 31, 1996 to $175.8 million, or 99% of
Telecom Services revenue, for fiscal 1997. Telecom Services operating costs
consist of payments to ILECs for the use of network facilities to support
special and switched access services, network operating costs, right of way fees
and other costs. The increase in operating costs in absolute dollars is
attributable to the increase in switched access services and the addition of
engineering and operations personnel dedicated to the development of local
exchange services. The increase in operating costs as a percentage of total
revenue is due primarily to the increase in switched access services revenue,
and the investment in the development of local exchange services without the
benefit of substantial corresponding revenue in the same period. The Company
expects that the Telecom Services ratio of operating costs to revenue will
further 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 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 16% to $53.9 million and increased as
a percentage of Network Services revenue from 77% for the 12 months ended
December 31, 1996 to 82% for fiscal 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 fiscal 1997 which were treated as selling,
general and administrative expenses during the comparable 12-month 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 $16.7 million for fiscal 1997, from $10.2 million
for the 12 months ended December 31, 1996. Satellite Services operating costs as
a percentage of Satellite Services revenue also increased from 48% for the 12
months ended December 31, 1996 to 56% for fiscal 1997. This increase is due to
an increase in MCN's sales as well 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 fiscal 1997 increased $68.4 million, or
83%, compared to the 12 months ended December 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 and long distance
telephone and data communications services. SG&A expenses as a percentage of
total revenue increased from 43% for the 12 months ended December 31, 1996 to
55% for fiscal 1997. There is typically a period of higher administrative and
marketing expense prior to the generation of appreciable revenue from newly
developed networks or services. The Company expects SG&A expenses for Telecom
Services to increase slightly over the near term as a result of hiring new staff
to facilitate the marketing and development of local dial tone, local toll, long
distance and data transmission services.
Depreciation and amortization. Depreciation and amortization increased
$21.8 million, or 62%, for fiscal 1997, compared to the 12 months ended December
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.
38
Net loss (gain) on disposal of long-lived assets. Net loss (gain) on
disposal of long-lived assets decreased from a net loss of $3.3 million for the
12 months ended December 31, 1996 to a net gain of $0.7 million for fiscal 1997.
Net loss on disposal of long-lived assets for the 12 months ended December 31,
1996 includes the loss recorded on the sale of four of the Company's teleports
used in its Satellite Services operations ($1.1 million), the loss recorded on
the disposal of other operating assets ($2.7 million) and a write-off of an
investment ($0.3 million), offset by a gain on the sale on sale of the Company's
50% interest in the Phoenix network joint venture ($0.8 million). For fiscal
1997, net loss on disposal of long-lived assets primarily relates to losses
recorded on the disposal of the Company's investment in its Melbourne network.
Provision for impairment of long-lived assets. For fiscal 1997, provision
for impairment of long-lived assets includes the write-down of the Company's
investment in StarCom International Optics Corporation, Inc. ($5.2 million), MCN
($2.9 million), Zycom ($2.7 million) and Nova-Net ($0.9 million) as well as a
write-down of other operating assets ($0.3 million). Provision for impairment of
long-lived assets for the 12 months ended December 31, 1996 includes valuation
allowances for the amounts receivable for advances made to the Phoenix network
joint venture included in long-term note receivable ($5.8 million), the
investments in the Melbourne network ($2.7 million) and the Satellite Services
Mexico subsidiary ($0.1 million) and the note receivable from NovoComm, Inc.
($1.3 million). Provision for impairment of long-lived assets was recorded based
on management's estimate of the net realizable value of the Company's assets at
December 31, 1996 and 1997.
Interest expense. Interest expense increased $22.6 million, from $95.0
million for the 12 months ended December 31, 1996, to $117.5 million for fiscal
1997, which includes $105.5 million of non-cash interest. This increase was
primarily attributable to an increase in long-term debt, primarily the 11 5/8%
Notes issued in March 1997. In addition, the Company's interest expense
increased, and will continue to increase, because the principal amount of its
indebtedness increases until the Company's senior indebtedness begins to pay
interest in cash.
Interest income. Interest income increased $0.4 million, from $21.5 million
for the 12 months ended December 31, 1996 to $21.9 million for fiscal 1997. The
increase is attributable to the increase in cash and invested cash balances from
the proceeds from the issuances of the 11 5/8% Notes and 14% Preferred Stock in
March 1997 and the 6 3/4% Preferred Securities in September and October 1997.
Other, net. Other, net decreased from $3.9 million net expense for the 12
months ended December 31, 1996 to $0.7 million net expense for fiscal 1997.
Other expense recorded for the 12 months ended December 31, 1996 consists
primarily of the write-off of deferred financing costs associated with the
conversion or repayment of debt and litigation settlement costs. For fiscal
1997, other, net consists primarily of litigation settlement costs and the loss
on disposal of non operating assets.
39
Minority interest in share of losses, net of accretion and preferred
dividends on preferred securities of subsidiaries. Minority interest in share of
losses, net of accretion and preferred dividends on preferred securities of
subsidiaries increased $10.7 million, from $27.1 million for the 12 months ended
December 31, 1996 to $37.8 million for fiscal 1997. The increase is due
primarily to the issuances of the 14% Preferred Stock in March 1997 and the 6
3/4% Preferred Securities in September and October 1997. Offsetting this
increase is $12.3 million recorded during the 12 months ended December 31, 1996
for the excess of the redemption price over the carrying amount of the 12%
redeemable preferred stock of Holdings ("12% Redeemable Preferred Stock")
redeemed in April 1996. Minority interest in share of losses, net of accretion
and preferred dividends on preferred securities of subsidiaries recorded during
fiscal 1997 consists of the accretion of issue costs ($0.9 million) and the
accrual of the preferred security dividends ($38.9 million) associated with the
6 3/4% Preferred Securities, the 14% Preferred Stock and the 14 1/4%
Exchangeable Preferred Stock Mandatorily Redeemable 2007 (the "14 1/4% Preferred
Stock"), offset by minority interest in losses of subsidiaries of $2.0 million.
Share of losses of 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 fiscal 1997, as
compared to the $1.6 million loss recorded during the comparable 12-month period
in 1996.
Net loss. Net loss increased $128.4 million, or 64%, due to the increases
in operating costs, SG&A expense, depreciation and amortization, interest
expense and minority interest in share of losses, net of accretion and preferred
dividends on preferred securities of subsidiaries noted above.
Three Months Ended December 31, 1996 Compared to Three Months Ended
December 31, 1995
Revenue. Revenue for the three months ended December 31, 1996 increased
$21.6 million, or 61%, from the three months ended December 31, 1995. The
increase in total revenue reflects continued growth in Telecom Services, Network
Services and Satellite Services, offset slightly by the loss in revenue
resulting from the sale of four of the Company's teleports during the second
quarter of fiscal 1996. Telecom Services revenue increased 157% to $34.8 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 $5.1 million (38% of Telecom Services revenue) for the
three months ended December 31, 1995, to $16.4 million (47% of Telecom Services
revenue) for the three months ended December 31, 1996. Switched access revenue
represented substantially all of the Company's switched services revenue
component for the three months ended December 31, 1996. Special access revenue
increased from $7.5 million (56% of Telecom Services revenue) for the three
months ended December 31, 1995 to $10.9 million (31% of Telecom Services
revenue) for the three months ended December 31, 1996. Also, included in Telecom
Services revenue for the three months ended December 31, 1996 is $7.5 million
generated by Zycom, compared to $0.9 million for the three months ended December
31, 1995. Approximately $6.5 million of the increase in Zycom revenue for the
three months ended December 31, 1996 as compared to the same period in 1995
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.
Network usage as reflected in VGEs increased 53% from 488,403 VGEs on December
31, 1995 to 748,528 at December 31, 1996. On December 31, 1996, the Company had
2,069 buildings connected to its networks compared to 1,539 buildings connected
on December 31, 1995. Consistent with expectations, Network Services revenue
growth was moderate, increasing from $15.7 million to $16.0 million for the
three months ended December 31, 1995 and 1996, respectively, while the Company
repositioned its systems and operations to improve operating results. Satellite
Services revenue remained relatively stable between the three-month periods
ended December 31, 1995 and 1996 as a result of the offsetting effects of
increased maritime minutes of use from cruise ships and no revenue in the three
months ended December 31, 1996 from the four teleports sold in March 1996. On a
pro forma basis to reflect the sale of the teleports, the Company's Satellite
Services revenue for the three months ended December 31, 1995 and 1996 was $3.7
million and $6.2 million, respectively.
40
Operating costs. Total operating costs for the three months ended December
31, 1996 increased $22.8 million, or 84%, from the same period in 1995. Telecom
Services operating costs increased from $11.9 million, or 88%, of Telecom
Services revenue for the three months ended December 31, 1995, to $34.5 million,
or 99%, of Telecom Services revenue for the three months ended December 31,
1996. 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 revenue is due primarily to
the increase in switched access services revenue. Network Services operating
costs increased 2% to $12.3 million for the three months ended December 31, 1996
and increased as a percentage of Network Services revenue from 76% to 77% for
the three month periods ended December 31, 1995 and 1996, respectively.
Satellite Services operating costs decreased 2% to $3.2 million for the three
months ended December 31, 1996. Satellite Services operating costs as a
percentage of revenue declined to 51% of Satellite Services revenue during the
three months ended December 31, 1996, from 52% during the three months ended
December 31, 1995. The decrease in percentage of revenue as well as absolute
dollars is attributable to the decline in revenue resulting from the sale of
four of the Company's teleports in March 1996, offset by an increase in higher
margin maritime services revenue at MTN. Revenue from teleport operations
historically have yielded lower gross margins than maritime services revenue.
Selling, general and administrative expense. SG&A expenses for the three
months ended December 31, 1996 increased $5.6 million, or 30%, compared to the
three months ended December 31, 1995. 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 was 43% for the three months ended December 31,
1996, compared to 53% for the same period in 1995. SG&A expenses for Network
Services decreased both in absolute dollars and as a percentage of Network
Services revenue due to approximately $0.7 million in non-recurring charges,
primarily legal accruals, recorded during the three months ended December 31,
1995. Satellite Services SG&A expenses decreased in absolute dollars and as a
percentage of Satellite Services revenue due to cost control efforts by the
Company's management. Other corporate expenses increased from $4.0 million, or
11% of total revenue, for the three months ended December 31, 1995 to $5.7
million, or 10% of total revenue, for the three months ended December 31, 1996.
This increase is primarily attributable to the addition of employees,
principally human resources and regulatory personnel, for the purpose of
managing the Company's growth and its expansion into new markets as allowed
under the Telecommunications Act.
41
Depreciation and amortization expense. Depreciation and amortization
expense increased $4.9 million, or 100%, for the three months ended December 31,
1996, as compared to the same period in 1995. Depreciation of fixed assets
increased by approximately $2.3 million as a result of the shortening of
estimated depreciable lives during fiscal 1996, as discussed in "-Accounting
Changes," and an increase in depreciable fixed assets due to the continued
expansion of the Company's networks. The increase in depreciation expense was
offset slightly due to the sale of four of the Company's teleports in March
1996.
Net loss (gain) on disposal of long-lived assets. Net loss (gain) on
disposal of long-lived assets decreased from a net loss of $1.0 million for the
three months ended December 31, 1995 to a net gain of $0.8 million for the three
months ended December 31, 1996. Net loss on disposal of long-lived assets for
the three months ended December 31, 1995 includes the write-off of certain
operating assets. For the three months ended December 31, 1996, net gain on
disposal of long-lived assets consists of the gain on sale of the Company's 50%
interest in the Phoenix network joint venture.
Interest expense. Interest expense increased by $9.3 million, from $15.2
million for the three months ended December 31, 1995 to $24.5 million for the
three months ended December 31, 1996, which included $22.7 million of non-cash
interest. This increase was attributable to an increase in long-term debt,
primarily the 12 1/2% Senior Discount Notes (the "12 1/2% Notes") issued in
April 1996 and an increase in capitalized lease obligations to finance Telecom
Services equipment used in the expansion of the Company's networks.
Interest income. Interest income increased $2.2 million from the three
months ended December 31, 1995 to $6.0 million for the three months ended
December 31, 1996. The increase is attributable to the interest earned on the
proceeds from the issuance of the 12 1/2% Notes and the 14 1/4% Preferred Stock
in April 1996.
Share of losses of joint venture and investment. As a result of the sale of
the Company's 50% interest in the Phoenix network joint venture, no share of
losses in joint venture was recorded during the three months ended December 31,
1996, as compared to the $0.2 million recorded during the same period in 1995.
Other, net. Other, net for the three months ended December 31, 1996 was
$0.1 million net expense as compared to a minor net gain for the three months
ended December 31, 1995. Other expense recorded during the three-month period
ended December 31, 1996 consists of miscellaneous other expenses.
42
Minority interest in share of losses, net of accretion and preferred
dividends on preferred securities of subsidiaries. Minority interest in share of
losses, net of accretion and preferred dividends on preferred securities of
subsidiaries increased $1.8 million, from $3.2 million for the three months
ended December 31, 1995 to $5.0 million for the three months ended December 31,
1996. The increase is due primarily to the issuance of the 14 1/4% Preferred
Stock in April 1996. Minority interest in share of losses, net of accretion and
preferred dividends on preferred securities of subsidiaries recorded during the
current three-month period ended December 31, 1996 consists of the accretion of
issue costs ($0.1 million) and the accrual of the preferred stock dividend ($5.7
million) associated with the 14 1/4% Preferred Stock, offset by minority
interest in losses of subsidiaries of $0.8 million.
Cumulative effect of change in accounting for revenue from long-term
telecom services contracts. The cumulative effect of change in accounting for
revenue from long-term telecom services contracts recorded during the three
months ended December 31, 1995 is due to the change in accounting principle as
described in "-Accounting Changes." As the change in accounting was applied
retroactively as of October 1, 1995, no similar amounts were recorded during the
three months ended December 31, 1996.
Net loss. Net loss increased $15.2 million, or 44%, due to the increase in
operating costs, SG&A expenses, depreciation and amortization and interest
expense noted above.
Fiscal 1996 Compared to Fiscal 1995
The following information reflects the results of operations for fiscal
1996 compared to the pro forma results of operations for fiscal 1995, assuming
the change in accounting for long-term telecom services contracts described in
"-Accounting Change" had been applied retroactively.
Revenue. Revenue for fiscal 1996 increased $58.2 million, or 52%, from
fiscal 1995. The increase in total revenue reflects continued growth in Telecom
Services, Network Services and Satellite Services, offset slightly by the loss
in revenue resulting from the sale of four of the Company's teleports. Telecom
Services revenue increased 177% to $87.7 million due to an increase in network
usage for both switched and special access services, offset in part by a decline
in average unit prices. Switched services revenue, consisting solely of switched
access services, increased from $5.8 million (18% of Telecom Services revenue)
for fiscal 1995, to $36.7 million (42% of Telecom Services revenue) for fiscal
1996. Special access revenue increased from $25.1 million (78% of Telecom
Services revenue) for fiscal 1995 to $36.1 million (41% of Telecom Services
revenue) for fiscal 1996. Also included in Telecom Services revenue for fiscal
1996 is $14.9 million generated by Zycom, compared to $1.4 million in fiscal
1995. Approximately $10.6 million of the increase in Zycom revenue 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. Network
usage as reflected in VGEs increased 47% from 430,535 VGEs on September 30,
1995, to 630,697 VGEs on September 30, 1996. On September 30, 1996, the Company
had 2,067 buildings connected to its networks compared to 1,375 buildings
connected on September 30, 1995. Consistent with expectations, Network Services
revenue growth was moderate, increasing from $58.8 million to $60.1 million,
while the Company repositioned its systems and operations to improve operating
results. Satellite Services revenue increased 4% to $21.3 million for fiscal
1996 primarily due to increased maritime minutes of use from cruise ships offset
in part by the decrease resulting from the sale of four of the Company's
teleports. Satellite Services revenue for fiscal 1995 and 1996, on a pro forma
basis to reflect the sale of teleports, was $11.4 million and $18.9 million,
respectively. Satellite Services revenue decreased $0.4 million from the third
quarter of fiscal 1996 to the fourth quarter of fiscal 1996. The decrease in
revenue was primarily due to three Navy vessels being in "dry dock."
43
Operating costs. Total operating costs for fiscal 1996 increased $56.4
million, or 72%, from fiscal 1995. Telecom Services operating costs increased
from $21.8 million, or 69% of Telecom Services revenue for fiscal 1995, to $78.7
million, or 90% of Telecom Services revenue for fiscal 1996. The increase in
operating costs in absolute dollars is attributable to the increase in switched
access services and the expansion in off-net special access service offerings.
The increase in operating costs as a percentage of total revenue is due
primarily to the increase in switched access services revenue. Network Services
operating costs increased 1% to $46.3 million and decreased as a percentage of
Network Services revenue from 78% for fiscal 1995 to 77% for fiscal 1996.
Satellite Services operating costs decreased to $10.3 million for fiscal 1996,
from $11.1 million for fiscal 1995. Satellite Services operating costs as a
percentage of revenue also declined to 48% for fiscal 1996, compared to 54% for
fiscal 1995. The decrease both in absolute dollars and as a percentage of
revenue is attributable to the decline in revenue resulting from the sale of
four of the Company's teleports, partially offset by an increase in higher
margin maritime services revenue at MTN.
Selling, general and administrative expense. SG&A expenses for fiscal 1996
increased $13.8 million, or 22%, compared to fiscal 1995. 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, marketing and sales staff dedicated to the expansion of the
Company's networks and implementation of the Company's switched services
strategy and development of the Company's CLEC operations. A portion of the
increase was also attributable to approximately $1.8 million of legal,
accounting, and SEC filing fees incurred in the incorporation of a new U.S.
publicly traded holding company, ICG Communications, Inc., and approximately
$1.3 million of consulting fees related to various process improvement
initiatives. SG&A expenses as a percentage of total revenue was 45% for fiscal
1996, compared to 57% for fiscal 1995. SG&A expenses for Network Services
increased due to increased engineering, marketing and sales staff to support
growth in network system installations. Satellite Services SG&A expenses
increased primarily due to the growth of MTN and MCN.
Depreciation and amortization. Depreciation and amortization increased
$13.7 million, or 83%, for fiscal 1996 compared to fiscal 1995. Depreciation of
fixed assets increased by approximately $7.0 million as a result of the
shortening of estimated depreciable lives discussed in "-Accounting Changes,"
and an increase in depreciable fixed assets due to the continued expansion of
the Company's networks. The increase in depreciation expense was offset slightly
due to the sale of four of the Company's teleports.
Net loss (gain) on disposal of long-lived assets. Net loss (gain) on
disposal of long-lived assets increased to $5.1 million during fiscal 1996 from
$0.2 million during fiscal 1995. Net loss on disposal of long-lived assets for
fiscal 1996 includes the loss recorded on the sale of four of the Company's
teleports used in its Satellite Services operations ($1.1 million), the loss
recorded on the disposal of other operating assets ($3.7 million) and a
write-off of an investment ($0.3 million).
44
Provision for impairment of long-lived assets. Provision for impairment of
long-lived assets increased $3.0 million from fiscal 1995 to $10.0 million for
fiscal 1996. The amount recorded during fiscal 1996 includes valuation
allowances for the amounts receivable for advances made to the Phoenix network
joint venture included in long-term notes receivable ($5.8 million), the
investment in the Melbourne network ($2.7 million), the note receivable from
NovoComm, Inc. ($1.3 million) and the Satellite Services Mexico subsidiary ($0.2
million). The fiscal 1995 amount includes an allowance for an investment ($2.0
million) and a write-down in the goodwill associated with the acquisition of
Nova-Net ($5.0 million). Provision for impairment of long-lived assets was
recorded based on management's estimate of the net realizable value of the
Company's assets at September 30, 1995 and 1996.
Interest expense. Interest expense increased by $61.3 million, from $24.4
million for fiscal 1995 to $85.7 million for fiscal 1996, which included $66.5
million of non-cash interest. This increase was attributable to an increase in
long-term debt, primarily the 13 1/2% Senior Discount Notes due 2005 (the "13
1/2% Notes") issued in August 1995 and the 12 1/2% Notes issued in April 1996,
and an increase in capitalized lease obligations to finance the purchase of
Telecom Services and Satellite Services equipment. Also included in interest
expense is a charge of approximately $11.5 million for the payments made to
holders of the 13 1/2% Notes with respect to consents to amendments to the
indenture governing the 13 1/2% Notes in order to permit the offering of the 13
1/2% Notes in April 1996.
Interest income. Interest income increased $15.1 million from fiscal 1995.
The increase is attributable to the increase in cash from the proceeds of the
issuance of the 13 1/2% Notes in August 1995 and the 12 1/2% Notes and 14 1/4%
Preferred Stock in April 1996.
Share of losses of joint venture and investment. Share of losses in the
Phoenix network joint venture, in which the Company held a 50% equity interest,
increased $1.1 million, or 145%, from fiscal 1995 to $1.8 million for fiscal
1996 due to increased losses resulting from the continued expansion and
implementation of switched access services.
Other, net. Other, net increased from $0.5 million net expense for fiscal
1995 to $3.9 million net expense for fiscal 1996. Other expense recorded in
fiscal 1996 consists primarily of settlement costs of certain litigation ($1.2
million) and the write-off of deferred financing costs upon conversion or
settlement of debt ($2.7 million).
Minority interest in share of losses, net of accretion and preferred
dividends on preferred securities of subsidiaries. Minority interest in share of
losses, net of accretion and preferred dividends on preferred securities of
subsidiaries increased $24.2 million, from $1.1 million for fiscal 1995 to
approximately $25.3 million for fiscal 1996. The increase is due to the
accretion of the unit warrants issued in connection with the 13% Notes ($14.4
million) and issue costs ($1.1 million) associated with the issuance of the 12%
Redeemable Preferred Stock, of Holdings (the "12% Preferred Stock") accretion of
issue costs associated with the 14 1/4% Preferred Stock ($0.3 million), accrual
of the preferred stock dividend on the 12% Preferred Stock ($2.1 million) and
the 14 1/4% Preferred Stock ($9.1 million) and the excess redemption price over
the stated value of the convertible Series B Preferred Stock of Holdings-Canada
($1.0 million), partially offset by the minority interest in losses of
subsidiaries.
45
Income tax benefit. Income tax benefit for fiscal 1996 was $5.1 million.
The income tax benefit is due to an adjustment to the deferred tax liability as
a result of the change in estimated depreciable lives.
Cumulative effect of change in accounting for revenue from long-term
telecom services contracts. The increase in cumulative effect of change in
accounting for revenue from long-term telecom services contracts is due to the
change in accounting as described in "-Accounting Changes."
Net loss. Net loss increased $107.5 million, or 140%, due to the increases
in operating costs, SG&A expenses, depreciation and amortization, interest
expense and minority interest in share of losses, net of accretion and preferred
dividends on preferred securities of subsidiaries noted above.
Quarterly Results
The following table presents selected unaudited operating results for
three-month quarterly periods, beginning with the three months ended December
31, 1995 and through the three months ended December 31, 1997. The Company
believes that all necessary adjustments have been included in the amounts stated
below to present fairly the quarterly results when read in conjunction with the
Company's Consolidated Financial Statements and related notes included elsewhere
in this Annual Report. Results of operations for any particular quarter are not
necessarily indicative of results of operations for a full year or predictive of
future periods. ICG's development and expansion activities, including
acquisitions, during the periods shown below materially affect the comparability
of this data from one period to another.
46
Three
Months
Three Months Ended Ended Three Months Ended
-------------------------------------------------- -----------------------------------------------
Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept.30, Dec. 31,
1995 1996 1996 1996 1996 1997 1997 1997 1997
------------ ------------ ------------ ----------- ------------ ----------- ---------- ----------- -------------
Statement of (Dollars in thousands)
Operations Data:
Revenue:
Telecom services $ 13,513 17,635 24,371 32,162 34,787 38,280 41,243 43,664 54,503
Network services 15,718 13,973 14,679 15,746 15,981 17,987 15,640 16,432 15,619
Satellites
services 6,168 4,336 5,596 5,197 6,188 6,783 7,883 7,640 7,680
------------ ------------ ------------ ----------- ------------------------ ---------- ----------- -------------
Total revenue 35,399 35,944 44,646 53,105 56,956 63,050 64,766 67,736 77,802
Operating loss (15,258) (15,823) (20,262) (37,031) (26,279) (40,915) (46,592) (46,543) (59,483)
Net loss before
cumulative effect
of change in
accounting (31,189) (26,939) (64,721) (57,805) (49,823) (66,781) (77,570) (80,047) (103,245)
Cumulative effect
of change in
accounting (1) (3,453) - - - - - - - -
------------ ------------ ------------ ----------- ------------------------ ---------- ----------- -------------
Net loss $ (34,642) (26,939) (64,721) (57,805) (49,823) (66,781) (77,570) (80,047) (103,245)
============ ============ ============ =========== ============================================== =============
Other Data:
EBITDA (2) (10,339) (8,381) (11,207) (12,957) (17,226) (29,901) (33,791) (31,699) (28,440)
Net cash used by
operating
activities (4,598) (16,400) (15,059) (7,300) (8,636) (14,770) (23,235) (33,219) (55,730)
Net cash used by
investing
activities (25,242) (51,322) (10,729) (47,911) (82,342) (60,219) (50,733) (193,587) (125,328)
Net cash (used)
provided by
financing
activities (8,413) (23,956) 400,467 (7,871) (170) 174,343 (3,100) 111,943 32,535
Capital
expenditures (3) 26,882 76,433 29,882 44,110 70,297 58,578 64,412 64,489 82,114
Statistical Data(4):
Full time employees 998 1,061 1,173 1,323 1,424 1,606 1,854 2,083 2,219
Telecom services:
Access lines in
service (5) - - - - - 5,371 20,108 50,551 141,035
Buildings connected:
On-net 304 327 384 478 522 545 560 590 596
Hybrid (6) 1,235 1,401 1,493 1,589 1,547 1,550 1,704 1,726 1,725
------------ ------------ ------------ ----------- ---------------------------------------------- -------------
Total buildings
connected 1,539 1,728 1,877 2,067 2,069 2,095 2,264 2,316 2,321
Customer circuits
in service
(VGEs) (7) 488,403 510,755 551,881 630,697 748,528 816,238 917,656 1,006,916 1,111,697
Operational
switches:
Voice 13 13 13 14 14 16 17 18 19
Data - - - - - 10 15 15 15
------------ ------------ ------------ ----------- ---------------------------------------------- -------------
Total
operational
switches 13 13 13 14 14 26 32 33 34
Switched minutes
of use (in
millions) 235 362 475 563 607 682 742 788 660
Fiber route
miles (8)
Operational 637 780 886 2,143 2,385 2,483 2,898 3,021 3,043
Under
construction - - - - - - - - 1,064
Fiber strand
miles (9)
Operational 28,779 36,310 45,098 70,067 75,490 83,334 101,788 109,510 111,435
Under
construction - - - - - - - - 16,366
Wireless
miles (10) 545 582 483 491 506 511 511 511 511
Satellite services:
VSATs 633 658 659 835 860 875 895 934 957
C-Band
installations(11) 33 36 48 48 54 57 57 54 57
L-Band
installations(12) - 3 53 109 204 355 671 768 1,239
- -----------
(1) During fiscal 1996, the Company changed its method of accounting for
long-term telecom services contracts to recognize revenue as services are
provided. See "-Accounting Change." Other than the cumulative effect of
adopting this new method of accounting, the effect of this change in
accounting for the periods presented was not significant.
(2) EBITDA consists of revenue less operating costs and selling, general and
administrative expenses. EBITDA is provided because it is a measure
commonly used in the telecommunications industry. EBITDA is presented to
enhance an understanding of the Company's operating results and is not
intended to represent cash flows or results of operations in accordance
with GAAP for the periods indicated. EBITDA is not a measurement under GAAP
and is not necessarily comparable with similarly titled measures of other
companies. Net cash flows from operating, investing and financing
activities as determined using GAAP are also presented in Other Data.
47
(3) Capital expenditures includes assets acquired under capital leases and
excludes payments for construction of the Company's new headquarters which
the Company sold in January 1998 and leased back under a long-term
operating lease.
(4) Amounts presented are for three-month periods ended, or as of the end of,
the period presented.
(5) Access lines in service at December 31, 1997 includes 66,346 lines which
are provisioned through the Company's switch and 74,689 lines which are
provisioned through resale and other agreements with various local exchange
carriers. Resale lines typically generate lower margins and are used
primarily to obtain customers. Although the Company plans to migrate lines
from resale to higher margin on-switch lines, there are no assurances that
it will be successful in executing this strategy.
(6) Hybrid buildings connected represent buildings connected to the Company's
network via another carrier's facilities. Hybrid buildings declined from
September 30, 1996 to December 31, 1996 due to the sale of the Company's
50% interest in the Phoenix joint venture.
(7) Customer circuits in service are measured in voice grade equivalents
("VGEs").
(8) Fiber route miles refers to the number of miles of fiber optic cable,
including leased fiber. As of December 31, 1997, the Company had 3,043
fiber route miles, of which 171 fiber route miles were leased under
operating leases. Fiber route miles under construction represents fiber
under construction which is expected to be operational within six months.
(9) 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 December 31, 1997, the Company had
111,435 fiber strand miles, of which 3,278 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.
(10) Wireless miles represents the total distance of the digital microwave paths
between Company transmitters which are used in the Company's networks.
(11) C-Band installations service cruise ships, U.S. Navy vessels and offshore
oil platform installations.
(12) L-Band installations service smaller maritime installations, and both
mobile and fixed land-based units.
The Company's consolidated revenue has increased every quarter since the
first fiscal quarter of 1992, primarily due to the installation and acquisition
of new networks, the expansion of existing networks and increased services
provided over existing networks. From the third quarter of fiscal 1993 until the
sale of four teleports in the second quarter of fiscal 1996, Satellite Services
also contributed to the quarterly revenue growth.
48
EBITDA, operating and net losses have generally increased immediately
preceding and during periods of relatively rapid network acquisition and
expansion activity. The increased quarterly losses from the first quarter of
fiscal 1995 through the quarter ended December 31, 1997 resulted from a
combination of increases in negative margin switched access services revenue and
increases in personnel and other SG&A expenses to support the acquisition and
expansion of Telecom Services networks, the implementation of the Company's
switched access services strategy and development of local exchange services.
Since the quarter ended June 30, 1996, EBITDA losses have improved for each
consecutive quarter. As the Company provides a greater volume of higher margin
services, principally local exchange services, carries more traffic on its own
facilities rather than ILEC facilities and obtains the right to use unbundled
ILEC facilities, while experiencing decelerating increases in personnel and
other SG&A expenses supporting its Telecom Services networks, any or all of
which may not occur, the Company anticipates that EBITDA losses will continue to
improve in the near term.
Individual operating units may experience variability in quarter to quarter
revenue due to (i) the type and mix of services available to customers, (ii) the
timing and size of contract orders, (iii) the timing of price changes and
associated impact on volume, and (iv) customer usage patterns.
Net Operating Loss Carryforwards
As of December 31, 1997, the Company had net operating loss carryforwards
("NOLs") of approximately $353.0 million, which expire at various times in
varying amounts through 2012. However, due to the provisions of Section 382,
Section 1502 and certain other provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), the utilization of a portion of the NOLs will be
limited. In addition, the Company is also subject to certain state income tax
laws which may also limit the utilization of NOLs for state income tax purposes.
Section 382 of the Code provides annual restrictions on the use of NOLs, as
well as other tax attributes, following significant changes in ownership of a
corporation's stock, as defined in the Code. Investors are cautioned that future
events beyond the control of the Company could reduce or eliminate the Company's
ability to utilize the tax benefits of its NOLs. Future ownership changes under
Section 382 will require a new Section 382 computation which could further
restrict the use of the NOLs. In addition, the Section 382 limitation could be
reduced to zero if the Company fails to satisfy the continuity of business
enterprise requirement for the two-year period following an ownership change.
Liquidity and Capital Resources
The Company's growth has been funded through a combination of equity, debt
and lease financing. As of December 31, 1997, the Company had current assets of
$310.2 million, including $217.0 million of cash, cash equivalents and
short-term investments available for sale, which exceeded current liabilities of
$99.3 million, providing working capital of $210.9 million. The Company invests
excess funds in short-term, interest-bearing investment-grade securities until
such funds are used to fund the capital investments and operating needs of the
Company's business. The Company's short term investment objectives are safety,
liquidity and yield, in that order.
49
Cash Used By Operating Activities
The Company's operating activities used $42.8 million and $43.4 million in
fiscal 1995 and 1996, respectively, $4.6 million and $8.6 million for the three
months ended December 31, 1995 and 1996, respectively, and $127.0 million for
fiscal 1997. Cash used by operations is primarily due to net losses, which are
partially offset by non-cash expenses, such as depreciation and amortization
expense, deferred interest expense, preferred dividends on subsidiary preferred
securities and changes in working capital items.
The Company expects to continue to generate negative cash flows from
operating activities while it emphasizes the 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, future expansion of existing networks or the construction and
acquisition of new networks in the near term. As the Company provides a greater
volume of higher margin services, principally local exchange services, carries
more traffic on its own facilities rather than ILEC facilities and obtains the
right to use unbundled ILEC facilities, while experiencing decelerating
increases in personnel and other SG&A expenses supporting its Telecom Services
networks, any or all of which may not occur, the Company anticipates that cash
used by operating activities will continue to improve in the near term.
Cash Used By Investing Activities
Cash used by investing activities was $71.6 million and $135.2 million (net
of $21.6 million received in connection with the sale of certain satellite
equipment, including four teleports) in fiscal 1995 and 1996, respectively,
$25.2 million (net of $21.1 million received in connection with the
aforementioned equipment sale) and $82.3 million for the three months ended
December 31, 1995 and 1996, respectively, and $429.9 million for fiscal 1997.
Cash used by investing activities includes cash expended for the acquisition of
property, equipment and other assets of $50.1 million and $122.3 million for
fiscal 1995 and 1996, respectively, and $26.8 million and $50.8 million for the
three months ended December 31, 1995 and 1996, respectively, and $269.6 million
for fiscal 1997. Additionally, cash used by investing activities includes
payments for construction of the Company's new headquarters of $1.5 million,
$7.9 million and $29.4 million for fiscal 1996, the three months ended December
31, 1996 and fiscal 1997, respectively. The Company will continue to use cash in
investing activities in 1998 and subsequent periods for the construction of new
networks, the expansion of existing networks and potentially for acquisitions.
The Company acquired assets under capital leases and through the issuance of
debt or warrants of $38.7 million and $55.0 million in fiscal 1995 and 1996,
respectively, $0.1 million and $19.5 million for the three months ended December
31, 1995 and 1996, respectively, and zero for fiscal 1997.
50
Cash Provided (Used) By Financing Activities
Financing activities provided $377.8 million and $360.2 million in fiscal
1995 and 1996, respectively, used $8.4 million and $0.2 million in the three
months ended December 31, 1995 and 1996, respectively, and provided $315.7
million in fiscal 1997. Cash provided by financing activities primarily includes
cash received in connection with the private placement of units consisting of
the 13 1/2% Senior Discount Notes due 2005 (the "13 1/2% Notes") and warrants in
August 1995, the 12 1/2% Notes and the 14 1/4% Preferred Stock in April 1996,
the 11 5/8% Notes and the 14% Preferred Stock in March 1997 and the 6 3/4%
Preferred Securities in September and October 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 ICG and Holdings-Canada common shares, convertible
subordinated notes, convertible preferred shares of Holdings-Canada, capital
lease financings and various working capital sources, including credit
facilities, in addition to the private placement of the securities previously
mentioned.
On March 11, 1997, Holdings completed a private placement of 11 5/8% Notes
and 100,000 shares of 14% Preferred Stock for net proceeds of approximately
$192.4 million. The Company believes the net proceeds of the private placement
will improve its operating and financial flexibility over the near term because
(a) the 11 5/8% Notes do not require the payment of cash interest until 2002 and
(b) Holdings has the option to pay dividends on the 14% Preferred Stock in
additional shares of 14% Preferred Stock prior to 2002 and the Preferred Stock
is not mandatorily redeemable until 2008.
The 11 5/8% Notes are unsecured senior obligations of Holdings (guaranteed
by ICG) that mature on March 15, 2007. Interest will accrue at 11 5/8% per
annum, beginning March 15, 2002, and is payable each March 15 and September 15,
commencing September 15, 2002. Dividends on the 14% Preferred Stock are
cumulative at a rate of 14% per annum and are payable quarterly in arrears each
March 15, June 15, September 15 and December 15, commencing June 15, 1997. The
14% Preferred Stock has a liquidation preference of $1,000 per share, plus
accrued and unpaid dividends, and is mandatorily redeemable in 2008. The 14%
Preferred Stock is exchangeable, at the option of Holdings, into 14% senior
subordinated exchange debentures of Holdings due 2008, at any time after the
exchange is permitted under certain indenture restrictions.
On September 24 and October 3, 1997, ICG Funding completed a private
placement (guaranteed by ICG) of 2,645,000 6 3/4% Preferred Securities for net
proceeds, after underwriting costs, of approximately $127.6 million. Dividends
on the 6 3/4% Preferred Securities are payable quarterly in arrears each
February 15, May 15, August 15 and November 15, and commenced November 15, 1997.
The dividend is payable in cash through November 15, 2000, and in cash or shares
of ICG common stock, at the option of ICG Funding, thereafter. The 6 3/4%
Preferred Securities have a liquidation preference of $50 per security, plus
accrued and unpaid dividends, and are mandatorily redeemable in 2009. The 6 3/4%
Preferred Securities are exchangeable at any time prior to November 15, 2009
into shares of ICG Common Stock at a rate of 2.0812 shares of Common Stock per
preferred security or $24.025 per share.
51
As of December 31, 1997, an aggregate of approximately $60.2 million of
capitalized lease obligations was due prior to December 31, 2001 and an
aggregate accreted value of approximately $887.5 million was outstanding under
the 13 1/2% Notes, the 12 1/2% Notes and the 11 5/8% Notes. The 13 1/2% Notes
require payments of interest to be made in cash commencing March 15, 2001 and
mature on September 15, 2005. The 12 1/2% Notes require payments of interest to
be made in cash commencing November 1, 2001 and mature on May 1, 2006. The 11
5/8% Notes require payments of interest to be made in cash commencing March 15,
2002 and mature on March 15, 2007. The 6 3/4% Preferred Securities require
payments of dividends to be made in cash and are being paid currently through
November 15, 2000. In addition, the 14% Preferred Stock and the 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 December 31, 1997, the Company
had $7.9 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 the first quarter of 1999.
With respect to indebtedness outstanding on December 31, 1997, the Company has
cash interest payment obligations of approximately $113.3 million in 2001,
$158.0 million in 2002 and $168.1 million in 2003. With respect to preferred
securities currently outstanding, the Company has cash dividend obligations of
approximately $8.9 million in each of 1998, 1999 and 2000, $21.5 million in
2001, $57.0 million in 2002 and $70.9 million in 2003. Accordingly, the Company
may have to refinance a substantial amount of indebtedness and obtain
substantial additional funds prior to March 2001. The Company's ability to do so
will depend on, among other things, its financial condition at the time,
restrictions in the instruments governing its indebtedness, and other factors,
including market conditions, beyond the control of the Company. There can be no
assurance that the Company will be able to refinance such indebtedness,
including such capitalized leases, or obtain such additional funds, and if the
Company is unable to effect such refinancings or obtain additional funds, the
Company's ability to make principal and interest payments on its indebtedness or
make payments of cash dividends on, or the mandatory redemption of, its
preferred securities, would be adversely affected.
On February 12, 1998, ICG Services completed a private placement of 10%
Senior Discount Notes due 2008 for net proceeds, after underwriting costs, of
approximately $291.6 million. Interest will accrue at 10% per annum, beginning
February 15, 2003, and is payable each February 15 and August 15, commencing
August 15, 2003. The Notes will be redeemable at the option of ICG Services, in
whole or in part, on or after February 15, 2003.
Capital Expenditures
The Company expects to continue to generate negative cash flows from
operating activities over the near term 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 and excluding payments for
construction of the Company's new headquarters) were $88.7 million and $177.3
million for fiscal 1995 and 1996, respectively, $26.9 million and $70.3 million
for the three months ended December 31, 1995 and 1996, respectively, and $269.6
million for fiscal 1997. 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 $450.0
million during 1998, including capital expenditure requirements of NETCOM. 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.
52
Other Cash Commitments and Capital Requirements
The Company's operations have required and will continue to require
significant capital expenditures for development, construction, expansion and
acquisitions of telecommunications assets. Significant amounts of capital are
required to be invested before revenue is generated, which results in initial
negative cash flows. In addition to the Company's planned capitial expenditures,
it has other cash commitments as described in the footnotes to the Company's
audited Consolidated Financial Statements for the fiscal year ended December 31,
1997 included elsewhere herein.
In view of the anticipated negative cash flows 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 the
first quarter of 1999. 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.
Year 2000 Compliance
While the Company believes that its software applications are year 2000
complaint, there can be no assurance until the year 2000 occurs that all systems
will then function adequately. Further, if the software applications of local
exchange carriers, long distance carriers or others on whose services the
Company depends are not year 2000 complaint, it could have a material adverse
effect on the Company's financial condition and results of operations.
53
Accounting Change
During fiscal 1996, the Company changed its method of accounting for
long-term telecom services contracts. Under the new method, the Company
recognizes revenue as services are provided and continues to charge direct
selling expenses to operations as incurred. The Company had previously
recognized revenue in an amount equal to the noncancelable portion of the
contract, which is a minimum of one year on a three-year or longer contract, at
the inception of the contract and upon activation of service to the customer, to
the extent of direct installation and selling expense incurred in obtaining
customers during the period in which such revenue was recognized. Revenue
recognized in excess of normal monthly billings during the year was limited to
an amount which did not exceed such installation and selling expense. The
remaining revenue from the contract had been recognized ratably over the
remaining noncancelable portion of the contract. The Company believes the new
method is preferable because it provides a better matching of revenue and
related operating expenses and is more consistent with accounting practices
within the telecommunications industry.
As required by generally accepted accounting principles, the Company has
reflected the effects of the change in accounting as if such change had been
adopted as of October 1, 1995. The Company's results for fiscal 1996 include a
charge of $3.5 million ($0.13 per share) relating to the cumulative effect of
this change in accounting as of October 1, 1995. The effect of this change in
accounting was not significant for fiscal 1996. If the new revenue recognition
method had been applied retroactively, Telecom Services revenue would have
decreased by $0.5 million and $0.7 million for fiscal 1994 and 1995,
respectively. See the Company's Consolidated Financial Statements and the
related notes thereto contained elsewhere in this Annual Report.
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 of Accounting Principles Board Opinion 15 and related
interpretations. The Company adopted SFAS 128 for the fiscal year ending
December 31, 1997, including the requirement for retroactive application. The
adoption of SFAS 128 had no effect on the Company's reported loss per share.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company appear on page F-1 of
this Annual Report. The financial statement schedule required under Regulation
S-X is filed pursuant to Item 14 of this Annual Report, and appears on page S-1
of this Annual Report.
54
Selected quarterly financial data required under this Item is included
under Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
55
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANTS
ICG's corporate charter provides that Directors serve staggered three-year
terms. The Directors of ICG will hold office until the designated annual meeting
of stockholders and until their successors have been elected and qualified or
until their death, resignation or removal.
There are currently four committees of the Board of Directors of ICG:
Executive Committee, Audit Committee, Compensation Committee and Stock Option
Committee. The Executive Committee provides Board oversight for the operations
of the Company between Board meetings. The Audit Committee reviews the services
provided by the Company's independent auditors, consults with the independent
auditors on audits and proposed audits of the Company, reviews certain filings
with the Securities and Exchange Commission, and reviews internal auditing
procedures and the adequacy of internal controls. The Compensation Committee
determines compensation for most executives and reviews transactions, if any,
with affiliates. The Stock Option Committee determines stock option awards. The
officers of ICG are elected by the Board of Directors and hold office until
their successors are chosen and qualified or until their death, resignation or
removal.
Set forth below are the names, ages and positions of Directors and
executive officers of ICG.
Name Age Position
- ---------------------------------- ----- ---------------------------------------
William J. Laggett (2)(4)(5)(6)(7) 68 Chairman of the Board of Directors
J. Shelby Bryan (2)(6) 52 President, Chief Executive Officer
and Director
Douglas I. Falk 48 Executive Vice President -
Satellite and President of ICG
Satellite Services, Inc.
David W. Garrison (3)(4) 42 Director and President and Chief
Executive Officer of NETCOM
James D. Grenfell 46 Executive Vice President and Chief
Financial Officer
John Kane 45 Executive Vice President - Network
and President of FOTI
Marc E. Maassen 47 Executive Vice President -
Strategic Planning
Sheldon S. Ohringer 40 Executive Vice President - Telecom
and President of ICG Telecom Group
Inc.
H. Don Teague 55 Executive Vice President, General
Counsel and Secretary
Harry R. Herbst (3)(4)(5)(7) 46 Director
Leontis Teryazos (1)(5)(7) 55 Director
Walter Threadgill (1)(5)(7) 52 Director
(1) Term expires at annual meeting of stockholders in 1998.
(2) Term expires at annual meeting of stockholders in 1999.
(3) Term expires at annual meeting of stockholders in 2000.
(4) Member of Audit Committee.
(5) Member of Compensation Committee.
(6) Member of Executive Committee.
(7) Member of Stock Option Committee.
56
Executive Officers of ICG
J. Shelby Bryan was appointed President, Chief Executive Officer and a Director
in May 1995. He has 18 years of experience in the telecommunications industry,
primarily in the cellular business. He co-founded Millicom International
Cellular S.A. ("Millicom"), a publicly owned corporation providing cellular
service internationally, served as its President and Chief Executive Officer
from 1985 to 1994 and has served as a Director through the present.
Douglas I. Falk has been President of ICG Satellite Services, Inc. since August
1996 and Executive Vice President - Satellite since October 1996. Prior to
joining the Company, Mr. Falk held several positions in the cruise line
industry, including President of Norwegian Cruise Line, Senior Vice President -
Marketing and Sales with Holland America Lines/Westours and Executive Vice
President of Royal Viking Line. Prior to his work in the cruise line industry,
Mr. Falk held executive positions with MTI Vacations, Brown and Williamson
Tobacco, Pepsico International, Glendenning Associates and The Procter and
Gamble Company.
James D. Grenfell, Executive Vice President and Chief Financial Officer, joined
the Company in November 1995. Previously, Mr. Grenfell served as Director of
Financial Planning for BellSouth Corporation and Vice President and Assistant
Treasurer of BellSouth Capital Funding. A Chartered Financial Analyst, Mr.
Grenfell has been a telephone industry financial executive for over 16 years. He
was with BellSouth from 1985 through November 1996, serving previously as
Finance Manager of Mergers and Acquisitions. He handled BellSouth's financing
strategies, including capital market financings as well as public debt and
banking relationships. Prior to BellSouth, Mr. Grenfell spent two years as a
Project Manager with Utility Financial Services and six years with GTE of the
South, a subsidiary of GTE Corporation, including four years as Assistant
Treasurer.
John Kane has been Executive Vice President - Network and President of Fiber
Optic Technologies, Inc. since March 1998. Prior to joining the Company, Mr.
Kane had 25 years of industry experience. Most recently, Mr. Kane was Executive
Vice President Business Development for AMNEX, Inc., a specialty
telecommunications services company. From 1992 to 1995, Mr. Kane was Senior Vice
President for WCT Communications, Inc. where he built a national fiber optic
long distance network. Mr. Kane has also served as President of Americas
Carriers Telecommunications Association (ACTA) and is a frequent speaker at
industry conferences.
Marc E. Maassen has been Executive Vice President - Strategic Planning since
August 1996. Prior to this position, Mr. Maassen was Executive Vice President -
Network of ICG beginning in October 1995, and President of Fiber Optic
Technologies, Inc. in April 1995. Mr. Maassen joined the Company in 1991 as Vice
President of Sales and Marketing. Prior to joining the Company, Mr. Maassen held
senior sales management positions at TelWatch, Inc., an integrated network
management software company. Mr. Maassen previously worked for First Interstate
as Director of Telecom and for AT&T Information Systems as an Account Executive
and for U S WEST as a Major Accounts Manager.
57
Sheldon S. Ohringer has been Executive Vice President - Telecom of ICG and
President of ICG Telecom Group, Inc. since September 1997. Prior to this
position, Mr. Ohringer was Senior Vice President of Business Development and
Strategic Planning for ICG Telecom Group, Inc. since November 1994. Prior to
joining the Company, Mr. Ohringer was Senior Vice President of Sales and
Business Development for US Long Distance from May 1991 until October 1994. From
May 1984 until August 1990, Mr. Ohringer held key management and executive
positions with Telecom* USA, a major long distance carrier which was acquired by
MCI in 1990.
H. Don Teague joined the Company as Executive Vice President, General Counsel
and Secretary in May 1997. Prior to this position, Mr. Teague was Senior Vice
President, Administration and Legal with Falcon Seaboard Holdings, L.P. and its
predecessors from April 1994 through April 1997. From 1974 to April 1994, Mr.
Teague was a partner in the law firm of Vinson & Elkins L.L.P.
Directors of ICG
William J. Laggett has been Chairman of the Board of Directors since June 1995
and a Director since January 1995. Mr. Laggett was the President of Centel
Cellular Company from 1988 until his retirement in 1993. From 1970 to 1988, Mr.
Laggett held a variety of management positions with Centel Corporation,
including Group Vice President-Products Group, President-Centel Services, and
Senior Vice President-Centel Corporation. Prior to joining Centel, Mr. Laggett
worked for New York Telephone Company.
David W. Garrison has been a Director of the Company since January 1998. In
March 1996, Mr. Garrison was appointed Chairman of the Board of Directors of
NETCOM and, since April 1995, Mr. Garrison has been NETCOM's Chief Executive
Officer. He has served as its President and a Director since February 1995. Mr.
Garrison also served as NETCOM's Chief Operating Officer from February 1995 to
April 1995. Mr. Garrison also serves on the Board of Directors of Ameritrade
Holding Corporation, Traveling Software, Inc. and the Internet Service
Association. From December 1990 to September 1994, Mr. Garrison was President of
SkyTel, a division of Mobile Telecommunications, Inc. ("MTEL"). During his
association with MTEL (1990 to 1994), Mr. Garrison also held positions as Senior
Vice President and Vice President. From 1986 to 1990, Mr. Garrison served
successively as Chief Operating Officer, President, Chief Executive Officer and
Chairman for Dial Page, a regional paging carrier based in Greenville, South
Carolina.
Harry R. Herbst has been a Director since October 1995 and has been Vice
President of Finance and Strategic Planning of Gulf Canada Resources Ltd. since
November 1995 and Vice President and Treasurer of Gulf Canada Resources Ltd.
from January to November 1995. Previously, Mr. Herbst was Vice President of
Taxation for Torch Energy Advisors Inc. from 1991 to 1994, and tax manager for
Apache Corp. from 1987 to 1990. Mr. Herbst is a certified public accountant,
formerly with Coopers & Lybrand.
58
Leontis Teryazos has been a Director since June 1995. Mr. Teryazos, a Canadian
resident, has headed Letmic Management Inc., a financial consulting firm, since
1993, and Letmic Management Reg'd., a real estate development and management
company, since 1985.
Walter Threadgill has been a Director since December 1997 and is the Managing
General Partner of Atlantic Coastal Ventures, L.P. Previously, Mr. Threadgill
was the President and CEO of Multimedia Broadcast Investment Corporation. He
also held tenures as Divisional Vice President of Fiduciary Trust Company in New
York, and as Sr. Vice President and Chief Operating Officer of United National
Bank in Washington D.C. Mr. Threadgill chaired the Presidential Small Business
Advisory Committee and served the National Association of Investment Companies
as Director, Treasurer, and Legislative Committee Chairman. Mr. Threadgill is a
member of the Federal Communications Bar Association.
Directors and Executive Officers of ICG Funding, Holdings-Canada and Holdings
The Directors and executive officers of each of ICG Funding,
Holdings-Canada and Holdings are set forth below. Biographical information
regarding each individual is set forth above (except as to Mr. Gregory C.K.
Smith, whose biographical information appears below).
ICG Funding
Common Member and Manager - ICG Communications, Inc.
Holdings-Canada
The Directors of Holdings-Canada are:
William J. Laggett (Chairman)
J. Shelby Bryan
Harry R. Herbst
Gregory C.K. Smith
Leontis Teryazos
The executive officers of Holdings-Canada are:
J. Shelby Bryan - President and Chief Executive Officer
Douglas I. Falk - Executive Vice President - Satellite
James D. Grenfell - Executive Vice President and Chief Financial
Officer
John Kane - Executive Vice President - Network
Marc E. Maassen - Executive Vice President - Strategic Planning
Sheldon S. Ohringer - Executive Vice President - Telecom
H. Don Teague - Executive Vice President, General Counsel and Secretary
59
Gregory C.K. Smith, 39, has been a Director of Holdings-Canada since April 1994.
Mr. Smith, a lawyer, is a partner of Tupper Jonsson & Yeadon in Vancouver,
British Columbia. Mr. Smith was an associate employed by Tupper Jonsson & Yeadon
from June 1986 until he joined the partnership in April 1991.
Holdings
The Directors of Holdings are:
J. Shelby Bryan (Chairman)
James D. Grenfell
John Kane
Mark E. Maassen
Sheldon S. Ohringer
The executive officers of Holdings are:
J. Shelby Bryan - President and Chief Executive Officer
Douglas I. Falk - Executive Vice President - Satellite
James D. Grenfell - Executive Vice President and Chief
Financial Officer
John Kane - Executive Vice President - Network
Marc E. Maassen - Executive Vice President - Strategic Planning
Sheldon S. Ohringer - Executive Vice President - Telecom
H. Don Teague - Executive Vice President, General Counsel and
Secretary
Compliance With Section 16(a) of the Exchange Act
The following table lists the Directors, officers and beneficial owners
of more than 10% of the outstanding Common Stock (each a "Reporting Person")
that failed to file on a timely basis reports required by Section 16(a) of the
Exchange Act during the most recent fiscal year, the number of late reports, the
number of transactions that were not reported on a timely basis and any known
failure to file a required Form by each Reporting Person.
Transactions Untimely Known Failures to File
Reporting Person Late Reports Reported Required Forms
- -------------------- -------------- --------------------- ----------------------
Walter Threadgill 1 (Form 3) 1 None
Mark S. Helwege (1) 1 (Form 5) 3 None
(1) Former Executive Vice President - Network and President of FOTI
60
ITEM 11. EXECUTIVE COMPENSATION
Director Compensation
ICG compensates its non-employee Directors $250 for telephonic meetings and
$2,500 for each Board of Directors' meeting or committee meeting attended, or
$500 for committee meetings attended in conjunction with a Board of Directors'
meeting, plus reimbursement of expenses. In addition, the Chairman of the Board
receives an annual fee of $80,000 payable in quarterly installments. In fiscal
1996, all non-employee Directors of ICG were granted options to purchase 20,000
shares of Common Stock under ICG's 1995 Stock Option Plan, and during the
transition period from October 1, 1996 through December 31, 1996, all
non-employee Directors of ICG were granted options to purchase 5,000 shares of
Common Stock under ICG's 1996 Stock Option Plan (the "1996 Plan"). On January 1,
1997, all non-employee Directors of ICG were granted options to purchase 20,000
shares of Common Stock under the 1996 Plan, which vested as to 5,000 shares at
the end of each fiscal quarter. On June 17, 1997, all non-employee Directors of
ICG were granted an additional option to purchase 5,000 shares of Common Stock
under the 1996 Plan. On January 1, 1998, all non-employee Directors of ICG were
granted options to purchase 20,000 shares of Common Stock under the 1996 Plan,
which vest as to 5,000 shares at the end of each fiscal quarter.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee presently consists of four non-employee
Directors: William J. Laggett, Chairman of the Board of Directors, Harry R.
Herbst, Walter Threadgill and Leontis Teryazos.
Board Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors of the Company (the
"Compensation Committee") evaluates compensation levels of senior management and
evaluates the various factors affecting compensation of the Company's highest
paid officers. The Compensation Committee believes that compensation to the
Company's executive officers should be designed to encourage and reward
management's efforts to further strengthen the Company's business and to create
added value for stockholders. Such a compensation program helps to achieve the
Company's business and financial objectives and also provides incentives needed
to attract and retain well-qualified executives. The Company operates in a
competitive marketplace and needs to attract and retain highly qualified senior
management and executive personnel in order for the Company to achieve its goals
of continuing to develop new services and expanding into new businesses and
markets. The Compensation Committee attributes a substantial portion of the
Company's overall performance, as well as the individual contributions of the
executive officers, to the executive officers' compensation.
61
The Company has employment agreements with several of its executive
officers. See "Executive Employment Contracts" for descriptions of those
agreements. All senior management, except for J. Shelby Bryan, President and
Chief Executive Officer, are compensated with a base salary and an incentive
bonus. The base salaries are intended to compensate these executives for their
ongoing leadership skills and management responsibility. The incentive bonuses
are dependent upon individual performance. For purposes of determining the
bonuses, the Compensation Committee evaluates the accomplishment of goals set at
the start of each fiscal year and compares the Company's performance in each
year to the prior year. Based on the progress of the Company during fiscal 1997,
Chairman Laggett recommended, and the Compensation Committee approved, bonuses
for the named executive officers of the Company. See "Summary Compensation
Table" for the bonuses paid to executive officers.
The compensation of the Company's President and Chief Executive Officer, J.
Shelby Bryan, is set forth in his employment contract. His base salary is
computed as: the sum of (x) one percent (1%) of the increase in Revenues of the
Company for such month over Revenues of the Company for the immediately prior
month and (y) three percent (3%) of the increase in Earnings Before Income
Taxes, Depreciation and Amortization ("EBITDA") of the Company for such month
over EBITDA of the Company for the immediately prior month. In addition, Mr.
Bryan receives other benefits. See "Summary Compensation Table" for the type and
amount of these payments. The Compensation Committee believes that the
compensation paid to Mr. Bryan is a suitable compensation package based on Mr.
Bryan's experience in the communications industry and because his compensation
is directly tied to the performance of the Company.
In addition, the Stock Option Committee awarded stock options to certain
employees of the Company, including executive officers. These grants were
related to the executive officers' performance in fiscal 1996 and as incentives
for continued efforts and success and were based on individual performance and
responsibility. The Compensation Committee believes that stock options serve as
important long-term incentives for executive officers by encouraging their
continued employment and commitment to the Company's performance. The
Compensation and Stock Option Committees do not consider the number of options
currently held by all executive officers in determining individual grants
because such consideration could create an incentive to exercise options and
sell the underlying stock. See "Summary Compensation Table" for the stock
options granted to the executive officers.
The Compensation Committee has reviewed the compensation of the Company's
executive officers and has concluded that their compensation was reasonable in
view of the Company's performance. The Compensation Committee observed that
revenue increased $82.7 million, approximately 43%, in fiscal 1997 as compared
with the 12 months ended December 31, 1996. The Company's networks have grown
from approximately 2,385 operational fiber route miles at December 1996 to
approximately 3,043 operational miles at the end of fiscal 1997. The Company
also raised net proceeds of $320.0 million from the issuance of preferred
securities and notes during fiscal 1997. These accomplishments exceeded the
Company's objectives for fiscal 1997. The Compensation Committee believes that
the Company appropriately awarded its executive officers for their short- and
long-term efforts.
62
The Compensation Committee continually evaluates the compensation of the
Company's executive officers, including assessing compensation reports for
comparable companies and for the telecommunications industry. The Compensation
Committee believes that maintaining suitable executive compensation programs is
necessary to support the future development of the Company and growth in
stockholder value.
William J. Laggett
Harry R. Herbst
Leontis Teryazos
Walter Threadgill
(Members of the Compensation Committee)
Executive Compensation
The following table provides certain summary information concerning
compensation paid or accrued by the Company and its subsidiaries, to or on
behalf of J. Shelby Bryan, the Company's President and Chief Executive Officer,
the four other most highly compensated executive officers of the Company and one
additional officer for whom disclosure would have been required but for the fact
that the individual was not serving as executive officer at December 31, 1997
(the "Named Officers") for the fiscal years ended December 31, 1997, September
30, 1996 and 1995. Due to the Company's change in year end during 1996 from
September 30 to December 31, additional amounts are shown below in the Summary
Compensation Table for the 12 months ended December 31, 1996 and are referred to
in such tables as "1996T." The Company has not maintained any long-term
incentive plans and the Company has not granted stock appreciation rights.
63
Summary Compensation Table
Annual Compensation Long-term Compensation
----------------------------------------------- ---------------------------
Fiscal Other Annual Securities Underlying
Name and Principal Position Year Salary ($) Bonus ($) Compensation ($) Options
- ------------------------------ --------- ------------- --------------- ------------------- ----------------------------
J. Shelby Bryan 1997 473,065 (1) - 86,095 (2) -
President and Chief 1996T 161,178 (1) - 91,812 (3) -
Executive Officer 1996 221,196 (1) - 78,919 (4) 450,000
1995 30,728 - - 1,550,000
James D. Grenfell 1997 200,000 68,000 26,600 (5) 47,500 (6)
Executive Vice President and 1996T 181,250 71,665 (7) 145,360 (8) 40,000
Chief Financial Officer 1996 148,526 46,665 138,435 (9) 50,000
1995 - - - -
Sheldon S. Ohringer 1997 164,792 73,245 15,112 (10) 17,500 (6)
Executive Vice President - 1996T 135,000 42,865 (11) 9,687 (12) 7,500
Telecom and President of ICG 1996 130,000 28,945 3,600 40,000
Telecom Group, Inc. 1995 110,000 - 3,600 15,000
Marc E. Maassen 1997 165,000 56,332 30,723 (13) 10,500 (6)
Executive Vice President - 1996T 156,244 43,125 (14) 25,244 (15) 7,000
Strategic Planning 1996 147,092 22,500 25,341 (16) 40,000
1995 131,933 60,000 9,291 (17) 15,000
Henry R. Carabelli 1997 178,333 58,984 14,605 (18) 50,000 (6)
Executive Vice President 1996T 113,462 91,105 (19) 77,637 (20) 35,000
and Chief of Operations of 1996 - - - -
ICG Telecom Group, Inc. 1995 - - - -
William J. Maxwell 1997 222,727 69,480 47,977 (21) 50,000 (6)
Former President of 1996T 228,750 147,880 (22) 29,322 (23) 25,000
ICG Enterprises Division 1996 222,917 117,160 18,632 (24) 75,000
1995 205,475 75,000 8,288 (17) 75,000
(1) Consists of amount earned pursuant to the compensation formula in Mr.
Bryan's employment agreement.
(2) Consists of $40,777 for car allowance, $44,422 for housing expenses and
Company contributions to 401(k) Defined Contribution Plan in the amount of
$896.
(3) Consists of $30,236 for car allowance, $49,683 for housing expenses and
Company contributions to 401(k) Defined Contribution Plan in the amount of
$11,893.
(4) Consists of $25,991 for car allowance, $43,428 for housing expenses and
Company contributions to 401(k) Defined Contribution Plan in the amount of
$9,500.
(5) Consists of $15,292 for car allowance and Company contributions to 401(k)
Defined Contribution Plan in the amount of $11,308.
(6) Includes options regranted as a result of the repricing of the Company's
options on April 16, 1997. See "-Ten-Year Option/SAR Repricings."
(7) Consists of bonus earned during fiscal 1996 ($46,665) and bonus earned
during the three months ended December 31, 1996 ($25,000).
(8) Consists of relocation expense in the amount of $121,600, car allowance of
$12,067 and Company contributions to 401(k) Defined Contribution Plan in
the amount of $11,693.
(9) Consists of relocation expenses in the amount of $117,295, car allowance of
$11,640 and Company contributions to 401(k) Defined Contribution Plan in
the amount of $9,500.
(10) Consists of $7,000 for car allowance, $234 for club dues and Company
contributions to 401(k) Defined Contribution Plan in the amount of $7,878.
(11) Consists of bonus earned during fiscal 1996 ($28,945) and bonus earned
during the three months ended December 31, 1996 ($13,920).
64
(12) Consists of $3,600 for car allowance and Company contributions to 401(k)
Defined Contribution Plan in the amount of $6,087.
(13) Consists of $21,394 for car allowance and Company contributions to 401(k)
Defined Contribution Plan in the amount of $9,329.
(14) Consists of bonus earned during fiscal 1996 ($22,500) and bonus earned
during the three months ended December 31, 1996 ($20,625).
(15) Consists of $18,072 for car allowance and Company contributions to 401(k)
Defined Contribution Plan in the amount of $7,172.
(16) Consists of $16,428 for car allowance and Company contributions to 401(k)
Defined Contribution Plan in the amount of $8,913.
(17) Consists of Company contributions to 401(k) Defined Contribution Plan.
(18) Consists of $7,500 for car allowance and Company contributions to 401(k)
Defined Contribution Plan in the amount of $7,105.
(19) Consists of bonus earned during fiscal 1996 ($47,625), bonus earned during
the three months ended December 31, 1996 ($18,480) and hiring bonus
($25,000).
(20) Consists of relocation expense of $65,973, car allowance of $2,932, and
Company contributions to 401(k) Defined Contribution Plan in the amount of
$8,732.
(21) Consists of $11,000 for car allowance, $23,076 for vacation and Company
contributions to 401(k) Defined Contribution Plan in the amount of $13,901.
(22) Consists of bonus earned during fiscal 1996 ($117,160) and bonus earned
during the three months ended December 31, 1996 ($30,720).
(23) Consists of $11,300 for car allowance and Company contributions to 401(k)
Defined Contribution Plan in the amount of $18,022.
(24) Consists of $9,200 for car allowance and Company contributions to 401(k)
Defined Contribution Plan in the amount of $9,432.
65
Option/SAR Grants in Last Fiscal Year
The Company granted no stock appreciation rights during fiscal 1997 to the
Named officers or to other employees. The following table provides information
on option grants during fiscal 1997 to the Named Officers:
Potential realizable
value at assumed
Individual grants annual rates of stock
-------------------------------------- price appreciation for
Number of Percent of total Exercise option term
securities options granted or base ------------------------
underlying to employees in price Expiration
Name options granted fiscal year ($/Sh) date 5% ($) 10% ($)
(#)
- ----------------------- -------------------- ------------------ --------- ------------ ----------- ------------
J. Shelby Bryan - - - - - -
James D. Grenfell 40,000 2.9 10.375(1) 10/22/06 245,273 613,054
7,500 0.5 10.375 4/16/07 48,936 124,013
Sheldon S. Ohringer 7,500 0.5 10.375(1) 10/22/06 45,989 114,948
10,000 0.7 10.375 4/16/07 65,248 165,351
Marc E. Maassen 7,000 0.5 10.375(1) 10/22/06 42.923 107,284
3,500 0.3 10.375 4/16/07 22,837 57,873
Henry R. Carabelli 20,000 1.5 10.375(1) 3/7/06 112,684 276,690
15,000 1.1 10.375(1) 10/22/06 91,978 229,895
15,000 1.1 10.375 4/16/07 97,871 248,026
William J. Maxwell 25,000 (2) 1.8 10.375(1) 10/22/06 153,296 383,158
25,000 (2) 1.8 10.375 4/16/07 163,120 413,377
(1) 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 $10.375, the
closing price of the Common Stock on April 16, 1997. See "-Ten-Year
Option/SAR Repricings."
(2) As a result of Mr. Maxwell's resignation on December 3, 1997, 43,750 of the
options granted during fiscal 1997 have been canceled.
66
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year End Option Values
The following table provides information on options exercised during fiscal
1997 by the Named Officers and the value of such officers' unexercised options
at December 31, 1997:
Number of securities Value of unexercised
in-the-
underlying unexercised money options at
Shares options at fiscal year end (#) fiscal year end ($)(1) (2)
acquired on Value ------------------------------- ----------------------------
Name exercise (#) realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------------
J. Shelby Bryan - - 1,775,000 225,000 33,815,625 3,881,250
James D. Grenfell - - 35,000 62,500 600,000 1,064,063
Sheldon S. Ohringer - - 36,875 35,625 586,641 608,672
Marc E. Maassen - - 52,750 32,750 834,515 555,152
Henry R. Carabelli - - 8,750 41,250 147,656 696,094
William J. Maxwell - - 294,750 - 5,258,248 -
(1) Based on the closing price of Common Stock of $27.25 on December 31, 1997.
(2) Options granted prior to fiscal 1994 contained exercise prices stated in
Canadian dollars; value listed is based on the exchange rate of 1.4296 in
effect on December 31, 1997.
Ten-Year Option/SAR Repricings
Report on Repricing of Options/SARs
The Stock Option Committee of the Board of Directors of the Company (the
"Committee") is responsible for administering the Company's Stock Option Plans,
as well as granting any stock options thereunder. The Committee is composed of
four independent, non-employee directors.
In 1996, the Company established the 1996 Stock Option Plan (the "Plan").
Prior to that time, the Plan was known as the IntelCom Group Inc. Restated and
Amended 1995 Stock Option Plan (the "IntelCom Plan"). Effective as of August 2,
1996, the Company assumed sponsorship of, and immediately thereafter amended and
restated, the IntelCom Plan. The Plan constitutes a continuation of the IntelCom
Plan, as assumed by the Company.
The purpose of the Plan is to promote success and enhance the value of the
Company by linking the personal interest of participants to those of the Company
stockholders by providing participants with an incentive for outstanding
performance. The Plan is further intended to assist the Company in its ability
to motivate, and retain the services of, participants upon whose judgement,
interest and special effort the successful conduct of its operations is largely
dependent. Stock options are awarded by the Committee according to the terms of
the Plan. Up to an aggregate number of 2,500,000 shares may be granted under the
Plan, reduced by the number of Common Shares of IntelCom represented by options
granted to individuals under the IntelCom Plan prior to August 2, 1996. When
awarding stock options, the Committee takes into consideration the individual's
past performance and contribution to the Company, as well as future potential.
67
In April 1997, the Committee considered repricing certain existing stock
options that, as a result of recent stock declines in the Company's industry,
had an exercise price in excess of the then fair market value of the Company's
Common Stock. Specifically, approximately 154,000 stock options granted on March
7, 1996 as part of employee bonus compensation had an exercise price of $15.875,
approximately 219,000 options granted in connection with recent new hires had
exercise prices ranging from $16.25 to $26.25, and approximately 225,000 options
granted as part of employee bonus compensation on October 22, 1996 had an
exercise price of $19.125 per share. At those prices, the Committee believed
that the options were not able to effectively serve as incentives for the
employees and that, in the current competitive market place, the Company needed
to have a strong incentive compensation program in place in order to retain,
keep and motivate its employees.
Consequently, the Committee approved the repricing of all outstanding
employee stock options previously granted under the stock option plans of the
Company (and its predecessor, IntelCom Group Inc.) which options were
exercisable at prices at or in excess of $15.875 per share (the "Eligible
Options"). The repricing was accomplished through an offer to all holders of
Eligible Options to exchange the Eligible Options for new stock options (the
"Repriced Options"), as of April 19, 1997, under the same terms and conditions
(including vesting) contained in the stock option plan as originally granted the
Eligible Option. The Repriced Options are exercisable at a price of $10.375 per
share, which was the closing price of a common share of Common Stock, $.01 par
value, of the company on the Nasdaq National Market on April 19, 1997.
William J. Laggett
Harry R. Herbst
Leontis Teryazos
Walter Threadgill
(Members of the Stock Option Committee)
68
The following provides information on the repricing of stock options of the
Named Officers:
Number of
securities Length of original
underlying Market price of Exercise price option term
options stock at time of at time of remaining at date
repriced or repricing or repricing or New exercise of repricing or
Name Date amended (#) amendment ($) amendment ($) price ($) amendment
- ------------------------- ---------- ---------------- ------------------ ---------------- --------------- ---------------------
J. Shelby Bryan 4/16/97 - - - - -
President and
Chief Executive Officer
James D. Grenfell 4/16/97 40,000 10.375 19.125 10.375 (1) 113 months
Executive Vice
President and Chief
Financial Officer
Sheldon S. Ohringer 4/16/97 7,500 10.375 19.125 10.375 (1) 113 months
Executive Vice
President - Telecom and
President of ICG
Telecom Group, Inc.
Marc E. Maassen 4/16/97 7,000 10.375 19.125 10.375 (1) 113 months
Executive Vice
President - Strategic
Planning
Henry R. Carabelli 4/16/97 15,000 10.375 19.125 10.375 (1) 113 months
Executive Vice 20,000 10.375 15.875 10.375 (1) 107 months
President and Chief of
Operations of ICG
Telecom Group, Inc.
William J. Maxwell 4/16/97 25,000 10.375 19.125 10.375 (1) 113 months
Former President of ICG
Enterprises Division
(1) Represents the closing price of the Common Stock on April 16, 1997.
Executive Employment Contracts
The Company and its subsidiaries have employment agreements with Messrs. J.
Shelby Bryan, Douglas I. Falk, David W. Garrison, James D. Grenfell and H. Don
Teague.
The Company's amended employment agreement with Mr. Bryan provides for a
term of two years, which commenced June 1, 1997. As compensation, the Company
will pay Mr. Bryan a salary equal to the sum of one percent of the monthly
increase in Company revenue and three percent of the monthly increase in EBITDA.
If Mr. Bryan's salary exceeds $1,500,000 in any fiscal year, the Company may
elect to pay such excess in unregistered ICG Common Stock. Mr. Bryan is entitled
to benefits as are generally provided to executive officers of ICG, including
options under stock option plans, a leased automobile, private club membership
fees and reimbursement of reasonable out-of-pocket expenses incurred on behalf
of the Company. The employment agreement may be terminated by the Company with
or without cause or after a disability continuing for a six-month consecutive
period, or by Mr. Bryan for cause, including breach of the agreement or
reduction in status or responsibilities, or change of control. If the employment
agreement is terminated for any reason other than for cause, the Company is
obligated to pay Mr. Bryan a lump sum of $2.5 million and to continue benefits
for a period equal to the greater of the remainder of the employment term or 18
months. After termination of the employment agreement, Mr. Bryan is subject to a
confidentiality covenant and a one-year non-competition commitment.
69
The Company's employment agreement with Mr. Falk, dated August 14, 1996,
has an initial one-year term commencing August 26, 1996 and continues from
month-to-month thereafter until either party provides 30 days notice of
termination. The agreement provides for an annual base salary and an incentive
bonus determined by the Board of Directors. Mr. Falk also receives stock options
under the stock option plans. If the Company terminates the employment agreement
without cause or if the Company or Mr. Falk terminates the employment agreement
upon the occurrence of a major transaction involving the Company, then Mr. Falk
will receive his salary and insurance benefits for a period of 12 months
following the date of termination. Mr. Falk is subject to a confidentiality
covenant and to a one-year non-competition commitment following the termination
of his employment.
NETCOM's employment agreement with Mr. Garrison which commenced June 1,
1997 provides for an annual base salary and an incentive bonus determined by the
Board of Directors. Mr. Garrison is entitled to such other benefits including
stock options under the Company's stock option plans, car allowance and
reimbursement or direct payment of reasonable out-of-pocket expenses incurred on
behalf of the Company. The Company may terminate the employment agreement at any
time and for any reason upon written notice. Mr. Garrison may terminate the
employment agreement for any reason by giving the Company 30 days written
notice. If termination without cause occurs six months after a change of
control, Mr. Garrison will receive his salary, insurance benefits and his annual
incentive bonus earned on a quarterly basis for a period of 12 months. If
termination without cause occurs within six months after a change in control,
Mr. Garrison will receive two times his salary, 200% of the greater of his prior
year's incentive bonus or his annual incentive bonus earned on a quarterly basis
and two years of life insurance. Mr. Garrison is subject to a confidentiality
covenant.
The Company's employment agreement with Mr. Grenfell originally provided
for an initial two-year term which commenced November 1, 1995. Upon completion
of the first 12 months of the initial term, the agreement automatically renewed
and will continue to automatically renew from month-to-month such that 12 months
remain in the term. The agreement may be terminated upon 30 days written notice
from either party or by the Company if Mr. Grenfell is unable to perform his
duties for 140 days in any 180-day period due to illness or incapacity. Mr.
Grenfell is entitled to such other benefits as are generally provided to
executive officers of the Company, including options under the Company's stock
option plans, use of a company car and reimbursement or direct payment of
reasonable out-of-pocket expenses incurred on behalf of the Company. The
agreement provides for an annual base salary and an incentive bonus determined
by the Board of Directors. If the employment agreement is terminated without
cause by the Company or by either party upon the occurrence of a change of
control involving the Company, Mr. Grenfell will receive a termination fee equal
to his current monthly salary times the number of months remaining in the term.
Mr. Grenfell is also subject to a ten-year confidentiality covenant and a
one-year non-competition commitment.
70
The Company's employment agreement with Mr. Teague provides for an initial
two-year term which commenced May 19, 1997. Upon completion of the first 12
months of the initial term, the agreement automatically renews from
month-to-month such that 12 months remain in the term. The agreement provides
for an annual base salary and an incentive bonus determined by the Board of
Directors. Mr. Teague is also entitled to such other benefits as are generally
provided to executive officers of the Company, including options under the
Company's stock option plans, a car allowance and reimbursement of reasonable
out-of-pocket expenses incurred on behalf of the Company. The agreement may be
terminated by the Company upon 30 days written notice if Mr. Teague is unable to
perform his duties for 140 days in any 180-day period due to illness or
incapacity. The agreement may also be terminated by the Company or Mr. Teague
upon 30 days written notice in certain other circumstances. If the employment
agreement is terminated as a result of illness or incapacity or without cause by
the Company or by either party upon the occurrence of a change of control
involving the Company, Mr. Teague will receive a termination fee equal to his
current monthly salary times the number of months remaining in the term. Mr.
Teague is also subject to a ten-year confidentiality covenant and a one-year
non-competition commitment.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 28, 1998, the number of
shares of Common Stock owned by all executive officers and Directors of ICG
individually and as a group, and each person who owned of record, or was known
to own beneficially, more than 5% of the outstanding shares of Common Stock. The
persons named in the table below have sole voting and investment power with
respect to all of the shares of Common Stock owned by them, unless otherwise
noted.
71
Amount/Nature of
Beneficial Ownership
Name and Address of Beneficial Owner Percent (1)
----------------------------------------------------------------- ----------------------- ------------------------
Montgomery Asset Management, L.P. . . . . . . . . . . . . . . . 4,158,000 9.3%
101 California Street
San Francisco, CA 94111
FMR Corporation . . . . . . . . . . . . . . . . . . . . . . . . 3,245,923 7.3%
82 Devonshire Street
Boston, MA 02109
Franklin Advisers, Inc. . . . . . . . . . . . . . . . . . . . 3,182,130 (2) 7.2%
777 Mariners Island Boulevard
San Mateo, CA 94404
William J. Laggett . . . . . . . . . . . . . . . . . . . . . . 80,297 (3) *
Chairman of the Board
J. Shelby Bryan . . . . . . . . . . . . . . . . . . . . . . . 1,795,736 (4) 3.9%
President, Chief Executive Officer and Director
Douglas I. Falk . . . . . . . . . . . . . . . . . . . . . . . 8,079 (5) *
Executive Vice President - Satellite and President of ICG
Satellite Services, Inc.
David W. Garrison . . . . . . . . . . . . . . . . . . . . . . 263,209 (6) *
Director and President and Chief Executive Officer of NETCOM
James D. Grenfell . . . . . . . . . . . . . . . . . . . . . . 37,964 (7) *
Executive Vice President and Chief Financial Officer
Mark S. Helwege .. . . . . . . . . . . . . . . . . . . . . . . 3,258 (8) *
Former Executive Vice President - Network and President of FOTI
Marc E. Maassen . . . . . . . . . . . . . . . . . . . . . . . 57,531 (9) *
Executive Vice President - Strategic Planning
Sheldon S. Ohringer . . . . . . . . . . . . . . . . . . . . . 62,475 (10) *
Executive Vice President - Telecom and President of ICG Telecom
Group, Inc.
H. Don Teague . . . . . . . . . . . . . . . . . . . . . . . . 12,500 (3) *
Executive Vice President, General Counsel and Secretary
Harry R. Herbst . . . . . . . . . . . . . . . . . . . . . . . 55,934 (3) *
Director
Leontis Teryazos . . . . . . . . . . . . . . . . . . . . . . . 75,000 (3) *
Director
(Continued)
72
Amount/Nature of
Beneficial Ownership
Name and Address of Beneficial Owner Percent (1)
----------------------------------------------------------------- ----------------------- ------------------------
Walter Threadgill . . . . . . . . . . . . . . . . . . . . . . 5,000 (3) *
Director
All executive officers and Directors as a group (12 persons) 2,456,983 (11) 5.2%
- ------------------
*Less than one percent of the outstanding shares of Common Stock.
(1) Based on 44,476,632 issued and outstanding shares of Common Stock on
February 28, 1998, plus shares of Common Stock which may be acquired by the
person or group indicated pursuant to any options and warrants exercisable,
or pursuant to any shares vesting under the Company's 401(k) Plan within 60
days.
(2) Franklin Advisers, Inc. has reported on Schedule 13G that its parent
holding company, Franklin Resources, Inc. ("FRI"), and Charles B. Johnson
and Rupert H. Johnson, Jr., principal shareholders of FRI, beneficially own
the shares reflected in this table.
(3) Represents shares which may be acquired pursuant to the exercise of
outstanding stock options.
(4) Includes 15,000 shares of Common Stock held by Mr. Bryan, 2,000 shares of
Common Stock held in Mr. Bryan's spouse's name for which Mr. Bryan
disclaims beneficial ownership, 3,736 shares of Common Stock held by a
401(k) Plan in Mr. Bryan's name and 1,775,000 shares of Common Stock which
may be acquired pursuant to the exercise of outstanding stock options.
(5) Includes 475 shares of Common Stock held by Mr. Falk, 729 unrestricted
shares of Common Stock held by an Employee Stock Purchase Plan and 6,875
shares of Common Stock which may be acquired pursuant to the exercise of
outstanding stock options.
(6) Includes 17,256 shares of Common Stock held directly by Mr. Garrison and
245,953 shares of Common Stock which may be acquired pursuant to the
exercise of outstanding stock options.
(7) Includes 662 shares of Common Stock held by a 401(k) Plan, 427 unrestricted
shares of Common Stock held by an Employee Stock Purchase Plan and 36,875
shares of Common Stock which may be acquired pursuant to the exercise of
outstanding stock options.
(8) Includes 436 shares of Common Stock held by a 401(k) Plan, 322 unrestricted
shares of Common Stock held by an Employee Stock Purchase Plan and 2,500
shares of Common Stock which may be acquired pursuant to the exercise of
outstanding stock options.
(9) Includes 3,572 shares of Common Stock held by a 401(k) Plan, 334
unrestricted shares of Common Stock held by an Employee Stock Purchase Plan
and 53,625 shares of Common Stock which may be acquired pursuant to the
exercise of outstanding stock options.
(10) Includes 20,800 shares of Common Stock held directly by Mr. Ohringer, 1,057
shares of Common Stock held by a 401(k) Plan, 1,243 unrestricted shares of
Common Stock held by an Employee Stock Purchase Plan and 39,375 shares of
Common Stock which may be acquired pursuant to the exercise of outstanding
stock options.
(11) Includes 55,531 shares of Common Stock held directly by the executive
officers and Directors of ICG as a group, 9,463 shares of Common Stock held
by a 401(k) Plan, 3,055 shares of Common Stock held by an Employee Stock
Purchase Plan and 2,388,934 shares of Common Stock which may be acquired
pursuant to the exercise of outstanding stock options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
To facilitate the acquisition of certain competitive access networks and
satellite services businesses which held common carrier radio licenses subject
73
to foreign ownership restrictions, the common carrier licenses used by the
Company's teleports and the wireless competitive access networks were
controlled, prior to November 30, 1997, by Teleport Transmissions Holdings Inc.
("TTH"), a corporation owned one-third each by U.S. Director William J. Laggett
and two former Directors. TTH's subsidiaries gave 15-year promissory notes to
ICG to acquire the FCC licenses. After receipt of approval from the FCC, the
Company exercised its option on November 30, 1997 to have the common carrier
licenses transferred back to the Company. Upon completion of the transfer of the
licenses, the promissory notes were canceled. In fiscal 1997, the Company paid
or accrued approximately $0.6 million to TTH's subsidiaries for common carrier
services, and the Company received from TTH's subsidiaries approximately $2.4
million as payment in full on the promissory notes, management services,
equipment leases and technical support. In addition, approximately $1.1 million
of the note balances were canceled due to the sale of the licenses in
conjunction with the sale of four of the Company's teleports. See
"Business-Regulation."
Holdings-Canada and International Communications Consulting, Inc. ("ICC")
have entered into a three-year consulting agreement whereby ICC will provide
various consulting services to the Company through December 1999 in exchange for
approximately $4.2 million in consulting fees to be paid during the term of the
agreement. During fiscal 1997, the Company paid approximately $1.1 million
related to this consulting agreement. William W. Becker, a former Director and
stockholder of the Company, is President and Chief Executive Officer of ICC.
As part of a resolution and settlement of certain transactions in 1995
between the Company and the Becker Group of Companies (the "Becker Group"), a
company founded by William W. Becker, the Company was assigned a note receivable
in the amount of $200,000, which had previously been advanced to John D. Field,
a former executive officer of the Company, by the Becker Group. The note
receivable is evidenced by a promissory note from Mr. Field to the Company
payable on demand, which bears interest at a rate of 7% per annum.
In order to facilitate the relocation of William J. Maxwell, a former
executive officer of the Company, the Company advanced $200,000 to Mr. Maxwell
in April 1994 pursuant to a promissory note payable on demand which bears
interest at a rate of 7% per annum. In March 1998, the April 1994 promissory
note was replaced with a new promissory note for $125,000 which is due in full
on September 30, 1998.
74
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORT ON FORM 8-K
(A) (1) Financial Statements. The following financial statements are included
in Item 8 of Part II:
Page
Independent Auditors' Report . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets, December 31, 1996 and 1997. . . F-3
Consolidated Statements of Operations, Fiscal Years Ended
September 30, 1995 and 1996, the Three Months Ended
December 31, 1995(unaudited) and 1996, and Fiscal Year
Ended December 31, 1997 . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Equity (Deficit),
Fiscal Years Ended September 30, 1995 and 1996, the
Three Months Ended December 31, 1996, and Fiscal Year
Ended December 31, 1997 . . . . . . . . . . . . . . . . . . F-7
Consolidated Statements of Cash Flows, Fiscal Years Ended
September 30, 1995 and 1996, the Three Months Ended
December 31, 1995 (unaudited) and 1996, and Fiscal Year
Ended December 31, 1997 . . . . . . . . . . . . . . . . . . F-9
Notes to Consolidated Financial Statements, December 31,
1996 and 1997 . . . . . . . . . . . . . . . . . . . . . . . F-12
(2) Financial Statement Schedule. The following Financial
Statement Schedule is submitted herewith:
Independent Auditors' Report . . . . . . . . . . . . . . . . S-2
Schedule II: Valuation and Qualifying Accounts . . . . . . . S-3
(3) List of Exhibits.
(2) Plan of Acquisition, Reorganization, Arrangement,
Liquidation or Succession.
2.1: Plan of Arrangement under Section 192 of the Canada Business
Corporations Act. [Incorporated by reference to Exhibit 2.1 to
Registration Statement on Form S-4 of ICG Communications, Inc.
(Commission File No. 333-4226)].
75
(3) Corporate Organization.
3.1: Memorandum and Articles of IntelCom Group Inc., as amended, filed
with the Registrar of Companies, Province of British Columbia,
Canada [Incorporated by reference to IntelCom Group Inc.'s Annual
Report on Form 20-F for the year ended September 30, 1992].
3.2: Altered Memorandum and Articles of IntelCom Group Inc., as
amended by Special Resolution passed October 7, 1994, filed with
the Registrar of Companies, Province of British Columbia, Canada
[Incorporated by reference to IntelCom Group Inc.'s Annual Report
on Form 10-K for the year ended September 30, 1994].
3.3: Certificate of Incorporation, as amended, from the Registrar of
Companies, Province of British Columbia, Canada [Incorporated by
reference to IntelCom Group Inc.'s Annual Report on Form 20-F for
the year ended September 30, 1992].
3.4: Certificate of Change of Name (under the B.C. Act) from the
Registrar of Companies, Province of British Columbia, Canada
[Incorporated by reference to IntelCom Group Inc.'s Annual Report
on Form 20-F for the year ended September 30, 1993, as filed on
September 30, 1994].
3.5: Certificate of Continuance from Industry Canada, dated October
30, 1995. [Incorporated by reference to Exhibit 3.5 to IntelCom
Group Inc.'s Annual Report on Form 10-K for the year ended
September 30, 1995].
3.6: Certificate of Incorporation of ICG Communications, Inc. dated
April 11, 1996. [Incorporated by reference to Exhibit 3.1 to
Registration Statement on Form S-4 of ICG Communications, Inc.,
File No. 333-4226].
3.7: By-laws of ICG Communications, Inc. [Incorporated by reference to
Exhibit 3.2 to Registration Statement on Form S-4 of ICG
Communications, Inc., File No. 333-4226].
(4) Instruments Defining the Rights of Security Holders, Including
Indentures.
4.1: Memorandum of Articles for the Registrant, Certificate of
Incorporation and copies of all Amendments thereto, filed with
the Registrar of Companies for the Province of British Columbia,
Canada [Incorporated by reference to Exhibit (i) to IntelCom
Group Inc.'s Form 20-F for the fiscal year ending September 30,
1991].
4.2: Note Purchase Agreement dated September 16, 1993 [Incorporated by
reference to IntelCom Group Inc.'s Annual Report on Form 20-F for
the year ended September 30, 1993, as filed on September 30,
1994].
4.3: Note Purchase Agreement dated October 27, 1993 [Incorporated by
reference to IntelCom Group Inc.'s Annual Report on Form 20-F for
the year ended September 30, 1993, as filed on September 30,
1994].
76
4.4: Form of Indenture between IntelCom Group Inc. and Bankers Trust
Company for 7% Convertible Subordinated Redeemable Notes due 1998
[Incorporated by reference to Exhibit 4.3 to Registration
Statement on Form S-1 of IntelCom Group Inc., File No. 33-75636].
4.5: Form of Indenture between IntelCom Group Inc. and Bankers Trust
Company for 7% Simple Interest Convertible Subordinated
Redeemable Notes due 1998 [Incorporated by reference to Exhibit
4.4 to Registration Statement on Form S-1 of IntelCom Group Inc.,
File No. 33-75636].
4.6: Note Purchase Agreement, dated as of July 14, 1995, among the
Registrant, IntelCom Group (U.S.A.), Inc., Morgan Stanley Group
Inc., Princes Gate Investors, L.P., Acorn Partnership I, L.P.,
PGI Investments Limited, PGI Investments Limited, PGI Sweden AB,
and Gregor von Opel and Morgan Stanley Group, Inc., as Agent for
the Purchasers [Incorporated by reference to Exhibit 4.1 to Form
8-K of IntelCom Group Inc., dated July 18, 1995].
4.7: Warrant Agreement, dated as of July 14, 1995, among the
Registrant, the Committed Purchasers, and IntelCom Group
(U.S.A.), Inc., as Warrant Agent [Incorporated by reference to
Exhibit 4.2 to Form 8-K of IntelCom Group Inc., dated July 18,
1995].
4.8: First Amended and Restated Articles of Incorporation of ICG
Holdings, Inc. [Incorporated by reference to Exhibit 3.1 to
Registration Statement on Form S-4 of IntelCom Group (U.S.A.),
Inc., File No. 333-04569].
4.9: Articles of Continuation of IntelCom Group Inc. [Incorporated by
reference to Exhibit 4.1 to Registration Statement on Form S-4 of
ICG Communications, Inc., File No. 333-4226].
4.10:Indenture, dated August 8, 1995, among IntelCom Group (U.S.A.)
Inc., IntelCom Group Inc. and Norwest Bank Colorado, National
Association [Incorporated by reference to Exhibit 4.6 to
Registration Statement on Form S-4 of IntelCom Group (U.S.A.)
Inc., File Number 33-96540].
4.11:Indenture, dated April 30, 1996, among IntelCom Group (U.S.A.)
Inc., IntelCom Group Inc. and Norwest Bank Colorado, National
Association [Incorporated by reference to Exhibit 4.14 to
Registration Statement on Form S-4 of IntelCom Group (U.S.A.)
Inc., File No. 333-04569].
4.12:Indenture, dated March 11, 1997, among ICG Holdings, Inc., ICG
Communications, Inc. and Norwest Bank Colorado, National
Association [Incorporated by reference to Exhibit 4.15 to
Registration Statement on Form S-4 of ICG Communications, Inc.,
File No. 333-24359].
4.13:Written Action of the Manager of ICG Funding, LLC, dated as of
September 24, 1997, with respect to the terms of the 6 3/4%
Exchangeable Limited Liability Company Preferred Securities
[Incorporated by reference to Exhibit 4.8 to Registration
Statement on Form S-3 of ICG Funding, LLC, File No. 333-40495].
77
4.14:Amended and Restated Limited Liability Company Agreement of ICG
Funding, LLC, dated as of September 23, 1997 [Incorporated by
reference to Exhibit 4.4 to Registration Statement on Form S-3 of
ICG Funding, LLC, File No. 333-40495].
(9) Voting Trust Agreement. None.
(10) Material Contracts.
10.1:Arrangement and Support Agreement dated June 27, 1996 between
ICG Communications, Inc. and IntelCom Group Inc. [Incorporated by
reference to Exhibit 2.1 to Registration Statement on Form S-4 of
ICG Communications, Inc. (Commission File No. 333-4226)].
10.2:Stock Purchase Agreement and Accord and Satisfaction Agreement
dated June 24, 1993, between Joseph T. Buck III and William A.
Byrd and TDI [Incorporated by reference to Exhibit 3.28 to
IntelCom Group Inc.'s Annual Report on Form 20-F for the fiscal
year ended September 30, 1993].
10.3:Full Payout Net Lease dated June 7, 1993 between Applied
Telecommunications Technologies, Inc. and Teleport Denver, Inc.
[Incorporated by reference to Exhibit 3.34 to IntelCom Group
Inc.'s Annual Report on Form 20-F for the fiscal year ended
September 30, 1993.]
10.4:Full Payout Net Lease dated June 18, 1993 between Applied
Telecommunications Technologies, Inc. and Teleport Denver, Inc.
[Incorporated by reference to Exhibit 3.35 to IntelCom Group
Inc.'s Annual Report on Form 20-F for the fiscal year ended
September 30, 1993].
10.5:Full Payout Net Lease dated July 16, 1993 between Applied
Telecommunications Technologies, Inc. and Teleport Denver, Inc.
[Incorporated by reference to Exhibit 3.36 to IntelCom Group
Inc.'s Annual Report on Form 20-F for the fiscal year ended
September 30, 1993].
10.6:Full Payout Net Lease dated November 10, 1993 between Applied
Telecommunications Technologies, Inc. and Teleport Denver, Inc.
[Incorporated by reference to Exhibit 3.37 to IntelCom Group
Inc.'s Annual Report on Form 20-F for the fiscal year ended
September 30, 1993].
10.7:Stock Purchase Agreement dated August 23, 1993, between Cliff
Arellano, Nancy Arellano and TDI [Incorporated by reference to
Exhibit 3.29 to IntelCom Group Inc.'s Annual Report on Form 20-F
for the fiscal year ended September 30, 1993].
78
10.8:Asset Purchase Agreement dated November 18, 1993, between Mtel
Digital Services, Inc. and IntelCom Group Inc. [Incorporated by
reference to Exhibit 3.30 to IntelCom Group Inc.'s Annual Report
on Form 20-F for the fiscal year ended September 30, 1993].
10.9: Stock Purchase Agreement dated November 18, 1993, between
IntelCom Group Inc., TDI, Pacific Telecom Inc., PTI Harbor Bay,
Inc., Bay Area Teleport, Inc., and Upsouth Corporation
[Incorporated by reference to Exhibit 3.31 to IntelCom Group
Inc.'s Annual Report on Form 20-F for the fiscal year ended
September 30, 1993].
10.10: Agreement and Plan of Merger dated May 24, 1994, by and among
IntelCom Group Inc., IntelCom Group (U.S.A.), Inc. and FiberCAP,
Inc. [Incorporated by reference to Exhibit 10.69 to the
Registration Statement on Form S-1, Amendment No. 4 of IntelCom
Group Inc., File No. 33-76568, filed August 26, 1994].
10.11: Note Sale and Purchase Agreement dated August 3, 1994, by and
between IntelCom Group Inc., ICG Wireless Services, Inc., Noon
Investments Ltd., Melco Investments Ltd. and Polera Overseas Inc.
[Incorporated by reference to Exhibit 10.70 to the Registration
Statement on Form S-1, Amendment No. 4 of IntelCom Group Inc.,
File No. 33-76568, filed August 26, 1994].
10.12: Agreement and Plan of Merger dated July 22, 1994, by and among
IntelCom Group Inc., IntelCom Group (U.S.A.), Inc., DataCom
Integrated Systems Corporation, Larry DiGioia and Richard
Williams [Incorporated by reference to Exhibit 10.71 to the
Registration Statement on Form S-1, Amendment No. 4 of IntelCom
Group Inc., File No. 33-76568, filed August 26, 1994].
10.13: Share Exchange Agreement, dated May 31, 1994, between IntelCom
Group Inc. and Worldwide Condominium Developments, Inc.
[Incorporated by reference to Exhibit 10.71 to the Registration
Statement on Form S-1, Amendment No. 7 of IntelCom Group Inc.,
File No. 33-76568, filed October 17, 1994.]
10.14: Incentive Stock Option Plan #2 [Incorporated by reference to
Exhibit 4.1 to the Registration Statement on Form S-8 of IntelCom
Group Inc., File No. 33-86346, filed November 14, 1994].
10.15: Form of Stock Option Agreement for Incentive Stock Option Plan
#2 [Incorporated by reference to Exhibit 4.2 to the Registration
Statement on Form S-8 of IntelCom Group Inc., File No. 33-86346,
filed November 14, 1994].
10.16: Incentive Stock Option Plan #3 [Incorporated by reference to
Exhibit 4.3 to the Registration Statement on Form S-8 of IntelCom
Group Inc., File No. 33-86346, filed November 14, 1994].
10.17: Form of Stock Option Agreement for Incentive Stock Option Plan
#3 [Incorporated by reference to Exhibit 4.4 to the Registration
Statement on Form S-8 of IntelCom Group Inc., File No. 33-86346,
filed November 14, 1994].
79
10.18: 1994 Employee Stock Option Plan [Incorporated by reference to
Exhibit 4.5 to the Registration Statement on Form S-8 of IntelCom
Group Inc., File No. 33-86346, filed November 14, 1994].
10.19: Form of Stock Option Agreement for 1994 Employee Stock Option
Plan [Incorporated by reference to Exhibit 4.6 to the
Registration Statement on Form S-8 of IntelCom Group Inc., File
No. 33-86346, filed November 14, 1994].
10.20: PEDTS Acquisition Note 1994-1, dated April 29, 1994, by Pacific
& Eastern Digital Transmission Services, Inc. ("PEDTS") to
IntelCom Group (U.S.A.), Inc. ("ICG"), in the amount of
$2,928,591 [Incorporated by reference to Exhibit 10.27 to
IntelCom Group Inc.'s Annual Report on Form 10-K for the fiscal
year ended September 30, 1994].
10.21: PEDTS Acquisition Note 1994-2, dated April 29, 1994, by PEDTS
to ICG, in the amount of $1,230,475 [Incorporated by reference to
Exhibit 10.28 to IntelCom Group Inc.'s Annual Report on Form 10-K
for the fiscal year ended September 30, 1994].
10.22: PEDTS Acquisition Note 1994-3, dated April 29, 1994, by PEDTS
to ICG, in the amount of $932,239 [Incorporated by reference to
Exhibit 10.29 to IntelCom Group Inc.'s Annual Report on Form 10-K
for the fiscal year ended September 30, 1994].
10.23: TTC Acquisition Note, dated November 3, 1994, by Teleport
Transmission Holdings, Inc. to ICG, in the amount of $125,242.33
[Incorporated by reference to Exhibit 10.30 to IntelCom Group
Inc.'s Annual Report on Form 10-K for the fiscal year ended
September 30, 1994].
10.24: Agreement and Assignment, dated July 24, 1995, by Teleport
Transmission Holdings, Inc., IntelCom Group (U.S.A.), Inc.,
William W. Becker, Michael L. Glaser, William J. Laggett, Jay E.
Ricks and Gary Bryson. [Incorporated by reference to Exhibit
10.26 to IntelCom Group Inc.'s Annual Report on Form 10-K for the
fiscal year ended September 30, 1995].
10.25: Employment Agreement, dated as of May 30, 1995, between
IntelCom Group Inc. and J. Shelby Bryan [Incorporated by
reference to Exhibit 10.5 to Form 8-K of IntelCom Group Inc., as
filed on August 2, 1995].
10.26: Stock Option Agreement, dated as of May 30, 1995, between
IntelCom Group Inc. and J. Shelby Bryan [Incorporated by
reference to Exhibit 10.6 to Form 8-K of IntelCom Group Inc., as
filed on August 2, 1995].
10.27: Indemnification Agreement, dated as of May 30, 1995, between
IntelCom Group Inc. and J. Shelby Bryan [Incorporated by
reference to Exhibit 10.7 to Form 8-K of IntelCom Group Inc., as
filed on August 2, 1995].
10.28: Letter Agreement, dated July 12, 1995, between IntelCom Group
Inc. and Larry L. Becker [Incorporated by reference to Exhibit
10.8 to Form 8-K of IntelCom Group Inc., as filed on August 2,
1995].
80
10.29: Agreement and General Release, made effective July 12, 1995,
between IntelCom Group Inc. and Larry L. Becker [Incorporated by
reference to Exhibit 10.9 to Form 8-K of IntelCom Group Inc., as
filed on August 2, 1995].
10.30: Subscription and Exchange Agreement, dated as of July 14, 1995,
among IntelCom Group Inc., IntelCom Group (U.S.A.), Inc., Princes
Gate Investors, L.P., Acorn Partnership I, L.P., PGI Investments
Limited, PGI Sweden AB, and Gregor von Opel [Incorporated by
reference to Exhibit 10.4 to Form 8-K of IntelCom Group Inc., as
filed on August 2, 1995].
10.31: Security Agreement, dated July 18, 1995, from IntelCom Group
(U.S.A.), Inc. as issuer, and the Grantors named therein, as
grantors, to MS Group, as agent [Incorporated by reference to
Exhibit 10.1 to Form 8-K of IntelCom Group Inc., as filed on
August 2, 1995].
10.32: Pledge Agreement, dated July 18, 1995, from IntelCom Group
Inc., as a pledgor, to MS Group, as agent [Incorporated by
reference to Exhibit 10.2 to Form 8-K of IntelCom Group Inc., as
filed on August 2, 1995].
10.33: Subsidiary Guarantee, dated July 18, 1995, from the persons set
forth on the signature pages thereof, as guarantors, in favor of
the purchasers to the Note Purchase Agreement referred to
therein, and MS Group, as agent [Incorporated by reference to
Exhibit 10.3 to Form 8-K of IntelCom Group Inc., as filed on
August 2, 1995].
10.34: Placement Agreement, dated as of August 3, 1995, among IntelCom
Group Inc., IntelCom Group (U.S.A.), Inc., certain subsidiaries
of IntelCom Group (U.S.A.), Inc. and Morgan Stanley & Co.
Incorporated [Incorporated by reference to Exhibit 10.1 to Form
8-K of IntelCom Group Inc., as filed on August 9, 1995].
10.35: Form of Exchange Agent Agreement between IntelCom Group
(U.S.A.), Inc. and Norwest Banks [Incorporated by reference to
Exhibit 10.11 to Registration Statement on Form S-4 of IntelCom
Group (U.S.A.), Inc., File No. 33-96540].
10.36: Employment Agreement between IntelCom Group Inc. and James D.
Grenfell, dated November 1, 1995. [Incorporated by reference to
Exhibit 10.38 to IntelCom Group Inc.'s Annual Report on Form
10-K/A for the fiscal year ended September 30, 1995].
10.37: Employment Agreement between Fiber Optic Technologies, Inc. and
Mark S. Helwege, dated July 8, 1996 [Incorporated by reference to
Exhibit 10.39 to ICG Communications, Inc.'s Annual Report on Form
10-K/A for the fiscal year ended September 30, 1996.]
10.38: Purchase and Sale Agreement, dated as of October 19, 1995, by
and among ICG Wireless Services, Inc., IntelCom Group (U.S.A.),
Inc., UpSouth Corporation and Vyvx, Inc. [Incorporated by
reference to Exhibit 10.40 to IntelCom Group Inc.'s Annual Report
on Form 10-K for the fiscal year ended September 30, 1995].
81
10.39: Employment Agreement between ICG Satellite Services, Inc. and
Douglas I. Falk, dated August 14, 1996 [Incorporated by reference
to Exhibit 10.41 to ICG Communications, Inc.'s Annual Report on
Form 10-K/A for the fiscal year ended September 30, 1996.]
10.40: ICG Communications, Inc., 401(k) Wrap Around Deferred
Compensation Plan. [Incorporated by reference to Exhibit 10.42 to
ICG Communications, Inc.'s Annual Report on Form 10-K/A for the
fiscal year ended September 30, 1996.]
10.41: ICG Communications, Inc. 1996 Employee Stock Purchase Plan.
[Incorporated by reference to the Registration Statement on Form
S-8 of ICG Communications, Inc., File No. 33-14127, filed on
October 14, 1996].
10.42: Consulting Services Agreement, by and between IntelCom Group
Inc. and International Communications Consulting, Inc., effective
January 1, 1996 [Incorporated by reference to Exhibit 10.44 to
ICG Communications, Inc.'s Transition Report on Form 10-K/A for
the three months ended December 31, 1996].
10.43: Confidential General Release and Convenant Not to Sue, by and
between ICG Communications, Inc. and John D. Field, dated
November 5, 1996 [Incorporated by reference to Exhibit 10.45 to
ICG Communications, Inc.'s Transition Report on Form 10-K/A for
the three months ended December 31, 1996].
10.44: 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 [Incorporated by reference to Exhibit 10 to
ICG Communications, Inc.'s Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1997].
10.45: 1996 Stock Option Plan [Incorporated by reference to Exhibit
4.6 to the Registration Statement on Form S-8 of ICG
Communications, Inc., File No. 333-25957, filed on April 28,
1997].
10.46: Amendment No. 1 to the ICG Communications, Inc. 1996 Stock
Option Plan.
10.47: Consulting Agreement, dated as of May 12, 1997, between ICG
Communications, Inc. and Jay E. Ricks [Incorporated by reference
to Exhibit 10.1 to ICG Communications, Inc.'s Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1997].
10.48: Employment Agreement, dated as of April 22, 1997, between ICG
Communications, Inc. and Don Teague [Incorporated by reference to
Exhibit 10.2 to ICG Communications, Inc.'s Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1997].
10.49: Amendment No. 2 to the ICG Communications, Inc. 1996 Stock
Option Plan [Incorporated by reference to Exhibit 10.1 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1997].
10.50: Employment Agreement, dated October 17, 1997, between
Communications Buying Group, Inc. and Robert Daly [Incorporated
by reference to Exhibit 10.2 to ICG Communications, Inc.'s
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1997].
82
10.51: Employment Agreement, dated June 1, 1997, between NETCOM
On-Line Communication Services, Inc. and David W. Garrison.
10.52a: Purchase Agreement between ICG Holdings, Inc. and TriNet
Corporate Realty Trust, Inc., dated December 9, 1997.
10.52b: First Amendment to Purchase Agreement, by and between ICG
Holdings, Inc. and TriNet Essential Facilities X, Inc., dated
January 15, 1998.
10.52c: Assignment of Purchase Agreement, by and between TriNet
Corporate Realty Trust, Inc., dated January 15, 1998.
10.52d: Commercial Lease - Net between TriNet Essential Facilities X,
Inc. and ICG Holdings, Inc., dated January 15, 1998.
10.52e: Continuing Lease Guaranty, by ICG Communications, Inc. to
TriNet Essential Facilities X, Inc., dated January 20, 1998.
10.52f: Continuing Lease Guaranty, by ICG Holdings (Canada), Inc. to
TriNet Essential Facilities X, Inc., dated January 20, 1998.
10.53: Agreement and Plan of Merger, dated October 12, 1997, by and
among ICG Communications, Inc., ICG Acquisition, Inc. and NETCOM
On-Line Communication Services, Inc. [Incorporated by reference
to Exhibit 2.1 to Form 8-K, dated January 21, 1998].
10.54: Amendment to Agreement and Plan of Merger, dated December 15,
1997, by and among ICG Communications, Inc., ICG Acquisition,
Inc. and NETCOM On-Line Communication Services, Inc.
[Incorporated by reference to Exhibit 2.2 to Form 8-K, dated
January 21, 1998].
(11) Statement re Computation of per Share Earnings.
Not Applicable
(12) Statement re Computation of Ratios.
Not Applicable
(13) Annual Report to Security Holders.
Not Applicable
(18) Letter re Change in Accounting Principles. Letter dated March 22, 1996
from KPMG Peat Marwick LLP to the Company [Incorporated by reference
to Exhibit 18 to IntelCom Group Inc.'s Quarterly Report on Form 10-Q/A
for the quarter ended December 31, 1995].
(21) Subsidiaries of the Registrant.
(22) Published Report re Matters Submitted to Vote of Security Holders.
Not Applicable
83
(23) Consent.
23.1: Consent of KPMG Peat Marwick LLP.
(24) Power of Attorney.
Not Applicable
(27) Financial Data Schedule.
(99) Additional Exhibits.
99.1:Report by the FCC on Preliminary Statistics of Communications
Common Carriers (1993 Edition) (pp. 39-40) [Incorporated by
reference to Exhibit 99.8 to the Registration Statement on Form
S-1, Amendment No. 4 of IntelCom Group Inc., File No. 33-76568,
filed August 26, 1994].
99.2:In re Expanded Interconnection with Local Telephone Company
Facilities (Phases I & II) (FCC 1992) [Incorporated by reference
to Exhibit 3.46 to IntelCom Group Inc.'s Annual Report on Form
20-F for the fiscal year ended September 30, 1993].
99.3:In re Teleport Transmission Holdings, (FCC 1993) [Incorporated
by reference to Exhibit 3.49 to IntelCom Group Inc.'s Annual
Report on Form 20-F for the fiscal year ended September 30,
1993].
(B) Report on Form 8-K. The following report on Form 8-K was filed by the
Registrants during the fiscal quarter ended December 31, 1997:
ICG Communications, Inc. Current Report on Form 8-K dated October
ICG Holdings (Canada), Inc. 21, 1997, announcing the proposed merger
ICG Holdings, Inc.: between ICG Communications, Inc. and NETCOM
On-Line Communication Services, Inc.
(C) Exhibits. The exhibits required by this Item are listed under Item
14(A)(3).
(D) Financial Statement Schedule. The financial statement schedule required by
this Item is listed under Item 14(A)(2).
F-1
FINANCIAL STATEMENTS
Page
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets, December 31, 1996 and 1997 . . . . . F-3
Consolidated Statements of Operations, Fiscal Years Ended
September 30, 1995 and 1996, the Three Months Ended
December 31, 1995 (unaudited) and 1996, and Fiscal
Year Ended December 31, 1997 . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Equity (Deficit),
Fiscal Years Ended September 1994, 1995 and 1996,
the Three Months Ended December 31, 1996, and Fiscal Year
Ended December 31, 1997 . . . . . . . . . . . . . . . . . . . . . F-7
Consolidated Statements of Cash Flows, Fiscal Years Ended
September 30, 1995 and 1996, the Three Months Ended
December 31, 1995 (unaudited) and 1996, and Fiscal Year Ended
December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . F-9
Notes to Consolidated Financial Statements, December 31,
1996 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . F-12
F-2
Independent Auditors' Report
The Board of Directors and Stockholders
ICG Communications, Inc.:
We have audited the accompanying consolidated balance sheets of ICG
Communications, Inc. and subsidiaries as of December 31, 1996 and 1997 and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the fiscal years ended September 30, 1995 and 1996, the
three-month period ended December 31, 1996, and the fiscal year ended December
31, 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ICG Communications,
Inc. and subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for the fiscal years ended September 30, 1995
and 1996, the three-month period ended December 31, 1996, and the fiscal year
ended December 31, 1997, in conformity with generally accepted accounting
principles.
As explained in note 2 to the consolidated financial statements, during the
fiscal year ended September 30, 1996, the Company changed its method of
accounting for long-term telecom services contracts.
KPMG Peat Marwick LLP
Denver, Colorado
February 19, 1998
F-3
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1997
- --------------------------------------------------------------------------------
December 31,
------------------------------------------------
Assets 1996 1997
- ------
------------------------ ----------------------
(in thousands)
Current assets:
Cash and cash equivalents $ 359,934 118,834
Short-term investments available for sale (note 4) 32,601 98,181
Receivables:
Trade, net of allowance of $2,515 and $5,376 at
December 31, 1996 and 1997, respectively 41,131 59,042
Revenue earned, but unbilled 6,053 8,599
Due from affiliate (note 5) - 9,384
Other (note 8) 1,440 1,696
------------------------ ----------------------
48,624 78,721
------------------------ ----------------------
Inventory 2,845 3,901
Prepaid expenses and deposits 5,019 10,543
Notes receivable, net 200 -
------------------------ ----------------------
Total current assets 449,223 310,180
------------------------ ----------------------
Property and equipment (notes 6, 9 and 10) 460,221 738,488
Less accumulated depreciation (56,545) (106,321)
------------------------ ----------------------
Net property and equipment 403,676 632,167
------------------------ ----------------------
Investments (note 3) 5,170 -
Long-term notes receivable from affiliate and others,
net(note 5) 623 10,375
Restricted cash (notes 11 and 14) 13,333 38,749
Other assets, net of accumulated amortization:
Goodwill (note 3) 31,881 77,562
Deferred financing costs (note 10) 21,963 23,196
Transmission and other licenses 8,526 6,031
Other (note 7) 9,738 9,404
------------------------ ----------------------
72,108 116,193
------------------------ ----------------------
$ 944,133 1,107,664
======================== ======================
(Continued)
F-4
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
- --------------------------------------------------------------------------------
December 31,
----------------------------------------------
Liabilities and Stockholders' Deficit 1996 1997
- -------------------------------------
------------------------ ---------------------
(in thousands)
Current liabilities:
Accounts payable $ 24,813 29,143
Accrued liabilities 31,890 57,691
Deferred revenue 5,419 5,049
Current portion of capital lease obligations (notes 9 and 14) 24,683 5,637
Current portion of long-term debt (note 10) 817 1,784
------------------------ ---------------------
Total current liabilities 87,622 99,304
------------------------ ---------------------
Capital lease obligations, less current portion (note 9) 71,146 66,939
Long-term debt, net of discount, less current portion (note 10) 690,358 890,568
------------------------ ---------------------
Total liabilities 849,126 1,056,811
------------------------ ---------------------
Minority interests 1,967 -
Redeemable preferred stock of subsidiary ($164.8 million and $301.2 million
liquidation value at December 31, 1996 and 1997, respectively) (notes 10
and 11) 159,120 292,442
Company-obligated mandatorily redeemable preferred securities of subsidiary
limited liability company which holds solely Company preferred stock ($133.4
million liquidation value at December 31, 1997) (note 11)
- 127,729
Stockholders' deficit:
Common stock (notes 1 and 12) 8,088 647
Additional paid-in capital 294,472 326,318
Accumulated deficit (368,640) (696,283)
------------------------ ---------------------
Total stockholders' deficit (66,080) (369,318)
------------------------ ---------------------
Commitments and contingencies (notes 8, 9, 10, 11 and 14)
$ 944,133 1,107,664
======================== =====================
See accompanying notes to consolidated financial statements.
F-5
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Fiscal Years Ended September 30, 1995 and 1996,
the Three Months Ended December 31, 1995 (unaudited) and 1996,
and Fiscal Year Ended December 31, 1997
- --------------------------------------------------------------------------------
Fiscal years ended Three months ended Fiscal year ended
September 30, December 31, December 31,
----------------------------- ---------------------------
1995 1996 1995 1996 1997
-------------- -------------- ------------- ------------- ------------------
(unaudited)
(in thousands, except per share data)
Revenue:
Telecom services (note 2) $ 32,330 87,681 13,513 34,787 177,690
Network services (note 17) 58,778 60,116 15,718 15,981 65,678
Satellite services (note 13) 20,502 21,297 6,168 6,188 29,986
-------------- -------------- ------------- ------------- ------------------
Total revenue 111,610 169,094 35,399 56,956 273,354
-------------- -------------- ------------- ------------- ------------------
Operating costs and expenses:
Operating costs 78,846 135,253 27,110 49,929 246,418
Selling, general and administrative
expenses 62,954 76,725 18,628 24,253 150,767
Depreciation and amortization (note 2) 16,624 30,368 4,919 9,825 57,081
Net loss (gain) on disposal of
long-lived assets (note 3) 241 5,128 1,030 (772) 671
Provision for impairment of
long-lived assets (note 3) 7,000 9,994 - - 11,950
-------------- -------------- ------------- ------------- ------------------
Total operating costs and expenses 165,665 257,468 51,687 83,235 466,887
-------------- -------------- ------------- ------------- ------------------
Operating loss (54,055) (88,374) (16,288) (26,279) (193,533)
Other income (expense):
Interest expense (note 10) (24,368) (85,714) (15,215) (24,454) (117,545)
Interest income 4,162 19,300 3,750 5,962 21,907
Other, net (note 10) (523) (3,877) 7 (64) (660)
-------------- -------------- ------------- ------------- ------------------
(20,729) (70,291) (11,458) (18,556) (96,298)
-------------- -------------- ------------- ------------- ------------------
Loss before income taxes, minority
interest, share of losses and
cumulative effect of change in
accounting (74,784) (158,665) (27,746) (44,835) (289,831)
Income tax benefit (note 15) - 5,131 - - -
-------------- -------------- ------------- ------------- ------------------
Loss before minority interest, share of
losses and cumulative effect of
change in accounting (74,784) (153,534) (27,746) (44,835) (289,831)
Minority interest in share of losses, net
of accretion and preferred dividends
on preferred securities of subsidiaries
(note 11) (1,123) (25,306) (3,215) (4,988) (37,812)
Share of losses of joint venture and
investment (note 3) (741) (1,814) (228) - -
-------------- -------------- ------------- ------------- ------------------
Loss before cumulative effect of change
in accounting (76,648) (180,654) (31,189) (49,823) (327,643)
Cumulative effect of change in accounting - (3,453) (3,453) - -
-------------- -------------- ------------- ------------- ------------------
Net loss $ (76,648) (184,107) (34,642) (49,823) (327,643)
============== ============== ============= ============= ==================
(Continued)
F-6
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations, Continued
- --------------------------------------------------------------------------------
Fiscal years ended Three months ended Fiscal year ended
September 30, December 31, December 31,
----------------------------- ------------------------------
1995 1996 1995 1996 1997
-------------- -------------- --------------- -------------- ------------------
(unaudited)
(in thousands, except per share data)
Loss per share - basic and diluted:
Loss before cumulative effect of
change in accounting $ (3.25) (6.70) (1.24) (1.56) (10.11)
Cumulative effect of change in
accounting - (0.13) (0.14) - -
============== ============== =============== ============== ==================
Loss per share - basic and
diluted (3.25) (6.83) (1.38) (1.56) (10.11)
============== ============== =============== ============== ==================
Weighted average number of shares
outstanding - basic and diluted 23,604 26,955 25,139 31,840 32,399
============== ============== =============== ============== ==================
See accompanying notes to consolidated financial statements.
F-7
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Fiscal Years Ended September 30, 1995 and 1996, the
Three Months Ended December 31, 1996, and Fiscal Year Ended December 31, 1997
- --------------------------------------------------------------------------------
Additional Total
Common stock paid-in Accumulated stockholders'
Shares Amount capital deficit equity
(deficit)
-------------- -------------- ------------- ------------- --------------
(in thousands)
Balances at October 1, 1994 17,047 $ 95,606 2,200 (58,024) 39,782
Shares issued for cash (note 12):
Public offering and private placements 6,312 84,498 - - 84,498
Public offering and private placement costs - (6,162) - - (6,162)
Exercise of options and warrants 338 1,471 - - 1,471
Shares issued as repayment of debt and related
accrued interest(note 10) 683 9,482 - - 9,482
Shares issued in connection with business
combinations (note 3) 130 1,737 - - 1,737
Conversion of ICG Holdings (Canada), Inc.
preferred shares 302 2,000 - - 2,000
Shares issued as contribution to 401(k) plan
(note 16) 38 490 - - 490
Warrants issued in connection with offerings
(notes 10, 11 and 12) - - 24,134 - 24,134
Change in foreign currency translation adjustment - - - (38) (38)
Compensation expense related to issuance of
common stock options - - 158 - 158
Shares issued in exchange for investments and
other assets 123 1,398 - - 1,398
Shares issued as payment of trade payables 18 233 - - 233
Net loss - - - (76,648) (76,648)
------------- -------------- -------------- ------------- --------------
Balances at September 30, 1995 24,991 190,753 26,492 (134,710) 82,535
Shares issued for cash in connection with the
exercise of options and warrants 1,522 1,742 152 - 1,894
Shares issued as repayment of debt and related
accrued interest (note 10) 130 687 - - 687
Shares issued in connection with business
combinations (note 3) 64 749 - - 749
Conversion of ICG Holdings (Canada), Inc.
preferred shares 496 3,780 - - 3,780
Shares issued as contribution to 401(k) plan
(note 16) 87 856 300 - 1,156
Shares issued upon conversion of subordinated
notes (note 10) 4,413 76,336 - - 76,336
Repurchase of warrants - - (2,671) - (2,671)
Compensation expense related to issuance of
common stock options - - 53 - 53
Exchange of ICG Holdings (Canada), Inc. common
shares for ICG common stock - (248,682) 248,682 - -
Net loss - - - (184,107) (184,107)
------------- -------------- -------------- ------------- --------------
Balances at September 30, 1996 31,703 $ 26,221 273,008 (318,817) (19,588)
(Continued)
F-8
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit), Continued
- --------------------------------------------------------------------------------
Additional Total
Common stock paid-in Accumulated stockholders'
Shares Amount capital deficit equity
(deficit)
------------- ------------- ------------- -------------- --------------
(in thousands)
Shares issued for cash in connection with the
exercise of options and warrants 132 $ 1,800 284 - 2,084
Shares issued in connection with business
combination (note 3) 18 - 350 - 350
Shares issued as contribution to 401(k) plan
(note 16) 19 - 480 - 480
Shares issued upon conversion of subordinated
notes (note 10) 23 417 - - 417
Exchange of ICG Holdings (Canada), Inc. common
shares for ICG common stock - (20,350) 20,350 - -
Net loss - - - (49,823) (49,823)
------------- ------------- ------------- -------------- --------------
Balances at December 31, 1996 31,895 8,088 294,472 (368,640) (66,080)
Shares issued for cash in connection with the
exercise of options and warrants 938 5 4,111 - 4,116
Shares issued in connection with business
combination (note 3) 687 7 15,953 - 15,960
Shares issued for cash in connection with
employee stock purchase plan 109 1 1,318 - 1,319
Shares issued as contribution to 401(k)
plan (note 16) 179 2 3,008 - 3,010
Exchange of ICG Holdings (Canada), Inc. common
shares for ICG common stock - (7,456) 7,456 - -
Net loss - - - (327,643) (327,643)
------------- ------------- ------------- -------------- --------------
Balances at December 31, 1997 33,808 $ 647 326,318 (696,283) (369,318)
============= ============= ============= ============== ==============
See accompanying notes to consolidated financial statements.
F-9
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Fiscal Years Ended September 30, 1995 and 1996,
the Three Months Ended December 31, 1995 (unaudited) and 1996,
and Fiscal Year Ended December 31, 1997
- --------------------------------------------------------------------------------
Fiscal years ended Three months ended Fiscal year ended
September 30, December 31, December 31,
--------------------------- ----------------------------
1995 1996 1995 1996 1997
------------- ------------- ------------- ---------------------------------
(unaudited)
(in thousands)
Cash flows from operating activities:
Net loss $ (76,648) (184,107) (34,642) (49,823) (327,643)
Adjustments to reconcile net loss to net cash
used by operating activities:
Cumulative effect of change in accounting - 3,453 3,453 - -
Share of losses of joint venture and investment 741 1,814 228 - -
Minority interest in share of losses, net of
accretion and non-cash preferred dividends
on preferred securities of subsidiaries 656 24,279 2,188 4,988 35,457
Depreciation and amortization 16,624 30,368 4,919 9,825 57,081
Compensation expense related to issuance of
common stock options 158 53 14 - -
Interest expense deferred and included in
long-term debt 14,068 63,951 12,004 22,087 102,947
Amortization of deferred financing costs
included in interest expense 989 2,573 527 612 2,514
Write-off of non operating assets - 2,650 - - 200
Contribution to 401(k) plan through issuance
of common shares 490 1,156 405 480 3,010
Deferred income tax benefit - (5,329) - - -
Provision for impairment of long-lived assets 7,000 9,994 - - 11,950
Net loss (gain) on disposal of long-lived
assets 241 5,128 1,030 (772) 671
Change in operating assets and liabilities,
excluding the effects of business acquisitions,
dispositions and non-cash transactions:
Receivables (6,092) (13,293) (3,742) (7,790) (24,452)
Inventory (447) (1,200) (272) 361 (2,822)
Prepaid expenses and deposits (2,482) (2,975) (459) (910) (5,405)
Accounts payable and accrued liabilities 514 16,674 8,970 9,731 19,908
Deferred revenue 1,390 1,454 779 2,575 (370)
------------- ------------ ------------- -------------- -----------------
Net cash used by operating activities $ (42,798) (43,357) (4,598) (8,636) (126,954)
------------- ------------- ------------- -------------- -----------------
(Continued)
F-10
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
- --------------------------------------------------------------------------------
Fiscal years ended Three months ended Fiscal year
September 30, December 31, ended December
31,
-------------------------- -------------------------
1995 1996 1995 1996 1997
------------ ------------ ------------- ----------- ------------------
(unaudited)
(in thousands)
Cash flows from investing activities:
(Increase) decrease in notes receivable from
affiliate and others $ 348 4 (1,263) 133 (9,552)
Advances to affiliates (2,184) (109) (15) - -
Investment in and advances to joint venture (5,452) (4,308) - - -
Payments for business acquisitions, net of cash
acquired (8,168) (8,441) - - (45,861)
Acquisition of property, equipment and other
assets (50,066) (122,277) (26,798) (50,818) (269,593)
Payments for construction of new headquarters - (1,501) - (7,945) (29,432)
Proceeds from disposition of property, equipment
and other assets - 21,593 21,146 2,057 15,567
Purchase of short-term investments - (6,832) (4,979) (25,769) (65,580)
Increase in restricted cash - (13,333) (13,333) - (25,416)
Other investments (6,061) - - - -
------------ ------------ ------------- ----------- ------------------
Net cash used by investing activities (71,583) (135,204) (25,242) (82,342) (429,867)
------------ ------------ ------------- ----------- ------------------
Cash flows from financing activities:
Proceeds from issuance of common stock:
Common stock offering 84,498 - - - -
Business combination (note 3) - - - - 15,960
Exercise of stock options and warrants 1,471 1,894 101 2,084 4,116
Employee stock purchase plan - - - - 1,319
Proceeds from issuance of redeemable preferred
securities of subsidiaries, net of issuance
costs 28,800 144,000 - - 223,628
Proceeds from issuance of convertible preferred
stock of subsidiary 16,000 - - - -
Offering costs related to common and preferred
stock offerings (5,565) - - - -
Redemption of preferred shares (3,800) (5,570) (5,570) - -
Repurchase of redeemable preferred stock of
subsidiary and payment of accrued dividend - (32,629) - - -
Repurchase of redeemable warrants - (2,671) - - -
Proceeds from issuance of short-term debt - 17,500 17,500 - -
Principal payments on short-term debt - (21,192) (3,692) - -
Proceeds from issuance of long-term debt 305,613 300,034 - - 99,908
Deferred debt issuance costs (13,641) (11,915) - - (3,554)
Principal payments on long-term debt (29,333) (16,920) (13,761) (279) (1,598)
Principal payments on capital lease obligations (6,271) (12,304) (2,991) (1,975) (24,058)
------------ ----------- ------------- ----------- ------------------
Net cash provided (used) by financing
activities 377,772 360,227 (8,413) (170) 315,721
------------ ----------- ------------- ----------- ------------------
Net (decrease) increase in cash and cash
equivalents 263,391 181,666 (38,253) (91,148) (241,100)
Cash and cash equivalents, beginning of period 6,025 269,416 269,416 451,082 359,934
------------ ----------- ------------- ----------- ------------------
Cash and cash equivalents, end of period $269,416 451,082 231,163 359,934 118,834
------------ ----------- ------------- ----------- ------------------
(Continued)
F-11
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
- --------------------------------------------------------------------------------
Fiscal years ended Three months ended Fiscal year ended
September 30, December 31, December 31,
------------------------- -------------------------
1995 1996 1995 1996 1997
------------ ----------- ----------- ------------ -------------------
(unaudited)
(in thousands)
Supplemental disclosure of cash flows information:
Cash paid for interest $ 9,311 19,190 2,684 1,755 12,084
============ =========== =========== ============ ===================
Supplemental schedule of non-cash investing and
financing activities:
Common shares issued in connection with
business combinations, repayment of debt or
conversion of liabilities to equity $ 11,452 77,772 - 350 -
============ =========== =========== ============ ===================
Common shares issued in exchange for notes
receivable, investments and other assets $ 1,398 - - - -
============ =========== =========== ============ ===================
Assets acquired under capital leases and
through the issuance of debt or warrants
(note 14) $ 38,670 55,030 84 19,479 -
============ =========== =========== ============ ===================
Reclassification of investment in joint
venture to long-term notes receivable $ 6,882 - - - -
============ =========== =========== ============ ===================
Conversion of notes receivable related to
business combinations $ 6,330 - - - -
============ =========== =========== ============ ===================
Capitalized interest on assets under
construction $ - 4,916 - 1,966 3,179
============ =========== =========== ============ ===================
See accompanying notes to consolidated financial statements.
F-12
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1997
- -------------------------------------------------------------------------------
(1) Organization and Nature of Business
ICG Communications, Inc., a Delaware corporation ("ICG"), was incorporated
on April 11, 1996, for the purpose of becoming the new publicly-traded U.S.
parent company of ICG Holdings (Canada), Inc., a Canadian federal
corporation ("Holdings-Canada"), ICG Holdings, Inc., a Colorado corporation
("Holdings"), and its subsidiaries. Pursuant to a Plan of Arrangement (the
"Arrangement"), which was approved by Holdings-Canada shareholders on July
30, 1996, and by the Ontario Court of Justice on August 2, 1996, each
shareholder of Holdings-Canada exchanged their common shares on a
one-for-one basis for either (i) shares of $.01 par value common stock of
ICG (the "Common Stock"), or (ii) Class A common shares of Holdings-Canada
(which are exchangeable at any time on a one-for-one basis into shares of
ICG Common Stock). On August 2, 1996, 28,795,132, or approximately 98%, of
the total issued and outstanding common shares of Holdings-Canada were
exchanged for an equal number of shares of Common Stock of ICG. In
accordance with generally accepted accounting principles, the Arrangement
was accounted for in a manner similar to a pooling of interests since ICG
and Holdings-Canada had common shareholders, and the number of shares
outstanding and the weighted average number of shares outstanding reflect
the equivalent shares outstanding for the combined companies. On September
17, 1997, ICG formed a new special purpose entity, ICG Funding, LLC, a
Delaware limited liability company and wholly owned subsidiary of ICG ("ICG
Funding"). ICG and its subsidiaries are collectively referred to as the
"Company."
The Company's principal business activity is telecommunications services,
including Telecom Services, Network Services and Satellite Services, and as
of January 21, 1998, the Company also began providing Internet Services,
through its recently acquired subsidiary, NETCOM On-Line Communication
Services, Inc. ("NETCOM"). Telecom Services consists of the Company's
competitive local exchange carrier operations which provide services to
business end users, long distance carriers and resellers. Network Services
supplies information technology services and selected networking products,
focusing on network design, installation, maintenance and support for a
variety of end users, including Fortune 1000 firms and other large
businesses and telecommunications companies. Satellite Services provides
satellite voice and data services to major cruise ship lines, the
commercial shipping industry, yachts, the U.S. Navy and offshore oil
platforms. The Company intends to dispose of its Satellite Services
operations to better focus on its core Telecom Services unit, although it
has not entered into a formal arrangement for such dispostion. Beginning in
1998, the Company's Internet Services
F-13
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1997
- -------------------------------------------------------------------------------
(1) Organization and Nature of Business
includes Internet access, World Wide Web (the "Web") site hosting services
and other value-added connectivity services, which are primarily targeted
to small and medium-sized business customers in the United States, Canada
and the United Kingdom.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the
United States, and include the accounts of the Company and its
majority and wholly owned subsidiaries. Financial information prior to
the completion of the Arrangement on August 2, 1996 represents the
financial position and results of operations of Holdings-Canada and
Holdings, which are considered to be predecessor entities to ICG.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
(b) Change in Fiscal Year End
The Company changed its fiscal year end to December 31 from September
30, effective January 1, 1997. References to fiscal 1995, 1996 and
1997 relate to the years ended September 30, 1995 and 1996 and
December 31, 1997, respectively.
Unaudited consolidated statements of operations and cash flows for the
three months ended December 31, 1995 have been included in the
accompanying consolidated financial statements for comparative
purposes.
F-14
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
(c) Cash Equivalents and Short-term Investments Available for Sale
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. The Company
invests primarily in high grade short-term investments which consist
of money market instruments, commercial paper, certificates of
deposit, government obligations and corporate bonds, all of which are
considered to be available for sale and generally have maturities of
one year or less. The Company's short-term investment objectives are
safety, liquidity and yield, in that order. The Company carries all
cash equivalents and short-term investments at cost, which
approximates fair value.
(d) Inventory
Inventory, consisting of satellite systems equipment and equipment to
be utilized in the installation of communications systems, services
and networks for customers, is recorded at the lower of cost or
market, using the first-in, first-out method of accounting for cost.
(e) Investments
Investments in joint ventures are accounted for using the equity
method, under which the Company's share of earnings or losses of the
joint ventures are reflected in operations and dividends are credited
against the investment when received. Losses recognized in excess of
the Company's investment due to additional investment or financing
requirements, or guarantees, are recorded as a liability in the
consolidated financial statements. Other investments representing an
interest of 20% or more, but less than 50%, are accounted for using
the equity method of accounting. Investments of less than a 20% equity
interest are accounted for using the cost method, unless the Company
exercises significant influence and/or control over the operations of
the investee company, in which case the equity method is used.
F-15
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
(f) Property and Equipment
Property and equipment are stated at cost. Costs of construction are
capitalized, including interest costs related to construction.
Equipment held under capital leases is stated at the lower of the fair
value of the asset or the net present value of the minimum lease
payments at the inception of the lease. For equipment held under
capital leases, depreciation is provided using the straight-line
method over the estimated useful lives of the assets owned, or the
related lease term, whichever is shorter.
Estimated useful lives of major categories of property and equipment
are as follows: Office furniture and equipment 3 to 7 years Buildings
and improvements 31.5 years Machinery and equipment 3 to 8 years
Switch equipment 10 years Fiber optic transmission system 20 years
The Company capitalizes the direct costs associated with the
installation of dial tone customers' service, including labor and an
allocation of overhead costs, and amortizes these costs over two
years, the estimated average customer contract term.
(g) Other Assets
Amounts related to the acquisition of transmission and other licenses
are recorded at cost and amortized over 20 years using the
straight-line method. Goodwill results from the application of the
purchase method of accounting for business combinations and is
amortized over a maximum of 20 years using the straight-line method.
Rights of way, minutes of use, and non-compete agreements are recorded
at cost, and amortized using the straight-line method over the terms
of the agreements, ranging from 2 to 12 years.
Amortization of deferred financing costs is provided over the life of
the related financing agreement, the maximum term of which is 10
years.
F-16
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
(h) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting periods. Actual results
could differ from those estimates.
(i) Revenue Recognition
The Company recognizes Telecom Services and Satellite Services revenue
as services are provided and charges direct selling expenses to
operations as incurred. Revenue from Network Services contracts for
the design and installation of communication systems and networks,
which are generally short-term in duration, is recognized using the
percentage of completion method of accounting. Maintenance revenue is
recognized as services are provided. Uncollectible trade receivables
are accounted for using the allowance method.
Revenue which has been earned under the percentage of completion
method, but has not been billed to the customer is included in
receivables-revenue earned, but unbilled in the consolidated financial
statements. Deferred revenue includes monthly advance billings to
customers for certain services provided by the Company's Telecom
Services and Satellite Services, as well as Network Services revenue
which has been billed to the customer in compliance with contract
terms, but not yet earned under the percentage of completion method.
Prior to January 1, 1996, the Company recognized Telecom Services
revenue in an amount equal to the non-cancelable portion of the
contract, which is a minimum of one year on a three-year or longer
contract, at the inception of the contract and upon activation of
service to the customer to the extent of direct installation and
selling expenses incurred in obtaining customers during the period in
which such revenue
F-17
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
was recognized. Revenue recognized in excess of normal monthly
billings during the year was limited to an amount which did not exceed
such installation and selling expense. The remaining revenue from the
contract was recognized ratably over the remaining non-cancelable
portion of the contract. The Company believes the new method is
preferable because it provides a better matching of revenue and
related operating expenses and is more consistent with accounting
practices within the telecommunications industry. As required by
generally accepted accounting principles, the Company has reflected
the effects of the change in accounting as if such change had been
adopted as of October 1, 1995, and has included in the results of
operations for fiscal 1996 a charge of approximately $3.5 million
relating to the cumulative effect of this change in accounting. Other
than the cumulative effect of adopting this new method of accounting,
the effect of this change in accounting for the periods presented was
not significant.
(j) Income Taxes
The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes ("SFAS 109"). Under the asset and liability method of
SFAS 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under SFAS 109, the effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(k) 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 for fiscal year 1995 and the three months ended
December 31, 1995 represents outstanding Holdings-Canada common
shares. Weighted average number of shares outstanding for fiscal 1996,
the three months ended December 31, 1996 and fiscal 1997 represents
Holdings-Canada common shares outstanding for the period October 1,
F-18
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
1995 through August 2, 1996, and combined ICG Common Stock and
Holdings-Canada Class A common shares outstanding for the periods
subsequent to August 5, 1996.
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 No. 15 and related interpretations. Under SFAS 128, basic loss
per share is computed on the basis of weighted average common shares
outstanding. Diluted loss per share considers potential common stock
instruments in the calculation. The Company adopted SFAS 128 for its
fiscal year ending December 31, 1997, including the requirement for
retroactive application. The adoption of SFAS 128 had no effect on the
Company's previously reported loss per share. Potential common stock
instruments, which include options, warrants and convertible
subordinated notes and preferred securities, are not included in the
loss per share calculation as their effect is anti-dilutive.
(l) Stock-Based Compensation
The Company accounts for its stock-based employee and non-employee
director compensation plans using the intrinsic value based method
prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related Interpretations ("APB 25").
The Company has provided pro forma disclosures of net loss and loss
per share as if the fair value based method of accounting for these
plans, as prescribed by Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), had
been applied. Pro forma disclosures include the effects of employee
and non-employee director stock options granted during fiscal 1996,
the three months ended December 31, 1996 and fiscal 1997.
(m) Impairment of Long-Lived Assets
The Company provides for the impairment of long-lived assets pursuant
to Statement of Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of ("SFAS 121") which requires that long-lived assets and
certain identifiable intangibles held and used by an
F-19
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. An impairment loss is recognized when estimated
undiscounted future cash flows expected to be generated by the asset
is less than its carrying value. Measurement of the impairment loss is
based on the fair value of the asset, which is generally determined
using valuation techniques such as the discounted present value of
expected future cash flows.
(n) Reclassifications
Certain prior period amounts have been reclassified to conform with
the current period's presentation.
(3) Business Combinations and Investments
(a) Acquisition During Fiscal 1997
On October 17, 1997, the Company purchased approximately 91% of the
outstanding capital stock of Communications Buying Group, Inc.
("CBG"), an Ohio based local exchange and centrex reseller. The
Company paid total consideration of approximately $46.5 million, plus
the assumption of certain liabilities. Separately, on October 17,
1997, the Company sold 687,221 shares of Common Stock for
approximately $16.0 million to certain shareholders of CBG. Subsequent
to December 31,1997, the Company purchased the remaining approximately
9% interest in CBG for approximately $2.9 million in cash.
The Company has accounted for the acquisition under the purchase
method of accounting, and accordingly, the operations of CBG have been
included in the Company's operations since the acquisition date. The
excess of the purchase price over the fair value of the net
identifiable assets acquired of $48.8 million has been recorded as
goodwill and is being amortized on a straight-line basis over six
years. Revenue, net loss and loss per share on a pro forma combined
basis are not significantly different from the Company's historical
results for the periods presented herein.
F-20
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
(b) Acquisitions and Investments During Fiscal 1996
In January 1996, the Company purchased the remaining 49% minority
interest of Fiber Optic Technologies, Inc. ("FOTI"), making FOTI a
wholly owned subsidiary. Consideration for the purchase was
approximately $2.0 million in cash and 66,236 common shares of
Holdings-Canada valued at approximately $0.8 million, for total
consideration of approximately $2.8 million.
In February 1996, the Company entered into an agreement with Linkatel
California, L.P. ("Linkatel") and its other partners, Linkatel
Communications, Inc. and The Copley Press, Inc., under which the
Company acquired a 60% interest in Linkatel for an aggregate purchase
price of $10.0 million in cash and became the general partner of
Linkatel. In April 1996, the partnership was renamed ICG Telecom of
San Diego, L.P.
In March 1996, the Company acquired a 90% equity interest in MarineSat
Communications Network, Inc. ("MCN"), (formally Maritime Cellular
Tele-network, Inc.), a Florida-based provider of cellular and
satellite communications for commercial ships, private vessels,
offshore oil platforms and land-based mobile units, for approximately
$0.7 million in cash and approximately $0.1 million of assumed debt,
for total consideration of approximately $0.8 million. In April 1997,
the Company received the remaining 10% interest in MCN as partial
consideration for the sale of its investment in Mexico. In the fourth
quarter of fiscal 1997, the Company recorded a provision for
impairment of $2.9 million of its investment in MCN.
In August 1996, the Company acquired certain Signaling System 7
("SS7") assets of Pace Network Services, Inc. ("Pace"), a division of
Pace Alternative Communications, Inc. SS7 is used by local exchange
companies, long-distance carriers, wireless carriers and others to
signal between network elements, creating faster call set-up resulting
in a more efficient use of network resources. The Company paid cash
consideration of $1.6 million as of September 30, 1996 and an
additional $1.0 million in January 1997, based on the operating
results of the underlying business since the date of acquisition.
F-21
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
The acquisitions described above have been accounted for using the
purchase method of accounting and, accordingly, the net assets and
results of operations are included in the consolidated financial
statements from the respective dates of acquisition. Revenue, net loss
and loss per share on a pro forma basis are not significantly
different from the Company's historical results for the periods
presented herein. The aggregate purchase price of the 1996
acquisitions, in which the Company obtained a controlling interest,
was allocated based on fair values of the underlying assets acquired
as follows (in thousands):
Current assets $ 6,563
Property and equipment 7,542
Other assets, including goodwill 10,647
Current liabilities (775)
Long-term liabilities (6,314)
Minority interest (1,422)
===================
$ 16,241
===================
(c) Acquisitions and Investments During Fiscal 1995
In January 1995, the Company and an unaffiliated entity formed
Maritime Telecommunications Network, Inc. ("MTN") to provide wireless
communications through satellites to the maritime cruise industry,
U.S. Navy vessels and offshore oil platforms. The Company acquired (i)
approximately 64% of MTN, (ii) approximately $4.4 million in notes
receivable from MTN and (iii) consulting and non-compete agreements
valued at an aggregate of approximately $0.3 million in exchange for
(i) approximately $9.0 million in cash, (ii) the surrender and
cancellation of a note to the Company from the other entity for $0.6
million plus interest, (iii) 408,347 Holdings-Canada common shares
valued at approximately $5.1 million (of which 256,303 common shares
were issued in the fourth quarter of fiscal 1994), and (iv) the
Company's commitment to provide additional convertible working capital
advances to MTN as required by MTN. The other shareholder of MTN
contributed the assets of a predecessor business to MTN.
MTN also assumed approximately $2.1 million of obligations of such
predecessor business. The Company paid a $0.5 million finder's fee
obligation of the predecessor to a third party. As part of the terms
of the original purchase agreement, the
F-22
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
Company agreed to purchase, at fair market value, all of the shares of
MTN that were owned by the minority shareholders, upon demand of the
minority shareholders, if a transaction was not effected which
converted the minority shares into publicly traded securities or cash
by January 3, 1998. As of the current date, no such demand has been
made by the minority shareholders.
During fiscal 1995, the Company purchased a 58% interest in Zycom
Corporation ("Zycom"), an Alberta, Canada corporation whose shares are
traded on the Alberta Stock Exchange. Consideration for the purchase
was approximately $0.8 million in cash, the conversion of $2.0 million
in notes receivable, and the assumption of approximately $0.7 million
in debt for total consideration of approximately $3.5 million. In
March 1996, the Company acquired an additional approximate 12% equity
interest in Zycom by converting a $3.2 million receivable due from
Zycom into common stock. In the fourth quarter of fiscal 1997, the
Company recorded a provision for impairment of $2.7 million of its
investment in Zycom.
The acquisitions described above were accounted for using the purchase
method of accounting, and accordingly, the net assets and the results
of operations are included in the consolidated financial statements
from the respective dates of acquisition. Revenue, net loss and loss
per share on a pro forma basis are not significantly different from
the Company's historical results for the periods presented herein. The
aggregate purchase price of the 1995 acquisitions, in which the
Company obtained a controlling interest, was allocated based on fair
values of the underlying assets acquired as follows (in thousands):
Current assets $ 1,835
Property and equipment 9,086
Other assets, including goodwill 16,986
Current liabilities (2,764)
Long-term liabilities (6,779)
Minority interest (4,850)
----------------------
$ 13,514
======================
F-23
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
During fiscal 1995, the Company invested approximately $5.2 million
($3.9 million in cash, $1.1 million in common shares of
Holdings-Canada, and the conversion of approximately $0.2 million in
notes receivable) in StarCom International Optics Corporation
("StarCom"), for which the Company received a 25% equity interest in
each of Starcom's wholly owned operating subsidiaries. In December
1997, a senior secured creditor of StarCom notified the Company that
it intended to foreclose on its collateral in StarCom, and in January
1998, StarCom commenced bankruptcy proceedings. Based on management's
estimate of the net realizable value of its investment, the Company
recorded a provision for impairment of its investment of $5.2 million
in fiscal 1997.
(d) Investments in Joint Venture and Affiliate
In September 1992, the Company entered into a joint venture agreement
with Greenstar Technologies Inc. (now GST Telecommunications, Inc.
("GST")) to design, construct and operate a competitive access network
in Phoenix. The Company and GST each had a 50% equity interest in the
joint venture. All financing provided to the joint venture by the
Company, as well as the recognition of the Company's share of the
joint venture's losses, were recorded according to the equity method
of accounting. During fiscal 1996, the Company recorded a valuation
allowance of approximately $5.8 million for the amounts receivable
arising from advances made to the Phoenix network joint venture, based
on management's estimate of the net realizable value of the
receivable.
In October 1996, the Company sold its interest in the joint venture to
GST. The Company received approximately $2.1 million in cash,
representing $1.3 million of consideration for its 50% interest and
$0.8 million for equipment and amounts advanced to the joint venture.
In addition, the Company received equipment with a net book value of
$2.4 million and assumed liabilities of $0.3 million. A gain on sale
of the joint venture of approximately $0.8 million was recorded in the
consolidated financial statements during the three months ended
December 31, 1996.
F-24
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
(e) Merger Subsequent to December 31, 1997
On January 21, 1998, the Company completed a merger with NETCOM.
Located in San Jose, California, NETCOM is a provider of Internet
connectivity and Web site hosting services and other value-added
Internet services. At the effective time of the merger, each
outstanding share of NETCOM common stock became automatically
convertible into shares of Common Stock at an exchange ratio of 0.8628
shares of Common Stock per NETCOM common share. As a result of the
transaction, the Company expects to issue an estimated 10.2 million
shares of Common Stock for the NETCOM common shares outstanding on
January 21, 1998. Cash will be paid in lieu of fractional shares. The
Company will account for the business combination under the
pooling-of-interests method of accounting and accordingly, the
Company's financial statements will be restated to reflect the
operations of NETCOM and the Company on a combined basis for all
historical periods.
The following unaudited pro forma information presents the combined
results of operations of the Company and NETCOM as if the business
combination had been consummated on October 1, 1994. The Company does
not anticipate any significant adjustments to conform the accounting
policies of NETCOM with those of the Company.
Fiscal years ended Three months ended Fiscal year ended
September 30, December 31, December 31,
---------------------------
1995 1996 1996 1997
------------- ------------- ------------------------- -----------------------
(unaudited)
(in thousands)
Revenue $164,032 289,634 93,335 434,014
Net loss (90,712) (228,372) (61,313) (360,735)
Loss per share -
basic and diluted (2.94) (6.19) (1.46) (8.49)
F-25
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(4) Short-term Investments Available for Sale
Short-term investments available for sale are comprised of the following:
December 31,
------------------------------------
1996 1997
---------------- ---------------
(in thousands)
Money market investments $ 10,000 -
Commercial paper 5,500 4,000
U.S. Treasury securities 17,101 94,181
================ ===============
$ 32,601 98,181
================ ===============
At December 31, 1996 and 1997, the estimated fair value of the Company's
money market instruments, commercial paper and U.S. Treasury securities
approximated cost, and the amount of gross unrealized gains was not
significant. All money market instruments, commercial paper and U.S.
Treasury securities mature within one year.
(5) Notes Receivable and Due from Affiliate
In January 1997, the Company announced a strategic alliance with Central
and South West Corporation ("CSW") which is developing and marketing
telecommunications services in certain cities in Texas. The venture entity,
a limited partnership named CSW/ICG ChoiceCom, L.P. ("ChoiceCom"), is based
in Austin, Texas. CSW holds 100% of the interest in ChoiceCom, and CSW and
the Company each have two representatives on the Management Committee of
the general partner of ChoiceCom. The Company has committed to loan
ChoiceCom $15.0 million under two promissory notes, which are payable on
demand and earn interest at LIBOR plus 2% per annum (7.97% at December 31,
1997). Advances under these promissory notes were $10.0 million at December
31, 1997.
Additionally, the Company has agreed to perform certain administrative
services for ChoiceCom and make certain payments to vendors on behalf of
ChoiceCom, for which such services and payments are to be conducted on an
arm's length basis and reimbursed by ChoiceCom. At December 31, 1997,
amounts outstanding under this arrangement and included in due from
affiliate were approximately $9.4 million, and were collected in full
during the subsequent fiscal quarter.
F-26
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(6) Property and Equipment
Property and equipment, including assets held under capital leases, is
comprised of the following:
December 31,
-------------------------------
1996 1997
------------- ---------------
(in thousands)
Land $ 306 709
Buildings and improvements 2,300 2,238
Furniture, fixtures and office equipment 35,904 46,711
Machinery and equipment 10,764 31,630
Fiber optic equipment 143,133 156,255
Satellite equipment 19,408 29,760
Switch equipment 58,199 85,546
Fiber optic transmission system 117,281 192,756
Build out/site preparation 13,284 13,898
Construction in progress (see note 14) 59,642 178,985
------------- ---------------
460,221 738,488
Less accumulated depreciation (56,545) (106,321)
============= ===============
$ 403,676 632,167
============= ===============
Property and equipment includes approximately $179.0 million of equipment
which has not been placed in service at December 31, 1997, and accordingly,
is not being depreciated. The majority of this amount is related to new
network construction (see note 14).
F-27
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(6) Property and Equipment (continued)
Certain of the assets described above have been pledged as security for
long-term debt and are held under capital leases at December 31, 1997. The
following is a summary of property and equipment held under capital leases:
December 31,
--------------------------------
1996 1997
------------- ----------------
(in thousands)
Machinery and equipment $ 1,842 3,926
Fiber optic equipment 7,514 6,314
Switch equipment 22,280 21,380
Fiber optic transmission system 55,746 58,806
Construction in progress 20,187 17,895
------------- ----------------
107,569 108,321
Less accumulated depreciation (4,424) (8,409)
============= ================
$ 103,145 99,912
============= ================
(7) Other Assets
Other assets are comprised of the following:
December 31,
--------------------------------
1996 1997
------------- ----------------
(in thousands)
Deposits $ 3,579 2,429
Pace customer base 2,581 2,805
Rights of way 1,739 425
Minutes of use agreement 1,421 -
Non-compete agreements 902 1,386
Right of entry - 5,019
Other 1,063 839
------------- ----------------
11,285 12,903
Less accumulated amortization (1,547) (3,499)
============= ================
Other $ 9,738 9,404
============= ================
F-28
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(8) Related Party Transactions
During fiscal 1996, Holdings-Canada and International Communications
Consulting, Inc. ("ICC") entered into a consulting agreement whereby ICC
will provide various consulting services to the Company through December
1999 for approximately $4.2 million to be paid during the term of the
agreement. During fiscal 1996, the three months ended December 31, 1996 and
fiscal 1997, the Company paid approximately $1.3 million, $0.3 million and
$1.1 million, respectively, related to this consulting agreement. William
W. Becker, a stockholder and former director of the Company, is President
and Chief Executive Officer of ICC.
At December 31, 1996 and 1997, receivables from officers and employees of
approximately $1.0 million and $0.9 million, respectively, are primarily
comprised of promissory notes from officers for relocation expenses, which
are generally payable on demand and bear interest at 7% per annum, and are
included in receivables-other in the accompanying consolidated financial
statements.
(9) Capital Lease Obligations
The Company has payment obligations under various capital lease agreements
for equipment. The future required payments under the Company's capital
lease obligations subsequent to December 31, 1997 are as follows (in
thousands):
Due December 31:
1998 $ 15,651
1999 13,782
2000 14,431
2001 16,350
2002 11,009
Thereafter 93,584
---------------------
Total minimum lease payments 164,807
Less amounts representing interest (92,231)
---------------------
Present value of net minimum lease payments 72,576
Less current portion (5,637)
=====================
$ 66,939
=====================
F-29
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(10) Long-term Debt
Long-term debt is summarized as follows:
December 31,
-----------------------------------------------
1996 1997
---------------------- ----------------------
(in thousands)
11 5/8% Senior discount notes, net of discount (a) $ - 109,436
12 1/2% Senior discount notes, net of discount (b) 325,530 367,494
13 1/2% Senior discount notes, net of discount (c) 355,955 407,409
Note payable with interest at the 90-day commercial
paper rate plus 4 3/4% (10.3% at December 31, 1997),
due 2001, secured by certain telecommunications equipment 5,815 4,932
Note payable with interest at 11%, due monthly through
fiscal 1999, secured by equipment 2,625 1,860
Mortgage payable with interest at 8 1/2%, due monthly
through 2009, secured by building 1,177 1,131
Other 73 90
---------------------- ---------------------
691,175 892,352
Less current portion (817) (1,784)
---------------------- ---------------------
$ 690,358 890,568
====================== =====================
(a) 11 5/8% Notes
On March 11, 1997, Holdings completed a private placement (the "1997
Private Offering") of 11 5/8% Senior Discount Notes due 2007 (the "11
5/8% Notes") and 14% Exchangeable Preferred Stock Mandatorily
Redeemable 2008 (the "14% Preferred Stock") for gross proceeds of
$99.9 million and $100.0 million, respectively. Net proceeds from the
1997 Private Offering, 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 indenture for the
F-30
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(10) Long-term Debt (continued)
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 cash dividends.
The 11 5/8% Notes were originally recorded at approximately $99.9
million. The discount on the 11 5/8% Notes and the debt issuance costs
are being accreted over ten years until maturity at March 15, 2007.
The accretion of the discount and debt issuance costs is included in
interest expense in the accompanying consolidated financial
statements.
(b) 12 1/2% Notes
On April 30, 1996, Holdings completed a private placement (the "1996
Private Offering") of 12 1/2% Senior Discount Notes due 2006 (the "12
1/2% Notes") and of 14 1/4% Exchangeable Preferred Stock Manditorily
Redeemable 2007 (the "14 1/4% Preferred Stock") for gross proceeds of
$300.0 million and $150.0 million, respectively. Net proceeds from the
1996 Private Offering, after issuance costs of approximately $17.0
million, were approximately $433.0 million.
The 12 1/2% Notes are unsecured senior obligations of Holdings
(guaranteed by ICG and Holdings-Canada) that mature on May 1, 2006,
with a maturity value of $550.3 million. Interest will accrue at 12
1/2% per annum, beginning May 1, 2001, and is payable each May 1 and
November 1, commencing November 1, 2001. The indenture for the 12 1/2%
Notes contains certain covenants which provide for limitations on
indebtedness, dividends, asset sales and certain other transactions
and effectively prohibits the payment of cash dividends.
The 12 1/2% Notes were originally recorded at approximately $300.0
million. The discount on the 12 1/2% Notes and the debt issuance costs
are being accreted over ten years until maturity at May 1, 2006. The
accretion of the discount and debt issuance costs is included in
interest expense in the accompanying consolidated financial
statements.
F-31
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(10) Long-term Debt (continued)
Approximately $35.3 million of the proceeds from the 1996 Private
Offering were used to redeem the 12% redeemable preferred stock of
Holdings (the "Redeemable Preferred Stock") issued in August 1995
($30.0 million), pay accrued preferred dividends ($2.6 million) and to
repurchase 916,666 warrants of the Company ($2.7 million) issued in
connection with the Redeemable Preferred Stock. The Company recognized
a charge to minority interest in share of losses, net of accretion and
preferred dividends on preferred securities of subsidiaries of
approximately $12.3 million for the excess of the redemption price of
the Redeemable Preferred Stock over the carrying amount at April 30,
1996, and recognized a charge to interest expense of approximately
$11.5 million for the payments made to noteholders with respect to
consents to amendments to the indenture governing the 13 1/2% Notes to
permit the 1996 Private Offering.
(c) 13 1/2% Notes
On August 8, 1995, Holdings completed a private placement (the "1995
Private Offering") through the issuance of 58,430 units (the "Units"),
each Unit consisting of ten $1,000, 13 1/2% Senior Discount Notes due
2005 (the "13 1/2% Notes") and warrants to purchase 33 common shares
of Holdings-Canada (the "Unit Warrants"). Net proceeds from the 1995
Private Offering, after issuance costs of approximately $14.0 million,
were approximately $286.0 million.
The 13 1/2% Notes are unsecured senior obligations of Holdings
(guaranteed by ICG and Holdings-Canada) that mature on September 15,
2005, with a maturity value of $584.3 million. Interest will accrue at
the rate of 13 1/2% per annum, beginning September 15, 2000, and is
payable in cash each March 15 and September 15, commencing March 15,
2001. The indenture for the 13 1/2% Notes contains certain covenants
which provide for limitations on the indebtedness, dividends, asset
sales and certain other transactions and effectively prohibits the
payment of cash dividends.
The 13 1/2% Notes were originally recorded at approximately $294.0
million, which represents the $300.0 million in proceeds less the
approximate $6.0 million value assigned to the Unit Warrants, which is
included in additional paid-in capital. The discount on the 13 1/2%
Notes and the debt issuance costs are being accreted over five years
until September 15, 2000, the date at which the 13 1/2% Notes can
first be
F-32
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(10) Long-term Debt (continued)
redeemed. The value assigned to the Unit Warrants, representing
additional debt discount, is also being accreted over the five-year
period. The accretion of the total discount is included in interest
expense in the accompanying consolidated financial statements.
Holdings may redeem the 13 1/2% Notes on or after September 15, 2000,
in whole or in part, at the redemption prices set forth in the
agreement, plus unpaid interest, if any, at the date of redemption.
The Unit Warrants entitle the holder to purchase one common share of
Holdings-Canada, which is exchangeable into one share of Common Stock,
at the exercise price of $12.51 per share and are exercisable at any
time between August 8, 1996 and August 8, 2005.
In connection with the issuance of the 13 1/2% Notes, the Company
obtained $6.0 million of interim financing from the placement agent
and certain private investors in exchange for the issuance of an
aggregate of 520,000 Series A Warrants (see note 12 (c)). The $6.0
million was repaid with a portion of the proceeds from the 1995
Private Offering. As a result of the repayment of the interim
financing, the value assigned to the Series A Warrants totaling
approximately $3.0 million, representing debt discount, was charged to
interest expense during the year ended September 30, 1995.
F-33
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(10) Long-term Debt (continued)
Scheduled principal maturities of long-term debt as of December 31,
1997 are as follows (in thousands):
Due December 31:
1998 $ 1,784
1999 1,686
2000 1,290
2001 938
2002 938
Thereafter (a) 1,311,976
-----------------
1,318,612
Less unaccreted discount on
the 11 5/8% Notes, the 12 1/2%
Notes and the 13 1/2% Notes (426,260)
==================
$ 892,352
==================
(a) Includes $176.0 million, $550.3 million and $584.3 million of 11
5/8% Notes, 12 1/2% Notes, and 13 1/2% Notes, respectively, due
at maturity.
(e) Private Placement of Senior Discount Notes Completed Subsequent to
December 31, 1997
On February 12, 1998, ICG Services, Inc., a Delaware corporation and
new wholly owned subsidiary of ICG ("ICG Services"), completed a
private placement of 10% Senior Discount Notes due 2008 (the "10%
Notes") for gross proceeds of approximately $300.6 million. Net
proceeds from the offering, after underwriting costs of approximately
$9.0 million, were approximately $291.6 million.
The 10% Notes are unsecured senior obligations of ICG Services that
mature on February 15, 2008, at a maturity value of $490.0 million.
Interest will accrue at 10% per annum, beginning February 15, 2003,
and is payable each February 15 and August 15, commencing August 15,
2003. The indenture for the 10% Notes contains certain covenants which
provide limitations on indebtedness, dividends, asset sales and
certain other transactions.
F-34
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(11) Redeemable Preferred Securities of Subsidiaries
Redeemable preferred stock of subsidiary is summarized as follows:
December 31,
--------------------------------
1996 1997
-------------- -----------------
(in thousands)
14% Exchangeable preferred stock,
mandatorily redeemable in 2008 (a) $ - 108,022
14 1/4% Exchangeable preferred stock,
mandatorily redeemable in 2007 (b) 159,120 184,420
============== =================
$ 159,120 292,442
============== =================
(a) 14% Preferred Stock
In connection with the 1997 Private Offering, Holdings sold 100,000
shares of exchangeable 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, and
commenced June 15, 1997. Through March 15, 2002, the dividend is
payable at the option of Holdings in cash or additional shares of 14%
Preferred Stock. Holdings may exchange the 14% Preferred Stock into
14% Senior Subordinated Exchange Debentures at any time after the
exchange is permitted by certain indenture restrictions. The 14%
Preferred Stock is subject to mandatory redemption on March 15, 2008.
(b) 14 1/4% Preferred Stock
In connection with the 1996 Private Offering, Holdings sold 150,000
shares of exchangeable preferred stock that bear a cumulative dividend
at the rate of 14 1/4% per annum. The dividend is payable quarterly in
arrears each February 1, May 1, August 1 and November 1, and commenced
August 1, 1996. Through May 1, 2001, the dividend is payable, at the
option of Holdings, in cash or additional shares of 14 1/4% Preferred
Stock. Holdings may exchange the 14 1/4% Preferred Stock into 14 1/4%
Senior Subordinated Exchange Debentures at any time after the exchange
is permitted by certain indenture restrictions. The 14 1/4% Preferred
Stock is subject to mandatory redemption on May 1, 2007.
F-35
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(11) Redeemable Preferred Securities of Subsidiaries (continued)
(c) 6 3/4% Preferred Securities
During fiscal 1997, a new subsidiary of the Company, ICG Funding,
completed a private placement of 6 3/4% Exchangeable Limited Liability
Company Preferred Securities Mandatorily Redeemable 2009 (the "6 3/4%
Preferred Securities") for gross proceeds of $132.25 million. Net
proceeds from the private placement, after offering costs, were
approximately $127.6 million. Restricted cash at December 31, 1997 of
$38.7 million includes the proceeds from the offering which are
designated for the payment of cash dividends on the 6 3/4% Preferred
Securities through November 15, 2000.
The 6 3/4% Preferred Securities consist of 2,645,000 exchangeable
preferred securities of ICG Funding that bear a cumulative dividend at
the rate of 6 3/4% per annum. The dividend is paid quarterly in
arrears each February 15, May 15, August 15 and November 15, and
commenced November 15, 1997. The dividend is payable in cash through
November 15, 2000 and thereafter, in cash or shares of ICG Common
Stock, at the option of ICG Funding. The 6 3/4% Preferred Securities
are exchangeable, at the option of the holder, at any time prior to
November 15, 2009 into shares of Common Stock at a rate of 2.0812
shares of Common Stock per preferred security, or $24.025 per share,
subject to adjustment. ICG Funding may, at its option, redeem the 6
3/4% Preferred Securities at any time on or after November 18, 2000.
Prior to that time, ICG Funding may redeem the 6 3/4% Preferred
Securities if the current market value of Common Stock equals or
exceeds the exchange price, for at least 20 days of any 30-day trading
period, by 170% prior to November 16, 1998; 160% from November 16,
1998 through November 15, 1999; and 150% from November 16, 1999
through November 15, 2000. The 6 3/4% Preferred Securities are subject
to mandatory redemption on November 15, 2009.
On February 15, 1998, ICG Funding used the remaining proceeds from the
private placement of the 6 3/4% Preferred Securities to purchase
$112.4 million of ICG Communications, Inc. Preferred Stock ("ICG
Preferred Stock") which pays dividends each February 15, May 15,
August 15 and November 15 in additional shares of ICG Preferred Stock
through November 15, 2000. Subsequent to November 15, 2000, dividends
are payable in cash or shares of Common Stock, at the option of ICG.
The ICG Preferred Stock is exchangeable, at the option of ICG
F-36
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(11) Redeemable Preferred Securities of Subsidiaries (continued)
Funding, at any time prior to November 15, 2009 into shares of Common
Stock at an exchange rate based on the exchange rate of the 6 3/4%
Preferred Securities. The ICG Preferred Stock is subject to mandatory
redemption on November 15, 2009.
The accreted value of the 6 3/4% Preferred Securities is included in
Company-obligated mandatorily redeemable preferred securities of
subsidiary limited liability company which holds solely Company
preferred stock in the accompanying consolidated balance sheet at
December 31, 1997.
Included in minority interest in share of losses, net of accretion and
preferred dividends on preferred securities of subsidiaries is
approximately $1.3 million, $27.0 million, $5.8 million and $39.8 million
for fiscal 1995 and 1996, the three months ended December 31, 1996 and
fiscal 1997, respectively, associated with the accretion of issuance costs,
discount and preferred security dividend accruals for the 6 3/4% Preferred
Securities, the 14% Preferred Stock, the 14 1/4% Preferred Stock and the
Redeemable Preferred Stock (issued in connection with the 1995 Private
Offering and redeemed in April 1996). These costs are partially offset by
the minority interest share in losses of subsidiaries of approximately $0.6
million, $2.7 million, $0.8 million and $2.0 million for fiscal 1995 and
1996, the three months ended December 31, 1996 and fiscal 1997,
respectively.
(12) Stockholders' Deficit
(a) Common Stock
Common stock outstanding at December 31, 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 December 31, 1997:
F-37
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(12) Stockholders' Deficit (continued)
Shares Shares not owned
owned by ICG by ICG
-------------------- -------------------
ICG Common Stock, $.01 par value,
100,000,000 shares authorized;
31,087,825 and 33,784,500 shares
issued and outstanding at December
31, 1996 and 1997, respectively - 33,784,500
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 1997, respectively:
Class A common shares,
exchangeable on a one-for-one
basis for ICG Common Stock
at any time - 23,700
Class A common shares owned
by ICG 31,799,056 -
-------------------
Total shares outstanding 33,808,200
===================
(b) Stock Options and Employee Stock Purchase Plan
In fiscal years 1991, 1992 and 1993, the Company's Board of Directors
approved incentive stock option plans and replenishments to those
plans which provide for the granting of options to directors,
officers, employees and consultants of the Company to purchase
285,000, 724,400 and 1,692,700 shares, respectively, of the Company's
Common Stock, with exercise prices between 80% and 100% of the fair
value of the shares at the date of grant. A total of 1,849,600 options
have been granted under these plans with exercise prices ranging from
approximately $2.92 to $14.03. Compensation expense has been recorded
for options granted at an exercise price below the fair market value
of the Company's Common Stock at the date of grant, pursuant to the
provisions of APB 25. The options granted under these plans are
subject to various vesting requirements and expire in five and ten
years from the date of grant.
In fiscal years 1994, 1995 and 1996, the three months ended December
31, 1996 and fiscal 1997, the Company's Board of Directors approved
incentive and non-qualified stock option plans and replenishments to
plans which provide for the granting of options to certain directors,
officers and employees to purchase 2,536,000 shares of
F-38
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(12) Stockholders' Deficit (continued)
the Company's Common Stock under the 1994 plan and an aggregate of
2,700,000 shares of the Company's Common Stock under the 1995 and 1996
plans. A total of 5,709,426 options have been granted under these
plans at original exercise prices ranging from $7.94 to $27.06, none
of which were less than 100% of the fair market value of the shares
underlying options on the date of grant, and accordingly, no
compensation expense was recorded for these options under APB 25. The
options granted under these plans are subject to various vesting
requirements and expire in five and ten years from the date of grant.
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 canceled by the
Stock Option Committee of the Company's Board of Directors and
regranted with an exercise price of $10.375, the closing price of the
Company's Common Stock on the Nasdaq National Market on April 16,
1997. A total of 597,600 options, with original exercise prices
ranging from $15.875 to $26.25, were canceled and regranted. There was
no effect on the Company's consolidated financial statements as a
result of the cancellation and regranting of options.
In October 1996, the Company established an Employee Stock Purchase
Plan whereby employees can elect to designate 1% to 30% of their
annual salary, to be used to purchase shares of the Company's Common
Stock, up to a limit of $25,000 in Common Stock each year, at a 15%
discount to fair market value. Stock purchases will occur four times a
year on February 1, May 1, August 1 and November 1, with the price per
share equaling the lower of 85% of the market price at the beginning
or end of the offering period. The Company is authorized to issue a
total of 1,000,000 shares of Common Stock to participants in the plan.
During fiscal 1997, the Company sold 109,213 shares of the Company's
Common Stock to employees under this plan.
The Company recorded compensation expense in connection with its
stock-based employee and non-employee director compensation plans of
$0.2 million and $0.1 million for fiscal 1995 and 1996, respectively,
pursuant to the intrinsic value based method of APB 25. Had
compensation expense for the Company's plans been determined based on
the fair market value of the options at the grant dates for awards
F-39
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(12) Stockholders' Deficit (continued)
under those plans consistent with the provisions of SFAS 123, the
Company's pro forma net loss and loss per share would have been as
presented below. Pro forma disclosures include the effects of employee
and non-employee director stock options granted during fiscal 1995 and
1996, the three months ended December 31, 1996 and fiscal 1997.
Fiscal years ended Three months ended Fiscal year ended
September 30, December 31, December 31,
-----------------------------------
1995 1996 1996 1997
--------------- ---------------- -------------------------- --------------------------
(in thousands, except per share amounts)
Net loss:
As reported $ (76,648) (184,107) (49,823) (327,643)
Pro forma (82,544) (186,831) (50,819) (331,715)
Loss per share - basic
and diluted:
As reported $ (3.25) (6.83) (1.56) (10.11)
Pro forma (3.50) (6.93) (1.60) (10.24)
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted average assumptions: an expected option life of three years
for directors, officers and other executives, and two years for other
employees, for all periods; expected volatility of 50% for all
periods; and risk-free interest rates ranging from 5.03% to 7.42% for
fiscal 1995 and 1996 and the three months ended December 31, 1996, and
risk-free interest rates ranging from 5.61% to 6.74% for fiscal 1997.
Risk-free interest rates, as were currently available on the grant
date, were assigned to each granted option based on the zero-coupon
rate of U.S. Treasury bills to be held for the same period as the
assumed option life. Since the Company does not anticipate issuing any
dividends on its Common Stock, the dividend yield was assumed to be
zero. The weighted average fair market value of options granted during
fiscal 1995 and 1996, the three months ended December 31, 1996 and
fiscal 1997 was approximately $4.11, $5.28, $9.42 and $5.75 per
option, respectively.
F-40
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(12) Stockholders' Deficit (continued)
As options outstanding at December 31, 1997 will continue to vest in
subsequent periods, additional options are expected to be awarded
under existing and new plans and options granted prior to 1995 have
not been considered, the above pro forma results are not necessarily
indicative of the impact on net loss and loss per share in future
periods.
The following table summarizes the status of the Company's stock-based
compensation plans:
Shares Weighted
underlying average Options
options exercise price exercisable
------------------- -------------------- ------------------------
(in thousands) (in thousands)
Outstanding at October 1, 1994 1,319 $ 6.81 769
Granted 2,520 9.73
Exercised (264) 3.32
Canceled (201) 13.25
-------------------
Outstanding at September 30, 1995 3,374 9.08 940
Granted 1,322 11.78
Exercised (248) 7.55
Canceled (243) 11.12
-------------------
Outstanding at September 30, 1996 4,205 9.77 2,264
Granted 335 18.59
Exercised (31) 8.95
Canceled (56) 12.65
-------------------
Outstanding at December 31, 1996 4,453 10.34 2,969
Granted 1,546 13.55
Exercised (632) 7.54
Canceled (860) 16.08
-------------------
Outstanding at December 31, 1997 4,507 10.62 3,037
===================
F-41
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(12) Stockholders' Deficit (continued)
The following table summarizes information about options outstanding
at December 31, 1997:
Options outstanding Options exercisable
--------------------------------------------------------- ---------------------------------
Weighted
average Weighted Weighted
Range of remaining average average
exercise Number contractual exercise Number exercise
prices outstanding life price exercisable price
------------------ ------------------ ----------------- ------------------ ----------------- -------------
(in thousands) (in years) (in thousands)
$4.00 - 6.25 98 4.95 $ 4.23 98 $ 4.23
7.94 1,550 7.41 7.94 1,550 7.94
8.50 - 10.38 1,689 8.35 10.02 607 9.71
10.50 - 26.88 1,135 7.89 15.26 782 13.70
27.06 35 9.77 27.06 - -
------------------ ------------------
4,507 3,037
================== ==================
(c) Warrants
During fiscal 1995 and 1996, the three months ended December 31, 1996
and fiscal 1997, the Company's warrant activity was as follows:
(i) During fiscal 1993, the Company issued to a debt holder warrants
to purchase 17,067, 3,255 and 11,039 common shares at exercise
prices of $6.56, $7.38 and $7.88, respectively. During fiscal
1994, 17,067 warrants were exercised for proceeds of
approximately $0.1 million. In addition, during fiscal 1994, the
Company issued to the same debt holder additional warrants to
purchase 1,989, 15,260 and 3,665 common shares of Holdings-Canada
at $21.51, $20.01 and $11.80 per share, exercisable on or before
November 10, 1998, March 24, 1999, and July 8, 1999,
respectively. An additional 7,725 warrants were issued on July
10, 1995 at an exercise price of $14.50, which expire on July 9,
2000. Also issued on July 10, 1995 were 60,000 additional
warrants to an affiliate of the debt holder at an exercise price
of $14.50, which expire on July 9, 2000. During the three months
ended December 31, 1996, 1,231 of
F-42
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(12) Stockholders' Deficit (continued)
the $7.38 warrants, 4,456 of the $7.88 warrants and 2,215 of the
$11.80 warrants were canceled. During fiscal 1997, 2,024 of the
$7.38 warrants, 6,583 of the $7.88 warrants, 1,450 of the $11.80
warrants and 17,429 of the $14.50 warrants were exercised in
exchange for Holdings-Canada Class A common shares. In addition,
50,296 of the $14.50 warrants were canceled. At December 31,
1997, a total of 17,249 of these warrants remained outstanding.
(ii) During fiscal 1994, the Company issued to two financial advisors
warrants to purchase 75,000 and 200,000 common shares of
Holdings-Canada. These warrants have an exercise price of $7.94
and $18.00 and are exercisable for two- and five-year periods,
respectively. During fiscal 1995 and 1996, 74,335 and 665 of the
75,000 warrants were exercised for total proceeds of
approximately $0.6 million. During the three months ended
December 31, 1996, 100,000 of the 200,000 warrants were exercised
for proceeds of approximately $1.8 million. At December 31, 1997,
100,000 warrants remained outstanding.
(iii)Pursuant to a private placement of the Redeemable Preferred
Stock and the interim financing arrangement during fiscal 1995,
the Company issued 1,895,000 Series A Warrants and 1,375,000
Series B Warrants to purchase an equal number of common shares of
Holdings-Canada with exercise prices of $7.94 and $8.73,
respectively, which expire on July 14, 2000. During fiscal 1996,
the Company repurchased 458,333 each of the Series A and Series B
Warrants for $3.21 and $2.52, respectively (see note 10 (c)). In
addition, 1,853,334 warrants were exercised in June 1996 through
a cashless exercise in which 1,271,651 Holdings-Canada common
shares were issued. During fiscal 1997, the remaining 500,000
warrants of the Series A and Series B warrants were exercised in
exchange for 346,014 common shares of Holdings-Canada, which were
in turn converted into an equal number of shares of ICG Common
Stock.
F-43
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(12) Stockholders' Deficit (continued)
(iv) In connection with the 1995 Private Offering, the Company issued
1,928,190 warrants to purchase an equal number of common shares
of Holdings-Canada. The warrants were exercisable beginning
August 8, 1996 at $12.51 per share and expire on August 6, 2005.
During fiscal 1997, 71,775 warrants were exercised for total
proceeds of approximately $0.9 million and were in turn converted
into an equal number of shares of ICG Common Stock. At December
31, 1997, 1,856,415 of these warrants remained outstanding.
The following table summarizes warrant activity for fiscal 1995 and 1996,
the three months ended December 31, 1996 and fiscal 1997:
Outstanding Price
warrants range
------------------- -----------------------
(in thousands)
Outstanding, October 1, 1994 310 $ 7.38 - 21.51
Granted 5,266 7.94 - 14.50
Exercised (74) 7.94
-------------------
Outstanding, September 30, 1995 5,502 7.38 - 21.51
Exercised (1,854) 7.94 - 8.73
Repurchased (917) 2.52 - 3.21
--------------------
Outstanding, September 30, 1996 2,731 7.38 - 21.51
Exercised (100) 18.00
Canceled (8) 7.38 - 11.80
--------------------
Outstanding, December 31, 1996 2,623 7.38 - 21.51
Exercised (599) 7.38 - 14.50
Canceled (50) 14.50
====================
Outstanding, December 31, 1997 1,974 12.51 - 21.51
====================
F-44
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(12) Stockholders' Deficit (continued)
The warrants outstanding on December 31, 1997 expire on the following
dates:
Outstanding Exercise
Expiration date warrants price
----------------- ------------------ ----------------
(in thousands)
November 10, 1998 2 $ 21.51
December 17, 1998 100 18.00
March 24, 1999 15 20.01
August 6, 2005 1,857 12.51
==================
1,974
==================
(13) Sale of Teleports
In December 1995, the Company received approximately $21.1 million as
partial payment for the sale of four of its teleports and certain related
assets, and entered into a management agreement with the purchaser whereby
the purchaser assumed control of the teleport operations. Upon approval of
the transaction by the Federal Communications Commission ("FCC"), the
Company completed the sale in March 1996 and received an additional $0.4
million due to certain closing adjustments, for total proceeds of $21.5
million. The Company recognized a loss of approximately $1.1 million on the
sale. Revenue associated with these operations was approximately $9.1
million and $2.5 million for fiscal 1995 and 1996, respectively. The
Company has reported results of operations from these assets through
December 31, 1995.
(14) Commitments and Contingencies
(a) Network Construction
In March 1996, the Company and Southern California Edison Company
("SCE") jointly entered into a 25-year agreement under which the
Company will lease 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
F-45
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
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 $144.7 million at
December 31, 1997. The agreement has been accounted for as a capital
lease in the accompanying consolidated balance sheets.
In May 1997, the Company entered into a long-term agreement with The
Southern Company ("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 43-mile build is expected to be completed by May of 1998. The
Company estimates costs to complete the initial build to be
approximately $5.2 million. Other than the initial $5.5 million
payment, no costs have been incurred as of December 31, 1997.
In January 1997, the Company announced the formation of ChoiceCom, a
strategic alliance between the Company and CSW, which is expected to
develop and market telecommunications services in certain cities in
Texas. CSW holds 100% of the partnership interest in ChoiceCom and the
Company has an option to purchase a 50% interest at any time prior to
July 1, 2003. Subsequent to July 1, 1999, if the Company has not
exercised its option, CSW will have the right to sell, at price
pursuant to the terms of the limited partnership agreement, either 51%
or 100% of the partnership interest in ChoiceCom to the Company.
Additionally, the Company has committed to loan $15.0 million to
ChoiceCom under two promissory notes, of which $10.0 million was
advanced as of December 31, 1997 and the remaining $5.0 million was
advanced during the first quarter of fiscal 1998.
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 and has incurred
f-46
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
approximately $8.0 million as of December 31, 1997, with total costs
anticipated to be approximately $35.0 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
During the three months ended December 31, 1996, the Company acquired
property for its new headquarters and commenced construction of an
office building that will accommodate most of the Company's Colorado
operations. The total cost of the project is expected to be
approximately $44.2 million, of which $29.4 million had been incurred
as of December 31, 1997 and is included in construction in progress.
In January 1998, the Company sold the substantially completed building
to a third party and entered into an agreement to lease back all of
the office space under a 15-year operating lease which includes two
ten-year renewal terms.
(c) Other Commitments
As part of the terms of the original purchase agreement, the Company
was 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 were owned by the minority
shareholders, upon demand of the minority shareholders, if a
transaction was not effected which converted the minority shares into
publicly traded securities or cash by January 3, 1998. As of the
current date, no such demand has been made by the minority
shareholders.
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 $19.5 million at December 31, 1997.
f-47
ICG COMMUNICATIONS,
INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
(d) Leases
The Company leases office space and equipment under non-cancelable
operating leases. Lease expense was approximately $2.8 million, $5.1
million, $1.3 million and $11.8 million for fiscal 1995 and 1996, the
three months ended December 31, 1996 and fiscal 1997, respectively.
Estimated future minimum lease payments for the years subsequent to
December 31, 1997 are (in thousands):
Due December 31:
1998 $12,765
1999 9,563
2000 8,536
2001 8,003
2002 6,292
Thereafter 53,631
=================
$ 98,790
=================
(e) Reciprocal Compensation
The Company has recorded revenue of approximately $4.9 million for
fiscal 1997 for reciprocal compensation relating to the transport and
termination of local traffic to Internet service providers from
customers of incumbent local exchange carriers pursuant to various
interconnection agreements. These local exchange carriers have not
paid most of the bills they have received from the Company and have
disputed substantially all of these charges based on the belief that
such calls are not local traffic as defined by the various agreements
and under state and federal laws and public policies. The resolution
of these disputes will be based on rulings by state public utility
commissions and/or by the FCC. To date, there have been favorable
rulings from 15 states and no unfavorable final rulings by any state
public utilities commission or the FCC that would indicate that calls
placed by end users to Internet service providers would not qualify as
local traffic subject to the payment of reciprocal compensation. While
the Company believes that all revenue recorded through December 31,
1997 is collectible and that future reciprocal compensation revenue
will be realized, there can be no assurance that such future
regulatory rulings will be favorable to the Company.
F-48
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
(f) Litigation
On April 4, 1997, certain shareholders of the Company's majority owned
subsidiary, Zycom Corporation ("Zycom"), an Alberta, Canada
corporation, filed a shareholder derivative suit and class action
complaint for unspecified damages, purportedly on behalf of all of the
minority shareholders of Zycom, in the District Court of Harris
County, Texas (Cause No. 97-17777) against the Company, Zycom and
certain of their subsidiaries. This complaint alleges that the Company
and certain of its subsidiaries breached certain duties owed to the
plaintiffs. The Company is vigorously defending the claims. While it
is not possible to predict the outcome of this litigation, management
believes these proceedings will not have a material adverse effect on
the Company's financial condition, results of operations or cash
flows.
The Company is a party to certain other litigation which has arisen in
the ordinary course of business. In the opinion of management, the
ultimate resolution of these matters will not have a material adverse
effect on the Company's financial condition, results of operations or
cash flows.
(15) Income Taxes
The components of income tax benefit for fiscal 1996 are as follows (in
thousands):
Current income tax expense $ (198)
Deferred income tax benefit 5,329
---------------------
Total $ 5,131
=====================
Current income tax expense for fiscal 1996 represents state income tax
relating to operations of companies in states requiring separate entity tax
returns. Accordingly, these entities' taxable income cannot be offset by
the Company's net operating loss carryforwards. No income tax expense or
benefit was recorded in fiscal 1995, the three months ended December 31,
1996 or fiscal 1997.
F-49
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(15) Income Taxes (continued)
During fiscal 1996, the deferred tax liability was adjusted for the effects
of certain changes in estimated lives of property and equipment as
discussed in note 2 (j). As a result, the Company recognized an income tax
benefit of $5.3 million.
Income tax benefit differs from the amounts computed by applying the U.S.
federal income tax rate to loss before income taxes primarily because the
Company has not recognized the income tax benefit of certain of its net
operating loss carryforwards and other deferred tax assets due to the
uncertainty of realization.
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1997 are as follows:
December 31,
--------------------------------------
1996 1997
------------------- -----------------
(in thousands)
Deferred income tax liabilities:
Property and equipment, due to excess
purchase price of tangible assets and
differences in depreciation for book and
tax purposes $ 14,106 6,254
------------------- ----------------
Deferred income tax assets:
Net operating loss carryforwards (68,740) (141,185)
Accrued interest on high yield debt obligations
deductible when paid (32,873) (72,330)
Accrued expenses not currently deductible for
tax purposes (2,031) (7,968)
Less valuation allowance 89,538 215,229
------------------- -----------------
Net deferred income tax asset (14,106) (6,254)
-------------------- -----------------
Net deferred income tax liability $ - -
=================== =================
F-50
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(15) Income Taxes (continued)
As of December 31, 1997, the Company has net operating losses ("NOLs") of
approximately $353.0 million for U.S. tax purposes which expire in varying
amounts through 2012. However, due to the provisions of Section 382,
Section 1502 and certain other provisions of the Internal Revenue Code (the
"Code"), the utilization of these NOLs will be limited. The Company is also
subject to certain state income tax laws, which will also limit the
utilization of NOLs.
A valuation allowance has been provided for the deferred tax asset relating
to the Company's NOLs, as management cannot determine when the Company will
generate future taxable income.
(16) Employee Benefit Plans
The Company has established salary reduction savings plans under Section
401(k) of the Code which the Company administers for participating
employees. All full-time employees are covered under the plan after meeting
minimum service and age requirements. The Company makes a matching
contribution of its Common Stock (up to
(16) Employee Benefit Plans (continued)
a maximum of 6% of an employee's eligible earnings) which totaled
approximately $0.5 million, $1.2 million, $0.5 million and $3.0 million
during fiscal 1995 and 1996, the three months ended December 31, 1996 and
fiscal 1997, respectively.
(17) Significant Customer
During fiscal 1995, the Company had revenue from a single customer which
comprised 11% of total revenue and accounts receivable which comprised 8%
of the total accounts receivable balance at September 30, 1995. There were
no customers which accounted for greater than 10% of revenue or accounts
receivable as of, or for the respective periods ended September 30, 1996,
December 31, 1996 or 1997.
(18) Summarized Financial Information of ICG Holdings, Inc.
As discussed in note 10, the 11 5/8% Notes issued by Holdings during 1997
are guaranteed by ICG. The 12 1/2% Notes and 13 1/2% Notes issued by
Holdings during fiscal 1996 and 1995, respectively, are also 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 significant to the holders of the 11 5/8% Notes, the 12
1/2% Notes and the 13 1/2% Notes. However, summarized combined financial
information for Holdings and subsidiaries and affiliates is as follows:
F-51
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(18) Summarized Financial Information of ICG Holdings, Inc. (continued)
Summarized Consolidated Balance Sheet Information
December 31,
---------------------------------------
1996 1997
------------------ ------------------
(in thousands)
Current assets $ 449,059 215,817
Property and equipment, net 403,676 632,167
Other non-current assets, net 88,439 122,768
Current liabilities 87,423 98,351
Long-term debt, less current portion 690,293 890,503
Due to parent 11,485 30,970
Other long-term liabilities 73,113 66,939
Preferred stock 159,120 292,442
Stockholders' deficit (80,260) (408,453)
Summarized Consolidated and Combined Statement of Operations Information (a)
Fiscal years ended Three months ended Fiscal year ended
September 30, December 31, December 31,
--------------------------------- --------------------------------
1995 1996 1995 1996 1997
--------------- ---------------- ---------------- --------------- ----------------------
(unaudited)
(in thousands)
Total revenue $ 111,610 169,094 35,399 56,956 273,354
Total operating costs
and expenses 157,384 238,908 50,296 83,934 465,517
Operating loss (45,774) (69,814) (14,897) (26,978) (192,163)
Net loss (68,760) (172,687) (34,281) (49,750) (328,193)
(a) Holdings-Canada's 51% interest in FOTI was contributed to Holdings
effective in February 1995 (the remaining 49% was purchased in January
1996) and, accordingly, FOTI's operations have been included in the
consolidated amounts subsequent to that date.
F-52
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(19) Financial Information of ICG Holdings (Canada), Inc.
Condensed financial information for Holdings-Canada only is as follows:
Condensed Balance Sheet Information
December 31,
---------------------------------------------
1996 1997
--------------------- ---------------------
(in thousands)
Current assets $ 165 162
Advances to subsidiaries 11,485 30,790
Non-current assets, net 2,793 3,800
Current liabilities 199 107
Long-term debt, less current portion 65 65
Due to parent 1,566 22,342
Preferred stock 127,729 -
Share of losses of subsidiary 80,260 408,453
Shareholders' deficit (67,647) (396,035)
F-53
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(19) Financial Information of ICG Holdings (Canada), Inc. (continued)
Condensed Statement of Operations Information
Fiscal years ended Three months ended December Fiscal year ended
September 30, 31, December 31,
--------------------------------- -------------------------------
1995 1996 1995 1996 1997
----------------- -------------- --------------- -------------- ----------------------
(unaudited)
(in thousands)
Total revenue $ - - - - -
Total operating costs
and expenses 1,309 3,438 361 73 195
Operating loss (1,309) (3,438) (361) (73) (195)
Losses from subsidiaries (68,760) (172,687) (34,281) (49,750) (328,193)
Net loss attributable to
common shareholders (76,648) (184,107) (34,642) (49,823) (328,388)
(20) Summarized Financial Information of ICG Funding, LLC
As discussed in note 11, the 6 3/4% Preferred Securities issued by ICG
Funding during fiscal 1997 are guaranteed by ICG. The separate complete
financial statements of ICG Funding have not been included herein because
such disclosure is not considered to be significant to the holders of the 6
3/4% Preferred Securities. For fiscal 1997, the statement of operations of
ICG Funding included only the preferred dividends paid and accrued on the 6
3/4% Preferred Securities and interest income earned on the proceeds from
the offering of such securities. The summarized balance sheet information
for ICG Funding is as follows:
F-54
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(20) Summarized Financial Information of ICG Funding, LLC (continued)
Summarized Balance Sheet Information
December 31,
1997
-------------------------
(in thousands)
Cash, cash equivalents and short-term
investments available for sale $ 94,182
Other current assets 19
Restricted cash 38,749
Dividends payable 1,116
Due to parent 4,642
Preferred securities 127,729
Member deficit (537)
(21) Condensed Financial Information of ICG Communications, Inc. (Parent
company)
The primary 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 $1.2 million for fiscal 1997. At December
31, 1997, ICG had no operations other than those of ICG Funding,
Holdings-Canada and its subsidiaries.
FINANCIAL STATEMENT SCHEDULE
ICG Communications, Inc. Page
Independent Auditors' Report . . . . . . . . . . . . . . . . . . S-1
Schedule II: Valuation and Qualifying Accounts . . . . . . . . S-2
S-1
Independent Auditors' Report
The Board of Directors and Stockholders
ICG Communications, Inc.:
Under the date of February 19, 1998, we reported on the consolidated balance
sheets of ICG Communications, Inc. and subsidiaries as of December 31, 1996 and
1997 and the related consolidated statements of operations, stockholders= equity
(deficit) and cash flows for the fiscal years ended September 30, 1995 and 1996,
the three months ended December 31, 1996, and the fiscal year ended December 31,
1997 as contained in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997. In connection with our audits of the
aforementioned consolidated financial statements, we have also audited the
related financial statement schedule as listed in the accompanying index. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as whole, presents
fairly, in all material respects, the information set forth therein.
As explained in note 2 to the consolidated financial statements, during the
fiscal year ended September 30, 1996, the Company changed its method of
accounting for long-term telecom services contracts.
KPMG Peat Marwick LLP
Denver, Colorado
February 19, 1998
S-2
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES Schedule II
Valuation and Qualifying Accounts
- -------------------------------------------------------------------------------
Additions
-----------------------------
Balance at Charged to Charged to Balance at
beginning costs and other end of
Description of period expenses accounts Deductions period
- --------------------------------------------- ------------ -------------- ------------- -------------- -------------
(in thousands)
Allowance for uncollectible trade receivables:
Fiscal year ended September 30, 1995 $ 1,061 2,360 - (1,204) 2,217
------------- -------------- ------------- -------------- -------------
Fiscal year ended September 30, 1996 $ 2,217 1,585 - (1,293) 2,509
------------- -------------- ------------- -------------- -------------
Three months ended December 31, 1996 $ 2,509 914 - (908) 2,515
------------- -------------- ------------- -------------- -------------
Fiscal year ended December 31, 1997 $ 2,515 4,003 - (1,142) 5,376
------------- -------------- ------------- -------------- -------------
Allowance for uncollectible note receivable:
Fiscal year ended September 30, 1995 $ - 175 - - 175
------------- -------------- ------------- -------------- -------------
Fiscal year ended September 30, 1996 $ 175 7,100 - - 7,275
------------- -------------- ------------- -------------- -------------
Three months ended December 31, 1996 $ 7,275 - - - 7,275
------------- -------------- ------------- -------------- -------------
Fiscal year ended December 31, 1997 $ 7,275 - - 3,975 3,300
------------- -------------- ------------- -------------- -------------
Allowance for investment impairment:
Fiscal year ended September 30, 1995 $ - 2,000 - - 2,000
------------- -------------- ------------- -------------- -------------
Fiscal year ended September 30, 1996 $ 2,000 - - - 2,000
-------------- ------------- ------------- -------------- -------------
Three months ended December 31, 1996 $ 2,000 - - - 2,000
------------- -------------- ------------- -------------- -------------
Fiscal year ended December 31, 1997 $ 2,000 5,170 - 2,000 5,170
------------- -------------- ------------- -------------- -------------
See accompanying independent auditors'report.
S-2
INDEX TO EXHIBITS
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
21: Subsidiaries of the Registrant.
23.1: Consent of KPMG Peat Marwick LLP.
27: Financial Data Schedule.
10.46: Amendment No. 1 to the ICG Communications, Inc. 1996 Stock
Option Plan.
10.51: Employment Agreement, dated June 1, 1997, between NETCOM
On-Line Communication Services, Inc. and David W. Garrison.
10.52a: Purchase Agreement between ICG Holdings, Inc. and TriNet
Corporate Realty Trust, Inc., dated December 9, 1997.
10.52b: First Amendment to Purchase Agreement, by and between ICG
Holdings, Inc. and TriNet Essential Facilities X, Inc., dated
January 15, 1998.
10.52c: Assignment of Purchase Agreement, by and between TriNet
Corporate Realty Trust, Inc., dated January 15, 1998.
10.52d: Commercial Lease - Net between TriNet Essential Facilities X,
Inc. and ICG Holdings, Inc., dated January 15, 1998.
10.52e: Continuing Lease Guaranty, by ICG Communications, Inc. to
TriNet Essential Facilities X, Inc., dated January 20, 1998.
10.52f: Continuing Lease Guaranty, by ICG Holdings (Canada), Inc. to
TriNet Essential Facilities X, Inc., dated January 20, 1998.
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 March 30, 1998.
ICG Communications, Inc.
By: /s/J. Shelby Bryan
J. Shelby Bryan
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Act of 1934, this Report has been
signed by the following persons in the capacities and on the dates indicated:
Signature Title Date
/s/William J. Laggett Chairman of the Board of Directors March 30, 1998
- -----------------------
William J. Laggett
President, Chief Executive Officer and
/s/J. Shelby Bryan Director (Principal Executive Officer) March 30, 1998
- -----------------------
J. Shelby Bryan
Executive Vice President and Chief
Financial Officer (Principal Financial
/s/James D. Grenfell Officer) March 30, 1998
- -----------------------
James D. Grenfell
Vice President and Corporate Controller
/s/Richard Bambach (Principal Accounting Officer) March 30, 1998
- -----------------------
Richard Bambach
/s/David W. Garrison Director March 30, 1998
- -----------------------
David W. Garrison
/s/Harry R. Herbst Director March 30, 1998
- -----------------------
Harry R. Herbst
/s/Leontis Teryazos Director March 30, 1998
- -----------------------
Leontis Teryazos
/s/Walter Threadgill Director March 30, 1998
- -----------------------
Walter Threadgill
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 March 30, 1997.
ICG Funding, LLC
By: ICG Communications, Inc.
Common Member and Manager
By: /s/James D. Grenfell
James D. Grenfell
Executive Vice President and
Chief Financial Officer
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 30, 1998.
ICG Holdings (Canada), Inc.
By: /s/J. Shelby Bryan
J. Shelby Bryan
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Act of 1934, this Report has been
signed by the following persons in the capacities and on the dates indicated:
Signature Title Date
/s/William J. Laggett Chairman of the Board of Directors March 30, 1998
- -----------------------
William J. Laggett
President, Chief Executive Officer and
/s/J. Shelby Bryan Director (Principal Executive Officer) March 30, 1998
- -----------------------
J. Shelby Bryan
Executive Vice President and Chief
/s/James D. Grenfell Financial Officer(Principal Financial March 30, 1998
- ----------------------- Officer)
James D. Grenfell
Vice President and Corporate Controller
/s/Richard Bambach (Principal Accounting Officer) March 30, 1998
- -----------------------
Richard Bambach
Director
- -----------------------
Harry R. Herbst
/s/Gregory C.K. Smith Director March 30, 1998
- -----------------------
Gregory C.K. Smith
/s/Leontis Teryazos Director March 30, 1998
- -----------------------
Leontis Teryazos
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 March 30, 1997.
ICG Holdings, Inc.
By: /s/J. Shelby Bryan
J. Shelby Bryan
Chairman of the Board of Directors,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this Report has been
signed by the following persons in the capacities and on the dates indicated:
Signature Title Date
Chairman of the Board of Directors,
President and Chief Executive Officer
/s/J. Shelby Bryan (Principal Executive Officer) March 30, 1998
- -----------------------
J. Shelby Bryan
Executive Vice President, Chief Financial
Officer and Director(Principal Financial
/s/James D. Grenfell Officer) March 30, 1998
- -----------------------
James D. Grenfell
Vice President and Corporate Controller
/s/Richard Bambach (Principal Accounting Officer) March 30, 1998
- -----------------------
Richard Bambach
Executive Vice President - Network and
/s/John Kane Director Marc 30, 1998
- -----------------------
John Kane
Executive Vice President - Strategic
/s/Marc E. Maassen Planning and Director March 30, 1998
- -----------------------
Marc E. Maassen
Executive Vice President - Telecom
/s/Sheldon S. Ohringer and Director March 30, 1998
- -----------------------
Sheldon S. Ohringer