UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
(Commission File Number 333-51037)
ICG SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1448147
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
161 Inverness Drive West
Englewood, Colorado 80112
(888) 424-1144 or (303) 414-5000
(Address of principal executive offices and registrant's telephone numbers,
including area codes)
Indicate by check mark whether the registrant (1) has 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
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
On May 17, 1999, ICG Services, Inc. had 10 shares of common stock
outstanding. ICG Communications, Inc. owns all of the issued and outstanding
shares of common stock of ICG Services, Inc.
TABLE OF CONTENTS
PART I ..................................................................... 3
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS .................. 3
Consolidated Balance Sheets as of December 31, 1998 and
March 31, 1999 (unaudited).................................. 3
Consolidated Statements of Operations (unaudited) for the
Three Months Ended March 31, 1998 and 1999.................. 5
Consolidated Statement of Stockholders' Equity (unaudited)
for the Three Months Ended March 31, 1999 .................. 6
Consolidated Statements of Cash Flows (unaudited) for the
Three Months Ended March 31, 1998 and 1999 ................. 7
Notes to Consolidated Financial Statements, December 31,
1998 and March 31, 1999 (unaudited) ........................ 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS .................................... 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ... 27
PART II .................................................................... 29
ITEM 1. LEGAL PROCEEDINGS ............................................ 29
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS .................... 29
ITEM 3. DEFAULTS UPON SENIOR SECURITIES .............................. 29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .......... 29
ITEM 5. OTHER INFORMATION ............................................ 29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................ 29
Exhibits ..................................................... 29
Reports on Form 8-K .......................................... 29
2
ICG SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and March 31, 1999 (unaudited)
December 31, March 31,
1998 1999
------------------ ----------------
Assets (in thousands)
Current assets:
Cash, cash equivalents and restricted cash $ 114,380 240,942
Short-term investments available for sale 41,000 36,647
Marketable trading securities (note 4) - 30,439
Receivables:
Network services (note 3) - 5,244
Leasing services, due from ICG (note 6) 7,753 18,463
Due from ICG (note 6) 137,762 123,368
----------------- ----------------
145,515 147,075
----------------- ----------------
Inventory - 70
Prepaid expenses and deposits 20 804
----------------- ----------------
Total current assets 300,915 455,977
----------------- ----------------
Property and equipment 301,969 432,702
Less accumulated depreciation (4,064) (16,100)
----------------- ----------------
Net property and equipment 297,905 416,602
----------------- ----------------
Investments in debt securities available for sale and restricted
preferred stock (note 4) - 27,466
Investments, accounted for under the equity method (note 4) 10,179 47,909
Deferred financing and lease administration costs, net of
accumulated amortization of $1.5 million and $2.0 million at
December 31, 1998 and March 31, 1999, respectively 16,727 17,087
Deposits and other assets - 749
Net non-current assets of discontinued operations (note 3) 54,023 -
----------------- ----------------
Total assets (note 8) $ 679,749 965,790
================= ================
(Continued)
3
ICG SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (unaudited), Continued
December 31, March 31,
1998 1999
------------------- -----------------
Liabilities and Stockholders' Equity (in thousands)
Current liabilities:
Accounts payable $ 28,840 33,397
Accrued liabilities 1,309 33,036
Deferred gain on sale (note 3) - 22,195
Current portion of capital lease obligations - 2,838
Current portion of long-term debt (note 5) - 814
Net current liabilities of discontinued operations (note 3) 22,328 -
------------------- -----------------
Total current liabilities 52,477 92,280
------------------- -----------------
Capital lease obligations, less current portion - 4,576
Long-term debt, net of discount, less current portion (note 5) 594,617 640,880
------------------- -----------------
Total liabilities 647,094 737,736
------------------- -----------------
Stockholders' equity:
Common stock, $.01 par value, 1,000 shares authorized; 10 shares
issued and outstanding at December 31, 1998 and March 31, 1999 - -
Additional paid-in capital 207,798 211,697
Accumulated (deficit) earnings (175,024) 16,357
Accumulated other comprehensive loss (119) -
------------------- -----------------
Total stockholders' equity 32,655 228,054
------------------- -----------------
Commitments and contingencies (notes 5 and 7)
Total liabilities and stockholders' equity $ 679,749 965,790
=================== =================
See accompanying notes to consolidated financial statements.
4
ICG SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (unaudited)
Three Months Ended March 31, 1998 and 1999
Three months ended
March 31,
--------------------------------------
1998 1999
---------------- ------------------
(in thousands)
Revenue from leasing services provided to ICG (notes 6 and 8) $ 14,603
-
Operating costs and expenses:
Operating costs - 586
Selling, general and administrative expenses, including amounts
allocated from ICG (note 6) 489 389
Depreciation (note 8) - 7,130
---------------- ------------------
Total operating costs and expenses 489 8,105
---------------- ------------------
Operating (loss) income (489) 6,498
Other (expense) income:
Interest expense (note 8) (3,948) (15,638)
Interest income, including amounts earned from ICG (note 6) 2,113 8,315
Unrealized gain on marketable trading securities - 439
---------------- ------------------
(1,835) (6,884)
---------------- ------------------
Loss from continuing operations before share of losses (2,324) (386)
Share of losses of equity investees (note 4) - (1,262)
---------------- ------------------
Loss from continuing operations (2,324) (1,648)
---------------- ------------------
Loss from discontinued operations (note 3) (16,579) -
---------------- ------------------
Extraordinary gain on sales of operations of NETCOM, net of income taxes
of $6.4 million (note 3) - 193,029
---------------- ------------------
Net (loss) income and comprehensive (loss) income $ (18,903) 191,381
================ ==================
See accompanying notes to consolidated financial statements.
5
ICG SERVICES, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity (unaudited)
Three Months Ended March 31, 1999
Accumulated
Common stock Additional Accumulated other Total
--------------------- paid-in (deficit) comprehensive stockholders'
Shares Amount capital earnings loss equity
---------- ----------- -------------- -------------- ---------------- ---------------
(in thousands)
Balances at January 1, 1999 - $ - 207,798 (175,024) (119) 32,655
Reversal of foreign currency translation
adjustment (note 3) - - - - 119 119
Excess of book value of net assets
acquired over consideration paid
(note 4) - - 3,899 - - 3,899
Net income - - - 191,381 - 191,381
---------- ----------- -------------- -------------- ---------------- ---------------
Balances at March 31, 1999 - $ - 211,697 16,357 - 228,054
========== =========== ============== ============== ================ ===============
See accompanying notes to consolidated financial statements.
6
ICG SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
Three Months Ended March 31, 1998 and 1999
Three months ended March 31,
------------------------------------
1998 1999
--------------- ----------------
(in thousands)
Cash flows from operating activities:
Net (loss) income $ (18,903) 191,381
Loss from discontinued operations 16,579 -
Extraordinary gain on sales of operations - (193,029)
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Recognition of deferred gain - (3,805)
Share of losses of equity investees - 1,262
Depreciation - 7,130
Interest expense deferred and included in long-term debt 3,872 14,578
Amortization of deferred financing costs included in interest expense 76 441
Amortization of deferred lease administration costs included in selling,
general and administrative expenses - 63
Unrealized gain on marketable trading securities - (439)
Change in operating assets and liabilities:
Receivables - (3,827)
Inventory - 136
Prepaid expenses and deposits - (284)
Accounts payable and accrued liabilities 138 (9,987)
--------------- ----------------
Net cash provided by operating activities 1,762 3,620
--------------- ----------------
Cash flows from investing activities:
Acquisition of property, equipment and other assets (2,123) (64,054)
(Purchase) sale of short-term investments available for sale (12,000) 4,353
Investment in equity investee - (35,093)
Proceeds from sales of operations of NETCOM, net of cash included in sale - 252,881
Purchase of investments - (27,466)
--------------- ----------------
Net cash (used) provided by investing activities (14,123) 130,621
--------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of common stock:
Exercise of stock options 341 -
Employee stock purchase plan 132 -
Proceeds from issuance of long-term debt 300,571 -
Deferred financing and lease administration costs (9,575) (863)
Principal payments on capital lease obligations - (1,131)
Principal payments on long-term debt - (578)
--------------- ----------------
Net cash provided (used) by financing activities 291,469 (2,572)
--------------- ----------------
Net increase in cash, cash equivalents and restricted cash 279,108 131,669
Net cash provided (used) by discontinued operations 436 (5,107)
Cash, cash equivalents and restricted cash, beginning of period - 114,380
--------------- ----------------
Cash, cash equivalents and restricted cash, end of period $ 279,544 240,942
=============== ================
(Continued)
7
ICG SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
Three Months Ended March 31, 1998 and 1999
Three months ended March 31,
------------------------------------
1998 1999
--------------- ----------------
(in thousands)
Supplemental disclosure of cash flows information of continuing operations:
Cash paid for interest $ - 619
=============== ================
Cash paid for taxes $ - 409
=============== ================
Supplemental disclosure of non-cash investing and financing activities of
continuing operations:
Acquisition of corporate headquarters assets through the issuance of
long-term debt and conversion of security deposit (note 5) $ - 33,719
=============== ================
Assets acquired under capital leases $ - 3,760
=============== ================
See accompanying notes to consolidated financial statements.
8
ICG SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and March 31, 1999 (unaudited)
(1) Organization and Nature of Business
ICG Services, Inc., a Delaware corporation ("ICG Services" or "the
Company"), was incorporated on January 23, 1998 and is a wholly owned
subsidiary of ICG Communications, Inc., a Delaware corporation ("ICG").
On January 21, 1998, ICG completed a merger with NETCOM On-Line
Communication Services, Inc., a Delaware corporation and Internet
service provider ("ISP") located in San Jose, California ("NETCOM"),
accounted for as a pooling of interests. Upon the formation of ICG
Services on January 23, 1998, ICG contributed its investment in NETCOM
to ICG Services and NETCOM became a wholly owned subsidiary of, and
predecessor entity to, ICG Services. Accordingly, the financial
statements of the Company prior to January 23, 1998 consist solely of
the accounts of NETCOM and its subsidiaries. On February 17 and March
16, 1999, the Company completed the sales of the operations of NETCOM.
In conjunction with the sales, the legal name of the NETCOM subsidiary
was changed to ICG PST, Inc. ("PST"). PST has retained the domestic
Internet backbone assets formerly owned by NETCOM which it intends to
use for the provision of newly developed wholesale network services to
ISPs and other telecommunications providers. The Company's consolidated
financial statements reflect the operations of NETCOM as discontinued
for all periods presented.
On January 23, 1998, ICG Equipment, Inc., a Colorado corporation and
wholly owned subsidiary of the Company ("ICG Equipment"), was formed
for the principal purpose of providing financing of telecommunications
equipment and services to ICG Telecom Group, Inc., an indirectly wholly
owned subsidiary of ICG and provider of competitive local exchange
services, and its subsidiaries ("ICG Telecom"). Such financing is
provided through ICG Equipment's purchase of telecommunications
equipment, software, network capacity and related services from
original equipment manufacturers, providers of intercity network
facilities and ICG Telecom, and subsequent lease of such assets to ICG
Telecom.
The Company's objective is to acquire and invest in telecommunications
equipment, software, network capacity and businesses that complement
ICG's business strategy. By leveraging its relationship with ICG, the
Company intends to capitalize on the growth in demand for
telecommunications equipment and services provided by the Company. In
addition to providing Leasing Services and Network Services, the
Company intends to grow through acquisition or investment in
telecommunications related businesses, including investment in
companies currently owned by ICG.
(2) Significant Accounting Policies
(a) Basis of Presentation
These financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December
31, 1998, as certain information and note disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the United States
Securities and Exchange Commission. The interim financial
statements reflect all adjustments which are, in the opinion of
management, necessary for a fair presentation of financial
position, results of operations and cash flows as of and for the
interim periods presented. Such adjustments are of a normal
recurring nature. Operating results for the three months ended
March 31, 1999 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1999.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
9
ICG SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Significant Accounting Policies (continued)
(b) Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Restricted cash of $19.9 million, held as collateral by a third
party and remitted to the Company subsequent to March 31, 1999, is
included in cash, cash equivalents and restricted cash in the
accompanying consolidated balance sheet.
(c) Investments
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.
Available for sale investments are carried at amortized cost,
which approximates fair market value, with unrealized gains and
losses, net of tax, reported in accumulated other comprehensive
income or loss. Realized gains and losses and declines in value
judged to be other than temporary are included in the statement of
operations.
Marketable securities consist of investments in common stock and
are stated at fair market value as determined by the most recently
traded price of the securities at the balance sheet date, net of
estimated costs of disposition. The Company's marketable
securities are accounted for as trading securities, with realized
and unrealized gains and losses included in the statement of
operations.
Investments in common or preferred stock for which there is no
public trading market and which represent less than a 20% equity
interest in the investee company 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.
(d) (Loss) Earnings Per Share
The Company has 10 shares of common stock issued and outstanding,
which are owned entirely by ICG. Accordingly, the Company does not
present (loss) earnings per share in its consolidated financial
statements as such disclosure is not considered to be meaningful.
(e) Reclassifications
Certain 1998 amounts have been reclassified to conform with the
1999 presentation.
(3) Discontinued Operations
On February 17, 1999, the Company sold certain of the operating assets
and liabilities of NETCOM to MindSpring Enterprises, Inc., an ISP
located in Atlanta, Georgia ("MindSpring"). Total proceeds from the
sale were $245.0 million, consisting of $215.0 million in cash and
376,116 shares of common stock of MindSpring, valued at approximately
$79.76 per share at the time of the transaction. Assets and liabilities
sold to MindSpring include those directly related to the domestic
operations of NETCOM's Internet dial-up, dedicated access and Web site
hosting services. In conjunction with the sale to MindSpring, the
Company entered into an agreement to lease to MindSpring for a one-year
period the capacity of certain network operating assets formerly owned
by NETCOM and retained by the Company. MindSpring is utilizing the
Company's network capacity to provide Internet access to the dial-up
10
ICG SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) Discontinued Operations (continued)
services customers formerly owned by NETCOM. Over the term of the
one-year agreement, MindSpring is required to pay the Company a
minimum of $27.0 million for the Company's network capacity, although
such minimum is subject to increase dependent upon network usage. In
addition, the Company is receiving for a one-year period 50% of the
gross revenue earned by MindSpring from the dedicated access customers
formerly owned by NETCOM, estimated to be approximately $10.0 million
for the term of the agreement. The Company is currently utilizing the
retained network operating assets to provide wholesale capacity and
other enhanced network services to MindSpring and intends to provide
similar services to other ISPs and telecommunications providers in the
future. The carrying value of the assets retained by the Company was
approximately $21.7 million, including approximately $17.5 million of
network equipment, on February 17, 1999. The Company also retained
approximately $11.3 million of accrued liabilities and capital lease
obligations.
On March 16, 1999, the Company sold all of the capital stock of
NETCOM's international operations for total proceeds of approximately
$41.1 million. MetroNET Communications Corp., a Canadian entity, and
Providence Equity Partners, located in Providence, Rhode Island
("Providence"), together purchased the 80% interest in NETCOM Canada
Inc. owned by NETCOM for approximately $28.9 million in cash.
Additionally, Providence purchased all of the capital stock of NETCOM
Internet Access Services Limited, NETCOM's operations in the United
Kingdom, for approximately $12.2 million in cash.
During the three months ended March 31, 1999, the Company recorded a
combined gain on the sales of the operations of NETCOM of approximately
$193.0 million, net of income taxes of approximately $6.4 million.
Offsetting the gain on the sales is approximately $16.6 million of net
losses from operations of NETCOM from November 3, 1998 (the date on
which the Company's board of directors adopted the formal plan to
dispose of the operations of NETCOM) through the dates of the sales.
Additionally, since the Company expects to generate operating costs in
excess of revenue under its network capacity agreement with MindSpring
and the terms of the sale agreement were dependent upon and negotiated
in conjunction with the terms of the network capacity agreement, the
Company deferred approximately $26.0 million of the proceeds from the
sale agreement to be applied on a periodic basis to the network
capacity agreement. The deferred proceeds will be recognized in the
Company's statement of operations as the Company incurs cash operating
losses under the network capacity agreement. Accordingly, the Company
does not expect to recognized any revenue, operating costs or selling,
general and administrative expenses from services provided to
MindSpring for the term of the agreement. Any incremental revenue or
costs generated by other customers, or by other services provided to
MindSpring, will be recognized in the Company's consolidated statement
of operations as incurred. Since the operations sold were acquired by
ICG in a transaction accounted for as a pooling of interests, the gain
on the sales of the operations of NETCOM is classified as an
extraordinary item in the Company's consolidated statement of
operations. For fiscal 1996, 1997 and 1998, NETCOM reported revenue of
$120.5 million, $160.7 million and $164.6 million, respectively.
(4) Investments
As discussed in note 3, the Company received 376,116 shares of common
stock of MindSpring, valued at $79.76 per share, or $30.0 million, at
the time of the transaction, as partial consideration for the sale of
the domestic operations of NETCOM. In April 1999, the Company sold its
investment in MindSpring for net proceeds of approximately $30.4
million. The Company has recorded an unrealized gain of approximately
$0.4 million in its statement of operations for the three months ended
March 31, 1999. The Company's investment in MindSpring is included in
marketable trading securities in the accompanying consolidated balance
sheet.
11
ICG SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4) Investments (continued)
On March 30, 1999, the Company purchased, for approximately $10.0
million in cash, 454,545 shares of restricted Series D-1 Preferred
Stock (the "NorthPoint Preferred Stock") of NorthPoint Communications
Holdings, Inc., a Delaware corporation and competitive local exchange
carrier ("CLEC") based in San Francisco, California ("NorthPoint"). The
NorthPoint Preferred Stock has no voting rights and is ultimately
convertible into a voting class of common stock of NorthPoint, at an
exchange price which represents a discount, as provided in the relevant
documentation, to the initial public offering price of NorthPoint's
common stock. The Company is restricted from selling the NorthPoint
Preferred Stock or securities obtained upon conversion of the
NorthPoint Preferred Stock until March 23, 2000. On May 5, 1999,
NorthPoint completed the initial public offering of its common stock,
at which time the NorthPoint Preferred Stock, and additional shares of
NorthPoint Preferred Stock obtained as a result of stock splits, were
automatically converted into shares of Class B common stock, a
nonvoting class of common stock of NorthPoint (the "NorthPoint Class B
Shares"), which are convertible on or after March 23, 2000 on a
one-for-one basis into a voting class of common stock of NorthPoint.
The Company will account for its investment in NorthPoint under the
cost method of accounting until the NorthPoint Class B Shares are
converted into voting and tradable common stock of NorthPoint, after
which the investment will be classified as a trading security.
On March 1, 1999, the Company purchased from ICG Telecom, for $35.1
million in cash, a 49% equity interest in ICG ChoiceCom, L.P.
("ChoiceCom"). Based in Austin, Texas, ChoiceCom currently provides
local exchange and long distance services in Austin, Corpus Christi,
Dallas, Houston and San Antonio, Texas. The Company accounts for its
investment in ChoiceCom under the equity method of accounting. The
remaining 51% equity interest in ChoiceCom is owned by ICG Telecom. Due
to the related party nature of the transaction, the Company has
reflected the excess of ICG Telecom's book value of the net assets
acquired over the consideration paid of $3.9 million as a contribution
to equity in the accompanying consolidated financial statements. For
the three months ended March 31, 1999, the Company included
approximately $0.8 million in its consolidated statement of operations
for its proportionate share of losses of ChoiceCom.
(5) Long-term Debt
Long-term debt is summarized as follows:
December 31, March 31,
1998 1999
--------------------- ---------------------
(in thousands)
9 7/8% Senior discount notes, net of discount $ 266,918 $ 273,401
10% Senior discount notes, net of discount 327,699 335,793
Mortgage payable with adjustable rate of interest
(14.34% at March 31, 1999), due monthly into 2013,
secured by corporate headquarters (a) - 32,500
--------------------- ---------------------
594,617 641,694
Less current portion - (814)
--------------------- ---------------------
$ 594,617 $ 640,880
===================== =====================
(a) Note Payable
Effective January 1, 1999, the Company purchased ICG's corporate
12
ICG SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) Long-term Debt (continued)
headquarters building, land and improvements (collectively, the
"Corporate Headquarters") for approximately $43.7 million, which
amount represents historical cost and approximates fair value.
The Company, through a newly formed subsidiary, financed the
purchase primarily through a mortgage secured by the Corporate
Headquarters. Payments on the mortgage are due monthly through
January 31, 2013, at an initial interest rate of 14.34% per annum
which rate increases annually by 0.003%. The seller of the
Corporate Headquarters has retained an option to repurchase the
Corporate Headquarters at the original sales price, which option
is exercisable from January 1, 2004 through January 31, 2012.
(6) Related Party Transactions
The Company and its subsidiaries have entered into certain intercompany
and shared services agreements with ICG, whereby ICG allocates to the
Company direct and certain indirect costs incurred by ICG or its other
subsidiaries (the "Restricted Subsidiaries") on behalf of the Company.
Allocated expenses generally include a portion of salaries and related
benefits of legal, accounting and finance, information systems support
and other ICG employees, certain overhead costs and reimbursement for
invoices of the Company paid by ICG. Conversely, any cash collected by
ICG on behalf of the Company or invoices paid by the Company on behalf
of ICG are in turn reimbursed to the Company by ICG. As the Company and
its subsidiaries and ICG and its Restricted Subsidiaries jointly enter
into service offerings and other transactions, joint costs incurred are
generally allocated to each of the Company and ICG according to the
relative capital invested and efforts expended by each party. All
transactions between the Company, including its subsidiaries, and ICG,
including its Restricted Subsidiaries, contain fair and reasonable
terms and are approved by the board of directors of the Company and of
ICG. All such transactions are settled in cash on a quarterly basis.
For the three months ended March 31, 1998 and 1999, ICG charged
approximately $1.6 million and $2.8 million, respectively, to the
Company for intercompany transfers and direct and indirect costs
incurred by ICG and its Restricted Subsidiaries on behalf of the
Company. Of these amounts, approximately $0.5 million and $0.3 million
are included in the Company's selling, general and administrative
expenses for the three months ended March 31, 1998 and 1999,
respectively. In addition, for the three months ended March 31, 1998
and 1999, the Company charged approximately $0.7 million and $125.2
million, respectively, to ICG and its Restricted Subsidiaries for
intercompany transfers and direct and indirect costs incurred by the
Company on behalf of ICG and its Restricted Subsidiaries. The net
receivable from ICG for all intercompany charges combined is included
in due from ICG in the Company's consolidated balance sheets. Net
interest income accrued by the Company on outstanding balances from ICG
and its Restricted Subsidiaries is included in interest income in the
Company's consolidated statement of operations and was approximately
$5.9 million for the three months ended March 31, 1999. Interest has
been accrued on outstanding balances of intercompany transfers and
direct and indirect costs between ICG Services and ICG and its
Restricted Subsidiaries at 10% and 12 1/2% per annum for 1998 and 1999,
respectively, which represents the Company's approximate weighted
average cost of capital at the beginning of the respective fiscal year.
During the three months ended March 31, 1999, ICG Equipment purchased
certain telecommunications equipment both from and for ICG Telecom for
an aggregate purchase price of approximately $64.1 million.
Additionally, ICG Equipment entered into separate agreements to lease
$96.5 million of telecommunications equipment to ICG Telecom under
operating leases, with annual lease payments commencing one year from
the date of the lease. ICG Equipment recognizes revenue from the lease
payments ratably over the lease terms. ICG Equipment recognized
approximately $11.1 million in revenue under its operating leases with
ICG Telecom for the three months ended March 31, 1999, all of which is
included in leasing services receivables at March 31, 1999. Subsequent
to March 31, 1999, ICG
13
ICG SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) Related Party Transactions (continued)
Equipment purchased certain telecommunications equipment and fiber
optic capacity from ICG Telecom for an aggregate purchase price of
approximately $9.8 million and simultaneously entered into agreements
to lease the same telecommunications equipment and fiber optic capacity
back to ICG Telecom under operating leases, with annual lease payments
commencing one year from the date of the lease. The purchase prices and
lease payments for all leases are subject to adjustment, based on the
results of an independent appraisal which may be requested at the
option of ICG Telecom and ICG Equipment on or before 90 days from the
purchase date. ICG Equipment has submitted a request to ICG Telecom for
independent appraisals of certain of the telecommunications equipment
and fiber optic capacity purchased through March 31, 1999. The Company
expects the appraisals for all transactions completed during fiscal
1998 to be complete during the second quarter of 1999.
Additionally, under a master lease agreement between ICG Equipment and
ICG Telecom, ICG Telecom is required to pay ICG Equipment a monthly
lease service fee, at an annual rate of prime plus 4% (11 3/4% at March
31, 1999), based on the average monthly balance of assets purchased by
ICG Equipment and intended for future lease to ICG Telecom, but not yet
placed into service. For the three months ended March 31, 1999, ICG
Equipment recognized approximately $2.3 million of monthly service fee
revenue under this agreement which was included in leasing services
receivables at March 31, 1999. The amount of assets purchased by ICG
Equipment and intended for future lease to ICG Telecom, but not yet
placed into service, was approximately $75.2 million at March 31, 1999.
The Company begins depreciation on property and equipment at the time
the assets are placed in service.
In the normal course of business, ICG Telecom provides the use of
certain of its local access lines to NETCOM (prior to the disposition
of the operations of NETCOM) and PST and, accordingly, charges NETCOM
and PST for costs of any installation and recurring access to its
network. For the three months ended March 31, 1999, NETCOM and PST
together incurred approximately $1.4 million for installation and
recurring local access charges from ICG Telecom, which have been
included in the extraordinary gain on the sales of the operations of
NETCOM for those charges relating to NETCOM and in operating costs for
those charges relating to PST, a portion of which were applied against
the deferred gain on the sale of certain of NETCOM's domestic operating
assets and liabilities, in the Company's consolidated financial
statements for the three months ended March 31, 1999.
Effective January 1, 1999, the Company purchased ICG's Corporate
Headquarters and subsequently assumed the prior lessor's operating
lease of the Corporate Headquarters assets to a Restricted Subsidiary
of ICG. For the three months ended March 31, 1999, the Company earned
leasing revenue from the Restricted Subsidiary of ICG of approximately
$1.2 million under the operating lease, which is included in revenue
and due from ICG in the Company's consolidated financial statements.
(7) Commitments and Contingencies
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 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.
The Company has entered into certain commitments to purchase capital
assets with an aggregate purchase price of approximately $91.1 million
at March 31, 1999.
A putative class action lawsuit was filed on July 15, 1997 in Superior
Court of California, Orange County,
14
ICG SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) Commitments and Contingencies (continued)
alleging unfair business practices and related causes of action against
NETCOM, now PST, in connection with its offers of free trial periods
and cancellation procedures. This litigation was settled in May 1999
for an amount which was not significant to the Company's consolidated
financial statements. NETCOM, now PST, 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.
(8) Business Units
The Company conducts transactions with external customers through the
operations of its Network Services (PST) and Leasing Services
(primarily ICG Equipment). Direct and certain indirect costs incurred
by ICG Services, Inc., the parent company, on behalf of Network
Services and Leasing Services are allocated among those business units
based on the nature of the underlying costs. As the operations of
Network Services commenced during the three months ended March 31,
1999, such operations are not considered to be significant for purposes
of business segment reporting and, accordingly, are included with the
remaining corporate subsidiaries of the Company which primarily hold
securities.
Set forth below are revenue, EBITDA (which represents the measure of
operating performance used by management to evaluate operating
results), depreciation, interest expense, capital expenditures of
continuing operations and total assets for Leasing Services and all
other subsidiaries of the Company combined. As described in note 3,
results of the Company reflect the operations of NETCOM as discontinued
for all periods presented.
Three months ended March 31,
---------------------------------------
1998 1999
------------------ -------------------
(in thousands)
Revenue:
Leasing Services $ - 14,603
All other - -
------------------ -------------------
Total revenue $ - 14,603
================== ===================
EBITDA (a):
Leasing Services $ (170) 14,494
All other (319) (866)
------------------ -------------------
Total EBITDA $ (489) 13,628
================== ===================
Depreciation (b):
Leasing Services $ - 6,353
All other - 777
------------------ -------------------
Total depreciation $ - 7,130
================== ===================
Interest expense (b):
Leasing Services $ - 621
All other 3,948 15,017
------------------ -------------------
Total interest expense $ 3,948 15,638
================== ===================
(Continued)
15
ICG SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) Business Units (continued)
Three months ended March 31,
-------------------------------------------
1998 1999
------------------- -------------------
(in thousands)
Capital expenditures of continuing operations (c):
Leasing Services $ 2,123 63,937
All other - 3,877
------------------- -------------------
Total capital expenditures of continuing operations $ 2,123 67,814
=================== ===================
December 31, March 31,
1998 1999
------------------- -------------------
(in thousands)
Total assets:
Leasing Services $ 289,464 413,218
All other (d) 595,265 879,692
Net current assets of discontinued operations (e) - -
Net non-current assets of discontinued operations 54,023 -
Leasing Services due to ICG (259,003) (331,019)
------------------- -------------------
Total assets $ 679,749 961,891
=================== ===================
(a) EBITDA consists of loss from continuing operations before
interest, income taxes, depreciation, other expense, net, and
share of losses of equity investees, or simply, revenue less
operating costs and selling, general and administrative expenses.
EBITDA is presented as the Company's measure of operating
performance 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 for the
periods indicated. EBITDA is not a measurement under generally
accepted accounting principles and is not necessarily comparable
with similarly titled measures of other companies.
(b) Although not included in EBITDA (which represents the measure of
operating performance used by management to evaluate operating
results) the Company has supplementally provided depreciation and
interest expense for each of the Company's Leasing Services and
all other Company subsidiaries combined. Interest expense
excludes amounts charged by ICG Services, Inc. to ICG Equipment,
Inc. (Leasing Services) for interest on outstanding cash advances
and expense allocations.
(c) Capital expenditures include assets acquired under capital leases
and excludes corporate headquarters assets acquired through the
issuance of long-term debt.
(d) Total assets excludes the investment in ICG Equipment, Inc.
(Leasing Services) which eliminates in consolidation.
(e) At December 31, 1998, the Company had net current liabilities of
discontinued operations of $22.3 million, and accordingly, such
amount was not included within net current assets of discontinued
operations on that date.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
The following discussion includes certain forward-looking statements which
are affected by important factors including, but not limited to, the Company's
lack of operating history, the successful execution of the Company's new
strategy of offering enhanced network services to ISPs, ICG Telecom and other
telecommunications providers and lack of credit support from ICG that could
cause actual results to differ materially from the forward-looking statements.
The results of operations for the three months ended March 31, 1998 and 1999
represent the consolidated operating results of the Company and its
subsidiaries. See the unaudited condensed consolidated financial statements of
the Company for the three months ended March 31, 1999 included elsewhere herein.
The Company's consolidated financial statements reflect the operations of NETCOM
as discontinued for all periods presented. The terms "fiscal" and "fiscal year"
refer to the Company's fiscal year ending December 31.
Company Overview
ICG Services, Inc. ("ICG Services" or the "Company") was formed on January
23, 1998 and is a wholly owned subsidiary of ICG. The Company's Leasing Services
and Network Services operations are currently conducted through its two
operating subsidiaries, ICG Equipment, Inc. ("ICG Equipment") and ICG PST, Inc.
("PST") (formerly NETCOM On-Line Communication Services, Inc. ("NETCOM")).
On January 21, 1998, ICG acquired NETCOM, a Delaware corporation and
provider of Internet connectivity and Web site hosting services located in San
Jose, California, in a transaction accounted for as a pooling of interests. As
consideration for the acquisition, ICG issued approximately 10.2 million shares
of common stock of ICG ("ICG Common Stock"), valued at approximately $284.9
million on the date of the merger. Upon the formation of ICG Services, ICG
contributed its investment in NETCOM to ICG Services and NETCOM became a wholly
owned subsidiary of, and predecessor entity to, ICG Services. Accordingly, the
historical consolidated financial statements of the Company prior to January 23,
1998 consist solely of the accounts of NETCOM.
In January 1998, the Company formed ICG Equipment, a Colorado corporation,
for the principal purpose of providing financing of telecommunications equipment
and services to ICG Telecom Group, Inc., an indirectly wholly owned subsidiary
of ICG and provider of competitive local exchange services, and its subsidiaries
("ICG Telecom"). Such financing is provided through ICG Equipment's purchase of
telecommunications equipment, software, network capacity and related services
from original equipment manufacturers, providers of intercity network facilities
and ICG Telecom, and subsequent lease of such assets to ICG Telecom. ICG
Equipment has applied for, and received or has pending, sales tax reseller
certificates in all jurisdictions in which it conducts business. By purchasing
assets through ICG Equipment, ICG Telecom defers sales tax on asset purchases
over the terms of its leases with ICG Equipment, which sales tax would otherwise
be paid in full by ICG Telecom at the time of the purchase. The equipment and
services provided to ICG Telecom are utilized to upgrade and expand ICG's
network infrastructure. All leasing and other arrangements between ICG Equipment
and ICG Telecom contain fair and reasonable terms and are intended to be
conducted on the basis of fair market value and on comparable terms that the
Company would be able to obtain from a comparable third party. ICG Equipment
completed its first significant transaction on June 30, 1998 and, accordingly,
ICG Equipment's operations prior to that date are not significant. During the
second half of 1998 and the three months ended March 31, 1999, ICG Equipment
entered into a series of agreements whereby ICG Equipment purchased
telecommunications equipment and fiber optic capacity from ICG Telecom and
leased back the same telecommunications equipment and fiber optic capacity to
ICG Telecom under operating leases. Additionally, under master lease agreements
between ICG Equipment and ICG Telecom, ICG Telecom is required to pay ICG
Equipment a monthly lease service fee based on the average monthly balance of
assets purchased by ICG Equipment and intended for future lease to ICG Telecom,
but not yet placed into service. At March 31, 1999, ICG Equipment had
approximately $291.5 million of telecommunications equipment, software, network
capacity and related services under lease to ICG Telecom and approximately $75.2
million of such assets intended for future lease to ICG Telecom, but not yet
placed into service.
On February 17, 1999, the Company sold certain of the operating assets and
liabilities of NETCOM to MindSpring Enterprises, Inc., an Internet service
provider ("ISP") located in Atlanta, Georgia ("MindSpring"), for total proceeds
of $245.0 million, and on March 16, 1999, the Company sold all of the capital
stock of NETCOM's international operations in Canada and the United Kingdom to
17
other unrelated third parties for total proceeds of approximately $41.1 million.
During the three months ended March 31, 1999, the Company recorded a combined
gain on the sales of the operations of NETCOM of approximately $193.0 million,
net of income taxes of approximately $6.4 million. Offsetting the gain on the
sales is approximately $16.6 million of net losses from operations of NETCOM
from November 3, 1998 (the date on which the Company's board of directors
adopted the formal plan to dispose of the operations of NETCOM) through the
dates of the sales. Since the operations sold were acquired by ICG in a
transaction accounted for as a pooling of interests, the gain on the sales of
the operations of NETCOM is classified as an extraordinary item in the Company's
consolidated statement of operations. For fiscal 1996, 1997 and 1998, NETCOM
reported revenue of $120.5 million, $160.7 million and $164.6 million,
respectively, and EBITDA losses of $(31.0) million, $(9.4) million and $(14.7)
million, respectively. The Company's consolidated financial statements reflect
the operations of NETCOM as discontinued for all periods presented.
In conjunction with the sale to MindSpring, the legal name of the NETCOM
subsidiary was changed to ICG PST, Inc. ("PST"). PST has retained the domestic
Internet backbone assets formerly owned by NETCOM which include 236 points of
presence ("POPs") serving approximately 700 cities nationwide. PST intends to
utilize the retained network operating assets to provide wholesale Internet
access and enhanced network services to MindSpring and other ISPs, ICG Telecom
and other telecommunications providers. On February 17, 1999, PST entered into
an agreement to lease to MindSpring for a one-year period the capacity of
certain network operating assets formerly owned by NETCOM and retained by the
Company. MindSpring is utilizing the Company's network capacity to provide
Internet access to the dial-up services customers formerly owned by NETCOM. Over
the term of the one-year agreement, MindSpring is required to pay the Company a
minimum of $27.0 million, although such minimum is subject to increase dependent
upon network usage. In addition, the Company is receiving for a one-year period
50% of the gross revenue earned by MindSpring from the dedicated access
customers formerly owned by NETCOM, estimated to be approximately $10.0 million
for the term of the agreement. Although the Company expects to generate cash
operating losses under this agreement, any such losses will be offset by the
periodic recognition of approximately $26.0 million of the proceeds from the
sale of certain of NETCOM's domestic operating assets and liabilities to
MindSpring, which the Company deferred on February 17, 1999. Accordingly, the
Company does not expect to recognize any revenue, operating costs or selling,
general and administrative expenses from services provided to MindSpring for the
term of the agreement. Any incremental revenue or costs generated by other
customers, or by other services provided to MindSpring, will be recognized in
the Company's consolidated statement of operations as incurred.
Additionally, PST intends to provide network capacity and enhanced data
services to ISPs, ICG Telecom and other telecommunications providers, as
required. In December 1998, ICG announced plans to offer several new network
services to its business and ISP customers by utilizing ICG's and, consequently,
PST's nationwide data network and service capabilities to carry out-of-region
traffic and enhance data services provided. One of the services currently being
offered is modemless remote access service ("RAS"). RAS, also known as managed
modem service, allows ICG to provide modem access at its own switch location,
thereby eliminating the need for ISPs to deploy modems physically at each of
their POPs. The benefits to ISPs, including reduced capital expenditures and the
shift of network management responsibility from the ISPs to ICG, will allow ICG
to act as an aggregator of ISP traffic. PST participates in offering RAS by
providing radius routing and proxy services at the modem bank connected to ICG
Telecom's or another telecommunications provider's local switch, which services
are the authentication services necessary to validate and accurately route
incoming call traffic to the ISP. PST also provides transport services to
deliver all Internet protocol ("IP") data packets either directly to the ISP, if
the ISP is not collocated at the telecommunications provider's local switch, or
directly to the Internet, bypassing the ISP. Additionally, through its network
operations center, PST monitors the usage of each port and is responsible for
the administration of all network repair and maintenance. The Company is
currently offering Internet RAS services, or expanded originating services, to
MindSpring and expects to extend such services offerings to other ISPs in the
future. In August 1998, ICG Telecom began offering enhanced telephony services
via IP technology. ICG Telecom currently offers this service in 230 major cities
in the United States, covering more than 90% of the commercial long distance
market. ICG Telecom carries the IP traffic over PST's nationwide data network
and terminates a large portion of the traffic via PST's POPs. PST charges ICG
Telecom for calls carried and terminated on PST's network. ICG and PST together
may also begin offering integrated access service ("IAS") which allows voice and
data traffic to be carried on the same circuit. Through equipment installed by
ICG Telecom at the customers' premises and in ICG Telecom's central offices, IAS
will provide expanded bandwidth for small to medium-sized business customers as
an alternative to purchasing additional circuits. Data traffic, including
18
Internet traffic, from IAS service offerings will be carried over PST's network.
PST's network will also be utilized by ICG Telecom in offering peering services
to its ISP customers, in which service offerings ICG Telecom will become the
general backbone provider for its customers. Additionally, PST intends to
provide other enhanced network services as demand warrants.
In March 1999, ICG entered into an agreement with NorthPoint
Communications, Inc., a data competitive local exchange carrier based in San
Francisco, California ("NorthPoint"), which designates NorthPoint as ICG's
preferred digital subscriber line ("DSL") provider through June 1, 2001. A
significant portion of ICG's DSL traffic will be routed by NorthPoint to PST's
asynchronous transfer mode ("ATM") switches and transported by PST either to the
ISP, via a point to point connection or via IP technology, or directly to the
Internet, as required. ICG expects to purchase a minimum of 75,000 digital
subscriber lines from NorthPoint during the term of the agreement. PST has not
finalized its arrangements with ICG Telecom regarding pricing and volume of
services required by PST in order for ICG Telecom to perform under its agreement
with NorthPoint and meet the needs of its customers, although the Company
believes this agreement will expand the current operations of PST.
The Company has and will continue to enter into agreements with ICG Telecom
to provide network services at negotiated rates. All such arrangements contain
fair and reasonable terms and are intended to be conducted on the basis of fair
market value and on comparable terms that the Company would be able to obtain
from a comparable third party. The Company is not presently able to determine
the impact that the offerings of its newly developed network services will have
on revenue or EBITDA in 1999, 2000 or future years. The nature, volume and
consideration received for network services from ISPs and other
telecommunications providers as well as that received under its agreements with
ICG Telecom are ultimately dependent upon demand from ISPs and other
telecommunications providers, and while ICG Telecom and PST believe the Internet
services market sector will benefit from these new services, there is no
assurance that ICG Telecom and PST will be able to successfully deploy and
market its new services efficiently, or at all, or obtain and retain new
customers in a competitive marketplace. In the event that ICG Telecom fails to
successfully deploy its new services utilizing PST's network, demands a lower
volume of network capacity services than originally anticipated or is unable to
adequately compensate PST for services provided or to be provided, PST will
market its services solely to unrelated third parties.
The Company may acquire telecommunications and related businesses that
complement ICG's business strategy to offer a wide array of telecommunications
and related services primarily to communications-intensive business customers.
Additionally, the Company may acquire businesses from ICG which ICG currently
owns and operates. Any further acquisitions would be primarily through the use
of cash on hand and the proceeds from securities offerings and ICG Common Stock.
However, there is no assurance that acquisitions at favorable prices to the
Company will occur or that the Company will have sufficient sources of funding
to make such acquisitions. The Company's results of operations and financial
condition will change as the operations of ICG Equipment and PST become more
significant and as it consummates acquisitions, if any.
Results of Operations
The following table provides certain statement of operations data and
certain other financial data for the Company for the periods indicated. The
table also presents revenue, operating costs and expenses, operating (loss)
income and EBITDA as a percentage of the Company's revenue.
19
Three months ended March 31,
-----------------------------------------------------------------
1998 1999
------------------------------- -------------------------------
$ % $ %
-------------- -------------- -------------- --------------
(unaudited)
(in thousands)
Statement of Operations Data:
Revenue - - 14,603 100
Operating costs and expenses:
Operating costs - - 586 4
Selling, general and administrative 489 - 389 3
Depreciation - - 7,130 49
-------------- -------------- -------------- --------------
Total operating expenses 489 - 8,105 56
Operating (loss) income (489) - 6,498 44
Other Data:
Net cash provided by operating activities 1,762 3,620
Net cash used (provided) by investing activities (14,123) 130,621
Net cash provided (used) by financing activities 291,469 (2,572)
EBITDA (1) (489) - 13,628 93
Capital expenditures of continuing operations (2) 2,123 67,814
Capital expenditures of discontinued operations (2) 6,509 -
(1) EBITDA consists of earnings (loss) from continuing operations before
interest, income taxes, depreciation, other expense, net and share of
losses of equity investees, or simply, operating income (loss) plus
depreciation. 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 of continuing
operations as determined using GAAP are also presented in Other Data.
(2) Capital expenditures includes assets acquired under capital leases and
excludes corporate headquarters assets acquired through the issuance of
long-term debt. Capital expenditures of discontinued operations includes
the capital expenditures of NETCOM.
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Revenue. The Company recorded revenue of approximately $14.6 million
for the three months ended March 31, 1999, which consists entirely of revenue
from Leasing Services provided to ICG or ICG's other operating subsidiaries.
Revenue recorded on operating leases of property and equipment to ICG Telecom
was $11.1 million for the three months ended March 31, 1999. Additionally, the
Company charged lease service fees to ICG Telecom during the three months ended
March 31, 1999 for the cost of carrying assets not yet placed into service. For
the three months ended March 31, 1999, revenue earned on lease service fees was
$2.3 million. The Company also receives rental income from ICG under the
operating lease for ICG's corporate headquarters, which the Company purchased
and simultaneously leased to ICG, effective January 1, 1999. For the three
months ended March 31, 1999, the Company recorded revenue on the operating lease
for the corporate headquarters of $1.2 million. Revenue earned of $5.7 million
for the three months ended March 31, 1999 under the Company's network capacity
agreement with MindSpring has been offset by operating costs and selling,
general and administrative expenses of $9.5 million incurred under the same
agreement. This $3.8 million operating deficit has been equally offset by the
recognition of $3.8 million of the deferred proceeds from the sale of certain of
the domestic operating assets and liabilities of NETCOM. The Company anticipates
that revenue will increase substantially in future periods as the volume of ICG
Equipment's operations increases and as PST generates revenue from customers
other than MindSpring, or provides new services to MindSpring.
20
Operating costs. Operating costs of $0.6 million for the three months
ended March 31, 1999 consists of line costs and other direct costs of PST
associated with PST's and ICG Telecom's joint service offering of IP telephony
services.
Selling, general and administrative expenses. Selling, general and
administrative ("SG&A") expenses were approximately $0.5 million and $0.4
million for the three months ended March 31, 1998 and 1999, respectively. SG&A
expenses consist principally of allocations of a portion of ICG's general and
administrative expenses for certain direct and indirect costs incurred by ICG on
behalf of the Company. Such allocations were $0.5 million and $0.3 million,
representing 100% and 73% of total SG&A expenses for the three months ended
March 31, 1998 and 1999, respectively. Remaining SG&A expenses include general
corporate administrative expenses, including professional and cash management
fees. SG&A expenses are expected to increase in absolute dollars as the volume
of ICG Equipment's operations increases and as PST commences new service
offerings to customers other than MindSpring, or provides new services to
MindSpring.
Depreciation. Depreciation was $7.1 million for the three months ended
March 31, 1999 and consists primarily of depreciation of ICG Equipment's
property and equipment purchased from and for ICG Telecom and leased to ICG
Telecom under long-term operating leases. The Company's depreciation expense
will continue to increase as PST purchases additional property and equipment,
ICG Equipment places in service equipment that has already been purchased,
purchases additional property and equipment for lease to ICG's other operating
subsidiaries and as the Company recognizes for a full period the depreciation of
assets formerly owned by NETCOM and retained by PST, which began in February
1999.
Interest expense. Interest expense increased $11.7 million, from $3.9
million for the three months ended March 31, 1998 to $15.6 million for the three
months ended March 31, 1999, which includes $15.0 million of non-cash interest.
Interest expense is primarily attributable to the 10% Senior Discount Notes due
2008 (the "10% Notes") issued in February 1998 and the 9 7/8% Senior Discount
Notes due 2008 (the "9 7/8% Notes') issued in April 1998. The Company's interest
expense will continue to increase as the principal amounts of the 10% Notes and
the 9 7/8% Notes increase until the 10% Notes and the 9 7/8% Notes begin to pay
interest in cash.
Interest income. Interest income increased $6.2 million, from $2.1
million for the three months ended March 31, 1998 to $8.3 million for the three
months ended March 31, 1999 and primarily represents interest earned on invested
cash balances from the proceeds from the issuance of the 10% Notes and the 9
7/8% Notes. The Company also earned net interest income from ICG of
approximately $5.9 million during the three months ended March 31, 1999 for
invoices paid by the Company on behalf of ICG and its other operating
subsidiaries and repaid on a quarterly basis. The Company expects interest
income to decline in future periods as the Company continues to invest its
available cash balances in telecommunications equipment and other assets.
Unrealized gain on marketable trading securities. Unrealized gain on
marketable trading securities of $0.4 million for the three months ended March
31, 1999 represents the unrealized gain on the common stock of MindSpring which
the Company received as partial consideration for the sale of the domestic
operations of NETCOM.
Share of losses of equity investees. The Company's share of losses of
ICG Ohio LINX, Inc. ("ICG Ohio LINX") and ICG ChoiceCom L.P. ("ChoiceCom") was
$1.3 million for the three months ended March 31, 1999. The Company purchased a
20% equity interest in ICG Ohio LINX in August 1998 and a 49% equity interest in
ChoiceCom in March 1999.
Loss from continuing operations. Loss from continuing operations
improved $0.7 million, or 29%, from $2.3 million for the three months ended
March 31, 1998 to $1.6 million for the three months ended March 31, 1999 due to
increases in revenue and interest income, offset by increases in operating
costs, depreciation, interest expense and share of losses of equity investees,
as noted above. As the operations of ICG Equipment become more significant, the
Company's loss from continuing operations will be increasingly impacted by the
operating income of ICG Equipment.
Loss from discontinued operations and net loss. For the three months
ended March 31, 1998, loss from discontinued operations was $16.6 million, or
88% of the Company's net loss and consists of the net loss of NETCOM. Since the
21
Company expected to report a gain on the disposition of NETCOM, the Company
deferred the net losses from operations of NETCOM from November 3, 1998 (the
date on which the Company's board of directors adopted the formal plan to
dispose of the operations of NETCOM) through the dates of the sales and,
accordingly, the Company reported no loss from discontinued operations of NETCOM
for the three months ended March 31, 1999.
Extraordinary gain on sales of operations of NETCOM. The Company
reported an extraordinary gain on the sales of the operations of NETCOM during
the three months ended March 31, 1999 of $193.0 million, net of income taxes of
$6.4 million. Offsetting the gain on the sales is approximately $16.6 million of
net losses of operations of NETCOM from November 3, 1998 through the dates of
the sales and $26.0 million of deferred sales proceeds from the sale of certain
of the domestic operating assets and liabilities of NETCOM to MindSpring. The
deferred proceeds will be recognized on a periodic basis over the term of the
Company's network capacity agreement with MindSpring.
Liquidity and Capital Resources
The Company's growth has been funded through the proceeds from its 1998
debt financings (the 10% Notes and the 9 7/8% Notes issued in February and April
1998, respectively) and the proceeds from the sales of the operations of NETCOM.
As of March 31, 1999, the Company had current assets of $456.0 million,
including $277.6 million of cash, cash equivalents, restricted cash and
short-term investments, which exceeded current liabilities of $92.3 million,
providing working capital of $363.7 million. The Company primarily 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.
Net Cash Provided By Operating Activities
The Company's operating activities provided $1.8 million and $3.6
million for the three months ended March 31, 1998 and 1999, respectively. Net
cash provided by operating activities is primarily due to losses from continuing
operations, which are more than offset by changes in working capital items and
non-cash expenses, such as deferred interest expense and depreciation.
The Company does not expect to generate significant cash flows from
operating activities while the Company continues to expand its operations.
Consequently, the Company does not anticipate that cash provided by the
continuing operations of ICG Equipment alone will be sufficient to fund
operating activities of continuing operations, including the operations of PST,
in the near term. The Company anticipates that cash used by operating activities
will improve when the Company expands leasing operations under ICG Equipment and
increases revenue from services offered by PST to customers other than
MindSpring, either of which may not occur.
Net Cash (Used) Provided By Investing Activities
The Company's investing activities used $14.1 million and provided
$130.6 million for the three months ended March 31, 1998 and 1999, respectively.
Net cash used by investing activities for the three months ended March 31, 1998
includes the acquisition of property, equipment and other assets and the
purchase of short-term investments available for sale. Net cash provided by
investing activities for the three months ended March 31, 1999 includes proceeds
from the sales of the operations of NETCOM of $252.9 million and the sale of
short-term investments of $4.4 million, offset by the acquisition of property,
equipment and other assets of $64.1 million, the purchase of the 49% equity
interest in ChoiceCom of $35.1 million and the purchase of long-term investments
of $27.5 million. The Company will continue to use cash in 1999 and subsequent
periods for the purchase of telecommunications equipment by ICG Equipment for
lease to ICG Telecom, the expansion of PST's operations and, potentially, for
acquisitions. The Company acquired assets under capital leases of $3.8 million
during the three months ended March 31, 1999.
Net Cash Provided (Used) By Financing Activities
The Company's financing activities provided $291.5 million and used
$2.6 million for the three months ended March 31, 1998 and 1999, respectively.
22
Net cash provided by financing activities for the three months ended March 31,
1998 includes net proceeds from the private placement of the 10% Notes in
February 1998 and proceeds from purchases under NETCOM's employee stock purchase
plan (which was dissolved in conjunction with NETCOM's merger with ICG in
January 1998) and proceeds from the exercise of NETCOM stock options. For the
three months ended March 31, 1999, the Company's financing activities consist of
principal payments on long-term debt and capital leases.
As of March 31, 1999, the Company had an aggregate accreted value of
approximately $609.2 million outstanding under the 10% Notes and the 9 7/8%
Notes. The 10% Notes require payments of interest to be made in cash commencing
August 15, 2003 and mature February 15, 2008. The 9 7/8% Notes require payments
of interest to be made in cash commencing November 1, 2003 and mature May 1,
2008. As of March 31, 1999, the Company had $7.4 million of capital lease
obligations and $32.5 million of other indebtedness outstanding. With respect to
senior indebtedness outstanding on March 31, 1999, the Company has cash interest
payment obligations of approximately $44.5 million in 2003 and $89.0 million in
2004, 2005 and each year thereafter through 2007. Accordingly, the Company may
have to refinance a substantial amount of indebtedness and obtain substantial
additional funds prior to August 2003. 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 or obtain
additional funds, and if the Company is unable to effect such refinancing or
obtain additional funds, the Company's ability to make principal and interest
payments on its indebtedness would be adversely affected.
Other Cash Commitments and Capital Requirements
The Company's capital expenditures of continuing operations were $2.1
million and $67.8 million for the three months ended March 31, 1998 and 1999,
respectively. The Company anticipates that the expansion of the Company's
businesses will require capital expenditures of approximately $375.0 million for
the remainder of 1999, including assets to be purchased by ICG Equipment from
ICG Telecom. To facilitate the expansion of its services and networks, the
Company has entered into equipment purchase agreements with various vendors
under which the Company will purchase equipment and other assets, including a
full range of switching systems, fiber optic cable, network electronics,
software and services. If the Company fails to meet the minimum purchase level
in any given year, the vendor may discontinue certain discounts, allowances and
incentives otherwise provided to the Company. 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, and the availability of equity,
debt and lease financing.
Management believes that the Company's cash on hand and amounts
expected to be available through cash flows from operations, vendor financing
arrangements and credit facilities will provide sufficient funds necessary for
the Company to expand ICG Equipment's and PST's businesses and to fund its
operating deficits as currently planned. Changes in the Company's business plan
may require additional sources of cash which may be obtained through public and
private debt financings, capital leases and other financing arrangements. To
date, the Company has been able to secure sufficient amounts of financing to
meet its capital and operating 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.
Year 2000 Compliance
As a wholly owned subsidiary of ICG, the Company's Year 2000 compliance
plan is embedded within ICG's Year 2000 compliance plan for its consolidated
operations. It is not practicable for ICG to address the state of Year 2000
readiness, compliance costs, risks or contingency plans of the Company, or for
any other legal entity on a stand-alone basis, as ICG's plan was designed to
resolve Year 2000 compliance issues for all entities combined, which is the most
cost-effective manner. Moreover, as a result of the Company's and ICG's shared
management and administrative personnel and ICG Equipment's and PST's dependence
upon the continuing successful operations of ICG Telecom, evaluating the
Company's plan for Year 2000 compliance on a stand-alone basis is not
23
meaningful. Accordingly, the following paragraphs describe ICG's plan for
addressing Year 2000 compliance issues, of which the issues facing the Company
are an integral part.
Importance
Many computer systems, software applications and other electronics
currently in use worldwide are programmed to accept only two digits in the
portion of the date field which designates the year. The "Year 2000 problem"
arises because these systems and products cannot properly distinguish between a
year that begins with "20" and the familiar "19." If these systems and products
are not modified or replaced, many will fail, create erroneous results and/or
may cause interfacing systems to fail.
Year 2000 compliance issues are of particular importance to ICG since
its operations rely heavily upon computer systems, software applications and
other electronics containing date-sensitive embedded technology. Some of these
technologies were internally developed and others are standard purchased systems
which may or may not have been customized for ICG's particular application. ICG
also relies heavily upon various vendors and suppliers that are themselves very
reliant on computer systems, software applications and other electronics
containing date-sensitive embedded technology. These vendors and suppliers
include: (i) ILECs and other local and long distance carriers with which ICG has
interconnection or resale agreements; (ii) manufacturers of the hardware and
related operating systems that ICG uses directly in its operations; (iii)
providers that create custom software applications that ICG uses directly in its
operations; and (iv) providers that sell standard or custom equipment or
software which allow ICG to provide administrative support to its operations.
Strategy
ICG's approach to addressing the potential impact of Year 2000
compliance issues is focused upon ensuring, to the extent reasonably possible,
the continued, normal operation of its business and supporting systems.
Accordingly, ICG has developed a four-phase plan which it is applying to each
functional category of ICG's computer systems and components. Each of ICG's
computer systems, software applications and other electronics containing
date-sensitive embedded technology is included within one of the following four
functional categories:
o Networks and Products, which consists of all components whether
hardware, software or embedded technology used directly in ICG's
operations, including components used by ICG's voice and data
switches and collocations and telecommunications products;
o IT Systems, which consists of all components used to support ICG's
operations, including provisioning and billing systems;
o Building and Facilities, which consists of all components with
embedded technology used at ICG's corporate headquarters building
and other leased facilities, including security systems, elevators
and internal use telephone systems;
o Office Equipment, which consists of all office equipment with
date-sensitive embedded technology.
For each of the categories described above, ICG will apply the
following four-phase approach to identifying and addressing the potential impact
of Year 2000 compliance issues:
o Phase I - Assessment
--------------------
During this phase, ICG's technology staff will perform an
inventory of all components currently in use by ICG. Based upon
this inventory, ICG's business executives and technology staff
will jointly classify each component as a "high," "medium" or
"low" priority item, determined primarily by the relative
importance that the particular component has to ICG's normal
business operations, the number of people internally and
externally which would be affected by any failure of such
component and the interdependence of such component with other
components used by ICG that may be of higher or lower priority.
24
Based upon such classifications, ICG's business executives and
information technology staff will jointly set desired levels of
Year 2000 readiness for each component inventoried, using the
following criteria, as defined by ICG:
- Capable, meaning that such computer system or component will
be capable of managing and expressing calendar years in four
digits;
- Compliant, meaning that ICG will be able to use such component
for the purpose for which ICG intended it by adapting to its
ability to manage and express calendar years in only two
digits;
- Certified, meaning that ICG has received testing results to
demonstrate, or the vendor or supplier is subject to
contractual terms which requires, that such component requires
no Year 2000 modifications to manage and express calendar
years in four digits; or
- Non-critical, meaning that ICG expects to be able to continue
to use such component unmodified or has determined that the
estimated costs of modification exceed the estimated costs
associated with its failure.
o Phase II - Remediation
----------------------
During this phase, ICG will develop and execute a remediation plan
for each component based upon the priorities set in Phase I.
Remediation may include component upgrade, reprogramming,
replacement, receipt of vendor and supplier certification or other
actions as deemed necessary or appropriate.
o Phase III - Testing
-------------------
During this phase, ICG will perform testing sufficient to confirm
that the component meets the desired state of Year 2000 readiness.
This phase will consist of: (i) testing the component in
isolation, or unit testing; (ii) testing the component jointly
with other components, or system testing; and (iii) testing
interdependent systems, or environment testing.
o Phase IV - Implementation
-------------------------
During the last phase, ICG will implement each act of remediation
developed and tested for each component, as well as implement
adequate controls to ensure that future upgrades and changes to
ICG's computer systems, for operational reasons other than Year
2000 compliance, do not alter ICG's Year 2000 state of readiness.
Current State of Readiness
ICG has commenced certain of the phases within its Year 2000 compliance
strategy for each of its functional system categories, as shown by the table set
forth below. ICG does not intend to wait until the completion of a phase for all
functional category components together before commencing the next phase.
Accordingly, the information set forth below represents only a general
description of the phase status for each functional category.
25
- ------------------------------- ----------------------------------------------------------------------------------------------
Phase
- ------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
I II III IV
System and Level of Priority Assessment Remediation Testing Implementation
- ------------------------------- ----------------------------------------------------------------------------------------------
Networks and Products
- ------------------------------- ----------------------------------------------------------------------------------------------
High Complete In progress In progress In progress
To complete Q2 1999 To complete Q3 1999 To complete Q3 1999
- ------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
Medium Complete In progress In progress In progress
To complete Q2 1999 To complete Q3 1999 To complete Q3 1999
- ------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
Low Complete Complete Complete Complete
- ------------------------------- ----------------------------------------------------------------------------------------------
IT Systems
- ------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
High Complete In progress In progress In progress
To complete Q2 1999 To complete Q3 1999 To complete Q3 1999
- ------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
Medium Complete In progress In progress In progress
To complete Q2 1999 To complete Q3 1999 To complete Q3 1999
- ------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
Low Complete Complete In progress In progress
To complete Q3 1999 To complete Q3 1999
- ------------------------------- ----------------------------------------------------------------------------------------------
Building and Facilities
- ------------------------------- ---------------------- ----------------------- -----------------------------------------------
High In progress In progress To be determined based on the results of
To complete Q2 1999 To complete Q2 1999 Phase II
- ------------------------------- ---------------------- -----------------------------------------------------------------------
Medium In progress To be determined based on the results of Phase I
To complete Q2 1999
- ------------------------------- ---------------------- -----------------------------------------------------------------------
Low To begin Q2 1999 To be determined based on the results of Phase I
To complete Q3 1999
- ------------------------------- ----------------------------------------------------------------------------------------------
Office Equipment
- ------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
High Complete Complete In progress In progress
To complete Q2 1999 To complete Q2 1999
- ------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
Medium Complete Complete Complete Complete
- ------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
Low Complete Complete Complete Complete
- ------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
Separately, ICG is in the process of reviewing ICG's material contracts
with contractors and vendors/suppliers and considering the necessity of
renegotiating certain existing contracts, to the extent that the contracts fail
to address the allocation of potential Year 2000 liabilities between parties.
Prior to entering into any new material contracts, ICG will seek to address the
allocation of potential Year 2000 liabilities as part of the initial
negotiation.
Costs
ICG expenses all incremental costs to ICG associated with Year 2000
compliance issues as incurred. Through March 31, 1999, such costs incurred were
approximately $0.6 million, consisting of approximately $0.4 of replacement
hardware and software and approximately $0.2 million of consulting fees and
other miscellaneous costs of Year 2000 compliance reference and planning
materials. ICG has also incurred certain internal costs, including salaries and
benefits for employees dedicating various portions of their time to Year 2000
compliance issues, of which costs ICG believes has not exceeded $0.5 million
through March 31, 1999. ICG expects that total future incremental costs of Year
2000 compliance efforts will be approximately $3.8 million, consisting of $2.3
million in consulting fees, $1.5 million in replacement hardware and software
and other miscellaneous costs. These anticipated costs have been included in
ICG's fiscal 1999 budget and represent approximately 4% of ICG's budgeted
expenses for information technology through fiscal 1999. Such cost estimates are
based upon presently available information and may change as ICG continues with
its Year 2000 compliance plan. ICG intends to use cash on hand for Year 2000
compliance costs, as necessary.
26
Risk, Contingency Planning and Reasonably Likely Worst Case Scenario
While ICG is heavily reliant upon its computer systems, software
applications and other electronics containing date-sensitive embedded technology
as part of its business operations, such components upon which ICG primarily
relies were developed with current state-of-the-art technology and, accordingly,
ICG has reasonably assumed that its four-phase approach will demonstrate that
many of its high-priority systems do not present material Year 2000 compliance
issues. For computer systems, software applications and other electronics
containing date-sensitive embedded technology that have met ICG's desired level
of Year 2000 readiness, ICG will use its existing contingency plans to mitigate
or eliminate problems it may experience if an unanticipated system failure were
to occur. For components that have not met ICG's desired level of readiness, ICG
will develop a specific contingency plan to determine the actions ICG would take
if such component failed.
At the present time, ICG is unable to develop a most reasonably likely
worst case scenario for failure to achieve adequate Year 2000 compliance. ICG
will be better able to develop such a scenario once the status of Year 2000
compliance of ICG's material vendors and suppliers is complete. ICG will monitor
its vendors and suppliers, particularly the other telecommunications companies
upon which ICG relies, to determine whether they are performing and implementing
an adequate Year 2000 compliance plan in a timely manner.
ICG acknowledges the possibility that ICG may become subject to
potential claims by customers if ICG's operations are interrupted for an
extended period of time. However, it is not possible to predict either the
probability of such potential litigation, the amount that could be in
controversy or upon which party a court would place ultimate responsibility for
any such interruption.
ICG views Year 2000 compliance as a process that is inherently dynamic
and will change in response to changing circumstances. While ICG believes that
through execution and satisfactory completion of its Year 2000 compliance
strategy its computer systems, software applications and electronics will be
Year 2000 compliant, there can be no assurance until the Year 2000 occurs that
all systems and all interfacing technology when running jointly will function
adequately. Additionally, there can be no assurance that the assumptions made by
ICG within its Year 2000 compliance strategy will prove to be correct, that the
strategy will succeed or that the remedial actions being implemented will be
able to be completed by the time necessary to avoid system or component
failures. In addition, disruptions with respect to the computer systems of
vendors or customers, which systems are outside the control of ICG, could impair
ICG's ability to obtain necessary products or services to sell to its customers.
Disruptions of ICG's computer systems, or the computer systems of ICG's vendors
or customers, as well as the cost of avoiding such disruption, could have a
material adverse effect on ICG's financial condition and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company's financial position and cash flows are subject to a
variety of risks in the normal course of business, which include market risks
associated with movements in interest rates and equity prices. The Company
routinely assesses these risks and has established policies and business
practices to protect against the adverse effects of these and other potential
exposures. The Company does not, in the normal course of business, use
derivative financial instruments for trading or speculative purposes.
Interest Rate Risk
The Company's exposure to market risk associated with changes in
interest rates relates primarily to the Company's investments in marketable
securities and its senior indebtedness.
The Company invests primarily in high grade short-term investments
which consist of money market instruments, commercial paper, certificates of
deposit, government obligations and corporate bonds, all of which are considered
to be available for sale and generally have maturities of one year or less. The
Company's short-term investment objectives are safety, liquidity and yield, in
that order. As of March 31, 1999, the Company had approximately $277.6 million
in cash, cash equivalents, restricted cash and short-term investments available
for sale and approximately $17.5 million in long-term debt securities available
for sale, at a weighted average fixed interest rate of 4.87% for the three
months ended March 31, 1999. A hypothetical 10% fluctuation in market rates of
27
interest would cause a change in the fair value of the Company's investment in
marketable securities at March 31, 1999 of approximately $0.3 million and,
accordingly, would not cause a material impact on the Company's financial
position, results of operations or cash flows.
At March 31, 1999, the Company's indebtedness included $609.2 million
under the 10% Notes and 9 7/8% Notes. These instruments contain fixed annual
interest rates and, accordingly, any change in market interest rates would have
no impact on the Company's financial position, results of operations or cash
flows. Future increases in interest rates could increase the cost of any new
borrowings by the Company. The Company does not hedge against future changes in
market rates of interest.
Equity Price Risk
On February 17, 1999, the Company completed the sale of the domestic
operations of NETCOM to MindSpring, in exchange for a combination of cash and
376,116 shares of common stock of MindSpring, valued at approximately $79.76 per
share, or $30.0 million, at the time of the transaction. Through April 16, 1999,
the Company bore some risk of market price fluctuations in its investment in
MindSpring. In order to mitigate the risk associated with a decrease in the
market value of the Company's investment in MindSpring, the Company entered into
a hedging contract. In April 1999, the Company sold its investment in MindSpring
for net proceeds of approximately $30.4 million. The Company recorded an
unrealized gain on its investment in MindSpring of approximately $0.4 million in
its statement of operations for the three months ended March 31, 1999. The
hedging contract was terminated upon the sale of the common stock of MindSpring.
On March 30, 1999, the Company purchased, for approximately $10.0
million in cash, 454,545 shares of NorthPoint Preferred Stock. The NorthPoint
Preferred Stock has no voting rights and is ultimately convertible into a voting
class of common stock of NorthPoint, at an exchange price which represents a
discount, as provided in the relevant documentation, to the initial public
offering price of NorthPoint's common stock. The Company is restricted from
selling the NorthPoint Preferred Stock or securities obtained upon conversion of
the NorthPoint Preferred Stock until March 23, 2000. Accordingly, the Company
will be subject to the effects of fluctuations in the fair value of the common
stock of NorthPoint until such time when the Company is permitted to liquidate
its investment in NorthPoint. Although changes in the fair market value of the
common stock of NorthPoint may affect the fair market value of the Company's
investment in NorthPoint and cause unrealized gains or losses, such gains or
losses will not be realized until the securities are sold.
28
PART II
ITEM 1. LEGAL PROCEEDINGS
-----------------
See Note 7 to the Company's unaudited condensed consolidated financial
statements for the quarterly period ended March 31, 1999 contained
elsewhere in this Quarterly Report.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-----------------------------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES AND USE OF PROCEEDS
---------------------------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
ITEM 5. OTHER INFORMATION
-----------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(A) Exhibits.
(10) Material Contracts.
10.1: Loan Agreement, dated as of January 1, 1999, by and among
TriNet Realty Capital, Inc. and ICG Services, Inc.
10.2: Promissory Note, dated as of January 1, 1999, by and among
TriNet Realty Capital, Inc. and ICG Services, Inc.
10.3: Deed of Trust, Assignment of Rents and Security Agreement,
made as of January 1, 1999, granted by ICG ervices, Inc.
for the benefit of TriNet Realty Capital, Inc.
10.4: Purchase Agreement, dated as of January 1, 1999, by and
among TriNet Essential Facilities X, Inc. and ICG
Services, Inc.
(27) Financial Data Schedule.
27.1: Financial Data Schedule of ICG Services, Inc. for the
Three Months Ended March 31, 1999.
(B) Reports on Form 8-K.
(i) Current Report on Form 8-K dated January 6, 1999, regarding the
announcement of the Company's definitive agreement to sell the
domestic operations of NETCOM On-Line Communication Services,
Inc. to MindSpring Enterprises, Inc.
(ii) Current Report on Form 8-K dated March 4, 1999, regarding the
disposition of NETCOM On-Line Communication Services, Inc.,
including pro forma financial information.
29
INDEX TO EXHIBITS
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
INDEX TO EXHIBITS
10.1: Loan Agreement, dated as of January 1, 1999, by and among TriNet Realty
Capital, Inc. and ICG Services, Inc.
10.2: Promissory Note, dated as of January 1, 1999, by and among TriNet
Realty Capital, Inc. and ICG Services, Inc.
10.3: Deed of Trust, Assignment of Rents and Security Agreement, made as of
January 1, 1999, granted by ICG Services, Inc. for the benefit of
TriNet Realty Capital, Inc.
10.4: Purchase Agreement, dated as of January 1, 1999, by and among TriNet
Essential Facilities X, Inc. and ICG Services, Inc.
27.1: Financial Data Schedule of ICG Services, Inc. for the Three Months
Ended March 31, 1999.
EXHIBIT 10.1
Loan Agreement, dated as of January 1, 1999, by and among TriNet Realty Capital,
Inc. and ICG Services, Inc.
EXHIBIT 10.2
Promissory Note, dated as of January 1, 1999, by and among TriNet Realty
Capital, Inc. and ICG Services, Inc.
EXHIBIT 10.3
Deed of Trust, Assignment of Rents and Security Agreement, made as of January 1,
1999, granted by ICG Services, Inc. for the benefit of TriNet Realty
Capital, Inc.
EXHIBIT 10.4
Purchase Agreement, dated as of January 1, 1999, by and among TriNet Essential
Facilities X, Inc. and ICG Services, Inc.
EXHIBIT 27.1
Financial Data Schedule of ICG Services, Inc. for the Three Months Ended March
31, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on May 14, 1999.
ICG SERVICES, INC.
Date: May 14, 1999 By: /s/ Harry R. Herbst
-------------------------------------------
Harry R. Herbst, Executive Vice President and
Chief Financial Officer (Principal Financial
Officer)
Date: May 14, 1999 By: /s/ Richard Bambach
---------------------------------------------
Richard Bambach, Vice President and Corporate
Controller (Principal Accounting Officer)