SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Commission File Number 1-11965)
ICG COMMUNICATIONS, INC.
(Commission File Number 1-11052)
ICG HOLDINGS (CANADA), INC.
(Commission File Number 33-96540)
ICG HOLDINGS, INC.
(Exact name of Registrants as Specified in their Charters)
- ---------------------------------------------------------------------
Delaware 84-1342022
Canada Not Applicable
Colorado 84-1158866
(State or other jurisdiction of (I.R.S. employer identification
incorporation) number)
- ---------------------------------------------------------------------
9605 East Maroon Circle Not applicable
Englewood, Colorado 80112
1710-1177 West Hastings Street c/o ICG Communications, Inc.
Vancouver, BC V6E 2L3 9605 East Maroon Circle
P.O. Box 6742
Englewood, Colorado 80155-6742
9605 East Maroon Circle Not applicable
Englewood, Colorado 80112
(Address of principal executive (Address of U.S. agent for
offices) service)
- ---------------------------------------------------------------------
Registrants' telephone numbers, including area codes:
(303)572-5960; (800) 650-5960; and (303) 572-5960
Securities registered pursuant to Section 12(b) of the Act:
- ---------------------------------------------------------------------
Title of Each Class Name of Exchange on Which
Registered
- ---------------------------------------------------------------------
Common Stock, $.01 par value American Stock Exchange
(30,953,330 shares outstanding
on December 10, 1996)
Class A Common Shares, no par Vancouver Stock Exchange
value
(31,795,270 shares outstanding on
December 10, 1996)
Not Applicable Not Applicable
- ---------------------------------------------------------------------
<PAGE>
Securities registered pursuant to Section 12(g) of the Act:
- ---------------------------------------------------------------------
Title of Each Class
- ---------------------------------------------------------------------
Not Applicable
Not Applicable
Not Applicable
- ---------------------------------------------------------------------
Indicate by check mark whether the Registrants: (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
On December 10, 1996, the aggregate market value of ICG Communications, Inc.
Common Stock held by non-affiliates (using the $19.88 American Stock Exchange
closing price on December 10, 1996) was approximately $615,352,200.
On December 10, 1996, the aggregate market value of ICG Holdings (Canada), Inc.
Class A Common Shares held by non-affiliates (using the US$21.32 Vancouver Stock
Exchange closing price on November 6, 1996, the last day on which a sale was
reported) was approximately $17,713,296.
ICG Holdings (Canada), Inc. owns all of the issued and outstanding shares of
Common Stock of ICG Holdings, Inc.
<PAGE>
TABLE OF CONTENTS
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . 5
Overview . . . . . . . . . . . . . . . . . . . . . . . . 5
Telecom Services . . . . . . . . . . . . . . . . . . . . 6
Strategy . . . . . . . . . . . . . . . . . . . . . . 6
Telecom Services Networks . . . . . . . . . . . . . 7
Recent Agreements . . . . . . . . . . . . . . . . . . 8
Services . . . . . . . . . . . . . . . . . . . . . . 12
Industry . . . . . . . . . . . . . . . . . . . . . . 13
Network Services . . . . . . . . . . . . . . . . . . . . 14
Satellite Services . . . . . . . . . . . . . . . . . . . 15
Customers and Marketing . . . . . . . . . . . . . . . . 16
Competition . . . . . . . . . . . . . . . . . . . . . . . 17
Regulation . . . . . . . . . . . . . . . . . . . . . . . 19
Employees . . . . . . . . . . . . . . . . . . . . . . . . 25
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . 25
ITEM 3. LEGAL AND ADMINISTRATIVE PROCEEDINGS . . . . . . . . 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . 25
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . 27
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . 50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES . . . . . . . . . 50
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT . . . 51
Executive Officers of ICG . . . . . . . . . . . . . . . . 52
Directors of ICG . . . . . . . . . . . . . . . . . . . . 53
Directors and Executive Officers of Holdings-Canada and
Holdings . . . . . . . . . . . . . . . . . . . . . . . . 54
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . 56
Director Compensation . . . . . . . . . . . . . . . . . 56
Compensation Committee Interlocks and Insider 56
Participation . . . . . . . . . . . . . . . . . . . . . . 56
Executive Compensation . . . . . . . . . . . . . . . . . 56
Summary Compensation Table . . . . . . . . . . . . . 56
Aggregated Option Exercises in Last Fiscal Year End
Option Values . . . . . . . . . . . . . . . . . . . . 58
Option/SAR Grants in Last Fiscal Year . . . . . . . 58
Executive Employment Contracts . . . . . . . . . . . 58
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . 60
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . 63
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
3
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS
ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . 64
Financial Statements . . . . . . . . . . . . . . . . . . 64
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 71
Exhibits . . . . . . . . . . . . . . . . . . . . . . . . 71
Financial Statement Schedule . . . . . . . . . . . . . . 71
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . F-1
FINANCIAL STATEMENT SCHEDULE . . . . . . . . . . . . . . . . . . . S-1
4
<PAGE>
PART I
Unless the context otherwise requires, the term "Company" or "ICG" means
the combined business operations of ICG Communications, Inc. ("ICG") and its
subsidiaries, including ICG Holdings (Canada), Inc. ("Holdings-Canada") and ICG
Holdings, Inc. ("Holdings"); the terms "fiscal" and "fiscal year" refer to ICG's
fiscal year ending September 30; and all dollar amounts are in U.S. dollars. The
Company has elected to change its fiscal year end to December 31 from September
30, effective for the 1997 fiscal year. All statistical information reported in
this Annual Report is as of September 30, 1996, unless otherwise noted. Industry
figures were obtained from reports published by the Federal Communications
Commission ("FCC"), the U.S. Department of Commerce, Connecticut Research (an
industry research organization) and other industry sources, which the Company
has not independently verified.
ITEM 1. BUSINESS
Overview
The Company is one of the largest providers of competitive local telephone
services in the United States, based on estimates of the industry's 1995
revenue. Competitive local exchange carriers ("CLECs"), formerly known as CAPs
(competitive access providers), seek to provide an alternative to the incumbent
local exchange carriers ("ILECs") for a full range of telecommunications
services in the newly opened regulatory environment. As a CLEC, the Company
operates networks and has acquired fiber optic facilities in three regional
clusters covering major metropolitan statistical areas in California, Colorado,
and the Ohio Valley, with an aggregate population of approximately 33.6 million,
and in three markets in the Southeast region, with an aggregate population of
approximately 2.9 million. The Company also provides a wide range of network
systems integration services and maritime and international satellite
transmission services. As a leading participant in a rapidly growing industry,
the Company has experienced significant growth, with total revenues increasing
from $29.5 million for fiscal 1993 to $169.1 million for fiscal 1996.
In August 1996, IntelCom Group Inc. ("IntelCom"), a Canadian federal
corporation, received final approval for its reincorporation into the United
States, pursuant to which its shareholders exchanged approximately 98 percent of
their common shares on a one-for-one basis for shares of Common Stock of ICG, a
Delaware corporation. IntelCom then changed its name to ICG Holdings (Canada),
Inc., and its wholly owned subsidiary, IntelCom Group (U.S.A.), Inc., a Colorado
corporation, changed its name to ICG Holdings, Inc. Shareholders who elected to
continue to hold common shares of Holdings-Canada ("Class A Common Shares") are
entitled to exchange such shares at any time into ICG Common Stock. The
reincorporation was designed to maintain the Company's results of operations,
existing net operating losses and asset values of the Company without causing
any material United States or Canadian federal income tax consequences to the
Company.
The federal Telecommunications Act of 1996 (the "Telecommunications Act")
and several pro-competitive regulatory initiatives have substantially changed
the telecommunications regulatory environment in the United States. Due to these
regulatory changes, the Company is now
5
<PAGE>
permitted to offer all interstate and intrastate telephone services, including
local dial tone. The Company began offering these services in Orange County,
California in September 1996, and intends to begin offering local dial tone
services in additional markets in the near future. In order to take advantage of
the switched services market, the Company installed 14 high capacity digital
switches, two of which are being relocated, and is installing two additional
digital switches, enabling the Company to offer these services in all of its
markets. ICG will continue to integrate advanced switching capabilities in its
networks and plans to install an additional 13 switches by the end of 1997. To
facilitate the expansion of its switched services strategy, in September 1996
the Company entered into a seven year, $1.0 billion agreement with Lucent
Technologies, Inc. ("Lucent") for a full range of switching systems, fiber,
network electronics, software and services. See "Recent Agreements-Lucent
Agreement."
Telecom Services
The Company operates networks in the following markets within its three
regional clusters: California (Sacramento, San Diego and the Los Angeles and San
Francisco metropolitan areas); Colorado (Denver, Colorado Springs and Boulder);
and the Ohio Valley (Akron, Cleveland, Columbus, Dayton and Louisville). The
Company also operates networks in Birmingham, Charlotte and Nashville. In
addition, the Company is developing networks in the Los Angeles metropolitan
area through its agreement with Southern California Edison Company ("SCE"),
which the Company entered into in March 1996, one additional city in the San
Francisco metropolitan area, and in Cincinnati and Greensboro/Winston-Salem. The
Company's operating networks have grown from approximately 168 fiber route miles
at the end of fiscal 1993 to approximately 2,143 fiber route miles as of
September 30, 1996. Telecom Services revenue has increased from $4.8 million for
fiscal 1993 to $87.7 million for fiscal 1996.
Strategy
The Company's objective is to become the dominant alternative to the ILEC
in the markets it serves. In furtherance of this objective, the Company has
developed strategies to capitalize on its established customer base of long
distance carriers and to develop its markets within regional clusters. Key
elements of this strategy are:
Aggressively Pursue Local and Statewide Telephone Service. The Company's
focus is to provide a wide range of telephone services. With the passage of the
Telecommunications Act, competitive opportunities for new entrants into the
local telephone services market have increased. At the same time, previous
restrictions on the ability of the Regional Bell Operating Companies ("RBOCs")
and GTE Corporation ("GTE"), the largest ILECs, to provide long distance
services have been eliminated, enabling the RBOCs and GTE to take advantage of
new competitive opportunities and to provide a wider range of services,
including long distance telephone service. It is likely that competition from
ILECs in the long distance market will increase and as a result, the Company's
long distance carrier customers are seeking ways to (i) increase their ability
to provide local telephone services as a complement to existing long distance
service offerings, and (ii) reduce their reliance on the ILEC networks. By
offering an array of telecommunications products, including local telephone
services and enhanced services, the Company will be providing a high quality,
lower cost alternative to the ILEC. The Company initiated the provision of local
telephone services in its Southern California markets in September 1996, and
will expand
6
<PAGE>
the provision of these services to its other markets in the near future. As a
result, the Company expects local telephone services to become its primary
business.
Market Services to Carriers and End-Users. The Company has historically
marketed its services primarily to long distance carriers and resellers and its
"first to market" advantage has enabled it to establish relationships with such
carriers. As competition in the provision of local telephone services increases,
these carriers are attempting to expand their service offerings by developing
and delivering local telephone services and new enhanced products and services,
which the Company is able to provide its carrier customers for resale by such
carriers. This enables the Company to meet the expanding focus of its carrier
customers. In addition, the Company is expanding its marketing efforts to
include large end-user business customers. Management believes a targeted
end-user focus can accelerate its penetration of the local services market and
better leverage the Company's network investment.
Concentrate Markets in Regional Clusters. The Company has concentrated its
networks in regional clusters serving major metropolitan areas in California,
Colorado and the Ohio Valley. The Company believes that by focusing on regional
clusters it will be able to more effectively service its customers' needs and
efficiently market, operate and control its networks. The Company also is
evaluating the expansion of its existing clusters and the addition of new
regional clusters in which it may seek to acquire and/or build facilities to
provide local telephone services as well as access services.
Expand Alliances with Utilities. The Company has established, and is
actively pursuing, strategic alliances with utility companies to take advantage
of their existing fiber optic infrastructures. This approach affords the Company
the opportunity to license or lease fiber optic facilities on a long-term basis
in a more timely, cost effective manner rather than constructing facilities. In
addition, utilities possess conduit and other facilities that may ease the
installation of fiber to extend the existing network in a given market. Finally,
the Company may take advantage of the utilities' name recognition to market the
Company's products and services to the utilities' customer base.
Telecom Services Networks
The Company's networks are composed of fiber optic cables, switching
facilities, advanced electronics, transmission equipment and related wiring and
equipment. The Company typically designs a ring architecture with a view toward
making the network accessible to the largest concentration of telecommunication
intensive businesses in a given market.
The Company's networks are configured in redundant synchronous optical
network ("SONET") rings that offer the advantage of uninterrupted service in the
event of a fiber cut or equipment failure. Additionally, much of the electronics
used by the Company in its networks have redundant components to limit outages
and increase network reliability. The Company generally markets its services at
prices below those charged by the ILEC. Management believes these factors
combine to create a more reliable and cost effective alternative to copper-based
networks which are still used, to some extent, by ILECs.
7
<PAGE>
The Company's networks are constructed to access long distance carriers as
well as areas of significant end-user telecommunications traffic in a cost
efficient manner. The construction period of a new network varies depending upon
the scope of the activities, such as the number of backbone route miles to be
installed, the initial number of buildings targeted for connection to the
network backbone and the general deployment of the network backbone.
Construction is planned to allow revenue-generating operations to commence prior
to the completion of the entire network backbone. When constructing and relying
principally on its own facilities, the Company has experienced a period of 12 to
18 months from initial design of a network to revenue generation for such
network. Based upon its experience (since the first quarter of fiscal 1993)
with, and strategy of, using leased telephone company facilities to provide
initial customer service, the Company has experienced revenue generation within
nine months after commencing network design. After installing the initial
network backbone, extensions to additional buildings and expansions to other
regions of a metropolitan area are evaluated, based on detailed assessments of
market potential. The Company is currently expanding all of its existing
networks to reduce its reliance on the ILECs and evaluating development of new
networks both inside and outside its existing regional clusters.
The Company's network monitoring center in Denver operates and manages all
of the Company's networks from one central location. Centralized electronic
monitoring and control of the Company's networks allows the Company to avoid
duplication of this function in each city, thereby reducing costs. The
monitoring capabilities are supplemented through a contract with an AT&T Corp.
("AT&T") switch control center in Phoenix for surveillance of all of the
Company's central office switches.
Switched services involve the transmission of voice, video or data to long
distance carrier-specified or end-user-specified termination sites (by manually
or electronically dialing a telephone number). By contrast, the special access
services provided by the Company and other CLECs involve a fixed communications
link or "pipe," usually between a specific end-user and a specific long distance
carrier's point of presence ("POP"). With a switch and interconnection to
various carriers' networks, it is possible for the Company to direct a long
distance carrier's traffic to any end-user regardless of whether the end-user is
connected to the Company's owned or leased network, to the local telephone
company or to other CLEC networks. In addition, a switch gives the Company the
technological capability to provide the full range of local telephone services,
including local dial tone. The Company began providing local telephone services
to business customers in the Orange County, California area in September 1996.
The Company anticipates extending such services over the next 12 months in other
markets in the Los Angeles metropolitan area, San Diego, the San Francisco Bay
area and Sacramento, as well as in the Company's other markets throughout the
U.S. The Company has regulatory authority to provide local telephone services in
California, Colorado, Ohio, Tennessee, Alabama and Texas, and is in the process
of obtaining such authority in other jurisdictions. See "Regulation-State
Regulation."
Recent Agreements
Cascade Agreement. In December 1996, the Company entered into an agreement
with Cascade Communications, Inc. ("Cascade") for the purchase of data switching
components that will enable the Company to provide Internet service providers
and data customers with high-speed data connectivity options. The agreement
includes the purchase of high-speed Frame Relay Multiservice
8
<PAGE>
and ATM (asynchronous transfer mode) switching products from Cascade. In
addition, the Company will utilize turnkey services from Cascade for planning
and deploying the initial product launch, including program management, network
design, onsite operations support and training. The Company expects to complete
a data communications platform in targeted California markets in December 1996,
and plans to deploy similar networks in its Ohio and Colorado markets in early
1997.
Lucent Agreement. In September 1996, the Company entered into a
seven-year, $1.0 billion equipment purchase agreement for advanced
telecommunications products and services with Lucent. Lucent will provide the
Company with a full range of systems, software and services which will be used
by the Company to build and expand the Company's advanced communications
networks, including 5ESS(R)-2000 switching systems, SONET equipment, access
equipment, power plants, application software systems, Advanced Intelligence
Network ("AIN") platforms, data networking products and fiber cable. Lucent has
also agreed to provide engineering, installation, on-site technical support and
other professional services. Under the agreement with Lucent, ICG has agreed to
purchase certain minimum levels of equipment and services during each year of
the agreement and if it does not meet a minimum level in any given year, Lucent
may discontinue certain discounts, allowances and incentives otherwise provided
to ICG for the year in which the minimum level was not met. In addition, the
agreement may be terminated by either the Company or Lucent upon sixty days
prior written notice.
AT&T Agreement. In March 1996, the Company entered into a national
contract with AT&T under which the Company may provide special and switched
services, private line, local calling, intraLATA toll and residential and
business telecommunications services to AT&T on a non-exclusive basis. The
Company and AT&T have executed agreements in six metropolitan statistical areas
("MSAs") and have identified six other MSAs in which the Company may provide
special access services, and are in discussions with respect to 17 additional
MSAs in which the Company may provide services. Under the contract, the Company
will work with AT&T to provide special and switched services in the Company's
other markets and new markets which the Company may enter.
The contract is for an initial five-year term and may be renewed for an
additional three-year term, unless sooner terminated or notice of nonrenewal is
provided by either the Company or AT&T. The Company believes that this agreement
is indicative of a trend by long distance carriers to shift origination and
termination of long distance traffic away from ILEC networks to the facilities
of CLECs. The contract does not prevent AT&T from using other CLECs in any of
the markets in which the Company will provide services to AT&T.
Network Expansion. The Company has recently expanded its network footprint
through several strategic initiatives in its regional clusters, including the
following:
SCE. In March 1996, the Company and SCE entered into a 25-year agreement
under which the Company will lease 1,258 miles of fiber optic cable in Southern
California (of which 1,209 miles are currently operational), and may install up
to 500 additional miles of fiber optic cable. This network, which will be
maintained and operated by the Company, stretches from Los Angeles to San Diego.
SCE may cancel the agreement, in whole or in part, during the three-year period
commencing November 26, 1996 upon 18 months notice with respect to the dark
fibers and upon
9
<PAGE>
36 months notice with respect to SCE's rights of way or other facilities if SCE
determines that the dark fibers or SCE's rights of way or other facilities being
used by the Company are necessary to conduct its utility operations. In
addition, the agreement may be terminated by either the Company or SCE upon the
occurrence of certain specified events, and both the Company and SCE have the
right, under certain circumstances, to either discontinue or relocate their
respective facilities.
LADWP. In September 1996, the Company entered into a 30-year agreement and
two indefeasible rights of use ("IRU") agreements with the Los Angeles
Department of Water and Power ("LADWP") for 105 miles of fiber optic capacity
throughout downtown Los Angeles, Century City, West Los Angeles, Mid-Wilshire,
and Sherman Oaks.
San Diego. In February 1996, the Company entered into an agreement to
acquire a 60% interest in Linkatel California, L.P. (now known as ICG Telecom of
San Diego, L.P.), which operates a 50-mile fiber optic network and plans to
construct an additional 110 miles of fiber in metropolitan San Diego, of which
approximately nine miles are completed. This acquisition, combined with the
Company's existing California networks and the facilities under agreement with
SCE, provides the Company with a network presence in all major metropolitan
areas of California.
Alameda. In September 1996, the Company entered into a ten-year agreement
with a five-year renewal, and three ten-year IRU agreements with the City of
Alameda Bureau of Electricity ("Alameda"), each with five-year renewals. Under
the terms of the agreements, the Company will have access to approximately seven
miles of fiber optic cable throughout the city of Alameda, California.
AEP. In July 1996, the Company entered into a 20-year agreement with
Columbus Southern Power Company and Ohio Power Company, affiliates of American
Electric Power (collectively, "AEP"), under which the Company and AEP will
jointly build a 45-mile fiber optic cable route in metropolitan Columbus, Ohio
and a 138-mile fiber optic cable route from Columbus, Ohio to Canton, Ohio.
WorldCom. In February 1996, the Company entered into a 20-year agreement
with WorldCom Inc. ("WorldCom") under which the Company will pay approximately
$8.8 million for the right to use fiber along a 330-mile fiber optic network in
Ohio. The network is being constructed by WorldCom in conjunction with the
Company and will provide a direct fiber link between the Company's existing
networks in Akron, Cleveland, Columbus and Dayton and its new network under
development in Cincinnati. The Company expects first connectivity to begin in
December 1996.
Following the initial 20-year term, the agreement may be renewed by the
Company for two consecutive terms of ten years each upon written notice to
WorldCom as provided in the agreement. After payment by the Company of the
amounts due under the agreement (other than the annual maintenance fee), the
Company has the right to terminate the agreement upon 180 days prior written
notice to WorldCom. Southern. In March 1996, the Company entered into a
long-term agreement with a subsidiary of The Southern Company and Alabama Power
Company ("Southern") for the right to
10
<PAGE>
use 22 miles of existing fiber and 122 miles of additional facilities, of which
approximately 98 miles are completed, to reach the three major business centers
in Birmingham.
Following the initial 20-year term, the agreement may be extended by the
Company for an additional 10-year term upon written notice to Southern as
provided in the agreement. The agreement may be terminated by mutual written
agreement of the parties, or by either Southern or the Company upon the
occurrence of certain events of default specified in the agreement.
CPS. In November 1995, the Company entered into a 25-year agreement with
City Public Service of San Antonio ("CPS") to license half of the capacity on a
300-mile fiber optic network in greater San Antonio, 60 miles of which currently
exist. CPS will construct the remaining 240 miles in conjunction with the
Company and will license facilities to the Company on an interim and
non-exclusive basis. Upon completion in approximately two years, the network is
expected to serve approximately 120 buildings. Following the initial 25-year
term, the agreement may be extended for subsequent five-year periods.
During construction, the Company will be able to provide services to
completed segments of the network. CPS has the right to reclaim any or all of
the fibers licensed to the Company that, in CPS's sole discretion, are needed by
it in connection with its electric or gas utility operations at any time
following the fifth anniversary of the date the network is complete and ready
for service. In such case, the Company will be entitled to an equitable pro rata
refund, without interest, of the respective license fee.
The legal ability of CPS, as a municipally-owned utility, to enter into
this contract with the Company has been challenged by SBC Communications, Inc.
("SBC") before the San Antonio City Council as being violative of a May 1995
Texas state law. The Company has filed a petition with the FCC requesting a
declaratory ruling that the Telecommunications Act preempts the Texas state law
to the extent that it precludes implementation of the agreement between CPS and
the Company, and has also filed a declaratory ruling request with a Texas state
court. Both of these actions are pending. The Company has also filed a civil
suit against SBC, and the Company's appeal of a dismissal of that suit is also
pending.
Interconnection Agreements. To date, the Company has executed
interconnection agreements with Pacific Bell for California, Ameritech Corp.
("Ameritech") for Ohio, SBC for Texas and Oklahoma, and a partial agreement has
been signed with GTE for California. The Company's interconnection agreement
with Pacific Bell was entered into in March 1996, and an amended agreement was
entered into in October 1996. The Company's interconnection agreement with
Ameritech was entered into in June 1996, and allows for the agreement to be
expanded without further negotiations to include Illinois, Indiana, Ohio,
Michigan and Wisconsin, the other five states in the Ameritech region. The
Company's interconnection agreement with SBC was entered into in November 1996,
and allows for the agreement to be expanded without further negotiations to
include Arkansas, Kansas, Missouri, Oklahoma and Texas, the other five states in
the SBC region. The Company's agreement with GTE for California is partial in
that it provides the Company with rights to interconnect with GTE's network in
California on favorable terms and conditions, but does not yet address other
issues such as access to unbundled network elements or number portability. The
Company is currently negotiating with GTE to revise the California
interconnection agreement to address these matters, as well as to enter into an
agreement with
11
<PAGE>
GTE to cover interconnection in Texas, Alabama, North Carolina, Indiana,
Kentucky, Ohio, Florida and Tennessee. The Company has also reached a
preliminary agreement on an interconnection agreement with US West
Communications, Inc. ("US West"). With respect to unresolved matters, the
Company sought arbitration by the Colorado Public Utility Commission (Colorado
"PUC"). The Colorado PUC conducted arbitration hearings and issued a ruling on
November 13, 1996, which decision is generally favorable to the Company.
Interconnection negotiations also have been initiated recently with BellSouth
for Alabama, North Carolina, Tennessee, Mississippi, Kentucky and Florida, and
with Cincinnati Bell Telephone Company.
Services
The Company's competitive local exchange services include private line,
special access, and interstate and intrastate switched services and local dial
tone. Private line services are generally used to connect the separate office
buildings of a single business. Special access services are used to connect
end-user customers to a long distance telephone carrier's facilities, to connect
long distance carrier's facilities to the local telephone company's central
offices, and to connect different facilities of the same long distance carrier
or facilities of different long distance carriers. The Company requires
interconnection with the local telephone company's central office in order to
offer this second alternative. As part of its "carrier's carrier" strategy, the
Company targets the transport between long distance company facilities and the
local telephone company central offices, and, for high volume customers, between
the long distance company and the end-user customer's office.
The Company's interstate and intrastate switched services include the
transport and switching of calls between the long distance carrier's facilities
and either the local telephone company central offices or end-users. By
performing the switching services and most of the transport, the Company can
reduce local access costs, which constitute the major operating expense for long
distance carriers. As the Company provides a greater portion of the local
segment of a call, the Company expects to experience improved margins on what
has initially been a negative or low margin revenue stream.
By offering switched services to its long distance carrier customers, the
Company may be designated by a long distance carrier to deliver incoming long
distance traffic to the Company's markets regardless of whether the terminating
end-user is connected to the Company's owned or leased network or to the ILEC.
The Company intends to expand the switched services it offers to its long
distance carrier customers to include a broad range of higher profit margin
enhanced services, such as enhanced routing, directory assistance and
information services including 800/888/900 numbers, calling cards and personal
number service, as permitted by applicable regulations. Long distance carriers
would purchase these enhanced services from the Company and then market and
resell them, at a markup, to end-users. By offering such services to its long
distance carrier customers, the Company would enable long distance carriers to
sell a broader range of services to their long distance customers and to
generate incremental revenue that previously could only be earned by ILECs.
Zycom. The Company owns a 70% interest in Zycom Corporation ("Zycom"), an
Alberta, Canada corporation, whose shares are traded on the Alberta Stock
Exchange. Zycom operates an
12
<PAGE>
800/888/900 number service bureau and a switched network in the United States
supplying information providers and commercial accounts with audio, text and
customer support services.
SS7. In August 1996, the Company acquired the Signaling System 7 ("SS7")
business of Pace Network Services, Inc., a division of Pace Alternative
Communications, Inc. The acquisition, which represents approximately 25% of the
SS7 operations of switch-based long distance carriers in the United States, will
enable the Company to strengthen its sales and marketing efforts in the SS7
area. The Company has also developed a nationwide SS7 service with Southern New
England Telephone, the nation's tenth largest local exchange carrier. SS7 is
used by local exchange companies, long distance carriers, wireless carriers and
others to signal between network elements, creating faster call set-up resulting
in a more efficient use of network resources. SS7 is now the standard method for
telecommunications signaling worldwide. SS7 is also the enabling technology for
AIN platforms, a set of services and signaling options that carriers can use to
create new services or customer options.
Industry
Until 1984, AT&T monopolized telephone services in the United States.
Effective in 1984, AT&T was required to divest its local telephone systems (the
"Divestiture"), which led to the present structure of the telecommunications
industry. As part of the Divestiture, AT&T's former local telephone systems were
organized into seven RBOCs while AT&T retained its long distance services and
equipment manufacturing operations. The separation of the RBOCs from AT&T's long
distance services created two distinct telecommunications markets: local
exchange and long distance. The Divestiture, as implemented by the FCC, decreed
direct, open competition in the long distance segment, but effectively retained
regulated monopolies for local exchange services provided within geographically
defined local access transport areas ("LATAs"). The Telecommunications Act ended
the consent decree which implemented the Divestiture, facilitating competition
for local exchange services and permitting the RBOCs to enter the interLATA long
distance market upon satisfaction of certain conditions and receipt of
regulatory approvals.
A long distance telephone call consists of three segments. Starting with
the originating customer, the call travels along a local exchange network to a
long distance carrier's POP. At the POP, the call is combined with other calls
and sent along a long distance network to a POP on the terminating customer's
local network. The call is then sent from this POP along a local exchange
network to the terminating customer. Long distance carriers generally provide
only the connection between the two local networks, and pay access charges to
the ILECs or to CLECs for originating and terminating calls.
Several factors have begun to promote competition in the local exchange
market, including: (i) customer demand for an alternative to the ILECs'
monopoly, partly stimulated by the development of competitive activities in the
long distance telephone market; (ii) technological advances in the transmission
of data and video offering greater capacity and reliability levels than the
ILECs' copper wire-based, twisted-pair networks were able to accommodate; (iii)
the development of fiber optics and digital electronic technology, which reduce
network construction costs while increasing transmission speeds, capacity and
reliability; (iv) the significant access charges that long distance carriers pay
for access to the local telephone networks; and (v) the passage of legislation
opening the local market to competition and many regulatory initiatives to
13
<PAGE>
the same end. Numerous new entrants to the telecommunications services market
now offer customers diverse service options. In the past, ILECs generally
reacted by resisting interconnection with their networks by new competitors or
service providers. However, the Telecommunications Act mandates that the ILECs
allow these new market entrants to access and utilize the ILECs' local telephone
networks to provide competing services. The Telecommunications Act imposes a
variety of new duties on ILECs in order to promote competition in local exchange
and access services, including the duty to permit competitors to interconnect
their facilities at any technically feasible point within their networks on
nondiscriminatory terms and conditions and at prices based on cost, and the duty
to provide nondiscriminatory access to unbundled network elements. ILECs are
also required to negotiate in good faith with competitive carriers requesting
these arrangements. On August 8, 1996, the FCC adopted national rules and
guidelines implementing these new statutory requirements. On October 15, 1996,
the U.S. Court of Appeals for the Eighth Circuit stayed implementation of
certain of the FCC's rules, to be in effect until the Court issues a decision on
the merits of the rules. The FCC rules not specifically stayed by the Court have
gone into effect. See "Regulation."
Competitors in the local exchange market, originally designated as
"competitive access providers" by the FCC, were first established in the
mid-1980s. In New York City, Chicago and Washington, D.C., newly formed
companies installed fiber optic cable connecting long distance telephone
carriers' POPs within a metropolitan area and, in some cases, connecting
end-users (primarily large businesses and government entities) with long
distance carrier POPs. The greater capacity and economies of scale inherent in
fiber optic cable enabled the CAPs to offer customers less expensive and higher
quality special access and private line services than the ILECs.
Signals carried over digital fiber optic networks are superior in many
respects to older analog signals carried over copper wire, which continue to be
used in varying degrees by the ILECs. In addition to offering faster and more
accurate transmission of voice and data communications, digital fiber optic
networks generally require less maintenance than comparable copper wire
facilities, thereby decreasing operating costs. Furthermore, the transmission
capacity of digital fiber optic cable is determined by the electronic equipment
used on the network. This allows network capacity to be increased with a change
in electronics, not the actual fiber network, as would be the case with a copper
wire architecture. Lastly, digital fiber optic cable is largely immune from
electromagnetic and radio interference, resulting in enhanced transmission
quality.
FCC decisions, the Telecommunications Act and many state legislative and
regulatory initiatives have substantially changed the telecommunications
regulatory environment in the United States. Due to these regulatory changes,
CLECs are now legally able to offer all interstate switched services as well as
all intrastate services, including local dial tone, effectively opening up the
local telephone market to full competition. Because of these changes in state
and federal regulations, CLECs have expanded their services from providing
competitive access services such as private line and special access to providing
all local exchange services to become true competitors to the ILECs. See
"Regulation."
Network Services
Through the Company's wholly owned subsidiary, Fiber Optic Technologies,
Inc. ("FOTI"), the Company supplies information technology services and selected
networking
14
<PAGE>
products, focusing on network design, installation, maintenance and support for
a variety of end-users, including Fortune 1000 firms and other large businesses
and telecommunications companies. Revenue from Network Services has grown from
$21.0 million for fiscal 1993 to $60.1 million for fiscal 1996.
The Company provides network infrastructures, systems and support
services, including the design, engineering and installation of local and wide
area networks ("LANs/WANs") for its customers. These networks (within end-user
offices, buildings or campuses) may include fiber optic, twisted-pair, coaxial
and other network technologies. The Company specializes in turnkey network
installations including cabling and electronics that address specific
environments. The Company also provides professional network support services.
These services include network move, add and change services and on-going
maintenance and support services. Network Services revenue is expected to
constitute a smaller portion of the Company's future revenue as Telecom Services
revenue increases.
The Company offers these network integration and support services through
offices located within four major regional support organizations. The regional
headquarters are located in Dallas, Denver, Portland (Oregon) and San Francisco.
Satellite Services
The Company's Satellite Services operations provide satellite voice and
data services to major cruise lines, the commercial shipping industry, yachts,
the U.S. Navy and offshore oil platforms. The Company also owns a teleport
facility which provides international voice and data services. In addition, the
Company provides private data networks operating on VSATs (very small aperture
terminals) through its wholly owned subsidiary, Nova-Net Communications, Inc.
("Nova-Net"). Revenue for the Satellite Services operations (adjusted to reflect
the sale of certain teleport assets) was $11.4 million for fiscal 1995 and $18.8
million for fiscal 1996.
MTN. In January 1995, the Company and an unaffiliated entity formed
Maritime Telecommunications Network, Inc.("MTN") which purchased the assets of a
business providing digital wireless communications through satellites to the
maritime cruise industry, U.S. Navy vessels and offshore oil platforms utilizing
experimental radio frequency licenses issued by the FCC. These licenses were
issued to the predecessors of MTN in 1991, were renewed by the FCC in 1993 and
renewed again in January 1995. The experimental licenses are valid until
February 1, 1997, and MTN may apply to the FCC for a further renewal. MTN
provides private communications networks to various cruise lines allowing
passengers to make calls from their cabins to anywhere in the world. MTN
additionally provides its communications services to the U.S. Navy in
conjunction with a major long distance provider, which serves as the long
distance carrier, while MTN provides the communications equipment and network.
The Company believes that the radio frequencies employed under its experimental
licenses enable it to provide a higher quality maritime service than is
available through the radio frequencies currently allocated to other maritime
service providers. In April 1996, the FCC issued a waiver which allows MTN to
apply for a permanent FCC license to utilize the same frequencies as are being
used under the experimental license enabling MTN to continue to provide these
services. The Company has applied for a permanent license under the terms of the
FCC's waiver grant, and the application is pending. See "-Regulation."
15
<PAGE>
MCN. In March 1996, the Company acquired a 90% equity interest in Maritime
Cellular Tele-Network, Inc. ("MCN"), a Florida-based provider of cellular and
satellite communications for commercial ships, private vessels and land-based
mobile units. This acquisition expands the Company's business from C-band
satellite services for cruise ships and naval vessels to cover land-based units
and smaller ships.
Nova-Net. In May 1994, the Company acquired Nova-Net, which provides
private data networks operating on VSATs specializing in data collection and in
monitoring and control of customer production and transmission facilities in
various industries, including oil and gas, electric and water utilities and
environmental monitoring industries. Nova-Net designs, builds and manages
private data networks that enable a variety of companies to transmit critical
sensor and flow readings to key monitoring points from multiple locations.
Nova-Net manages networks through its network control center in Englewood,
Colorado.
Teleport. The teleport in Holmdel, New Jersey, acquired as part of the
Company's acquisition of MTN, is located 20 miles south of Newark and
specializes in international digital voice and data communications services with
full fiber interconnection to the local telephone company facilities in New York
City. Teleport services are also provided to the maritime industry, including
support of the Company's cruise ship, U.S. Navy and offshore oil platform
telephone and data services business. In addition, the Company markets the
resale of services from the four teleports it sold in the first quarter of 1996.
Customers And Marketing
The Company's primary marketing strategy for its Telecom Services is to
offer high quality and low cost diverse alternative communications pathways and
services to customers at competitive rates. The Company's service agreements
with long distance carriers also provide additional marketing opportunities as
the long distance carriers typically offer their customers the Company's local
telecommunications services with their long distance service. Telecom Services'
revenue from major long distance carriers and resellers constituted
approximately 69% of the Company's Telecom Services revenue in fiscal 1996
compared to 82% in fiscal 1995. The balance of the Company's Telecom Services
revenue was derived from end-users. The Company anticipates revenue from
end-users will continue to increase in the future as it continues to expand its
local telephone service offerings. Telecom service agreements with end-users
typically provide for terms of one to five years, fixed prices and early
termination penalties.
The Company's Telecom Services include special access and private line
services, which are point-to-point high-speed connections between end-user
locations and long distance carrier networks and/or between two end-user
locations. The Company packages its special access and private line services
specifically to meet the needs of long distance carriers, which remarket these
services to end-users, and to large end-user customers that typically acquire
access networks directly from access providers. In addition, the Company offers
wholesale switched services (offering access to interstate, intrastate and
intraLATA toll) providing long distance carriers with an alternative to
purchasing access directly from ILECs. These services feature discounts and
simplified pricing structures, making the services a cost-effective alternative
for long distance carriers.
16
<PAGE>
The Company is in the process of developing a full range of competitive
local telephone services, which the Company began offering in Orange County,
California in September 1996 and intends to begin offering in additional markets
in the near future. The Company's plan is to market its telecommunications
products directly to end-users. The Company will also market these services to
long distance carriers that will brand the Company's products, providing
customers with a complete package of communications services under the carrier's
own brand identity. The Company also offers enhanced services, which include a
pay-per-call service bureau for customers that distribute news and entertainment
programming.
The Company markets its network systems integration products and services
through a direct sales force located in the Rocky Mountains, Pacific Northwest,
Texas and California regions. The Company also has entered into reseller
agreements with manufacturers of network integration products and services.
The Company has begun offering satellite private line transmission
services from its teleport to business customers that can benefit from the
Company's international and domestic transmission capabilities. With its
acquisitions of MTN and MCN, the Company also markets voice and data
communications to the maritime industry, including cruise ships, U.S. Navy
vessels, commercial vessels, private yachts, offshore oil platforms and mobile
land-based units.
Competition
The Company operates in an increasingly competitive environment dominated
by the ILECs, such as the RBOCs and GTE, which are among the Company's current
competitors. Also included among the Company's current competitors are
independent ILECs, other CLECs, network systems integration services providers,
microwave and satellite service providers, teleport operators, wireless
telecommunications providers and private networks built by large end-users.
Potential competitors (using similar or different technologies) include cable
television companies, utilities, local telephone companies outside their current
local service areas, as well as local access operations of long distance
carriers. Consolidation of telecommunications companies, including recently
announced proposed mergers between certain of the RBOCs, and the formation of
strategic alliances within the telecommunications industry, as well as the
development of new technologies, could give rise to significant new competitors
to the Company. One of the purposes of the Telecommunications Act is to promote
competition, in particular in the local telephone market. Since enactment of the
Telecommunications Act, several telecommunications companies have indicated
their intention to enter many areas of the telecommunications industry,
including areas and markets in which the Company participates and expects to
participate. This may result in the presence of more participants than can
ultimately be successful in a given market, subjecting the Company to further
competition.
Telecom Services. The bases of competition in competitive local
telecommunications services are generally price, service, reliability,
transmission speed and capacity. The Company believes that its expertise in
developing and operating highly reliable, advanced digital networks which offer
substantial transmission capacity at competitive prices enables the Company to
compete effectively against the ILECs and other CLECs.
17
<PAGE>
In every market in which the Company operates telecom service networks,
the ILECs (which are the historical monopoly providers of local telephone
services) are the primary competitors. The ILECs have long-standing
relationships with their customers and provide those customers with various
transmission and switching services. The ILECs also have the potential to
subsidize access and switched services with revenue from a variety of businesses
and historically have benefited from certain state and federal regulations that
have favored the ILECs over the Company. In certain markets where the Company
operates, other CLECs also operate or have announced plans to enter the market.
Some of those CLECs are affiliated with major long distance companies. Current
competitors also include network systems integration services providers,
wireless telecommunications providers and private networks built by large
end-users. Additional competition may emerge from cable television operators and
electric utilities. Many of the Company's actual and potential competitors have
greater financial, technical and marketing resources than the Company.
The Company's networks compete most directly with the RBOCs and GTE. In
general, the provision of interstate access services by the RBOCs and GTE,
including the rates charged for such services, is regulated by the FCC, and the
provision of intrastate access and local services, including the rates charged
for such services, is regulated by the individual state regulatory commissions.
See "-Regulation." In the past, FCC policies have constrained the ability of the
RBOCs and GTE to decrease their prices for interstate access services, based on
their status as dominant carriers. Although FCC regulatory approval for price
reductions (beyond certain parameters) still must be obtained, the FCC has
allowed all recently proposed access reductions to become effective and has
granted the RBOCs flexibility in pricing their interstate access services on a
central office by central office basis. In addition, the FCC has granted waivers
of its access charge pricing rules to the RBOCs to allow them to further reduce
certain access prices. The FCC also has announced its intention to conduct a
comprehensive reform of its access charge pricing rules, as well as a reform of
existing subsidies that promote universal service. Under the Telecommunications
Act, the FCC is required to complete the universal service reform proceeding and
to adopt new rules by May 8, 1997. The FCC previously had announced that the
access charge reform proceeding would proceed on the same schedule as the
universal service proceeding; more recently, however, the FCC staff has
indicated that the access charge reform proceeding may be delayed. The FCC's
access charge reform proceeding is likely to eventually result in a reduction in
access rates charged by the RBOCs and GTE. The lowering of access rates and
increased pricing flexibility for the RBOCs and GTE may adversely affect the
Company's ability to compete for certain services. If the RBOCs and GTE continue
to lower access rates, there would be downward pressure on certain special
access and switched access rates charged by CLECs, which pressure may adversely
affect the Company's profitability. See "-Regulation." In addition, the
Telecommunications Act and its implementation by the states and the FCC allows
the RBOCs and GTE to provide a broader range of services and likely will enable
the RBOCs and GTE to more effectively compete against long distance carriers,
which are the Company's primary customers for telecom services.
The Company does not believe that it currently competes directly with any
cable television company, except against CLECs owned or controlled by cable
television companies. In the past, cable company controlled CLECs possessed
certain advantages over other CLECs in the provision of telecommunications
competitive access services, resulting from cable television companies' ability
to access rights of way and poles, conduit and ducts owned or controlled by
utilities or
18
<PAGE>
ILECs, and from a preferential rate for use of those facilities by
cable owned or controlled CLECs that was required under old federal law. With
the enactment of the Telecommunications Act, all providers of telecommunications
services have equal rights of access to rights of way, poles, conduit and ducts
owned or controlled by electric utilities and ILECs. Certain constraints, such
as the availability of space on poles, may, however, prohibit such rights of
access. In addition, the Telecommunications Act provides that over a five-year
period, the FCC is to adopt and implement new regulations that will require all
telecom service providers to be charged the same rate for use of such rights of
way, poles, conduit and ducts. On August 8, 1996, in the Second Report and Order
in the FCC's CC Docket No. 96-98 ("Second Report and Order"), the FCC adopted
certain rules of general applicability concerning non-discriminatory access to
poles, ducts, conduit and rights of way owned or controlled by ILECs and
utilities, and also adopted expedited dispute resolution procedures. The rules
adopted by the FCC on August 8, 1996 in the Second Report and Order have been
appealed to the federal court of appeals. See "-Regulation."
Network Services. The bases of competition in the network services market
are primarily technological capability and experience, value-added services and
price. In this market, the Company competes with a variety of small local system
integrators as well as, in certain markets, with AT&T and other large companies.
Satellite Services. In the delivery of domestic and international satellite
services, the Company competes with other full service teleports in the
northeast region of the United States. The bases of competition are primarily
reliability, price and transmission quality. Most of the Company's satellite
competitors focus on the domestic video market. Competition is expected
principally from a number of domestic and foreign telecommunications carriers,
many of which have substantially greater financial and other resources than the
Company. In the maritime telecommunications market, MTN competes primarily with
COMSAT Corporation ("COMSAT") in providing similar telecommunications services.
COMSAT has FCC licenses that are similar to MTN's, it owns its own satellites
and it is the sole U.S. point of control for access to Intelsat satellites.
Regulation
The Company's services are subject to significant federal, state and local
regulation. The Company operates in an industry that is undergoing substantial
change as a result of the passage of the Telecommunications Act.
The Telecommunications Act opens the local and long distance markets to
additional competition and changes the division of oversight between federal and
state regulators. Under previous law, state regulators had authority over those
services that originated and terminated within the state ("intrastate") and
federal regulators had jurisdiction over services that originated within one
state and terminated in another state ("interstate"). State and federal
regulators now share responsibility for implementing and enforcing the
provisions of the Telecommunications Act. In exchange for unbundling their
network elements and allowing competitors to interconnect at cost-based rates
and on nondiscriminatory terms and conditions, the RBOCs are now allowed to seek
authority to provide long distance services.
19
<PAGE>
In order to be granted authority to provide long distance services in its
service territory, the RBOC must be able to demonstrate it is subject to
facilities-based local competition. In addition, the RBOC must comply with a
14-point "checklist" of regulatory requirements which would result in
competitors having co-carrier status in the RBOC's service territory. Co-carrier
status, as it has become known in state regulatory proceedings, effectively
treats CLECs and other competitors as peers of the ILECs insofar as it relates
to the interconnections of networks and the origination and termination of local
telecommunication traffic. The states continue to have jurisdiction (for the
most part in conjunction with the FCC) over co-carrier issues under the new law,
in particular in reviewing and approving interconnection agreements.
The Telecommunications Act generally requires ILECs to provide
interconnection and nondiscriminatory access to the LEC network on more
favorable terms than have been available in the past. However, such new
agreements are subject to negotiations with each ILEC which may involve
considerable delays and may not necessarily be obtained on terms and conditions
that are acceptable to the Company. In such instances, the Company may petition
the proper state regulatory agency to arbitrate disputed issues. Ultimately, the
terms of an arbitrated agreement are subject to review by the FCC or the federal
courts. There can be no assurance that the Company will be able to negotiate
acceptable new interconnection agreements or that, if state regulatory
authorities impose terms and conditions on the parties in arbitration, such
terms will be acceptable to the Company.
To date, the Company has sent requests for negotiations of interconnection
agreements, as provided by the Telecommunications Act, to the local operating
affiliates of the RBOCs and GTE in each of the areas in which the Company
operates, as well as to Cincinnati Bell Telephone Company, a major independent
ILEC. Interconnection agreements were signed with Pacific Bell in March 1996 for
California, Ameritech in June 1996 for Ohio, SBC Communications in November 1996
for Texas and Oklahoma, and a partial agreement with GTE in August 1996 for
California. Negotiations are underway with GTE for California, Ohio, Texas,
Alabama, Tennessee, Indiana, Kentucky, Oklahoma and North Carolina, Cincinnati
Bell for Ohio, and BellSouth for Tennessee, North Carolina, Alabama,
Mississippi, Kentucky and Florida. The Company has conducted negotiations with
US West for Colorado, and has reached agreement on certain issues involved in
the negotiations. Pursuant to the Telecommunications Act, the Company petitioned
the Colorado PUC to arbitrate certain disputed issues. The Colorado PUC
conducted arbitration hearings and issued a decision that generally is favorable
to the Company.
On August 8, 1996, in two separate decisions in its CC Docket 96-98,
referred to as the "First Report and Order" and the "Second Report and Order,"
the FCC adopted rules and policies implementing the local competition provisions
of the Telecommunications Act. The FCC, among other things, adopted national
guidelines with respect to the unbundling of ILECs' network elements, resale of
ILEC services, the pricing of interconnection services and unbundled elements,
and other local competition issues.
In the First Report and Order, the FCC identified a minimum of five
technically feasible points of interconnection at which ILECs must allow
interconnection; identified a minimum set of network elements that ILECs must
provide on an unbundled basis by January 1, 1997; and required that prices for
interconnection and access to unbundled network elements be based on an estimate
of the economic cost of the element, which the FCC defined as Total Element Long
20
<PAGE>
Run Incremental Cost ("TELRIC"), or the long run incremental costs of the
element or interconnection, plus a reasonable share of forward looking joint and
common costs. The FCC also established "default" and "proxy" price ceilings and
ranges which state regulatory commissions may use to set rates for
interconnection and unbundled network elements until the state has completed the
necessary cost studies to adopt permanent rates under the TELRIC pricing
standard. In the Second Report and Order, rules were adopted concerning access
to rights of way, dialing parity, and non-discriminatory access.
Both of the Orders adopted by the FCC on August 8, 1996 have been
challenged in federal courts of appeals by the RBOCs, GTE, other independent
ILECs, long distance carriers, and state regulatory commissions. Petitions also
have been filed with the FCC requesting that the FCC reconsider various aspects
of the interconnection rules. The requests for court review of the FCC's First
Report and Order have been consolidated into one proceeding that was heard by
the U.S. Court of Appeals for the Eighth Circuit in St. Louis, Missouri.
Requests also were filed by certain ILECs and state commissions to stay the
effective date of the FCC's rules adopted in the First Report and Order pending
the issuance by the Court of a decision on the merits. On October 15, 1996, the
Court issued a stay of certain of the FCC's rules adopted in the First Report
and Order, including implementation of the pricing provisions of the FCC's
rules, which define the methodology by which the ILECs must develop prices for
their unbundled elements and provide the basis for the FCC's interim or
"default" and "proxy" price ceilings and ranges. The Court also stayed the FCC's
"most favored nation" rules which implement Section 252(i) of the
Telecommunications Act and require ILECs to make available any interconnection,
service or network element in an approved interconnection agreement to any other
requesting carrier on the same terms and conditions and at the same price,
thereby enabling new entrants to "pick and choose" elements of established
interconnection agreements. Oral argument on the merits of the FCC's rules is
scheduled for January 1997, and the Court is not expected to render a decision
until March or April 1997. The Court's stay, however, does not affect the FCC's
other interconnection rules as adopted on August 8, 1996, nor does it affect the
statutory requirements of the Telecommunications Act, including the statutory
requirement that ILECs conduct negotiations, enter into interconnection
agreements with competitive carriers, and unbundle their network elements. A
separate appeal of the FCC's Second Report and Order also is pending.
Federal Regulation. The Company generally operates as a regulated carrier
with fewer regulatory obligations than the ILECs. The Company must comply with
the requirements of the Telecommunications Act, such as offering service on a
non-discriminatory basis at just and reasonable rates. The FCC treats the
Company as a non-dominant carrier. The FCC has established different levels of
regulation for dominant and non-dominant carriers. Of domestic common carriers,
only GTE and the RBOCs are classified as dominant carriers for the provision of
access services, and all other providers of domestic common carrier services are
classified as non-dominant. Under the FCC's streamlined regulation of
non-dominant carriers, the Company must file tariffs with the FCC for certain
interstate services on an ongoing basis. The FCC has, however, recently
eliminated the requirement that non-dominant long distance carriers file
tariffs. Based on this proposal and previous FCC decisions, the Company believes
that the FCC also will eliminate tariff filing requirements for non-dominant
local exchange carriers such as the Company. The Company is not subject to price
cap or rate of return regulation, nor is it currently required to obtain FCC
authorization for the installation or operation of its fiber optic network
facilities used for services in the United States. The Company may install and
operate non-radio facilities for the
21
<PAGE>
transmission of interstate communications without prior FCC authorization. The
Company's use of digital microwave radio frequencies in connection with certain
of its telecommunications services is subject to FCC radio frequency licensing
regulation. See "Federal Regulation of Microwave and Satellite Radio
Frequencies" below. In addition, the FCC may have the authority, which it is not
presently exercising, to impose restrictions on foreign ownership of
communication service providers not utilizing radio facilities. The FCC requires
non-dominant carriers to obtain FCC authorization to provide international
services and the FCC has imposed reporting requirements with respect to foreign
affiliations between U.S. international and foreign telecommunication carriers,
as well as reports of certain investments by other foreign entities. Depending
on the particular foreign affiliate and its "home" market, the FCC may limit the
size of the foreign affiliate's investment in the U.S. carrier or subject the
U.S. carrier to increased regulation on one or more international routes.
Effective in early 1994, FCC decisions announced in September 1992 and
August 1993, as modified by subsequent FCC and court decisions (the
"Interconnection Decisions"), restructured the interstate competitive access
services market and introduced new levels of competition in special access and
switched access elements. The FCC ordered the RBOCs and all but one of the local
telephone companies having in excess of $100 million in gross annual revenue for
regulated services, to provide expanded interconnection and collocation in local
telephone company central offices and serving wire centers to any CLEC, long
distance carrier or end-user seeking such interconnection for the provision of
interstate access services, and required, subject to few exceptions, ILECs to
offer interconnection in their central offices at cost-based rates. The FCC's
Interconnection Decisions also required ILECs to provide central office
transmission equipment dedicated to interconnectors' use and to terminate
interconnectors' circuits ("collocation"). The Interconnection Decisions
permitted, in some cases, the Company to install transmission equipment in ILEC
central offices and connect its network directly to the local telephone
companies' network. As noted above, the Telecommunications Act now requires
ILECs to provide interconnection and nondiscriminatory access to ILEC networks
at more favorable terms than had previously been available to competitors. The
Telecommunications Act requires most ILECs to provide physical collocation, at
the option of the requesting carrier, of the requesting carrier's equipment in
the ILEC's premises, except where the ILEC can demonstrate space limitations or
other technical impediments to collocation. In addition, the FCC re-adopted some
of its interconnection rules in its August 1996 decision. Consequently, the
Company can reach most business customers in its metropolitan service areas,
either on its own networks or through collocation and thereby significantly
expand its customer base.
In conjunction with the Interconnection Decisions, the FCC provided ILECs
with a degree of increased pricing flexibility for special access and switched
services selectively on a specific central office by central office basis. Under
this pricing scheme, once a collocation tariff is in effect and a competitor has
taken service under the tariff, the ILEC is allowed within specified ranges to
charge different rates for access services in different zones. This pricing
flexibility has resulted in certain ILECs lowering their prices in high density
zones, the probable arena of competition with the Company. The Company
anticipates that if additional lowering of ILEC access rates in high density
zones is achieved, and to the extent that the FCC provides the ILECs with
increased flexibility to lower their rates as the number of interconnections and
competitors increase, the Company's ability to compete for certain services may
be adversely affected.
22
<PAGE>
In a concurrent proceeding on switched transport rate structure and
pricing, the FCC adopted interim pricing rules that restructure local telephone
company switched transport rates in order to facilitate competition for switched
services. Additionally, as noted above, the FCC has announced its intention to
conduct a comprehensive reform of its access charge pricing rules. See
"-Competition."
State Regulation. In general, state regulatory agencies have regulatory
jurisdiction over the Company when Company facilities and services are used to
provide intrastate services. Under the Telecommunications Act, states cannot
effectively prohibit any entity from providing telecommunications services, but
the states continue to have general authority to set criteria for reviewing
applications to provide intrastate services (including local services). State
regulators will continue to set the requirements for providers of local and
intrastate services, including quality of services criteria. However, state
regulators can no longer allow (or require) restrictions on the resale of
telecommunication services. State regulators also can regulate the rates charged
by CLECs for intrastate and local services. In addition to the provisions of the
Telecommunications Act that open all telecommunications markets to competition,
many states, including Arizona, California, Colorado, Florida, Georgia,
Illinois, Maryland, Massachusetts, Michigan, New York, North Carolina, Tennessee
and Washington, have adopted, and many other states are considering, legislative
and/or regulatory initiatives addressing implementation of competition in the
local exchange market. The Company's provision of local dial tone and intrastate
switched and dedicated services are classified as intrastate and therefore
subject to state regulation. The Company expects that it will offer more
intrastate services as its business and product lines expand. To provide
intrastate service (particularly local dial tone service), the Company generally
must obtain a Certificate of Public Convenience and Necessity ("CPCN") from the
state regulatory agency prior to offering service. In most states, the Company
also is required to file tariffs setting forth the terms, conditions and prices
for services that are classified as intrastate, and to update or amend its
tariffs as rates change or new products are added. The Company may also be
subject to various reporting and record-keeping requirements.
The Company currently holds CPCNs (or their equivalents) from the states
of Alabama, California, Colorado, Ohio, Tennessee, North Carolina, Kentucky and
Texas. The Company has authority from: (i) Alabama to provide local telephone
services as well as intrastate interLATA and intraLATA long distance services;
(ii) California to provide local telephone services and intrastate interLATA and
intraLATA long distance services; (iii) Ohio to provide local telephone services
in Ameritech service areas in the state; and (iv) Tennessee to provide local
telephone services and intrastate long distance services. The Company has been
granted operating authority by the Colorado PUC to provide competitive local
services. The Company also has two grants of authority from the Texas PUC which
authorize the Company to provide CLEC services, including facilities-based
services, within the San Antonio exchange area and within the other exchange
areas of Southwestern Bell Telephone Company, GTE Southwest, Central Telephone
Company of Texas, and United Telephone Company of Texas. The Company also holds
CPCNs to provide intrastate long distance services in North Carolina and
Kentucky, and applications are pending before the applicable state commission
for CPCNs to provide local telecommunications services in North Carolina,
Indiana and Kentucky, as well as to expand the Company's local telephone service
areas in Ohio.
23
<PAGE>
Local Government Authorizations. Under the Telecommunications Act, local
authorities retain jurisdiction under applicable state law to control the
Company's access to municipally owned or controlled rights of way and to require
the Company to obtain street opening and construction permits to install and
expand its fiber optic network. In addition, many municipalities require the
Company to obtain licenses or franchises (which generally have terms of 10 to 20
years) and to pay license or franchise fees, based on a percentage of gross
revenue, in order to provide telecommunication services. In certain states,
however, including California and Colorado, such fees cannot be imposed under
state law. There is no assurance that certain cities that do not impose fees
will not seek to impose fees, nor is there any assurance that, following the
expiration of existing franchises, fees will remain at their current levels. In
many markets, the ILECs have been excused from paying such franchise fees or pay
fees that are materially lower than those required to be paid by the Company for
access to public rights of way. However, under the Telecommunications Act, while
municipalities may still regulate use of their streets and rights of way,
municipalities may not prohibit or effectively prohibit any entity from
providing any telecommunication services. In addition, the Telecommunications
Act requires that local governmental authorities treat telecommunications
carriers in a non-discriminatory and competitively neutral manner. If any of the
Company's existing franchise or license agreements were terminated prior to
their expiration dates or not renewed, and the Company was forced to remove its
fiber from the streets or abandon its network in place, such termination could
have a material adverse effect on the Company.
Federal Regulation of Microwave and Satellite Radio Frequencies. The FCC
continues to regulate radio frequency use by both private and common carriers
under the Telecommunications Act. Unlike common carriers, private carriers
contract with select customers to provide services tailored to the customer's
specific needs. The FCC does not currently regulate private carriers (other than
their use of radio frequencies) and has preempted the states from regulating
private carriers insofar as they provide interstate services. The Company offers
certain services as a private carrier.
The Company is required to obtain authorization from the FCC for its use
of radio frequencies to provide satellite and wireless services. The Company
holds a number of satellite earth station licenses in connection with its
operation of satellite-based private carrier networks. The Company also provides
maritime communications services pursuant to an experimental license that
currently is due to expire February 1, 1997, with an opportunity for renewal. In
April 1996, the FCC issued a waiver to the Company which will allow it to obtain
a permanent license to provide these services using the same radio frequencies
currently being used under the experimental license. The Company has applied for
a permanent license under the terms of the FCC's waiver decision, and the
application is pending.
The Telecommunications Act limits ownership or control of an entity
holding a common carrier radio license by non-U.S. citizens, foreign
corporations and foreign governments. Because of these restrictions,
historically the Company and its subsidiaries have not been eligible to hold
common carrier radio licenses used to provide telephone and wireless services.
Therefore, third parties hold certain common carrier licenses and provide
service to the Company over the licensed facilities for resale by the Company to
the Company's customers. The Telecommunications Act permits the FCC to determine
on a case-by-case basis that the public interest will be served by waiving the
foreign ownership restrictions. The Company intends to apply to the FCC for a
24
<PAGE>
waiver of the foreign ownership restrictions that remain applicable to the
Company. If a waiver is granted, or if currently applicable ownership
restrictions are relaxed or removed, the common carrier radio licenses will be
transferred to the Company upon receipt of FCC approval.
Employees
On September 30, 1996, the Company employed a total of 1,323 individuals
on a full time basis. There are 55 employees in the Company's Oregon network
systems integration service office who are represented by a collective
bargaining agreement which expires on December 31, 1997. The Company believes
that its relations with its employees are good.
ITEM 2. PROPERTIES
The Company's physical properties include owned and leased space for
offices, storage and equipment rooms and collocation sites. Additional space may
be purchased or leased by the Company as networks are expanded. The Company owns
a 30,000 square-foot building located in the Denver metropolitan area. This
facility serves as the Company's corporate headquarters as well as its
nationwide network monitoring and control facility for its Telecom Services
business. The Company currently also leases approximately 116,000 square feet of
office space for operations located in the Denver metropolitan area. As a result
of its recent and anticipated future growth, the Company has acquired property
for its new headquarters and has commenced construction of an office building
that the Company anticipates will accommodate all of the Company's Colorado
operations.
ITEM 3. LEGAL AND ADMINISTRATIVE PROCEEDINGS
The shareholder litigation, initially filed by Marc Manoff on May 17,
1995, Isabell Sperber, on behalf of the Isabell Sperber Individual Retirement
Account on June 1, 1995, Lyon Investment Partnership on July 17, 1995 and Forest
S. Williams on July 24, 1995 naming Holdings-Canada and William W. Becker, Larry
L. Becker, John R. Evans and William J. Maxwell as defendants, alleging that the
defendants violated the Securities Exchange Act of 1934 with respect to the
content and timing of its disclosures concerning the suspension and debarment of
FOTI, have been settled for an amount equivalent to a reasonable estimate of the
cost of litigation. The settlement has been approved by the Court and is subject
to approval by the plaintiff class.
ICG and its subsidiaries are not parties to any material litigation. The
continuing participation by ICG and its subsidiaries in regulatory proceedings
before the FCC and state regulatory agencies concerning the adoption of new
regulations is unlikely to result in a material adverse effect on the financial
condition and results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ICG has not had any matters submitted to a vote of its security holders
since ICG was formed in April 1996.
25
<PAGE>
The following sets forth the matters submitted to a vote of
Holdings-Canada's security holders at Holdings-Canada's Annual and Special
Meeting of Shareholders held in Toronto, Ontario, Canada on Tuesday, July 30,
1996:
1. Elected Jay E. Ricks as Director, whose term expires at the annual meeting
in 1999. (Vote taken by a show of hands, and therefore final count is not
available).
The following Directors' terms of office continued after the meeting:
Term expires at
Name annual meeting in
William J. Laggett 1998
William W. Becker 1997
J. Shelby Bryan 1997
Harry R. Herbst 1998
Gregory C.K. Smith 1997
Leontis Teryazos 1998
2. Reappointed KPMG, Chartered Accountants, as Holdings-Canada's independent
auditors in Canada and KPMG Peat Marwick LLP as Holdings-Canada's
independent auditors in the United States. (Vote taken by a show of hands,
and therefore final count is not available).
3. Approved a special resolution to change the name of IntelCom Group Inc. to
"ICG Communications, Inc." (Vote taken by a show of hands, and therefore
final count is not available).
4. Approved a special resolution adopting the Plan of Arrangement and Support
Agreement, including a special resolution to further change the name of
IntelCom Group Inc. to "ICG Holdings (Canada), Inc." (15,021,910 shares in
favor; 31,830 against; 4,438,891 abstained).
Holdings is a wholly owned subsidiary of Holdings-Canada. The following
matter was approved by the sole shareholder of Holdings by written consent
effective September 3, 1996:
1. Elected the following Directors: J. Shelby Bryan, John D. Field, James D.
Grenfell, William J. Maxwell and Mark S. Helwege.
26
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ICG Common Stock, $.01 par value per share, has been listed on the
American Stock Exchange ("AMEX") since August 5, 1996 under the symbol "ICG."
Prior to that time, Holdings-Canada's Common Shares had been listed on the AMEX
under the symbol "ITR" from January 14, 1993 through February 28, 1996, and
under the symbol "ICG" thereafter through August 2, 1996. Holdings-Canada Common
Shares ceased trading on the AMEX at the close of trading on August 2, 1996.
Holdings-Canada Class A Common Shares are listed on the Vancouver Stock Exchange
("VSE") under the new symbol "IHC.A."
The following table sets forth, for the fiscal periods indicated, the high
and low sale prices of the Common Shares as reported on the AMEX through August
2, 1996, and the VSE through the date indicated below, and the high and low
sales prices of the Common Stock as reported on the AMEX from August 5, 1996
through the date indicated below. The table also sets forth the average of the
monetary exchange rates on the last day of each such fiscal period.
<TABLE>
<CAPTION>
American Stock Vancouver Stock
Exchange (1) Exchange (1) Exchange
--------------- -------------------
Rate
High Low High Low (C$/$)
------ ------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended
September 30, 1995
First Quarter $17.88 $12.38 C$ 33.50 C$ 18.50 1.38
Second Quarter 14.13 9.38 19.75 17.38 1.40
Third Quarter 13.25 6.63 18.00 18.00 1.36
Fourth Quarter 14.00 8.00 - - 1.34
Fiscal Year Ended
September 30, 1996
First Quarter $12.75 $ 8.63 C$ - C$ - 1.36
Second Quarter 17.88 10.25 - - 1.37
Third Quarter 27.38 17.13 17.50 17.50 1.36
Fourth Quarter 25.88 19.13 - - 1.36
Fiscal Period Ended
December 31, 1996 (2)
Through December 10,
1996 $22.25 $17.63 C$ 28.35 C$ 28.35 1.36
- ----------
<FN>
(1) Effective at the close of trading on August 2, 1996, Holdings-Canada's
Common Shares ceased trading on the AMEX and the Common Stock commenced
trading on the AMEX on August 5, 1996. The Common Stock is not traded on
the VSE. The Class A Common Shares trade on the VSE and all information
reported on the above table from August 5, 1996 to the date indicated
above with respect to the VSE relates only to the Class A Common Shares.
(2) The Company has elected to change its fiscal year end to December 31 from
September 30, effective for the 1997 fiscal year.
</FN>
</TABLE>
On December 10, 1996, the last reported sale price for the Common Stock on
the AMEX was $19.88 per share. On December 10, 1996, there were 30,953,330
shares of Common Stock outstanding and 121 holders of record.
27
<PAGE>
The Company has never declared or paid dividends on the Common Stock and does
not intend to pay cash dividends on the Common Stock in the foreseeable future.
ICG intends to retain future earnings, if any, to finance the development and
expansion of its business. In addition, the payment of any dividends on the
Common Stock is effectively prohibited by the restrictions contained in the
Company's indentures and in the First Amended and Restated Articles of
Incorporation of Holdings, which prohibits Holdings from making any material
payment to the Company. Certain of the Company's debt facilities contain
covenants which also may restrict the Company's ability to pay cash dividends.
The Company has not made any sales of unregistered securities during 1996.
28
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial data for each fiscal year in the
five-year period ended September 30, 1996 has been derived from the audited
Consolidated Financial Statements of the Company. The information set forth
below should be read in conjunction with the 1994, 1995 and 1996 Consolidated
Financial Statements of the Company and the notes thereto included elsewhere in
this Annual Report. The Company's development and expansion activities,
including acquisitions, during the years shown below materially affect the
comparability of this data from one year to another. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------------
Statement of Operations 1992 1993 1994 1995 1996
Data:
-------- ------ ------- ------- -------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenue:
Telecom services $1,061 4,803 14,854 32,330 87,681
Network services 4,955 21,006 36,019 58,778 60,116
Satellite services (1) 1,468 3,520 8,121 20,502 21,297
Other 126 147 118 - -
-------- ------- ------- ------- -------
Total revenue 7,610 29,476 59,112 111,610 169,094
Operating costs 5,423 18,961 38,165 78,846 135,253
Selling, general and
administrative expenses 3,921 10,702 28,015 62,954 76,725
Depreciation and
amortization 1,602 3,473 8,198 16,624 30,368
-------- ------- ------- ------- -------
Total operating costs
and expenses 10,946 33,136 74,378 158,424 242,346
-------- ------- ------- ------- -------
Operating loss (3,336) (3,660) (15,266) (46,814) (73,252)
Interest expense (525) (2,523) (8,481) (24,368) (85,714)
Other income (expense),
net 33 22 (121) (5,466) (26,819)
-------- ------- ------- ------- -------
Loss before income taxes
and cumulative
effect of change in
accounting (3,828) (6,161) (23,868) (76,648)(185,785)
Income tax benefit 174 1,552 - - 5,131
Cumulative effect of
change in accounting (2) - - - - (3,453)
-------- ------- ------- ------- -------
Net loss $(3,654) (4,609) (23,868) (76,648)(184,107)
======== ======= ======= ======= =======
Loss per share $ (0.42) (0.39) (1.56) (3.25) (6.83)
======== ======= ======= ======= =======
Weighted average number
of shares outstanding(3) 8,737 11,671 15,342 23,604 26,955
======== ======= ======= ======= =======
Other Data:
EBITDA (4) $(1,734) (187) (7,068)(30,190) (42,884)
Capital expenditures (5) $12,599 20,685 54,921 88,495 175,148
29
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------
Balance Sheet Data: 1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Working capital (deficit) $ (392) 7,990 (8,563) 249,089 446,164
Total assets 54,417 95,196 201,991 583,553 939,351
Notes payable and current
portion of long-
term debt and capital
lease obligations 991 7,657 23,118 27,310 8,282
Long-term debt and capital
lease obligations,
less current portion 15,565 37,116 104,461 405,535 739,827
Redeemable preferred stock
of Holdings - - - 14,986 153,318
Stockholders' equity
(deficit) 21,826 34,753 39,782 82,535 (19,588)
<FN>
(1) Prior to January 1995, revenue from Satellite Services was from the
Company's satellite (voice and data) operations and after January 1995,
revenue from Satellite Services was from the Company's satellite (voice
and data) and maritime communication operations.
(2) Effective January 1, 1996, the Company changed its method of accounting
for long-term telecom services contracts to recognize revenue as services
are provided. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Accounting Matters - Accounting
Changes." As required by generally accepted accounting principles, the
Company has reflected the effects of the change in accounting as if such
change had been adopted as of October 1, 1995. The Company's results for
the year ended September 30, 1996 reflect a charge of $3.5 million
relating to the cumulative effect of this change in accounting as of
October 1, 1995. The effect of this change in accounting for fiscal year
1996 was not significant. If the new revenue recognition method had been
applied retroactively, telecom services revenue would have decreased by
$0.3 million, $2.0 million, $0.5 million and $0.7 million for fiscal 1992,
1993, 1994 and 1995, respectively.
(3) Weighted average number of shares outstanding for fiscal years 1992, 1993,
1994 and 1995 represents Holdings-Canada common shares outstanding.
Weighted average number of shares outstanding for fiscal 1996 represents
Holdings-Canada common shares outstanding for the period October 1, 1995
through August 2, 1996, and represents ICG Common Stock and
Holdings-Canada Class A common shares (owned by third parties) outstanding
for the period August 5, 1996 through September 30, 1996.
(4) EBITDA consists of operating loss plus depreciation and amortization.
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 flow or results of operations in accordance with generally
accepted accounting principles for the periods indicated. See the
Company's Consolidated Financial Statements contained elsewhere in this
Annual Report.
(5) Capital expenditures include assets acquired under capital leases and
through the issuance of debt or warrants.
</FN>
</TABLE>
30
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion includes certain forward-looking statements which
are affected by important factors including, but not limited to, dependence on
increased traffic on the Company's facilities, increased Satellite Services
revenue from the cruise ship and U.S. Navy telephone services business and
actions of competitors and regulatory authorities that could cause actual
results to differ materially from the forward-looking statements.
Company Overview
The Company provides Telecom Services, Network Services and Satellite
Services. Telecom Services consist of the Company's CLEC operations. The Company
is one of the largest providers of competitive local telephone services in the
United States, based on estimates of the industry's 1995 revenue. CLECs,
formerly known as CAPs, seek to provide an alternative to the ILEC for a full
range of telecommunications services in the newly opened regulatory environment.
As a CLEC, the Company operates networks and has acquired fiber optic facilities
in three regional clusters covering major MSAs in California, Colorado and the
Ohio Valley, with an aggregate population of approximately 33.6 million, and in
three markets in the Southeast region, with an aggregate population of
approximately 2.9 million. Network Services consist of information technology
services, network design and installation, and network systems support.
Satellite Services consist of maritime and international satellite transmission
services. As a leading participant in a rapidly growing industry, the Company
has experienced significant growth, with total revenues increasing from $59.1
million for fiscal 1994, to $111.6 million for fiscal 1995 to $169.1 million for
fiscal 1996. The Company's rapid growth is the result of the initial
installation, acquisition and subsequent expansion of its fiber optic networks,
the acquisition and growth of its network systems integration business and
growth in Satellite Services.
The Company's operating networks have grown from 323 fiber route miles at
the end of fiscal 1994 to 2,143 fiber route miles at the end of fiscal 1996.
Telecom Services revenue has increased from $14.9 million for fiscal 1994 to
$87.7 million for fiscal 1996. The Company has experienced declining access unit
prices and increasing price competition which have been more than offset by
increasing network usage. The Company expects to continue to experience
declining access unit prices for the foreseeable future.
The Company expects to continue to experience negative operating margins
from the provision of switched access services while its networks are in the
development and construction phases, during which the Company relies on ILEC
networks to carry a significant portion of its customers' switched traffic. The
Company expects to realize improved operating margins from switched access
services on a given network when (i) increased volumes of traffic and build-out
enables such traffic to be carried on the Company's own network instead of ILEC
networks, and (ii) higher margin enhanced services are provided to customers on
the Company's network. However, the Company's switched access services strategy
has not yet been profitable and may not become profitable due to, among other
factors, lack of customer demand, competition from other CLECs and pricing
pressure from the ILECs.
31
<PAGE>
The Company believes that the provisions of the Telecommunications Act,
including the opening of the local telephone services market to competition, the
unbundling of ILEC services and the implementation of local telephone number
portability, will facilitate the Company's plan to provide a full array of local
telephone services. In order to fully implement its strategy, the Company must
make significant capital expenditures to provide additional switching capacity,
network infrastructure and electronic components. The Company has limited
experience providing such services and there can be no assurance that the
Company will be successful.
The continued development, construction and expansion of the Company's
business requires significant capital, a large portion of which is expended
before any revenue is generated. The Company has experienced, and expects to
continue to experience, negative cash flow and significant losses while it
expands its operations to provide local telephone services and establishes a
sufficient revenue-generating customer base. There can be no assurance that the
Company will be able to establish such a customer base. When constructing and
relying principally on its own facilities, the Company has experienced a period
of up to 18 months from initial design of a network to revenue generation for
that network. However, using leased ILEC facilities to provide initial customer
service and the Company's new agreements to use utilities' existing fiber, the
Company has experienced initial revenue generation within nine months after
commencing network design.
Growth in Satellite Services revenue has resulted principally from the
acquisition of Nova-Net Communications, Inc. in May 1994, the acquisition of a
64% interest in MTN in January 1995 and the acquisition of a 90% interest in MCN
in March 1996. In May 1992, the Company acquired a 51% interest in Fiber Optic
Technologies, Inc., which accounts for most of the Company's Network Services
revenue, and the remaining 49% in January 1996. As a result of the significant
lag time between commencement of network development and generation of
appreciable related Telecom Services revenue, the majority of the Company's
revenue prior to fiscal 1996 had been derived from Network Services. However,
the Company's Network Services revenue (as well as Satellite Services revenue)
will continue to represent a diminishing percentage of the Company's
consolidated revenue as the Company continues to emphasize its Telecom Services.
32
<PAGE>
Results of Operations
The following table provides a breakdown of revenue and operating costs
for Telecom Services, Network Services and Satellite Services and certain other
financial data for the Company for the fiscal years indicated. The table also
shows certain revenue, expenses, operating loss and EBITDA as a percentage of
the Company's total revenue.
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
$ % $ % $ %
--------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Telecom services (1) 14,854 25 32,330 29 87,681 52
Network services 36,019 61 58,778 53 60,116 36
Satellite services 8,121 17 20,502 18 21,297 12
Other 118 * - - - -
------ --- ------ --- ------- ---
Total revenue 59,112 100 111,610 100 169,094 100
Operating costs
Telecom services 7,050 21,825 78,705
Network services 26,334 45,928 46,256
Satellite services 4,697 11,093 10,292
Other 84 - -
------ --- ------ --- ------- ---
Total operating costs 38,165 65 78,846 71 135,253 80
Selling, general and
administrative 28,015 47 62,954 56 76,725 45
Depreciation and
amortization 8,198 14 16,624 15 30,368 18
Operating loss (15,266) (26) (46,814) (42) (73,252) (43)
EBITDA (2) (7,068) (12) (30,190) (27) (42,884) (25)
Supplemental Pro Forma
Data (1):
Telecom services revenue 14,395 25 31,617 29 87,681 52
Total revenue 58,653 100 110,897 100 169,094 100
Operating loss (15,725) (27) (47,527) (43) (73,252) (43)
EBITDA (2): (7,527) (13) (30,903) (28) (42,884) (25)
- ----------
* Less than 0.5%
<FN>
(1) During 1996, the Company changed its method of accounting for long-term
telecom services contracts to recognize revenue as services are provided.
See "-Accounting Matters-Accounting Changes." As required by generally
accepted accounting principles, the Company has reflected the effects of
the change in accounting as if such change had been adopted as of October
1, 1995, and is presenting the pro forma effects on prior periods assuming
the change had been applied retroactively. See "Selected Financial Data."
(2) See note 4 under "Selected Financial Data" for the definition of EBITDA.
</FN>
</TABLE>
33
<PAGE>
Fiscal 1996 Compared to Fiscal 1995
The following information reflects the results of operations for
fiscal 1996 compared to the pro forma results of operations for fiscal 1995,
assuming the change in accounting for long-term telecom services contracts
described in "-Accounting Matters-Accounting Changes" had been applied
retroactively.
Revenue. Revenue for fiscal 1996 increased $58.2 million, or 52%, from
fiscal 1995. The increase in total revenue reflects continued growth in Telecom
Services, Network Services and Satellite Services, offset slightly by the loss
in revenue resulting from the sale of four of the Company's teleports. Telecom
Services revenue increased 177% to $87.7 million due to an increase in network
usage for both special and switched access services, offset in part by a decline
in average unit prices. Switched services revenue increased from $7.2 million
(22% of Telecom Services revenue) for fiscal 1995, to $51.6 million (59% of
Telecom Services revenue) for fiscal 1996, of which $14.9 million relates to
revenue from Zycom compared to $1.4 million in fiscal 1995. $10.6 million of the
increase in Zycom revenue relates to changes in reporting Zycom revenue due to
the Company having entered into long-term contracts with its major customers.
Network usage as reflected in voice grade equivalents ("VGEs") increased 47%
from 430,535 VGEs on September 30, 1995, to 630,697 VGEs on September 30, 1996.
On September 30, 1996, the Company had 2,067 buildings connected to its networks
compared to 1,375 buildings connected on September 30, 1995. Consistent with
expectations, Network Services revenue growth has been moderate, increasing from
$58.8 million to $60.1 million, while the Company continues to reposition its
systems and operations to better manage its bottom line growth. Satellite
Services revenue increased 4% to $21.3 million for fiscal 1996 primarily due to
increased maritime minutes of use from cruise ships offset in part by the
decrease resulting from the sale of four of the Company's teleports. Satellite
Services revenue for fiscal 1995 and 1996, on a pro forma basis to reflect the
sale of teleports, was $11.4 million and $18.9 million, respectively. Satellite
Services revenue decreased $0.4 million from the third quarter of fiscal 1996 to
the fourth quarter of fiscal 1996. The decrease in revenue was primarily due to
three navy vessels being in "dry dock" which resulted in significantly less
revenue from navy vessels.
Operating costs. Total operating costs for fiscal 1996 increased $56.4
million, or 72%, from fiscal 1995. Telecom Services operating costs increased
from $21.8 million, or 69% of Telecom Services revenue for fiscal 1995, to $78.7
million, or 90% of Telecom Services revenue for fiscal 1996. Telecom Services
operating costs consist of payments to ILECs for the use of network facilities
to support off-net and switched access services, network operating costs, right
of way fees and other costs. Network operating costs, which were previously
classified as selling, general and administrative expenses, have been included
in operating costs beginning in fiscal 1996 in order to conform with current
industry practice. Such expenses amounted to $2.1 million and $13.7 million in
fiscal 1995 and fiscal 1996, respectively. All prior year information has been
restated to conform with this year's presentation. The increase in operating
costs in absolute dollars is attributable to the increase in switched access
services and the expansion in off-net special service offerings. The increase in
operating costs as a percentage of total revenue is due primarily to the
increase in switched services revenue, which generates lower margins than
special access services due to the costs associated with reselling ILEC network
facilities. The Company expects that the Telecom Services ratio of operating
costs to revenue will continue to increase until the Company carries more
traffic on its own facilities rather than the ILEC facilities, provides a
34
<PAGE>
greater volume of higher margin enhanced services, including local telephone
services, and obtains the right to use unbundled ILEC facilities on satisfactory
terms, any or all of which may not occur. Network Services operating costs
increased 1% to $46.3 million and decreased as a percentage of Network Services
revenue from 78% for fiscal 1995 to 77% for fiscal 1996. Network Services
operating costs includes the cost of equipment sold, direct hourly labor and
other indirect project costs. Satellite Services operating costs decreased to
$10.3 million for fiscal 1996, from $11.1 million for fiscal 1995. Satellite
Services operating costs as a percentage of revenue also declined to 48% for
fiscal 1996, compared to 54% for fiscal 1995. The decrease both in absolute
dollars and as a percentage of revenue is attributable to the decline in revenue
resulting from the sale of four of the Company's teleports, partially offset by
an increase in higher margin maritime services revenue at MTN. Satellite
Services operating costs consists of MTN and MCN space segment transponder
costs, VSAT network costs and costs of VSAT equipment sold and satellite
transponder lease costs (for the prior period and for the three months ended
December 31, 1995). Revenue from teleport operations historically have yielded
lower gross margins than maritime services revenue. Gross margins for Satellite
Services has improved, and should continue to improve, as a result of the sale
of the teleports. The expectation described in the foregoing forward-looking
statement is dependent upon, among other things, increased Satellite Services
revenue from the cruise ship, U.S. Navy and commercial shipping telephone
services business, the absence of increased competition in this market and the
absence of new technology which potentially could render the Company's leased
satellite facilities obsolete.
Selling, general and administrative ("SG&A") expense. SG&A expense for
fiscal 1996 increased $13.8 million, or 17%, compared to fiscal 1995. This
increase was principally due to the continued rapid expansion of the Company's
Telecom Services networks and related significant additions to the Company's
management information systems, marketing and sales staff dedicated to the
expansion of the networks and implementation of the Company's switched services
strategy and development of local telephone services. A portion of the increase
was also attributable to approximately $1.8 million of legal, accounting, and
SEC filing fees incurred in the reincorporation of the Company as a new publicly
traded U.S. corporation, ICG Communications, Inc. and approximately $1.3 million
of consulting fees related to various process improvement initiatives. SG&A
expense as a percentage of total revenue was 45% for fiscal 1996, compared to
57% for fiscal 1995. There is typically a period of higher administrative and
marketing expense prior to the generation of appreciable revenue from newly
acquired or developed networks. Network operating costs, which were previously
classified as selling, general and administrative expenses, have been included
in operating costs beginning in fiscal 1996 in order to conform with current
industry practice. Such expenses amounted to $2.1 million and $13.7 million in
fiscal 1995 and 1996, respectively. All prior year information has been restated
to conform with the current year's presentation. The Company expects SG&A
expense for Telecom Services to increase over the near term as a result of
hiring new staff to facilitate the development and marketing of local telephone
services. SG&A expense for Network Services increased due to increased
engineering, marketing and sales staff to support growth in network system
installations. Satellite Services SG&A expense increased primarily due to the
growth of MTN and MCN.
Depreciation and amortization. Depreciation and amortization increased
$13.7 million, or 83%, for fiscal 1996 compared to fiscal 1995. Depreciation of
fixed assets increased by approximately $7.0 million as a result of the
shortening of estimated depreciable lives discussed in "-Accounting
Matters-Accounting Changes," and an increase in depreciable fixed assets due to
35
<PAGE>
the continued expansion of competitive exchange networks. The increase in
depreciation expense was offset slightly due to the decrease in depreciable
assets resulting from the sale of four of the Company's teleports. The Company
reports high levels of depreciation relative to revenue during the early years
of operation of a new network because the full cost of a network is depreciated
using the straight line method despite the low rate of capacity utilization in
the early stages of network operation.
Interest expense. Interest expense increased by $61.3 million, from $24.4
million for fiscal 1995 to $85.7 million for fiscal 1996, which included $66.5
million of non-cash interest. This increase was attributable to an increase in
long-term debt, primarily the 13 1/2% Senior Discount Notes (the "13 1/2%
Notes") issued in August 1995 and the 12 1/2% Senior Discount Notes (the "12
1/2% Notes") issued in April 1996, and an increase in capitalized lease
obligations to finance Telecom Services and Satellite Services equipment and the
expansion of the Company's competitive exchange networks. Also included in
interest expense is a charge of approximately $11.5 million for the payments
made to holders of the 13 1/2% Notes with respect to consents to amendments to
the indenture governing the 13 1/2% Notes in order to permit the 1996 Private
Offering (as defined herein) in April 1996.
Interest income. Interest income increased $15.1 million from fiscal 1995.
The increase is attributable to the increase in cash from the proceeds of the
issuance of 13 1/2% Notes in August 1995 and 12 1/2% Notes in April 1996.
Share of losses in joint venture. Share of losses in the Phoenix network
joint venture, in which the Company holds a 50% equity interest, increased $1.1
million, or 145%, from fiscal 1995 to $1.8 million for fiscal 1996 due to
increased losses resulting from the continued expansion and implementation of
switched services. The Company intends to sell its interest in the Phoenix
network and, accordingly, share of losses in joint venture will cease upon
completion of such sale.
Provision for impairment of goodwill, investment and notes receivable.
Provision for impairment of goodwill, investment and notes receivable increased
$2.9 million from fiscal 1995 to $9.9 million for fiscal 1996. The current year
amount includes valuation allowances for the amounts receivable for advances
made to the Phoenix network joint venture included in long-term notes receivable
($5.8 million), the investment in the Melbourne network ($2.7 million) and the
note receivable from NovaComm, Inc. ($1.3 million). The allowances were a result
of management's estimate of the realizable value of the assets as of September
30, 1996.
Other, net. Other, net increased $8.4 million for fiscal 1996 from $0.8
million for fiscal 1995 due primarily to the loss on the sale of four of the
Company's teleports and certain other satellite assets ($1.1 million), the
write-off of certain assets ($2.5 million), settlement costs of certain
litigation ($1.2 million) and the write-off of deferred financing costs upon
conversion or settlement of debt ($2.7 million).
Minority interest in share of losses, net of accretion and preferred
dividends on subsidiary preferred stock. Minority interest in share of losses,
net of accretion and preferred dividends on subsidiary preferred stock increased
$24.2 million, from $1.1 million for fiscal 1995 to approximately $25.3 million
for fiscal 1996. The increase is due to the accretion of the Unit Warrants (as
defined herein) ($14.4 million) and issue costs ($1.1 million) associated with
the
36
<PAGE>
issuance of the 12% redeemable Preferred Stock of Holdings (the "Redeemable
Preferred Stock"), accretion of issue costs associated with the 14 1/4%
Exchangeable Preferred Stock (the "Exchangeable Preferred Stock") ($0.2
million), accrual of the preferred stock dividend on the Redeemable Preferred
Stock ($2.1 million) and the Exchangeable Preferred Stock ($9.1 million) and the
excess redemption price over the stated value of the convertible Series B
Preferred Stock of Holdings-Canada ("Convertible Preferred Stock of
Holdings-Canada") ($1.0 million), partially offset by the minority interest in
losses of subsidiaries.
Income tax benefit. Income tax benefit for fiscal 1996 was $5.1 million.
The income tax benefit is due to an adjustment to the deferred tax liability as
a result of the change in estimated depreciable lives.
Cumulative effect of change in accounting for revenue from long-term
telecom services contracts. The increase in cumulative effect of change in
accounting for revenue from long-term telecom services contracts is due to the
change in accounting as described in "-Accounting Matters-Accounting Changes."
Fiscal 1995 Compared to Fiscal 1994
The following information reflects the results of operations for fiscal
1995 compared to the pro forma results of operations for fiscal 1994, assuming
the change in accounting for long-term telecom services contracts described in
"-Accounting Matters-Accounting Changes" had been applied retroactively.
Revenue. Revenue for fiscal 1995 increased $52.2 million, or 89%, from
fiscal 1994, reflecting continued growth in Telecom Services, Network Services
and Satellite Services operations. Telecom Services revenue increased 120% to
$31.6 million. The increase in Telecom Services revenue reflects an increase in
network usage, which was partially offset by a decline in average unit prices,
and the acquisition in April 1994 of networks in the Los Angeles and San
Francisco metropolitan areas, which were included for the full year in fiscal
1995. Network usage as reflected in VGEs increased 92% from 224,072 VGEs on
September 30, 1994 to 430,535 VGEs on September 30, 1995. On September 30, 1995,
the Company had 1,375 buildings connected to its networks compared to 776
buildings connected on September 30, 1994. Network Services revenue increased
63% to $58.8 million primarily from the acquisition of DataCom Integrated
Systems Corporation ("DISC"), which was included for the full year in fiscal
1995 and which subsequently merged into Network Services, as well as from new
network system installations. The increase in network system installations
resulted from additional projects from existing customers and an increase in
general demand for local area networks due to increased business networking
requirements. Satellite Services revenue increased 152% to $20.5 million for
fiscal 1995, which resulted principally from the acquisitions of Nova-Net, MTN
and teleports located in the metropolitan Atlanta and New York areas which
generated $3.9 million, $7.5 million and $4.4 million in revenue, respectively,
for fiscal 1995. Satellite Services revenue for fiscal 1995, as adjusted to
reflect the sale of four of the Company's teleports was $11.4 million.
Operating costs. Total operating costs for fiscal 1995 increased $40.7
million, or 107%, from fiscal 1994. Telecom Services operating costs increased
from $7.1 million, or 49% of Telecom Services revenue
37
<PAGE>
for fiscal 1994, to $21.8 million, or 69% of Telecom Services revenue for fiscal
1995. Telecom Services operating costs increased in absolute terms as well as a
percentage of revenue due to an expansion in off-net service offerings, for
which the Company leases network facilities from local telephone companies, and
the implementation of switched services, which generated negative margins due to
the costs associated with reselling ILEC network facilities. Network operating
costs, which were previously classified as SG&A, have been included in operating
costs beginning in fiscal 1996 in order to conform with current industry
practice. Such expenses amounted to $2.6 million and $2.1 million in fiscal 1994
and 1995, respectively. All prior year information has been restated to conform
with the 1996 presentation. Network Services operating costs increased 74% to
$45.9 million primarily due to an increased volume of Network Services business.
Network Services operating costs as a percentage of revenue increased from 73%
for fiscal 1994 to 78% for fiscal 1995 due to rapid expansion and the inclusion
in Network Services operating costs of project managers and operations personnel
directly associated with network systems projects in fiscal 1995, which were
treated as SG&A costs in 1994. Network Services operating costs include the cost
of equipment sold, direct hourly labor and other indirect project costs.
Satellite Services operating costs increased to $11.1 million, or 54% of
Satellite Services revenue, for fiscal 1995, from $4.7 million, or 58% of
Satellite Services revenue, for fiscal 1994. This increase in absolute terms was
attributable to an increased volume of Satellite Services business primarily due
to the acquisition of Nova-Net and MTN, and increased usage of leased satellite
transponders. The decrease in operating costs as a percentage of revenue is
attributable to the higher margins associated with MTN, which represented a
larger portion of Satellite Services revenue in fiscal 1995, as opposed to video
and data transmission services.
Selling, general and administrative expense. SG&A expense for fiscal 1995
increased $34.9 million, or 125%, compared to fiscal 1994. This increase was
principally due to the continued rapid expansion of the Company's networks,
including the acquisition of networks in the Los Angeles and San Francisco
metropolitan areas during the third quarter of fiscal 1994 and related
significant additions to the Company's management information systems, marketing
and sales staffs dedicated to the expansion of the networks and implementation
of the Company's switched services strategy. SG&A expense as a percentage of
total revenue was 57% for fiscal 1995 compared to 48% for fiscal 1994. There is
typically a period of higher administrative and marketing expense prior to the
generation of appreciable revenue from newly acquired or developed networks.
Network operating costs, which were previously classified as SG&A, have been
included in operating costs beginning in fiscal 1996 in order to conform with
industry practice. Such expenses amounted to $2.6 million and $2.1 million in
fiscal 1994 and 1995, respectively. All prior year information has been restated
to conform with the fiscal 1996 presentation. SG&A expense for Network Services
increased due to increased engineering, marketing and sales staff to support
increased growth in network systems installations. Satellite Services SG&A
increased due to the acquisitions of teleports in metropolitan Atlanta and New
York, the acquisition of the Company's VSAT operations during the third quarter
of fiscal 1994, and the acquisition of MTN during the second quarter of fiscal
1995.
Depreciation and amortization. Depreciation and amortization increased
$8.4 million, or 103%, for fiscal 1995 compared to fiscal 1994. This increase
resulted from an increased investment in depreciable fixed assets as a result of
the acquisition of new networks and the expansion of existing networks and
Satellite Services facilities.
38
<PAGE>
Interest expense. Interest expense increased $15.9 million, from $8.5
million for fiscal 1994 to $24.4 million for fiscal 1995, which included $15.1
million of non-cash interest. This increase was attributable to an increase in
capitalized lease obligations to finance Telecom Services and Satellite Services
equipment and an increase in long-term debt, primarily the 13 1/2% Notes issued
in the fourth quarter of fiscal 1995 to finance the expansion of the Company's
networks.
Interest income. Interest income increased $2.4 million, or approximately
133%, from fiscal 1994. The increase is attributable to the increase in cash
from the proceeds of the issuance of the 13 1/2% Notes in August 1995.
Provision for impairment of goodwill, investment and notes receivable. The
$7.0 million provision for impairment of goodwill, investment and notes
receivable for fiscal 1995 is a result of a $5.0 million write-down in the
goodwill associated with the acquisition of Nova-Net and a $2.0 million
allowance for an investment. The write-downs and allowance were a result of
management's estimate of the realizable value of the assets as of September 30,
1995.
Share of losses of joint venture. The Company has a 50% equity interest in
a joint venture operating the Phoenix network. Using the equity accounting
method, the Company's share of losses in the Phoenix network joint venture was
approximately $0.7 million for fiscal 1995. The Company began recording losses
from the joint venture in the second quarter of fiscal 1994. The loss from joint
venture recorded in fiscal 1994 includes $0.4 million for losses incurred prior
to fiscal 1994.
Quarterly Results
The following table presents selected unaudited quarterly operating
results for fiscal 1995 and 1996. The Company believes that all necessary
adjustments have been included in the amounts stated below to present fairly the
quarterly results when read in conjunction with the Company's Consolidated
Financial Statements and related notes included elsewhere in this Annual Report.
Results of operations for any particular quarter are not necessarily indicative
of results of operations for a full year or predictive of future periods. ICG's
development and expansion activities, including acquisitions, during the periods
shown below materially affect the comparability of this data from one period to
another.
39
<PAGE>
<TABLE>
<CAPTION>
Fiscal 1995 Fiscal 1996
---------------------------------- -----------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
------ ------- ------ ------- ------- ------- ------- -------
(in thousands, except Statistical Data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Revenue:
Telecom services $ 5,795 7,039 9,173 10,323 13,513 17,635 24,371 32,162
Network services 15,293 13,496 14,061 15,928 15,718 13,973 14,679 15,746
Satellites
services 3,546 5,387 5,825 5,744 6,168 4,336 5,596 5,197
------ ------ ------- ------ -------- ------ -------- --------
Total revenue 24,634 25,922 29,059 31,995 35,399 35,944 44,646 53,105
Operating loss (6,664) (10,625) (12,443)(17,082)(15,258)(15,823) (20,262) (21,909)
EBITDA (3,333) (6,849) (7,846)(12,162)(10,339) (8,381) (11,207) (12,957)
Net loss before
cumulative effect
of change
in accounting (9,533) (13,508)(15,916) (37,691) (31,189)(26,939)(64,721) (57,805)
Cumulative effect
of change in
accounting (1) - - - - (3,453) - - -
Net loss $(9,533) (13,508)(15,916) (37,691) (34,642)(26,939)(64,721) (57,805)
====== ======= ======= ======== ======= ======= ======= =======
Supplemental Pro
Forma Data (1):
Telecom services
revenue 5,525 6,669 8,835 10,588 13,513 17,635 24,371 32,162
Total revenue 24,364 25,552 28,721 32,260 35,399 35,944 44,646 53,105
EBITDA (3,603) (7,219) (8,184) (11,897) (10,339) (8,381)(11,207) (12,957)
Net loss (9,803) (13,878)(16,254) (37,426) (34,642)(26,939)(64,721) (57,805)
Statistical Data (2):
Telecom services:
Buildings
connected:
On-net 244 251 273 280 304 327 384 478
Off-net 628 777 978 1,095 1,235 1,401 1,493 1,589
------ ------- ------- ------ ------ -------- ------- ------
Total 872 1,028 1,251 1,375 1,539 1,728 1,877 2,067
buildings connected
Customer circuits
in service
(VGEs) 259,219 287,167 389,928 430,535 488,403 510,755 551,881 630,697
Switches
operational 2 6 12 13 13 13 13 14
Switched
minutes of use
(in millions) 10 32 97 144 235 362 475 563
Fiber route
miles (3)
Operational 424 466 579 627 637 780 886 2,143
Under
construction - - - - - - - 869
Fiber strand
miles (4)
Operational 19,049 21,811 25,264 27,150 28,779 36,310 45,098 70,067
Under
construction - - - - - - - 40,533
Wireless
miles(5) 606 606 606 568 545 582 483 491
Satellite services:
VSATs 682 694 687 626 633 658 659 835
C-Band
installations (6) - 17 25 28 33 36 48 48
L-Band
installations (7) - - - - - 3 53 109
Maritime
minutes of use
(in thousands)(8) - 251 207 210 435 407 505 515
-----------
<FN>
(1) Effective January 1, 1996, the Company changed its method of accounting
for long-term telecom services contracts to recognize revenue as services
are provided. See "-Accounting Matters-Accounting Changes." As required by
generally accepted accounting principles, the Company has reflected the
effects of the change in accounting as if such change had been adopted as
of October 1, 1995, and is presenting the pro forma effects on prior
periods assuming the change had been applied retroactively.
(2) Amounts presented are for three-month periods ended, or as of, the end of
the period presented.
40
<PAGE>
(3) Fiber route miles refers to the number of miles of fiber optic cable,
including leased fiber. As of September 30, 1996, the Company had 2,143
fiber route miles, of which 165 fiber route miles were leased. Fiber route
miles under construction represents fiber under construction and fiber
which is expected to be operational within six months.
(4) Fiber strand miles refers to the number of fiber route miles, including
leased fiber, along a telecommunications path multiplied by the number of
fiber strands along that path. As of September 30, 1996, the Company had
70,067 fiber strand miles, of which 2,465 fiber strand miles were leased.
Fiber strand miles under construction represents fiber under construction
and fiber which is expected to be operational within six months.
(5) Wireless miles represents the total distance of the digital microwave
paths between Company transmitters which are used in the Company's
networks.
(6) C-Band installations service cruise ships, navy vessels and offshore oil
platform installations.
(7) L-Band installations service smaller maritime installations, and both
mobile and fixed land-based units.
(8) Reflects minutes of use for C-Band installations on cruise ships and,
since the three months ended June 30, 1996, also includes minutes of use
for L-Band installations. Maritime minutes of use had previously included
C-Band installations on navy vessels. However, due to changes in
agreements with certain of the navy vessels, the revenue has been
negotiated at a fixed monthly rate and does not bear a direct relationship
to the minutes of use.
</FN>
</TABLE>
The Company's consolidated revenue has increased every quarter since the
first fiscal quarter of 1992, primarily due to the installation and acquisition
of new networks, the expansion of existing networks and increased services
provided over existing networks. From the third quarter of fiscal 1993 until
the sale of four teleports in the second quarter of 1996, Satellite Services
also contributed to the quarterly revenue growth.
Operating and net losses have generally increased immediately preceding
and during periods of relatively rapid network acquisition and expansion
activity. The increased quarterly losses from the first quarter of fiscal 1995
through the fourth quarter of fiscal 1996 resulted primarily from increases in
personnel and other SG&A expenses to support the acquisition and expansion of
Telecom Services networks, the implementation of the Company's switched
services strategy and development of local telephone services.
Individual operating units may experience variability in quarter to
quarter revenue due to (i) the timing and size of contract orders, (ii) the
timing of price changes and associated impact on volume and (iii) customer
usage patterns.
Net Operating Loss Carryforwards
As of September 30, 1996, the Company had net operating loss carryforwards
("NOLs") of approximately $135.5 million, which expire in varying amounts
through 2010. However, due to the provisions of Section 382, Section 1502 and
certain other provisions of the Internal Revenue
41
<PAGE>
Code (the "Code"), the utilization of a portion of the NOLs will be limited. In
addition, the Company is also subject to certain state income tax laws, which
may also limit the utilization of NOLs.
Section 382 of the Code provides annual restrictions on the use of NOLs, as
well as other tax attributes, following significant changes in ownership of a
corporation's stock, as defined in the Code. Investors are cautioned that future
events beyond the control of the Company could reduce or eliminate the Company's
ability to utilize the tax benefits of its NOLs. Future ownership changes under
Section 382 will require a new Section 382 computation which could further
restrict the use of the NOLs. In addition, the Section 382 limitation could be
reduced to zero if the Company fails to satisfy the continuity of business
enterprise requirement for the two-year period following an ownership change.
Liquidity and Capital Resources
The Company's total assets have increased from $202.0 million at September
30, 1994 to $939.4 million at September 30, 1996. The Company's growth has been
funded through a combination of equity, debt and lease financing including,
most recently, the 1996 Private Offering in April 1996. As of September 30,
1996, the Company had current assets of $506.3 million, including $457.9
million of cash and short-term investments, which exceeded current liabilities
of $60.2 million, providing working capital of $446.1 million. The Company
invests any 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.
Cash Used By Operating Activities
The Company's operating activities used $7.5 million, $43.0 million and
$47.4 million in fiscal 1994, 1995 and 1996, respectively. Cash used by
operations is primarily due to net losses, which are partially offset by
non-cash expenses, such as depreciation, deferred interest expense, preferred
dividends on subsidiary preferred stock and changes in working capital items.
The Company expects to continue to generate negative cash flow from
operating activities while it emphasizes development, construction and
expansion of its Telecom Services business. Consequently, it does not
anticipate that cash provided by operations will be sufficient to fund future
expansion of existing networks or the construction and acquisition of new
networks in the near term.
Cash Used By Investing Activities
Cash used by investing activities was $51.5 million, $71.3 million and
$131.2 million (net of $21.6 million received in connection with the sale of
certain satellite equipment, including four teleports) in fiscal 1994, 1995 and
1996, respectively. Cash used by investing activities includes cash expended
for the acquisition of property, equipment and other assets of $43.2 million,
$49.8 million and $120.1 million for fiscal 1994, 1995 and 1996, respectively.
The Company will continue to use cash in fiscal 1997 for the construction of
new networks and the expansion of existing networks. The Company acquired
assets under capital leases and through the issuance of debt or warrants of
$11.7 million, $38.7 million and $55.0 million in fiscal 1994, 1995 and 1996,
41
<PAGE>
respectively. The majority of assets acquired under capital leases and through
the issuance of debt during fiscal 1995 was for the purchase and installation
of 12 of the Company's 14 high capacity digital switches to provide switched
services in Birmingham, Charlotte, Cleveland, Columbus, Irvine, Los Angeles,
Louisville, Melbourne, Nashville, Oakland, Phoenix and Sacramento. Assets
purchased during the year ended September 30, 1996 under capital leases
primarily consisted of fiber optic networks included in the SCE agreement.
In January 1994, the Company committed to provide financing to its joint
venture in Phoenix, of which $6.9 million and $11.7 million had been provided
through September 30, 1995 and 1996.
The acquisition in January 1995 of a 64% interest in MTN, $4.4 million
notes receivable from MTN and consulting and non-compete agreements valued at
an aggregate of approximately $0.3 million, required cash payments of $9.0
million, the surrender and cancellation of a $0.6 million note and the issuance
of approximately $5.1 million in Holdings-Canada common shares. The Company
also agreed to fund $2.7 million in MTN working capital requirements. In
addition, the Company has agreed that if MTN has not completed an initial
public offering of its common stock by January 3, 1998, the Company will, at
the option of the minority shareholders, buy the minority shares of MTN at the
then fair market value.
The Company owns approximately 70% of the issued and outstanding common
stock of Zycom Corporation (Alberta, Canada), Zycom Corporation (Texas) and
Zycom Network Services, Inc. (collectively, "Zycom"). In March 1995, the
Company acquired a 56% equity interest in Zycom for approximately $3.2 million,
consisting of $0.6 million in cash, the conversion of a $2.0 million note
receivable to equity of Zycom and the assumption of $0.6 million in debt. In
July 1995, the Company purchased an additional 2% of Zycom common stock held by
Zycom's former president and chief executive officer for approximately $0.2
million. In March 1996, the Company acquired an additional approximate 12%
equity interest in Zycom by converting a $3.2 million receivable due from
Zycom.
In March 1996, the Company completed the sale of four teleports and certain
other satellite equipment for approximately $21.6 million in cash.
In November 1995, the Company entered into a 25-year agreement with CPS, a
municipally owned electric and gas utility, to license half of the capacity on a
300-mile fiber optic network (60 miles of which currently exist) in greater San
Antonio. Pursuant to this agreement the Company has provided a $12.0 million
irrevocable letter of credit to finance the Company's portion of the
construction costs. The letter of credit is secured by cash collateral of $13.3
million.
On January 3, 1996, the Company acquired the remaining 49% minority
interest in Fiber Optic Technologies, Inc., resulting in it becoming a wholly
owned subsidiary. Consideration for the acquisition was $2.0 million in cash and
66,236 Holdings-Canada common shares valued at $0.8 million, for total
consideration of $2.8 million.
42
<PAGE>
In February 1996, the Company invested $4.0 million and in April 1996
invested $6.0 million to acquire a 60% interest in, and become the general
partner of, ICG Telecom of San Diego.
In February 1996, the Company entered into a long-term agreement with
WorldCom under which the Company will pay approximately $8.8 million for the
right to use fiber along a 330-mile fiber optic network in Ohio. An aggregate of
approximately $2.7 million has been paid by the Company through September 30,
1996.
In March 1996, the Company and SCE jointly filed an agreement with the
California PUC under which the Company will license 1,258 miles of fiber optic
cable in Southern California. An aggregate of approximately $3.9 million has
been paid by the Company through September 30, 1996.
In March 1996, the Company entered into a long-term agreement with Southern
for the right to use 22 miles of existing fiber and 122 miles of additional
rights of way and facilities to reach the three major business centers in
Birmingham, for which the Company paid Southern $2.9 million.
In August 1996, the Company acquired the SS7 business of Pace Network
Systems, Inc. for $1.8 million.
Cash Provided By Financing Activities
Financing activities provided $49.4 million, $377.8 million and $360.2
million in fiscal 1994, 1995 and 1996, respectively. The funds to finance the
Company's business acquisitions, capital expenditures, working capital
requirements and operating losses were obtained through public and private
offerings of Holdings-Canada common shares, the 12 1/2% Notes and Exchangeable
Preferred Stock, units (the "Units") consisting of the 13 1/2% Notes and
warrants (the "Unit Warrants"), the Redeemable Preferred Stock, 8% Convertible
Subordinated Notes and 7% Convertible Subordinated Notes (together the
"Convertible Subordinated Notes") and Convertible Preferred Shares of
Holdings-Canada, capital lease financings and various working capital sources,
including credit facilities. Such funds were obtained from the following
sources:
I. On April 30, 1996, Holdings completed a private placement of the 12
1/2% Notes and 150,000 shares of the Exchangeable Preferred Stock (the
"1996 Private Offering") for aggregate net proceeds of approximately
$433.0 million. The net proceeds of the 1996 Private Offering, along
with the balance of the net proceeds from the private placement of the
Units in August 1995 (the "1995 Private Offering"), will improve the
Company's operating and financial flexibility over the near term. The
Company believes its liquidity improved because (a) the 12 1/2% Notes
do not require the payment of cash interest until 2001 and (b)
Holdings has the option to pay dividends on the Exchangeable Preferred
Stock in additional shares of Exchangeable Preferred Stock through May
1, 2001, and the Exchangeable Preferred Stock is not mandatorily
redeemable until 2007. Approximately $35.3 million of the proceeds
from the 1996 Private Offering were used to redeem the Redeemable
Preferred Stock issued in connection with the 1995 Private Offering
($30.0 million), pay accrued preferred dividends ($2.6 million) and to
repurchase 916,666 of
44
<PAGE>
redeemable warrants (the "Redeemable Warrants") ($2.7 million) issued
in connection with the Redeemable Preferred Stock. The Company
recognized a charge of approximately $12.3 million for the excess of
the redemption price of the Redeemable Preferred Stock over the
carrying amount at April 30, 1996, and recognized a charge of
approximately $11.5 million for the payments made to noteholders with
respect to consents to amendments to the 13 1/2% Notes indenture to
permit the 1996 Private Offering. During the fourth quarter of fiscal
1996, the 12 1/2% Notes and the Exchangeable Preferred Stock were
exchanged for 12 1/2% Notes and Exchangeable Preferred Stock
registered under the Securities Act of 1933 (the "Securities Act").
The 1996 Private Offering consisted of:
A. The 12 1/2% Notes: The 12 1/2% Notes are unsecured senior
obligations of Holdings (guaranteed by ICG and Holdings-Canada)
that mature on May 1, 2006. Interest will accrue at 12 1/2% per
annum beginning May 1, 2001, and is payable each May 1 and
November 1, commencing November 1, 2001.
B. Exchangeable Preferred Stock: Dividends on the Exchangeable
Preferred Stock are cumulative at a rate of 14 1/4% per annum and
are payable quarterly each February 1, May 1, August 1 and
November 1, commencing August 1, 1996. The Exchangeable Preferred
Stock has a liquidation preference of $1,000 per share, plus
accrued and unpaid dividends, and is mandatorily redeemable in
2007. The Exchangeable Preferred Stock is exchangeable, at the
option of Holdings, into 14 1/4% Senior Subordinated Exchange
Debentures of ICG due 2007, at any time after the exchange is
permitted under certain indenture restrictions.
II. In the fourth quarter of fiscal 1995, the Company completed the 1995
Private Offering, consisting of the 13 1/2% Notes and the Unit
Warrants, and sold the Redeemable Preferred Stock and the Redeemable
Warrants to improve its operating and financial flexibility over the
near term. The Company believes its liquidity improved because the 13
1/2% Notes do not require the payment of cash interest until 2001 and
do not require payment of principal until maturity in 2005. In January
1996, the 13 1/2% Notes were exchanged for 13 1/2% Notes registered
under the Securities Act. The 1995 Private Offering consisted of:
A. 1995 Private Offering: In August 1995, Holdings-Canada and
Holdings issued and sold the Units for net proceeds of $286.4
million. The 13 1/2% Notes are unsecured senior obligations of
Holdings (guaranteed by ICG and Holdings-Canada) that mature on
September 15, 2005. Interest is payable each March 15 and
September 15 commencing March 15, 2001.
B. Preferred Stock Placement: Simultaneously with the closing of the
Unit Offering, Holdings issued the Redeemable Preferred Stock to
Princes Gate Investors, L.P., an affiliate of Morgan Stanley &
Co. Incorporated ("Morgan Stanley"), and related investors
(collectively, "PGI"), together with 916,666 Redeemable Warrants
and warrants to purchase 1,833,334 Holdings-Canada common shares
(the "PGI Warrants") (the "Preferred Stock Placement"). The
Redeemable Preferred Stock accrued dividends quarterly at an
annual rate of 12% per annum. On April 30, 1996, the Redeemable
Preferred Stock and the Redeemable Warrants were redeemed with a
portion of the proceeds from the 1996 Private Offering. In June
1996, 1,333,334
45
<PAGE>
PGI warrants were exercised through a cashless exercise in which
909,190 Holdings-Canada common shares were issued.
III. As an interim financing arrangement, in July 1995, Holdings-Canada,
Holdings and certain subsidiaries of Holdings entered into a Note
Purchase Agreement with Morgan Stanley Group Inc. ("Morgan Stanley
Group") and PGI for up to $35.0 million of Senior Secured Notes and
issued warrants to Morgan Stanley to purchase 800,000 Holdings-Canada
common shares and warrants to PGI to purchase 600,000 Holdings-Canada
common shares. Proceeds from the 1995 Private Offering and the
Preferred Stock Placement were used to repay principal and interest
(approximately $6.0 million) on all Senior Secured Notes purchased by
Morgan Stanley Group. In connection with such repayment, warrants to
purchase 280,000 Holdings-Canada common shares issued to Morgan
Stanley Group were returned and canceled. In June 1996, 520,000
warrants were exercised through a cashless exercise in which 362,461
Holdings-Canada common shares were issued.
IV. Public Offering of Holdings-Canada Common Shares: In October 1994,
Holdings-Canada and an unaffiliated shareholder completed the sale of
6,900,000 Holdings-Canada common shares at a price of $14.00 per share
in a public offering, of which 5,716,853 Holdings-Canada common shares
were sold by Holdings-Canada for net proceeds of approximately $74.3
million. The Company used $6.9 million of such proceeds to repay a
note issued in April 1994 in connection with its purchase of the
telecom network assets of Mtel Digital Services, Inc. in Los Angeles.
V. Convertible Subordinated Long-Term Debt Financing: Holdings-Canada
issued and sold $18.0 million principal amount of 8% Convertible
Subordinated Notes in September 1993. As of September 30, 1996, all of
the 8% Convertible Subordinated Notes and approximately $3.2 million
of the interest on such notes had been converted to 1,358,968
Holdings-Canada common shares. An additional $47.8 million principal
amount of 7% Convertible Subordinated Notes were issued and sold in
October 1993. Interest on these notes was payable in cash or in kind,
at the option of Holdings-Canada. Holdings-Canada has paid the first
five interest installments of interest by issuing additional interest
notes (the "Interest Notes"). During fiscal 1996, the Company notified
the holders of the 7% Convertible Subordinated Notes of its intent to
redeem the 7% Convertible Subordinated Notes. As of September 30,
1996, $47.8 million of the 7% Convertible Subordinated Notes and
approximately $7.9 million of the interest on such notes and interest
on the Interest Notes had been converted to 3,123,116 Holdings-Canada
common shares. In addition, $88,967 in interest was paid to the
trustee to pay in full the interest associated with the remaining $0.5
million of Interest Notes which are in the process of being converted.
VI. Private Equity Financing: In February 1994, William W. Becker, a
director of ICG and Holdings-Canada, purchased 600,000 Holdings-Canada
common shares for $3.8 million pursuant to an outstanding warrant
obtained in February 1992. In May and June 1995, Holdings-Canada
raised $4.0 million in a private placement of 595,000 Holdings-Canada
common shares and $16.0 million ($15.2 million net proceeds) in
private placements of Convertible Preferred Shares. A portion of the
proceeds from the Unit Offering and the Preferred Stock Placement has
been used to repurchase $10.0 million of the Convertible Preferred
Shares and the remaining $6.0 million of the Convertible Preferred
Shares have
46
<PAGE>
been converted to 783,657 Holdings-Canada common shares.
VII. Lease Financing: During fiscal 1995, the Company used lease financing
of $24.5 million for the acquisition of 12 digital switches. A capital
lease agreement with AT&T Capital Corporation provided $18.2 million
for the acquisition of 9 digital switches from Lucent Technologies,
Inc. (formerly AT&T Network Systems) bearing interest at 7.6%. The
Company may purchase these switches in 2001 for 30% of the original
price. Additional capital lease obligations for three other switches
totaled $6.3 million, bearing interest at rates ranging from 11.8% to
13.0%.
In March 1996, the Company entered into a 25-year agreement with
SCE under which the Company will license 1,258 miles of fiber optic
cable in Southern California. The agreement also allows the Company to
utilize SCE's facilities to install up to 500 additional miles of
fiber optic cable. Under the terms of the agreement, the Company will
pay SCE an annual fee for ten years, certain fixed quarterly payments,
including a quarterly payment equal to a percentage of network
revenue, and certain other installation and fiber connection fees. The
aggregate fixed payments remaining under this 25-year agreement
(consisting of the annual fee and fixed quarterly payments) totaled
approximately $149.7 million at September 30, 1996.
VIII.Working Capital Sources: FOTI and its subsidiaries had a $4.0 million
working capital line of credit (the "FOTI Line of Credit") which bore
interest at the prime rate plus 5.0% per annum and was due on demand.
At September 30, 1995, the outstanding borrowings under the FOTI Line
of Credit totaled approximately $3.7 million. In December 1995, the
Company refinanced the FOTI Line of Credit as part of a short-term
facility with Norwest Bank Colorado, N.A. ("Norwest") (see IX. below).
Also, FOTI has a $4.5 million working capital line of credit, of which
$1.4 million was outstanding as of September 30, 1996, with a supplier
that provides goods and services that are used in network system
integration installations.
IX. Short-Term Credit Facility: In December 1995, Holdings obtained a
short-term credit facility with Norwest to refinance certain of the
Company's debt. The credit facility provided for $17.5 million in
short-term financing with interest at 2.5% above the Money Market
Account yield. The Company paid off this debt and accrued interest in
March 1996.
Capital Expenditures
The Company expects to continue to generate negative cash flow from
operating activities while it emphasizes development, construction and
expansion of its business and until the Company establishes a sufficient
revenue-generating customer base. The Company's capital expenditures were $54.9
million, $88.5 million and $175.1 million (including assets acquired under
capital leases and through the issuance of debt) in fiscal 1994, 1995 and 1996,
respectively. The Company anticipates that the expansion of existing networks,
construction of new networks and further development of the Company's products
and services will require capital expenditures of approximately $300.0 million
through the end of 1997 and continued significant capital expenditures
thereafter. To facilitate the expansion of its switched services strategy, the
Company
47
<PAGE>
entered into a seven-year, $1.0 billion equipment purchase agreement with
Lucent in September 1996 for a full range of switching systems, fiber, network
electronics, software and services. Actual capital expenditures will depend on
numerous factors beyond the Company's control or ability to predict. These
factors include the nature of future expansion and acquisition opportunities,
economic conditions, competition, regulatory developments and the availability
of capital.
General
The Company's operations have required and will continue to require
significant capital expenditures for development, construction, expansion and
acquisitions. Significant amounts of capital are required to be invested before
revenue is generated, which results in initial negative cash flow.
In view of the anticipated negative cash flow from operating activities,
the continuing development of the Company's products and services, the expansion
of existing networks and the construction, leasing and licensing of new
networks, the Company will require additional amounts of cash in the future from
outside sources. Management believes that the Company's cash on hand and amounts
expected to be available through vendor financing arrangements will provide
sufficient funds necessary for the Company to expand its Telecom Services
business as currently planned and to fund its operating deficits through 1997
and early 1998. Additional sources of cash may include public and private equity
and debt financings, sales of non-strategic assets, capital leases and other
financing arrangements. The Company may require additional amounts of equity
capital in the near term. In the past, the Company has been able to secure
sufficient amounts of financing to meet its capital expenditure needs. There can
be no assurance that additional financing will be available to the Company or,
if available, that it can be obtained on terms acceptable to the Company.
Accounting Matters
Accounting Changes
During 1996, the Company changed its method of accounting for long-term
telecom services contracts. Under the new method, the Company recognizes revenue
as services are provided and continues to charge direct selling expenses to
operations as incurred. The Company had previously recognized revenue in an
amount equal to the noncancelable portion of the contract, which is a minimum of
one year on a three-year or longer contract, at the inception of the contract
and upon activation of service to the customer, to the extent of direct
installation and selling expense incurred in obtaining customers during the
period in which such revenue was recognized. Revenue recognized in excess of
normal monthly billings during the year was limited to an amount which did not
exceed such installation and selling expense. The remaining revenue from the
contract had been recognized ratably over the remaining noncancelable portion of
the contract. The Company believes the new method is preferable because it
provides a better matching of revenue and related operating expenses and is more
consistent with accounting practices within the telecommunications industry.
48
<PAGE>
As required by generally accepted accounting principles, the Company has
reflected the effects of the change in accounting as if such change had been
adopted as of October 1, 1995. The Company's results for the year ended
September 30, 1996 include a charge of $3.5 million ($0.13 per share) relating
to the cumulative effect of this change in accounting as of October 1, 1995. The
effect of this change in accounting was not significant for fiscal 1996. If the
new revenue recognition method had been applied retroactively, Telecom Services
revenue would have decreased by $0.5 million and $0.7 million for fiscal 1994
and 1995, respectively. See the Company's Consolidated Financial Statements and
the related notes thereto contained elsewhere in this Annual Report.
In addition, the Company has shortened the estimated depreciable lives for
substantially all of its fixed assets. These estimates were changed to better
reflect the estimated periods during which these assets will remain in service
and result in useful lives which are more consistent with industry practice. The
changes in estimates of depreciable lives have been made on a prospective basis,
beginning January 1, 1996. This change in estimate increased depreciation
expense during fiscal year 1996 by approximately $7.0 million ($0.26 per share).
The change would have had an estimated annual effect of approximately $9.0
million had the change been in effect for the entire year. Deferred tax
liability has been adjusted for the effect of this change in estimated
depreciable lives, which resulted in an income tax benefit of $5.3 million.
New Accounting Standards
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
("SFAS 121"), was issued in March 1995 by the Financial Accounting Standards
Board. It requires that long-lived assets and certain identifiable intangibles
held and used by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. SFAS 121 is required to be adopted for fiscal years beginning after
December 15, 1995 and was adopted by the Company as of October 1, 1996. The
adoption of SFAS 121 did not have a significant effect on the consolidated
financial statements of the Company.
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"), was issued by the Financial Accounting
Standards Board in October 1995. SFAS 123 establishes financial accounting and
reporting standards for stock-based employee compensation plans as well as
transactions in which an entity issues its equity instruments to acquire goods
or services from non-employees. This statement defines a fair value based method
of accounting for employee stock options or similar equity instruments, and
encourages all entities to adopt this method of accounting for all employee
stock compensation plans. However, it also allows an entity to continue to
measure compensation cost for those plans using the intrinsic value based method
of accounting prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("Opinion 25"). Entities electing to
remain with the accounting method prescribed in Opinion 25 must make pro forma
disclosures of net income and, if presented, earnings per share, as if the fair
value based method of accounting defined by SFAS 123 had been applied. SFAS 123
is applicable to fiscal years beginning after December 15, 1995. The Company
currently accounts for its stock-based compensation using the accounting method
prescribed by Opinion 25 and does not currently expect to adopt the accounting
method prescribed by SFAS 123. However, the Company will include the pro forma
disclosures
49
<PAGE>
required by SFAS 123 for periods beginning subsequent to September 30, 1996.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company appear on page
F-1 of this Annual Report. The financial statement schedule required under
Regulation S-X is filed pursuant to Item 14 of this Annual Report, and appears
on page S-1 of this Annual Report.
Selected quarterly financial data required under this Item is included
under Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
50
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
ICG's corporate charter provides that Directors serve staggered three-year
terms. The Directors of ICG will hold office until the designated annual meeting
of stockholders and until their successors have been elected and qualified or
until their death, resignation or removal.
There are currently four committees of the Board of Directors of ICG:
Executive Committee, Audit Committee, Compensation Committee and Stock Option
Committee. The Executive Committee provides Board oversight for the operations
of the Company between Board meetings. The Audit Committee reviews the services
provided by the Company's independent auditors, consults with the independent
auditors on audits and proposed audits of the Company and reviews certain
filings with the Securities and Exchange Commission and the need for internal
auditing procedures and the adequacy of internal controls. The Compensation
Committee determines compensation for most executives and reviews transactions,
if any, with affiliates. The Stock Option Committee determines stock option
awards.
The officers of ICG are elected by the Board of Directors and hold office
until their successors are chosen and qualified or until their death,
resignation or removal.
Set forth below are the names, ages and positions of Directors and
executive officers of ICG.
Name Age Position
- ---------------------------------------------------------------------
William J. Laggett 66 Chairman of the Board of Directors
(3)(4)(5)(6)(7)
J. Shelby Bryan 50 President, Chief Executive Officer
(3)(4)(5)(6) and Director
Douglas I. Falk 46 Executive Vice President - Satellite
and President of ICG Satellite
Services, Inc.
James D. Grenfell 44 Executive Vice President, Chief
Financial Officer and Treasurer
Mark S. Helwege 45 Executive Vice President - Network
and President of FOTI
Marc E. Maassen 45 Executive Vice President - Strategic
Planning
William J. Maxwell 54 Executive Vice President - Telecom
and President of ICG Telecom Group,Inc.
William W. Becker 67 Director
(2)(5)(7)(8)
Harry R. Herbst 45 Director
(1)(4)(7)
Stan McLelland 51 Director
(2)(5)(7)
Jay E. Ricks (1)(5)(6) 63 Director
Leontis Teryazos 53 Director
(2)(7)
(1) Term expires at annual meeting of stockholders in 1997.
(2) Term expires at annual meeting of stockholders in 1998.
(3) Term expires at annual meeting of stockholders in 1999.
(4) Member of Audit Committee.
(5) Member of Compensation Committee.
51
<PAGE>
(6) Member of Executive Committee.
(7) Member of Stock Option Committee.
(8) Mr. Becker has submitted his resignation from the Board of Directors
of ICG effective January 15, 1997.
Executive Officers of ICG
William J. Laggett has been Chairman of the Board of Directors since June
1995 and a Director since January 1995. Mr. Laggett was the President of Centel
Cellular Company from 1988 until his retirement in 1993. From 1970 to 1988, Mr.
Laggett held a variety of management positions with Centel Corporation,
including Group Vice President-Products Group, President-Centel Services, and
Senior Vice President-Centel Corporation. Prior to joining Centel, Mr. Laggett
worked for New York Telephone Company.
J. Shelby Bryan was appointed President, Chief Executive Officer and a
Director in May 1995. He has 17 years of experience in the telecommunications
industry, primarily in the cellular business. He co-founded Millicom
International Cellular S.A. ("Millicom"), a publicly owned corporation providing
international cellular service, served as its President and Chief Executive
Officer from 1985 to 1994 and has served as a Director through the present.
Douglas I. Falk has been President of ICG Satellite Services, Inc. since
August 1996 and Executive Vice President - Satellite of ICG since October 1996.
Prior to joining the Company, Mr. Falk held several positions in the cruise line
industry, including President of Norwegian Cruise Line, Senior Vice President -
Marketing and Sales with Holland America Lines/Westours and Executive Vice
President of Royal Viking Line. Prior to his work in the cruise line industry,
Mr. Falk held executive positions with MTI Vacations, Brown and Williamson
Tobacco, Pepsico International, Glendenning Associates and The Procter and
Gamble Company.
James D. Grenfell joined the Company as Executive Vice President, Chief
Financial Officer and Treasurer in November 1995. Previously, Mr. Grenfell
served as Director of Financial Planning for BellSouth Corporation and Vice
President and Assistant Treasurer of BellSouth Capital Funding. A Chartered
Financial Analyst, Mr. Grenfell has been a telephone industry financial
executive for over 15 years. He was with BellSouth from 1985 through November
1996, serving previously as Finance Manager of Mergers and Acquisitions. He
handled BellSouth's financing strategies, including capital market financings as
well as public debt and banking relationships. Prior to BellSouth, Mr. Grenfell
spent two years as a Project Manager with Utility Financial Services and six
years with GTE of the South, a subsidiary of GTE Corporation, including four
years as Assistant Treasurer.
Mark S. Helwege has been Executive Vice President - Network of ICG and
President of Fiber Optic Technologies, Inc. since August 1996. Prior to joining
the Company, Mr. Helwege was Director of Service Marketing Support for
Technology Service Solutions. From 1986 to 1995, Mr. Helwege held various senior
management roles, including Vice President of Sales, and President and Chief
Executive Officer with Intelogic Trace. Mr. Helwege also has held various
management positions with the Computer Services Division of General Electric,
General Datacomm Industries and Western Union Telegraph Company.
Marc E. Maassen has been Executive Vice President - Strategic Planning
since August 1996. Prior to this position, Mr. Maassen was Executive Vice
President - Network of ICG beginning in October
52
<PAGE>
1995, and President of Fiber Optic Technologies, Inc. in April 1995. Mr. Maassen
joined the Company in 1991 as Vice President of Sales and Marketing. Prior to
joining the Company, Mr. Maassen held senior sales management positions at
TelWatch, Inc., an integrated network management software company. Mr. Maassen
previously worked for First Interstate as Director of Telecom and for AT&T
Information Systems as an Account Executive and US West as a Major Accounts
Manager.
William J. Maxwell has been Executive Vice President - Telecom of ICG since
October 1995, and President of ICG Telecom Group, Inc. since December 1992.
Prior to joining the Company, Mr. Maxwell was the senior marketing executive of
WilTel Inc., a full service telecommunications company. Mr. Maxwell, who has
over 25 years of general management and financial experience, also served as
President and Chief Executive Officer of MidAmerican Communications Corporation
in Omaha, Nebraska from November 1987 to June 1991.
Directors of ICG
William W. Becker has been a Director since 1986 and was Chairman and Chief
Executive Officer from 1986 to 1995 and President from 1987 to 1995. Mr. Becker
founded the Becker Group of Companies (the "Becker Group"), which controls and
manages a number of companies in industries varying from communications to oil
and gas.
Harry R. Herbst has been a Director since October 1995 and has been Vice
President and Treasurer of Gulf Canada Resources Ltd. since January 1995.
Previously, Mr. Herbst was Vice President of Taxation for Torch Energy Advisors
Inc. from 1991 to 1994, and tax manager for Apache Corp. from 1987 to 1990. Mr.
Herbst is a certified public accountant, formerly with Coopers & Lybrand.
Stan McLelland has been a Director since October 1996 and is Executive Vice
President and General Counsel of Valero Energy Corporation in San Antonio,
Texas. McLelland also served on the Board of Directors of Valero Natural Gas
Partners, L.P., a publicly owned limited partnership traded on the New York
Stock Exchange, from 1987 to 1994. Mr. McLelland was previously associated with
the law firm of Baker & Botts in Houston and in the private practice of law in
Austin specializing in oil and gas litigation.
Jay E. Ricks has been a Director since March 1993. Mr. Ricks is Chairman of
Douglas Communications Corp. ("DCC"), a privately held cable television company.
Mr. Ricks is a director of Data Transmission Network Corporation, a
publicly-owned data distribution company and a director of the licensee of
KBTX-TV in Bryan, Texas, and KWTX-TV in Waco, Texas. Mr. Ricks is also a
director and shareholder of SkyConnect, Inc. Mr. Ricks specialized in the
communications law practice with the Washington, D.C. law firm of Hogan &
Hartson from 1962 until 1990.
Leontis Teryazos has been a Director since June 1995. Mr. Teryazos, a
Canadian resident, has headed Letmic Management Inc., a financial consulting
firm, since 1993, and Letmic Management Reg'd., a real estate development and
management company, since 1985.
53
<PAGE>
Directors and Executive Officers of Holdings-Canada and Holdings
The Directors and executive officers of each of Holdings-Canada and
Holdings are set forth below. Biographical information regarding each individual
is set forth above (except as to Mr. Gregory C.K. Smith, whose biographical
information appears below).
Holdings-Canada
The Directors of Holdings-Canada are:
William J. Laggett (Chairman)
William W. Becker
J. Shelby Bryan
Harry R. Herbst
Jay E. Ricks
Gregory C.K. Smith
Leontis Teryazos
The executive officers of Holdings-Canada are:
J.Shelby Bryan - President and Chief Executive Officer
Douglas I.Falk - Executive Vice President - Satellite
James D. Grenfell - Executive Vice President, CFO and Treasurer
Mark S. Helwege - Executive Vice President - Network
Marc E. Maassen - Executive Vice President -Strategic Planning
William J. Maxwell - Executive Vice President - Telecom
- --------------
Gregory C.K. Smith, 38, has been a Director of Holdings-Canada since April
1994. Mr. Smith, a lawyer, is a partner of Tupper Jonsson & Yeadon in Vancouver,
British Columbia. Mr. Smith was an associate employed by Tupper Jonsson & Yeadon
from June 1986 until he joined the partnership in April 1991.
53
<PAGE>
Holdings
The Directors of Holdings are:
J. Shelby Bryan
James D. Grenfell
Mark S. Helwege
William J. Maxwell
The executive officers of Holdings are:
J. Shelby Bryan - President and Chief Executive Officer
Douglas I. Falk - Executive Vice President - Satellite
James D.Grenfell - Executive Vice President, CFO and Treasurer
Mark S.Helwege - Executive Vice President - Network
Marc E. Maassen - Executive Vice President - Strategic Planning
William J. Maxwell - Executive Vice President - Telecom
Compliance With Section 16(a) of the Exchange Act
The following table lists the Directors, officers, beneficial owners of
more than 10% of the outstanding Common Stock (each a "Reporting Person") that
failed to file on a timely basis reports required by Section 16(a) of the
Exchange Act during the most recent fiscal year or prior fiscal years, the
number of late reports, the number of transactions that were not reported on a
timely basis, and any known failure to file a required Form by each Reporting
Person.
Known
Reporting Person Late Transactions Failures to
Reports Untimely File
Reported Required
Forms
-------------------------------------------------------------
William W. Becker 2 (Form 4) 14 3
Harry R. Herbst 1 (Form 4) 1 None
William J. Laggett 1 (Form 4) 1 None
Marc E. Maassen 1 (Form 4) 1 None
Jay E. Ricks 2 (Form 4) 2 None
Robert Swenarchuk (1) 1 (Form 4) 1 None
(1) Former Director.
54
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Director Compensation
ICG compensates its non-employee directors $250 for telephonic meetings
and $2,500 for each directors' meeting or committee meeting attended, plus
reimbursement of expenses. In addition, the Chairman of the Board receives an
annual fee of $80,000 payable in quarterly installments. In fiscal 1996, all
non-employee directors of ICG were granted options to purchase 20,000 shares of
Common Stock under ICG's 1996 Stock Option Plan, and during the stub period from
October 1, 1996 through December 31, 1996, all non-employee directors of ICG
were granted options to purchase 5,000 shares of Common Stock under such Plan.
At the commencement of fiscal 1997, all non-employee directors of ICG will be
granted options to purchase 20,000 shares of Common Stock under ICG's 1996 Stock
Option Plan, which will vest as to 5,000 shares at the end of each fiscal
quarter. All non-employee directors are given the option to receive shares of
ICG Common Stock in lieu of their cash fees.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee presently consists of J. Shelby Bryan, the
President and Chief Executive Officer, William J. Laggett, the Chairman of the
Board of Directors and William W. Becker and Jay E. Ricks, Directors.
Executive Compensation
The following table provides certain summary information concerning
compensation paid or accrued by the Company and its subsidiaries, to or on
behalf of J. Shelby Bryan, the Company's President and Chief Executive Officer,
and the four other most highly compensated executive officers for the fiscal
years ended September 30, 1996, 1995 and 1994, and one additional officer for
whom disclosure would have been required but for the fact that the individual
was not serving as executive officer at September 30, 1996 (the "Named
Officers"). The Company has not maintained any long-term incentive plans and the
Company has not granted stock appreciation rights.
55
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-term
Compensation
- ------------------------------------------------------------------------------
Name and Other Securities
Principal Fiscal Salary ($) Bonus ($) Annual Underlying
Position Year Compensation Options
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
J. Shelby Bryan 1996 221,196(1) - 35,491(2) 450,000
President and 1995 30,728 - - 1,550,000
Chief Executive 1994 - - - -
Officer
John D. Field 1996 295,000 50,000 27,857(3) 75,000
Former 1995 66,667 110,000 3,000(4) -
Executive Vice 1994 - - - -
President and
Secretary
James D. Grenfell 1996 148,526 46,665 138,435(5) 50,000
Executive Vice 1995 - - - -
President, CFO 1994 - - - -
and Treasurer
Marc E. Maassen 1996 147,092 22,500 25,341(7) 40,000
Executive Vice 1995 131,933 60,000 9,291(4) 15,000
President- 1994 105,100 23,375 6,290(4) -
Strategic
Planning (6)
William J. Maxwell 1996 222,917 117,160 18,632(8) 75,000
Executive Vice 1995 205,475 75,000 8,288(4) 75,000
President-Telecom 1994 179,850 100,000 9,250(4) -
and President ICG
Telecom Group, Inc.
John R. Evans(9) 1996 33,205 - 361,311(10) -
Former Vice 1995 169,850 43,750 12,008(4) 40,000
President,Treasurer 1994 121,600 70,000 9,240(4) -
and CFO
<FN>
(1) Consists of $221,196 earned pursuant to the compensation formula in Mr.
Bryan's employment agreement.
(2) Consists of $25,991 for car allowance and ICG's contributions to 401(k)
Defined Contribution Plan in the amount of $9,500.
(3) Consists of $15,586 for car allowance and ICG's contributions to 401(k)
Defined Contribution Plan in the amount of $12,271.
(4) Consists of ICG's contributions to 401(k) Defined Contribution Plan.
(5) Consists of relocation expenses in the amount of $117,295, car allowance of
$11,640 and ICG's contributions to 401(k) Defined Contribution Plan in the
amount of $9,500.
(6) Consists of compensation earned as the former Executive Vice
President-Network, and President of FOTI and former Vice President of
Mergers and Acquisitions of ICG.
(7) Consists of $16,428 for car allowance and ICG's contributions to 401(k)
Defined Contribution Plan in the amount of $8,913.
(8) Consists of $9,200 for car allowance and ICG's contributions to 401(k)
Defined Contribution Plan in the amount of $9,432.
(9) Mr. Evans is the Former Vice President, Treasurer and Chief Financial
Officer of Holdings-Canada, whose employment terminated in November 1995.
(10) Consists of $600 for car allowance, $8,401 accrued vacation, $350,000
severance payment and ICG's contributions to 401(k) Defined Contribution
Plan in the amount of $2,310.
</FN>
</TABLE>
56
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year
End Option Values
The following table provides information on options exercised during
fiscal 1996 by the Named Officers and the value of such officers' unexercised
options at the end of the last fiscal year:
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Fiscal Options at Fiscal
Year End Year End(1)(2)
Number of ----------------------- --------------------
Shares
Acquired Value Exercis- Unexercis- Exercis- Unexercis-
Name on Exercise Realized able able able able
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
J.Shelby
Bryan - $ - 1,220,000 780,000 $15,936,250 $9,260,625
John D.
Field - - 0 28,750 0 316,250
James D.
Grenfell - - 0 50,000 0 550,000
Marc E.
Maassen 11,000 246,174 21,000 54,000 176,190 557,460
William J.
Maxwell - - 197,000 153,000 2,433,790 1,483,260
John R.
Evans 64,000 200,173 0 0 0 0
<FN>
(1) Based on the closing price of $21.00 per share of Common Stock on September
30, 1996, on the American Stock Exchange.
(2) Options granted prior to fiscal 1994 contained exercise prices stated in
Canadian dollars; value listed based on an exchange rate of 1.3699.
</FN>
</TABLE>
Option/SAR Grants in Last Fiscal Year
The following table provides information on option grants during fiscal 1996 to
the Named Officers:
<TABLE>
<CAPTION>
Potential Realized
Value at Assumed Annual
Rates of Stock Price
Appreciation for
Indvidual Grants Option Term
--------------------- -----------------------
Number of Percent of
Securities Total Options
Underlying Granted to Exercise
Options Employee in Price Expiration
Name Granted Fiscal Year ($/sh) Date 5%($) 10%($)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
J. Shelby
Bryan 450,000 33.9 $ 10.00 11/13/2005 $2,830,500 $7,173,000
John D.
Field 75,000(1) 5.7 10.00 11/13/2005 471,750 1,195,500
James D.
Grenfell 50,000 3.8 10.00 11/13/2005 314,500 797,000
Marc E.
Maassen 40,000 3.0 10.00 11/13/2005 251,600 637,600
William J.
Maxwell 75,000 5.7 10.00 11/13/2005 471,750 1,195,500
John R.
Evans 0 - - - - -
<FN>
(1) 46,250 options have been canceled as a result of Mr. Field's resignation on
November 5, 1996.
</FN>
</TABLE>
Executive Employment Contracts
The Company has employment agreements with Messrs. J. Shelby Bryan, Douglas
I. Falk, James D. Grenfell, Mark S. Helwege and William J. Maxwell, and an
agreement with Mr. John D. Field, former Executive Vice President of the
Company.
57
<PAGE>
The Company's employment agreement with Mr. Bryan provides for an initial
term of two years, which commenced May 30, 1995 and which may be continued for
one year at the option of Mr. Bryan. As compensation, the Company will pay Mr.
Bryan a salary equal to the sum of one percent of the monthly increase in
Company revenue and three percent of the monthly increase in EBITDA, offset in
any month where one component is a negative amount to not less than zero. If Mr.
Bryan's salary exceeds $1,500,000 in any fiscal year, the Company may elect to
pay such excess in unregistered Common Stock. Mr. Bryan is entitled to benefits
as are generally provided to executive officers of ICG, including options under
stock option plans, a leased automobile, private club membership fees and
reimbursement of reasonable out-of-pocket expenses incurred on behalf of the
Company. The employment agreement may be terminated by the Company with or
without cause or after a disability continuing for a six-month consecutive
period, or by Mr. Bryan for cause, including breach of the agreement or
reduction in status or responsibilities, or change of control. If the employment
agreement is terminated for any reason other than for cause, the Company is
obligated to pay Mr. Bryan a lump sum of $2.5 million and to continue benefits
for a period equal to the greater of the remainder of the employment term or
eighteen months. After termination of the employment agreement, Mr. Bryan is
subject to a confidentiality covenant and a one-year non-competition commitment.
The Company's employment agreement with Mr. Falk, dated August 14, 1996,
has an initial one-year term commencing August 26, 1996 and continues from month
to month thereafter until either party provides 30 days notice of termination.
The agreement provides for an annual base salary and an incentive bonus
determined by the Board of Directors. Mr. Falk also receives stock options under
the stock option plans. If the Company terminates the employment agreement
without cause or if the Company or Mr. Falk terminates the employment agreement
upon the occurrence of a major transaction involving the Company, then Mr. Falk
will receive his salary and insurance benefits for a period of 12 months
following the date of termination. Mr. Falk is subject to a confidentiality
covenant and to a one-year non-competition commitment following the termination
of his employment.
58
<PAGE>
The Company's employment agreement with Mr. Grenfell provides for an
initial two-year term which commenced November 1, 1995. Upon completion of the
first 12 months of the initial term, the agreement automatically renews from
month-to-month such that 12 months remain in the term. The agreement may be
terminated upon 30 days written notice from either party or by the Company if
Mr. Grenfell is unable to perform his duties for 140 days in any 180-day period
due to illness or incapacity. Mr. Grenfell is entitled to such other benefits as
are generally provided to executive officers of the Company, including options
under the Company's stock option plans, use of a company car and reimbursement
or direct payment of reasonable out-of-pocket expenses incurred on behalf of the
Company. The agreement provides for an annual base salary and an incentive bonus
determined by the Board of Directors. If the employment agreement is terminated
without cause by the Company or by either party upon the occurrence of a change
of control involving the Company, Mr. Grenfell will receive a termination fee
equal to his current monthly salary times the number of months remaining in the
term. Mr. Grenfell is also subject to a ten-year confidentiality covenant and a
one-year non-competition commitment.
The Company's employment agreement with Mr. Helwege, dated July 8, 1996,
has an initial one-year term commencing August 1, 1996 and renews automatically
thereafter until either party provides 30 days notice of termination. The
agreement provides for an annual base salary and an
59
<PAGE>
incentive bonus determined by the Board of Directors. Mr. Helwege also receives
stock options under the stock option plans. The Company may terminate the
employment agreement for any reason upon 30 days notice. If the Company
terminates the employment agreement without cause or if the Company or Mr.
Helwege terminates the employment agreement upon the occurrence of a major
transaction involving the Company, then Mr. Helwege will receive his salary and
insurance benefits for a period of 12 months following the date of termination.
Mr. Helwege is subject to a confidentiality covenant and to a one-year
non-competition commitment following the termination of his employment.
The Company's employment agreement with Mr. Maxwell, dated December 1,
1992, has an initial five-year term and thereafter one-year terms until either
party provides 30 days notice of termination prior to the end of a term. The
agreement provides for an annual base salary and an incentive bonus determined
by the Board of Directors. Mr. Maxwell also receives stock options under the
stock option plans. If the Company terminates the employment agreement without
cause or if the Company or Mr. Maxwell terminates the employment agreement upon
the occurrence of a major transaction involving the Company, then Mr. Maxwell
shall receive his salary for the lesser of one year or until the expiration of
the current employment term. Mr. Maxwell is subject to a confidentiality
covenant and to a one-year non-competition commitment following the termination
of his employment.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of December 10, 1996, the number of
shares of Common Stock of ICG owned by (i) each Named Officer and Director, (ii)
all executive officers and Directors as a group, and (iii) each person who owned
of record, or was known to own beneficially, more than 5% of the outstanding
shares of Common Stock. The persons named in the table below have sole voting
and investment power with respect to all of the shares of Common Stock owned by
them, unless otherwise noted.
60
<PAGE>
<TABLE>
<CAPTION>
Amount/Nature
Name and Address of Beneficial Owner of Beneficial Ownership Percent(1)
- ----------------------------------------- ----------------------- ----------
<S> <C> <C>
William W. Becker 1,837,198(2) 5.9%
Director
West Bay Road
Georgetown, Cayman Island
Montgomery Asset Management, L.P. 1,790,000 5.8%
600 Montgomery Street
San Francisco, CA 94111
LGT Asset Management, Inc. 1,687,700 5.5%
80 California Street
San Francisco, CA 94111
Morgan Stanley Group, Inc. 1,621,651(3) 5.2%
1585 Broadway
New York, NY 10036
Peter Wightman 1,592,200(4) 5.1%
19 Vectis Court
Southhampton, U.K. S01 7LY
William J. Laggett 48,074(5) *
Chairman of the Board of Directors of
ICG
J. Shelby Bryan 1,664,773(6) 5.1%
President, Chief Executive Officer and
Director of ICG, Holdings-Canada and
Holdings
Douglas I. Falk 0 *
Executive Vice President-Satellite of
ICG, President of ICG Satellite
Services and Director of Holdings
James D. Grenfell 12,500(5) *
Executive Vice President, Chief
Financial Officer and
Treasurer of ICG, Holdings-Canada and
Holdings
Mark S. Helwege 0 *
Executive Vice President-Network of
ICG, President of FOTI and Director of
Holdings
Marc E. Maassen 32,715(7) *
Executive Vice President-Strategic
Planning of ICG
William J. Maxwell 238,754(8) *
Executive Vice President-Telecom of ICG
and Holdings-Canada, President of ICG
Telecom Group, Inc. and Director of
Holdings
61
<PAGE>
Harry R. Herbst 25,369(5) *
Director of ICG
Stan McLelland 5,000(5) *
Director of ICG
Jay E. Ricks 82,180(9) *
Director of ICG
Leontis Teryazos 45,000(5) *
Director of ICG
John R. Evans 0 *
Former Vice President, Treasurer and
Chief Financial
Officer of Holdings-Canada
John D. Field 20,281(10) *
Former Executive Vice President and
Secretary of ICG, Holdings-Canada and
Holdings
All executive officers and Directors as 3,992,094(11) 11.9%
a group (12 persons)
- ------------------
*Less than one percent of ICG's outstanding shares of Common Stock.
<FN>
(1) Based on 30,953,330 issued and outstanding shares of Common Stock on
December 10, 1996, plus shares of Common Stock which may be acquired by
the person or group indicated pursuant to any options and warrants
exercisable within 60 days.
(2) Includes 1,404,078 shares of Common Stock and options to purchase 433,120
shares of Common Stock held directly by William W. Becker.
(3) Includes 319,706 shares of Common Stock held by Morgan Stanley Group,
Inc., 801,945 shares of Common Stock held by PGI, an affiliate of Morgan
Stanley Group, Inc., and 500,000 shares of Common Stock which may be
acquired by PGI pursuant to the exercise of outstanding PGI Warrants.
(4) Includes 1,300,000 shares of Common Stock held by Martin Holdings Ltd. of
which Peter Wightman is chairman and sole shareholder, and 292,200 shares
of Common Stock held by Hartford Holdings, Inc. Ltd., of which Mr.
Wightman is also chairman and sole shareholder.
(5) Represents shares of Common Stock which may be acquired pursuant to the
exercise of outstanding stock options.
(6) Includes 1,662,500 shares of Common Stock which may be acquired pursuant
to the exercise of outstanding options, 2,000 shares of Common Stock held
in Mr. Bryan's spouse's name for which Mr. Bryan disclaims beneficial
ownership, and 273 shares of Common Stock held by a 401(k) Plan pursuant
to contribution of shares to the Plan by the Company.
(7) Includes 1,715 shares of Common Stock held by a 401(k) Plan pursuant to
contribution of shares to the Plan by the Company and 31,000 shares of
Common Stock which may be acquired pursuant to the exercise of
62
<PAGE>
outstanding stock options.
(8) Includes 17,000 shares of Common Stock held jointly with Mr. Maxwell's
spouse, 3,800 shares of Common Stock held in Mr. Maxwell's spouse's name
for which Mr. Maxwell disclaims beneficial ownership, 2,204 shares of
Common Stock held by a 401(k) Plan pursuant to a contribution of shares of
Common Stock to the Plan by the Company, and 215,750 shares of Common
Stock which may be acquired pursuant to the exercise of outstanding stock
options.
(9) Includes 2,000 shares of Common Stock held directly by Mr. Ricks and
80,180 shares of Common Stock which may be acquired pursuant to the
exercise of outstanding stock options.
(10) Includes 1,000 shares of Common Stock held jointly with Mr. Field's
spouse, 531 shares of Common Stock held by a 401(k) Plan pursuant to a
contribution of shares to the Plan by the Company and 18,750 shares of
Common Stock which may be acquired pursuant to the exercise of outstanding
stock options.
(11) As a group, executive officers and Directors beneficially own 2,558,493
shares of Common Stock through stock options which are presently
exercisable or which will become exercisable within 60 days.
</FN>
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
To facilitate the acquisition of certain competitive access networks and
satellite services businesses which held common carrier radio licenses subject
to foreign ownership restrictions, the common carrier licenses used by the
Company's teleports and the wireless competitive access networks are controlled
by TTH, a corporation owned 33% each by U.S. Directors, William Laggett and Jay
Ricks, and a former Director. TTH's subsidiaries have given 15-year promissory
notes to ICG to acquire FCC licenses. As a result of the Plan of Arrangement,
the Company is reviewing the possibility of exercising its option to have the
common carrier licenses transferred back to the Company. In the event that the
Company meets the requirements imposed by the FCC, or receives appropriate
waivers, upon completion of the transfer of the licenses the promissory notes
will be canceled and TTH and its subsidiaries will be dissolved. In fiscal 1996,
the Company paid or accrued $2.4 million to TTH's subsidiaries for common
carrier services, and ICG received from TTH's subsidiaries $1.9 million as
payments on the promissory notes, management services, equipment leases and
technical support. In addition, $1.1 million of the note balances were canceled
due to the sale of the licenses in conjunction with the sale of four of the
Company's teleports. See "Business-Regulation."
Holdings-Canada and International Communications Consulting, Inc. ("ICC")
have entered into a three-year consulting agreement whereby ICC will provide
various consulting services to the Company through December 1999 in exchange for
approximately $4.2 million in consulting fees to be paid during the term of the
agreement. William W. Becker is President and Chief Executive Officer of ICC.
In order to facilitate the relocation of William J. Maxwell, the Company
advanced $200,000 to Mr. Maxwell in April 1994 pursuant to a promissory note
payable on demand, which bears interest at a rate of 7% per annum.
J. Shelby Bryan also serves as a director of a subsidiary of Millicom,
which was a customer of the Company's Satellite Services business from October
1995 through November 1995.
63
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(A) (1) Financial Statements. The following financial statements are included
in Item 8 of Part II:
Independent Auditors' Report F-2
Consolidated Balance Sheets, September 30, 1995 and 1996 F-3
Consolidated Statements of Operations,
Years Ended September 30, 1994, 1995 and 1996 F-5
Consolidated Statements of Stockholders' Equity
(Deficit), Years Ended September 30, 1994, 1995 and 1996 F-6
Consolidated Statements of Cash Flows, Years
Ended September 30, 1994, 1995 and 1996 F-7
Notes to Consolidated Financial Statements F-10
(2) Financial Statement Schedule. The following Financial Statement
Schedule is submitted herewith:
Independent Auditors' Report S-2
Schedule II: Valuation and Qualifying Accounts S-3
(3) List of Exhibits.
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or
Succession.
2.1: Plan of Arrangement under Section 192 of the Canada Business
Corporations Act. [Incorporated by reference to Exhibit 2.1 to
Registration Statement on Form S-4 of ICG Communications, Inc.
(Commission File No. 333-4226)].
(3) Corporate Organization
3.1: Memorandum and Articles of IntelCom Group Inc., as amended,
filed with the Registrar of Companies, Province of British
Columbia, Canada [Incorporated by reference to IntelCom
Group Inc.'s Annual Report on Form 20-F for the year ended
September 30, 1992].
3.2: Altered Memorandum and Articles of IntelCom Group Inc., as
amended by Special Resolution passed October 7, 1994, filed
with the Registrar of Companies, Province of British
Columbia, Canada [Incorporated by reference to IntelCom
Group Inc.'s Annual Report on Form 10-K for the year ended
September 30, 1994].
3.3: Certificate of Incorporation, as amended, from the Registrar
of Companies, Province of British Columbia, Canada
[Incorporated by reference to IntelCom Group Inc.'s Annual
Report
64
<PAGE>
on Form 20-F for the year ended September 30, 1992].
3.4: Certificate of Change of Name (under the B.C. Act) from the
Registrar of Companies, Province of British Columbia, Canada
[Incorporated by reference to IntelCom Group Inc.'s Annual
Report on Form 20-F for the year ended September 30, 1993,
as filed on September 30, 1994].
3.5: Certificate of Continuance from Industry Canada, dated
October 30, 1995. [Incorporated by reference to Exhibit 3.5
to IntelCom Group Inc.'s Annual Report on Form 10-K for the
year ended September 30, 1995].
3.6: Certificate of Incorporation of ICG Communications, Inc.
dated April 11, 1996. [Incorporated by reference to Exhibit
3.1 to Registration Statement on Form S-4 of ICG
Communications, Inc., File No. 333-4226].
3.7: By-laws of ICG Communications, Inc. [Incorporated by
reference to Exhibit 3.2 to Registration Statement on Form
S-4 of ICG Communications, Inc., File No. 333-4226].
(4) Instruments Defining the Rights of Security Holders, Including
Indentures.
4.1: Memorandum of Articles for the Registrant, Certificate of
Incorporation and copies of all Amendments thereto, filed
with the Registrar of Companies for the Province of British
Columbia, Canada [Incorporated by reference to Exhibit (i)
to IntelCom Group Inc.'s Form 20-F for the fiscal year
ending September 30, 1991].
4.2: Note Purchase Agreement dated September 16, 1993
[Incorporated by reference to IntelCom Group Inc.'s Annual
Report on Form 20-F for the year ended September 30, 1993,
as filed on September 30, 1994].
4.3: Note Purchase Agreement dated October 27, 1993 [Incorporated
by reference to IntelCom Group Inc.'s Annual Report on Form
20-F for the year ended September 30, 1993, as filed on
September 30, 1994].
4.4: Form of Indenture between IntelCom Group Inc. and Bankers
Trust Company for 7% Convertible Subordinated Redeemable
Notes due 1998 [Incorporated by reference to Exhibit 4.3 to
Registration Statement on Form S-1 of IntelCom Group Inc.,
File No. 33-75636].
4.5: Form of Indenture between IntelCom Group Inc. and Bankers
Trust Company for 7% Simple Interest Convertible
Subordinated Redeemable Notes due 1998 [Incorporated by
reference to Exhibit 4.4 to Registration Statement on Form
S-1 of IntelCom Group Inc., File No. 33-75636].
4.6: Note Purchase Agreement, dated as of July 14, 1995, among
the
65
<PAGE>
Registrant, IntelCom Group (U.S.A.), Inc., Morgan Stanley
Group Inc., Princes Gate Investors, L.P., Acorn Partnership
I, L.P., PGI Investments Limited, PGI Investments Limited,
PGI Sweden AB, and Gregor von Opel and Morgan Stanley Group,
Inc., as Agent for the Purchasers [Incorporated by reference
to Exhibit 4.1 to Form 8-K of IntelCom Group Inc., dated
July 18, 1995].
4.7: Warrant Agreement, dated as of July 14, 1995, among the
Registrant, the Committed Purchasers, and IntelCom Group
(U.S.A.), Inc., as Warrant Agent [Incorporated by reference
to Exhibit 4.2 to Form 8-K of IntelCom Group Inc., dated
July 18, 1995].
4.8: First Amended and Restated Articles of Incorporation of ICG
Holdings, Inc. [Incorporated by reference to Exhibit 3.1 to
Registration Statement on Form S-4 of IntelCom Group
(U.S.A.), Inc., File No. 333-04569].
4.9: Articles of Continuation of IntelCom Group Inc.
[Incorporated by reference to Exhibit 4.1 to Registration
Statement on Form S-4 of ICG Communications, Inc., File No.
333-4226].
(9) Voting Trust Agreement.
None.
(10) Material Contracts.
10.1: Joint Venture Agreement, dated September 29, 1992, between
IntelCom Group Inc. and Greenstar Resources Ltd.
[Incorporated by reference to Exhibit 16 to IntelCom Group
Inc.'s Annual Report on Form 20-F, as amended, for the
fiscal year ended September 30, 1992].
10.2: Employment Agreement between Teleport Denver, Inc. and
William J. Maxwell [Incorporated by reference to Exhibit
3.38 to IntelCom Group Inc.'s Annual Report on Form 20-F for
the fiscal year ended September 30, 1993].
10.3: Arrangement and Support Agreement dated June 27, 1996
between ICG Communications, Inc. and IntelCom Group Inc.
[Incorporated by reference to Exhibit 2.1 to Registration
Statement on Form S-4 of ICG Communications, Inc.
(Commission File No. 333-4226)].
10.4: Stock Purchase Agreement and Accord and Satisfaction
Agreement dated June 24, 1993, between Joseph T. Buck III
and William A. Byrd and TDI [Incorporated by reference to
Exhibit 3.28 to IntelCom Group Inc.'s Annual Report on Form
20-F for the fiscal year ended September 30, 1993].
10.5: Full Payout Net Lease dated June 7, 1993 between Applied
Telecommunications Technologies, Inc. and Teleport Denver,
Inc. [Incorporated by reference to Exhibit 3.34 to IntelCom
Group Inc.'s Annual Report on Form 20-F for the fiscal year
ended September 30, 1993.]
65
<PAGE>
10.6: Full Payout Net Lease dated June 18, 1993 between Applied
Telecommunications Technologies, Inc. and Teleport Denver,
Inc. [Incorporated by reference to Exhibit 3.35 to IntelCom
Group Inc.'s Annual Report on Form 20-F for the fiscal year
ended September 30, 1993].
10.7: Full Payout Net Lease dated July 16, 1993 between Applied
Telecommunications Technologies, Inc. and Teleport Denver,
Inc. [Incorporated by reference to Exhibit 3.36 to IntelCom
Group Inc.'s Annual Report on Form 20-F for the fiscal year
ended September 30, 1993].
10.8: Full Payout Net Lease dated November 10, 1993 between
Applied Telecommunications Technologies, Inc. and Teleport
Denver, Inc. [Incorporated by reference to Exhibit 3.37 to
IntelCom Group Inc.'s Annual Report on Form 20-F for the
fiscal year ended September 30, 1993].
10.9: Stock Purchase Agreement dated August 23, 1993, between
Cliff Arellano, Nancy Arellano and TDI [Incorporated by
reference to Exhibit 3.29 to IntelCom Group Inc.'s Annual
Report on Form 20-F for the fiscal year ended September 30,
1993].
10.10: Asset Purchase Agreement dated November 18, 1993, between
Mtel Digital Services, Inc. and IntelCom Group Inc.
[Incorporated by reference to Exhibit 3.30 to IntelCom Group
Inc.'s Annual Report on Form 20-F for the fiscal year ended
September 30, 1993].
10.11: Stock Purchase Agreement dated November 18, 1993, between
IntelCom Group Inc., TDI, Pacific Telecom Inc., PTI Harbor
Bay, Inc., Bay Area Teleport, Inc., and Upsouth Corporation
[Incorporated by reference to Exhibit 3.31 to IntelCom Group
Inc.'s Annual Report on Form 20-F for the fiscal year ended
September 30, 1993].
10.12: Agreement and Plan of Merger dated May 24, 1994, by and
among IntelCom Group Inc., IntelCom Group (U.S.A.), Inc. and
FiberCAP, Inc. [Incorporated by reference to Exhibit 10.69
to the Registration Statement on Form S-1, Amendment No. 4
of IntelCom Group Inc., File No. 33-76568, filed August 26,
1994].
10.13: Note Sale and Purchase Agreement dated August 3, 1994, by
and between IntelCom Group Inc., ICG Wireless Services,
Inc., Noon Investments Ltd., Melco Investments Ltd. and
Polera Overseas Inc. [Incorporated by reference to Exhibit
10.70 to the Registration Statement on Form S-1, Amendment
No. 4 of IntelCom Group Inc., File No. 33-76568, filed
August 26, 1994].
10.14: Agreement and Plan of Merger dated July 22, 1994, by and
among IntelCom Group Inc., IntelCom Group (U.S.A.), Inc.,
DataCom Integrated Systems Corporation, Larry DiGioia and
Richard Williams [Incorporated by reference to Exhibit 10.71
to the Registration Statement on Form S-1, Amendment No. 4
of IntelCom Group Inc., File No. 33-76568, filed August 26,
1994].
10.15: Share Exchange Agreement, dated May 31, 1994, between
IntelCom Group
66
<PAGE>
Inc. and Worldwide Condominium Developments, Inc.
[Incorporated by reference to Exhibit 10.71 to the
Registration Statement on Form S-1, Amendment No. 7 of
IntelCom Group Inc., File No. 33-76568, filed October 17,
1994.]
10.16: Incentive Stock Option Plan #2 [Incorporated by reference
to Exhibit 4.1 to the Registration Statement on Form S-8 of
IntelCom Group Inc., File No. 33-86346, filed November 14,
1994].
10.17: Form of Stock Option Agreement for Incentive Stock Option
Plan #2 [Incorporated by reference to Exhibit 4.2 to the
Registration Statement on Form S-8 of IntelCom Group Inc.,
File No. 33-86346, filed November 14, 1994].
10.18: Incentive Stock Option Plan #3 [Incorporated by reference
to Exhibit 4.3 to the Registration Statement on Form S-8 of
IntelCom Group Inc., File No. 33-86346, filed November 14,
1994].
10.19: Form of Stock Option Agreement for Incentive Stock Option
Plan #3 [Incorporated by reference to Exhibit 4.4 to the
Registration Statement on Form S-8 of IntelCom Group Inc.,
File No. 33-86346, filed November 14, 1994].
10.20: 1994 Employee Stock Option Plan [Incorporated by reference
to Exhibit 4.5 to the Registration Statement on Form S-8 of
IntelCom Group Inc., File No. 33-86346, filed November 14,
1994].
10.21: Form of Stock Option Agreement for 1994 Employee Stock
Option Plan [Incorporated by reference to Exhibit 4.6 to the
Registration Statement on Form S-8 of IntelCom Group Inc.,
File No. 33-86346, filed November 14, 1994].
10.22: PEDTS Acquisition Note 1994-1, dated April 29, 1994, by
Pacific & Eastern Digital Transmission Services, Inc.
("PEDTS") to IntelCom Group (U.S.A.), Inc. ("ICG"), in the
amount of $2,928,591 [Incorporated by reference to Exhibit
10.27 to IntelCom Group Inc.'s Annual Report on Form 10-K
for the fiscal year ended September 30, 1994].
10.23: PEDTS Acquisition Note 1994-2, dated April 29, 1994, by
PEDTS to ICG, in the amount of $1,230,475 [Incorporated by
reference to Exhibit 10.28 to IntelCom Group Inc.'s Annual
Report on Form 10-K for the fiscal year ended September 30,
1994].
10.24: PEDTS Acquisition Note 1994-3, dated April 29, 1994, by
PEDTS to ICG, in the amount of $932,239 [Incorporated by
reference to Exhibit 10.29 to IntelCom Group Inc.'s Annual
Report on Form 10-K for the fiscal year ended September 30,
1994].
10.25: TTC Acquisition Note, dated November 3, 1994, by Teleport
Transmission Holdings, Inc. to ICG, in the amount of
$125,242.33 [Incorporated by reference to Exhibit 10.30 to
IntelCom Group Inc.'s Annual Report on Form 10-K for the
fiscal year ended September 30, 1994].
10.26: Agreement and Assignment, dated July 24, 1995, by Teleport
Transmission Holdings, Inc., IntelCom Group (U.S.A.), Inc.,
William W. Becker, Michael L. Glaser, William J. Laggett,
Jay E.
67
<PAGE>
Ricks and Gary Bryson. [Incorporated by reference to Exhibit
10.26 to IntelCom Group Inc.'s Annual Report on Form 10-K
for the fiscal year ended September 30, 1996].
10.27: Employment Agreement, dated as of May 30, 1995, between
IntelCom Group Inc. and J. Shelby Bryan [Incorporated by
reference to Exhibit 10.5 to Form 8-K of IntelCom Group
Inc., as filed on August 2, 1995].
10.28: Stock Option Agreement, dated as of May 30, 1995, between
IntelCom Group Inc. and J. Shelby Bryan [Incorporated by
reference to Exhibit 10.6 to Form 8-K of IntelCom Group
Inc., as filed on August 2, 1995].
10.29: Indemnification Agreement, dated as of May 30, 1995,
between IntelCom Group Inc. and J. Shelby Bryan
[Incorporated by reference to Exhibit 10.7 to Form 8-K of
IntelCom Group Inc., as filed on August 2, 1995].
10.30: Letter Agreement, dated July 12, 1995, between IntelCom
Group Inc. and Larry L. Becker [Incorporated by reference to
Exhibit 10.8 to Form 8-K of IntelCom Group Inc., as filed on
August 2, 1995].
10.31: Agreement and General Release, made effective July 12,
1995, between IntelCom Group Inc. and Larry L. Becker
[Incorporated by reference to Exhibit 10.9 to Form 8-K of
IntelCom Group Inc., as filed on August 2, 1995].
10.32: Subscription and Exchange Agreement, dated as of July 14,
1995, among IntelCom Group Inc., IntelCom Group (U.S.A.),
Inc., Princes Gate Investors, L.P., Acorn Partnership I,
L.P., PGI Investments Limited, PGI Sweden AB, and Gregor von
Opel [Incorporated by reference to Exhibit 10.4 to Form 8-K
of IntelCom Group Inc., as filed on August 2, 1995].
10.33: Security Agreement, dated July 18, 1995, from IntelCom
Group (U.S.A.), Inc. as issuer, and the Grantors named
therein, as grantors, to MS Group, as agent [Incorporated by
reference to Exhibit 10.1 to Form 8-K of IntelCom Group
Inc., as filed on August 2, 1995].
10.34: Pledge Agreement, dated July 18, 1995, from IntelCom Group
Inc., as a pledgor, to MS Group, as agent [Incorporated by
reference to Exhibit 10.2 to Form 8-K of IntelCom Group
Inc., as filed on August 2, 1995].
10.35: Subsidiary Guarantee, dated July 18, 1995, from the persons
set forth on the signature pages thereof, as guarantors, in
favor of the purchasers to the Note Purchase Agreement
referred to therein, and MS Group, as agent [Incorporated by
reference to Exhibit 10.3 to Form 8-K of IntelCom Group
Inc., as filed on August 2, 1995].
10.36: Placement Agreement, dated as of August 3, 1995, among
IntelCom Group Inc., IntelCom Group (U.S.A.), Inc., certain
subsidiaries of IntelCom Group (U.S.A.), Inc. and Morgan
Stanley & Co. Incorporated [Incorporated by reference to
Exhibit 10.1 to Form 8-K of IntelCom Group Inc., as filed on
August 9, 1995.]
10.37: Form of Exchange Agent Agreement between IntelCom Group
68
<PAGE>
(U.S.A.), Inc. and Norwest Banks [Incorporated by reference
to Exhibit 10.11 to Registration Statement on Form S-4 of
IntelCom Group (U.S.A.), Inc., File No. 33-96540].
10.38: Employment Agreement between IntelCom Group Inc. and James
D. Grenfell, dated November 1, 1995. [Incorporated by
reference to Exhibit 10.38 to IntelCom Group Inc.'s Annual
Report on Form 10-K for the fiscal year ended September 30,
1995].
10.39: Employment Agreement between Fiber Optic Technologies, Inc.
and Mark S. Helwege, dated July 8, 1996.
10.40: Purchase and Sale Agreement, dated as of October 19, 1995,
by and among ICG Wireless Services, Inc., IntelCom Group
(U.S.A.), Inc., UpSouth Corporation and Vyvx, Inc.
[Incorporated by reference to Exhibit 10.40 to IntelCom
Group Inc.'s Annual Report on Form 10-K for the fiscal year
ended September 30, 1995].
10.41: Employment Agreement between ICG Satellite Services, Inc.
and Douglas I. Falk, dated August 14, 1996.
10.42: ICG Communications, Inc., 401(k) Wrap Around Deferred
Compensation Plan.
10.43: ICG Communications, Inc. 1996 Employee Stock Purchase Plan.
[Incorporated by reference to the Registration Statement on
Form S- of ICG Communications, Inc., File No. 33-14127,
filed on October 14, 1996].
(11) Statement re Computation of per Share Earnings.
Not Applicable
(12) Statement re Computation of Ratios.
Not Applicable
(13) Annual Report to Security Holders.
Not Applicable
(18) Letter re Change in Accounting Principles. Letter dated March 22,
1996 from KPMG Peat Marwick LLP to the Company [Incorporated by
reference to Exhibit 18 to IntelCom Group Inc.'s Quarterly Report
on Form 10-Q/A for the quarter ended December 31, 1995].
(21) Subsidiaries of Registrant.
(22) Published Report re Matters Submitted to Vote of Security
Holders.
Not Applicable
(23) Consent
23.1: Consent of KPMG Peat Marwick
(24) Power of Attorney.
69
<PAGE>
Not Applicable
(27) Financial Data Schedule.
(99) Additional Exhibits.
99.1: Report by the FCC on Preliminary Statistics of
Communications Common Carriers (1993 Edition) (pp. 39-40)
[Incorporated by reference to Exhibit 99.8 to the
Registration Statement on Form S-1, Amendment No. 4 of
IntelCom Group Inc., File No. 33-76568, filed August 26,
1994].
99.2: In re Expanded Interconnection with Local Telephone Company
Facilities (Phases I & II) (FCC 1992) [Incorporated by
reference to Exhibit 3.46 to IntelCom Group Inc.'s Annual
Report on Form 20-F for the fiscal year ended September 30,
1993].
99.3: In re Teleport Transmission Holdings, (FCC 1993)
[Incorporated by reference to Exhibit 3.49 to IntelCom Group
Inc.'s Annual Report on Form 20-F for the fiscal year ended
September 30, 1993].
(B) Reports on Form 8-K. The following reports on Form 8-K were filed by the
Registrants during the fourth quarter of the fiscal year ended September
30, 1996:
ICG Communications, Inc.: Current Report on Form 8-K
dated August 2, 1996.
Current Report on Form 8-K dated
October 25, 1996.
ICG Holdings (Canada), Inc.: Current Report on Form 8-K
dated August 2, 1996.
(C) Exhibits. The exhibits required by this Item are listed under Item
14(A)(3).
(D) Financial Statement Schedule. The financial statement schedule required by
this Item is listed under Item 14(A)(2).
70
<PAGE>
FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets, September 30, 1995 and 1996 . . . . F-3
Consolidated Statements of Operations, Years Ended September 30,
1994, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Equity (Deficit), Years
Ended September 30, 1994, 1995 and 1996 . . . . . . . . . . . F-6
Consolidated Statements of Cash Flows, Years Ended September 30,
1994, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements, September 30, 1995
and 1996 . . . . . . . . . . . . . . . . . . . . .. . . . . . . . F-10
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
ICG Communications, Inc.:
We have audited the accompanying consolidated balance sheets of ICG
Communications, Inc. and subsidiaries as of September 30, 1995 and 1996, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the years in the three-year period ended September
30, 1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ICG Communications,
Inc. and subsidiaries as of September 30, 1995 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 1996, in conformity with generally accepted
accounting principles.
As explained in note 2 to the consolidated financial statements, during fiscal
1996, the Company changed its method of accounting for long-term telecom
services contracts.
KPMG Peat Marwick LLP
Denver, Colorado
November 18, 1996
F-2
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1995 and 1996
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets 1995 1996
- ------
------------- --------------
(in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 269,416 451,082
Short-term investments - 6,832
Receivables:
Trade, net of allowance of $2,217
and $2,509 at September 30, 1995
and 1996, respectively 23,483 34,818
Revenue earned, but unbilled (note 2) 7,046 4,062
Joint venture and affiliate (note 3) 732 -
Other (note 7) 1,430 1,955
------------- --------------
32,691 40,835
Inventory 2,165 3,206
Prepaid expenses and deposits 3,424 4,109
Notes receivable, net (note 4) 1,761 263
------------- --------------
Total current assets 309,457 506,327
------------- --------------
Property and equipment (notes 5, 8 and 9) 228,609 383,435
Less accumulated depreciation (note 2) (26,605) (47,298)
------------- --------------
Net property and equipment 202,004 336,137
------------- --------------
Investments (note 3) 5,209 5,169
Long-term notes receivable, net (note 3) 7,599 6,618
Restricted cash (note 14) - 13,333
Other assets, net of accumulated
amortization (notes 3 and 6):
Goodwill 29,199 32,175
Deferred financing costs 16,018 22,584
Transmission and other licenses 10,792 8,611
Other 3,275 8,397
------------- --------------
59,284 71,767
------------- --------------
$ 583,553 939,351
============= ==============
(Continued)
</TABLE>
F-3
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity (Deficit) 1995 1996
------------- ------------
(in thousands)
<S> <C> <C>
Current liabilities:
Accounts payable $ 14,712 17,722
Accrued liabilities 18,346 34,159
Line-of-credit payable (note 8) 3,692 -
Current portion of long-term debt (note 8) 14,454 795
Current portion of capital lease obligations 9,164 7,487
(note 9) ------------- ------------
Total current liabilities 60,368 60,163
Long-term debt, net of discount, less current 379,100 668,989
portion (note 8)
Capital lease obligations, less current 26,435 70,838
portion (note 9)
Deferred income taxes (note 15) 5,702 -
Share of losses of joint venture in excess of
investment (note 3) 1,037 2,851
------------- ------------
Total liabilities 472,642 802,841
------------- ------------
Minority interests 4,040 2,780
Redeemable preferred stock of subsidiary
($30.5 million and $159.1 million
liquidation value at September 30, 1995 and
1996, respectively) (notes 8 and 10) 14,986 153,318
Convertible Series B Preferred Stock of
subsidiary (note 11) 9,350 -
Stockholders' equity (deficit):
Common stock (notes 1, 2 and 12) 190,753 275,355
Additional paid-in capital 26,492 23,874
Accumulated deficit (134,710) (318,817)
------------- ------------
Total stockholders' equity (deficit) 82,535 (19,588)
------------- ------------
Commitments and contingencies (notes 3, 7, 8,
9, 10, 11, 14 and 15) $ 583,553 939,351
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended September 30, 1994, 1995 and 1996
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
1994 1995 1996
-------------------------------
(in thousands, except per
share data)
<S> <C> <C> <C>
Revenue:
Telecom services (note 2) $ 14,854 32,330 87,681
Network services (note 17) 36,019 58,778 60,116
Satellite services 8,121 20,502 21,297
Other 118 - -
------------------------------
Total revenue 59,112 111,610 169,094
------------------------------
Operating costs and expenses:
Operating costs 38,165 78,846 135,253
Selling, general and administrative
expenses 28,015 62,954 76,725
Depreciation and amortization
(note 2) 8,198 16,624 30,368
---------- --------- ----------
Total operating costs and expenses 74,378 158,424 242,346
Operating loss (15,266) (46,814) (73,252)
Other income (expense):
Interest expense (8,481) (24,368) (85,714)
Interest income 1,788 4,162 19,300
Share of losses of joint venture and
investment (1,481) (741) (1,814)
Provision for impairment of
goodwill, investment and notes
receivable (notes 3 and 4) - (7,000) (9,917)
Other, net (863) (764) (9,082)
---------- ---------- --------
(9,037) (28,711) (87,227)
---------- ---------- --------
Loss before minority interest, income
taxes and cumulative effect of change
accounting (24,303) (75,525) (160,479)
Minority interest in share of losses, net
of accretion and preferred dividends on
subsidiary preferred stock
(notes 10 and 11) 435 (1,123) (25,306)
--------- --------- ----------
Loss before income taxes and cumulative
effect of change in accounting (23,868) (76,648) (185,785)
Income tax benefit (note 15) - - 5,131
--------- --------- ----------
Loss before cumulative effect of change (23,868) (76,648) (180,654)
in accounting
Cumulative effect of change in
accounting for revenue from
long-term telecom services contracts
(note 2) - - (3,453)
--------- -------- ----------
Net loss $ (23,868) (76,648) (184,107)
========== ========= =========
Loss per share (note 2):
Loss before cumulative effect of
change in accounting $ (1.56) (3.25) (6.70)
Cumulative effect of change in - - (0.13)
accounting ----------- --------- ---------
Loss per share $ (1.56) (3.25) (6.83)
========== ========= ===========
Weighted average number of shares
outstanding 15,342 23,604 26,955
========== ========= ===========
Pro forma amounts before cumulative
effects of change in accounting
assuming the new method of
accounting for revenue from long-term
telecom services contracts is
applied retroactively:
Telecom services revenue $ 14,395 31,617 87,681
Total revenue 58,653 110,897 169,094
Operating loss (15,725) (47,527) (73,252)
Net loss (24,327) (77,361) (180,654)
Loss per share
(1.59) (3.28) (6.70)
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years Ended September 30, 1994, 1995 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional Total
Common stock Paid-in Accumulated Stockholders'
Shares Amount capital deficit equity (deficit)
-------- -------- -------- ---------- -----------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balances at October 1, 1993 13,868 $ 56,201 200 (21,648) 34,753
Private placement offering costs - (89) - - (89)
Shares issued for cash-exercise of
options and warrants (note 12) 737 4,539 - - 4,539
Shares issued as repayment of debt
and related accrued interest (note 8) 110 883 - - 883
Shares issued in connection with
business combination (note 3) 1,485 23,537 - - 23,537
Shares issued in exchange for notes
receivable (note 3) 256 3,050 - - 3,050
Shares issued as contribution to
401(k) plan (note 16) 20 257 - - 257
Warrants issued in connection with
acquisition of equipment - - 982 - 982
Issuance of bonus and penalty shares
(note 12) 197 - - - -
Acquisition of minority interest of
ICG Holdings, Inc. (note 7) 374 7,228 107 (12,449) (5,114)
Change in foreign currency
translation adjustment - - - (59) (59)
Compensation expense related to
issuance of common stock options - - 911 - 911
Net loss - - - (23,868) (23,868)
-------- -------- -------- -------- --------
Balances at September 30, 1994 17,047 95,606 2,200 (58,024) 39,782
Shares issued for cash (note 12):
Public offering and private placements 6,312 84,498 - - 84,498
Public offering and private
placement costs - (6,162) - - (6,162)
Exercise of options and warrants 338 1,471 - - 1,471
Shares issued as repayment of debt
and related accrued interest (note 8) 683 9,482 - - 9,482
Shares issued in connection with
business combinations (note 3) 130 1,737 - - 1,737
Conversion of ICG Holdings-Canada,
Inc. preferred shares (notes 11 and 12) 302 2,000 - - 2,000
Shares issued as contribution to
401(k) plan (note 16) 38 490 - - 490
Warrants issued in connection with
Offerings (notes 8, 10 and 12) - - 24,134 - 24,134
Change in foreign currency
translation adjustment - - - (38) (38)
Compensation expense related to
issuance of common stock options - - 158 - 158
Shares issued in exchange for
investments and other assets 123 1,398 - - 1,398
Shares issued as payment of trade
payables 18 233 - - 233
Net loss - - - (76,648) (76,648)
-------- -------- -------- -------- --------
Balances at September 30, 1995 24,991 190,753 26,492 (134,710) 82,535
Shares issued for cash-exercise of
options and warrants 1,522 1,894 - - 1,894
Shares issued as repayment of debt
and related accrued interest (note 8) 130 687 - - 687
Shares issued in connection with
business combinations (note 3) 67 749 - - 749
Conversion of ICG Holdings-Canada,
Inc. preferred shares (notes 11 and 12) 496 3,780 - - 3,780
Shares issued as contribution to
401(k) plan (note 16) 87 1,156 - - 1,156
Shares issued upon conversion of
subordinated notes (note 8) 4,413 76,336 - - 76,336
Repurchase of warrants - - (2,671) - (2,671)
Compensation expense related to
issuance of common stock options - - 53 - 53
Net loss - - - (184,107) (184,107)
-------- -------- -------- -------- --------
Balances at September 30, 1996 31,703 275,355 23,874 (318,817) (19,588)
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended September 30, 1994, 1995 and 1996
<TABLE>
<CAPTION>
1994 1995 1996
------- ---------- ------------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(23,868) (76,648) (184,107)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Cumulative effect of change in
accounting - - 3,453
Share of losses of joint
venture and investment 1,481 741 1,814
Minority interest in share of
(losses), net of accretion
and non-cash preferred
dividends on subsidiary
preferred stock (435) 656 24,279
Depreciation and amortization 8,198 16,624 30,368
Compensation expense related to
issuance of common stock options 911 158 53
Interest expense deferred and
included in long-term debt and
non-cash interest expense 4,885 14,068 63,951
Amortization of deferred
financing costs included in
interest expense 615 989 2,573
Write-off of deferred finance
costs upon conversion or
repayment of debt - - 2,650
Contribution to 401(k) plan
through issuance of common shares 257 490 1,156
Deferred income tax benefit - - (5,329)
Provisions for impairment of
goodwill, investment and
notes receivable - 7,000 9,917
Loss on sale of certain
Satellite Services assets - - 1,124
Decrease (increase) in operating
assets, excluding the effects of
business acquisitions, dispositions
and non-cash transactions:
Accounts receivable (13,208) (6,092) (13,293)
Inventory (84) (447) (1,200)
Prepaid expenses and deposits 317 (2,482) (2,975)
Increase (decrease) in operating
liabilities, excluding the effects of
business acquisitions, dispositions and
non-cash transactions:
Accounts payable and accrued
liabilities 13,399 1,904 18,205
--------- --------- ----------
Net cash used by operating $ (7,532) (43,039) (47,361)
activities
---------- --------- ----------
</TABLE>
(Continued)
F-7
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years Ended September 30, 1994, 1995 and 1996
_________________________________________________________________________
<TABLE>
<CAPTION>
1994 1995 1996
---------- --------- ----------
(in thousands)
<S> <C> <C> <C>
Cash flows from investing activities:
Notes receivable $ (5,249) 348 348
Advances to affiliates - (2,184) (109)
Investment in and advances to
joint venture (1,185) (5,452) (4,308)
Payments for business
acquisitions, net of cash acquired (1,811) (8,168) (8,441)
Acquisition of property, equipment
and other assets, net of
dispositions (43,207) (49,825) (120,118)
Purchase of short-term investments - - (6,832)
Restricted cash - - (13,333)
Proceeds from the sale of certain
Satellite Services assets - - 21,593
Other investments - (6,061) -
---------- --------- ---------
Net cash used by investing
activities (51,452) (71,342) (131,200)
---------- --------- ---------
Cash flows from financing activities:
Issuance of common shares for cash - 84,498 -
Issuance of preferred shares of
subsidiary for cash - 16,000 144,000
Issuance of redeemable preferred
stock of subsidiary - 28,800 -
Offering costs related to common
and preferred stock offerings - (5,565) -
Redemption of preferred shares - (3,800) (5,570)
Repurchase of redeemable preferred
stock of subsidiary and payment
of accrued dividend - - (32,629)
Repurchase of redeemable warrants - - (2,671)
Proceeds from exercise of stock
options and warrants 4,539 1,471 1,894
Proceeds from advances from
related parties 3,334 - -
Payments on advances from related
parties (7,744) - -
Principal payments on capital lease
obligations (1,264) (6,271) (12,304)
Proceeds from issuance of
short-term debt - - 17,500
Principal payments on short-term
debt - - (21,192)
Proceeds from issuance of
long-term debt 57,340 305,613 300,034
Principal payments on long-term debt (4,144) (29,333) (16,920)
Deferred debt issuance costs (2,633) (13,641) (11,915)
---------- --------- --------
Net cash provided by financing
activities 49,428 377,772 360,227
---------- --------- --------
Net increase (decrease) in cash
and cash equivalents (9,556) 263,391 181,666
Cash and cash equivalents, beginning
of year 15,581 6,025 269,416
---------- --------- --------
Cash and cash equivalents, end
of year 6,025 269,416 451,082
========== ========= =========
Supplemental disclosure of cash
flow information:
Cash paid for interest $ 2,625 9,338 19,035
========== ========= =========
</TABLE>
(Continued)
F-8
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years Ended September 30, 1994, 1995 and 1996
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
1994 1995 1996
--------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Supplemental schedule of non-cash
financing and investing activities:
Common shares issued in
connection with business
combinations, repayment of
debt or conversion of
liabilities to equity $ 31,647 11,452 77,772
========= ========== ===========
Common shares issued in exchange
for notes receivable,
investments and other assets $ 3,050 1,398 -
========= ========== ===========
Assets acquired under capital
leases and through
the issuance of debt or
warrants $ 11,714 38,670 55,030
========= ========== ===========
Liability related to business
combination $ 8,746 - -
========= ========== ===========
Reclassification of investment
in joint venture to long-term $ - 6,882 -
notes receivable ========= ========== ===========
Conversion of notes receivable
related to business $ 6,330 -
combinations ========= ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995 and 1996
- ------------------------------------------------------------------------------
(1) Organization and Nature of Business
ICG Communications, Inc. ("ICG"), a Delaware corporation, was incorporated
on April 11, 1996, for the purpose of becoming the new publicly-traded
U.S. parent company of ICG Holdings (Canada), Inc. ("Holdings-Canada"), a
Canadian federal corporation (formerly known as IntelCom Group Inc.), ICG
Holdings, Inc. ("Holdings"), a Colorado corporation (formerly known as
IntelCom Group (U.S.A.), Inc.), and its subsidiaries (collectively, the
"Company"). Pursuant to a Plan of Arrangement (the "Arrangement"), which
was approved by Holdings-Canada shareholders on July 30, 1996, and by the
Ontario Court of Justice on August 2, 1996, each shareholder of
Holdings-Canada exchanged their common shares on a one-for-one basis for
either (i) shares of $.01 par value common stock of ICG (the "Common
Stock"), or (ii) Class A common shares of Holdings-Canada (which are
exchangeable at any time on a one-for-one basis into shares of ICG Common
Stock). On August 2, 1996, 28,795,132, or approximately 98%, of the total
issued and outstanding common shares of Holdings-Canada were exchanged for
an equal number of shares of Common Stock of ICG. In accordance with
generally accepted accounting principles, the Arrangement was accounted
for in a manner similar to a pooling of interests since ICG and
Holdings-Canada have common shareholders, and the number of shares
outstanding and the weighted average number of shares outstanding reflect
the equivalent shares outstanding for the combined companies.
The Company's principal business activity is telecommunications services,
including Telecom Services, Network Services and Satellite Services.
Telecom Services consist of the Company's competitive local exchange
carrier ("CLEC") operations. CLECs, formerly known as competitive access
providers ("CAPs"), seek to provide an alternative to the incumbent local
exchange telephone company ("ILEC") for a full range of telecommunications
services in the newly opened regulatory environment. The Company's Telecom
Services customers are primarily long distance carriers and resellers, as
well as end-users. Network Services supplies information technology
services and selected networking products, focusing on network design,
installation, maintenance and support for a variety of end-users,
including Fortune 1000 firms and other large businesses and
telecommunications companies. Satellite Services provides satellite, voice
and data services to major cruise ship lines, the commercial shipping
industry, yachts, the U.S. Navy and offshore oil platforms.
F-10
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the
United States, and include the accounts of the Company, and its
majority and wholly owned subsidiaries. Financial information prior to
the completion of the Arrangement on August 2, 1996, represents the
financial position and results of operations of Holdings-Canada and
Holdings, which are considered predecessor entities to ICG.
In addition, the accompanying consolidated financial statements include
the accounts of Teleport Transmission Holdings, Inc. ("TTH"), which
holds certain transmission licenses acquired in connection with certain
of the Company's business combinations in 1994. As of September 30,
1996, TTH is owned one-third each by two U.S. directors and one former
director. TTH's financial statements have been consolidated with the
financial statements of the Company due to common ownership and
control.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
(b) Change in Fiscal Year End
The Company's fiscal year currently ends on September 30. The Company
has elected to change its fiscal year end to December 31 from September
30, effective for the 1997 fiscal year.
(c) Cash Equivalents and Short-term Investments
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. The Company
invests primarily in high grade short-term investments which consist of
money market instruments, commercial paper, certificates of deposit,
government obligations and corporate bonds. The Company's investment
objectives are safety, liquidity and yield, in that order.
F-11
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
The Company carries all cash equivalents and short-term investments at
cost, which approximates fair value.
(d) Inventory
Inventory, consisting of satellite systems equipment and equipment to
be utilized in the installation of fiber optic communications systems
and networks for customers, is recorded at the lower of cost or market,
using the first-in, first-out method of accounting for cost.
(e) Investments
Investments in joint ventures are accounted for using the equity
method, under which the Company's share of earnings or losses of the
joint ventures are reflected in operations and dividends are credited
against the investment when received. Losses recognized in excess of
the Company's investment due to additional investment or financing
requirements, or guarantees, are recorded as a liability in the
accompanying consolidated financial statements. Other investments
representing an interest of 20% or more, but less than 50%, are
accounted for using the equity method of accounting. Investments of
less than 20% are accounted for using the cost method, unless the
Company exercises significant influence and/or control over the
operations of the investee company, in which case the equity method is
used.
(f) Property and Equipment
Property and equipment are stated at cost. Costs of construction are
capitalized, including interest costs related to construction.
Equipment held under capital leases is stated at the lower of the fair
value of the asset or the net present value of the minimum lease
payments at the inception of the lease. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets
owned and the related lease term for equipment held under capital
leases.
Effective January 1, 1996, the Company shortened the estimated
depreciable lives for substantially all of its fixed assets. These
estimates were changed to better reflect the estimated periods during
which these assets will remain in service and result in useful lives
which are more consistent with industry practice. The changes in
estimates of depreciable lives were made on a prospective basis,
beginning January
F-12
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
1, 1996. The effect of this change was to increase depreciation expense
and net loss for the year ended September 30, 1996, by approximately
$7.0 million ($0.26 per share).
Estimated useful lives of major categories of property and equipment
before and after January 1, 1996 are as follows:
Before After
January 1, January 1,
1996 1996
-------------- --------------
Office furniture and equipment 5 to 7 years 3 to 7 years
Buildings and improvements 31.5 years 31.5 years
Machinery and equipment 7 to 15 years 3 to 8 years
Switch equipment 15 years 10 years
Fiber optic transmission system 30 years 20 years
(g) Other Assets
Amounts related to the acquisition of transmission and other licenses
are recorded at cost. Amortization is provided using the straight-line
method over 20 years. Goodwill results from the application of the
purchase method of accounting for business combinations. Amortization
is provided using the straight-line method over a maximum of 20 years.
Rights of way, minutes of use, and non-compete agreements are recorded
at cost, and amortized using the straight-line method over the terms of
the agreements, currently ranging from 2 to 12 years.
Amortization of deferred financing costs is provided over the life of
the related financing agreement, the maximum term of which is 10 years.
The Company periodically evaluates the carrying value of intangible
assets using a discounted cash flow methodology and provides a
provision for impairment, if necessary, in the year the impairment is
identified.
F-13
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
(h) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could differ
from those estimates.
(i) Revenue Recognition
During fiscal 1996, the Company changed its method of accounting for
long-term telecom services contracts. Under the new method, the Company
recognizes revenue as services are provided and continues to charge
direct selling expenses to operations as incurred. The Company had
previously recognized revenue in an amount equal to the non-cancelable
portion of the contract, which is a minimum of one year on a three-year
or longer contract, at the inception of the contract and upon
activation of service to the customer to the extent of direct
installation and selling expenses incurred in obtaining customers
during the period in which such revenue was recognized. Revenue
recognized in excess of normal monthly billings during the year was
limited to an amount which did not exceed such installation and selling
expense. The remaining revenue from the contract had been recognized
ratably over the remaining non-cancelable portion of the contract. The
Company believes the new method is preferable because it provides a
better matching of revenue and related operating expenses and is more
consistent with accounting practices within the telecommunications
industry.
As required by generally accepted accounting principles, the Company
has reflected the effects of the change in accounting as if such change
had been adopted as of October 1, 1995, and has presented the pro forma
effects on prior periods assuming the change had been applied
retroactively. The Company's results for fiscal 1996 reflect a charge
of approximately $3.5 million relating to the cumulative effect of this
change in accounting as of October 1, 1995. The effect of this change
in accounting for fiscal 1996 was not significant.
F-14
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
Revenue from Satellite Services is recognized as services are rendered.
Revenue from Network Services contracts for the design and installation
of fiber optic communication systems and networks, which are generally
short-term in duration, is recognized primarily using the percentage of
completion method of accounting. Maintenance revenue is recognized as
services are provided.
Uncollectible trade receivables are accounted for using the allowance
method.
(j) Income Taxes
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes
("SFAS 109"). Under the asset and liability method of SFAS 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered
or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(k) Loss Per Share
Loss per share is calculated by dividing the net loss by the weighted
average number of shares outstanding. Weighted average number of shares
outstanding for fiscal years 1994 and 1995 represents outstanding
Holdings-Canada common shares. Weighted average number of shares
outstanding for fiscal 1996 represents outstanding Holdings-Canada
common shares for the period October 1, 1995 through August 2, 1996,
and outstanding ICG Common Stock and Holdings-Canada Class A common
shares (owned by third parties) for the period August 5, 1996 through
September 30, 1996.
Common stock equivalents, which include options, warrants and
convertible subordinated notes and preferred stock, are not included in
the loss per share calculation as their effect is anti-dilutive.
F-15
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
(l) New Accounting Standards
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed of ("SFAS 121"), was issued in March 1995 by the Financial
Accounting Standards Board. It requires that long-lived assets and
certain identifiable intangibles held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. SFAS 121
is required to be adopted for fiscal years beginning after December 15,
1995, and was adopted by the Company as of October 1, 1996. The
adoption of SFAS 121 did not have a significant effect on the
consolidated financial statements of the Company.
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"), was issued by the Financial
Accounting Standards Board in October 1995. SFAS 123 establishes
financial accounting and reporting standards for stock-based employee
compensation plans as well as transactions in which an entity issues
its equity instruments to acquire goods or services from non-employees.
This statement defines a fair value-based method of accounting for
employee stock options or similar equity instruments, and encourages
all entities to adopt this method of accounting for all employee stock
compensation plans. However, it also allows an entity to continue to
measure compensation cost for those plans using the intrinsic
value-based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees
("Opinion 25"). Entities electing to remain with the accounting method
prescribed in Opinion 25 must make pro forma disclosures of net income
and, if presented, earnings per share, as if the fair value-based
method of accounting defined by SFAS 123 had been applied. SFAS 123 is
applicable to fiscal years beginning after December 15, 1995. The
Company currently accounts for its stock-based compensation using the
accounting method prescribed by Opinion 25 and does not expect to adopt
the accounting method prescribed by SFAS 123; however, the Company will
include the pro forma disclosures required by SFAS 123 for periods
beginning subsequent to September 30, 1996.
F-16
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
(m) Reclassifications
Beginning in fiscal 1996, network operating costs, which were
previously classified as selling, general and administrative expenses,
have been reclassified as operating costs to conform with current
industry practice. Such expenses amounted to $2.6 million, $2.1
million, and $13.7 million in fiscal 1994, 1995 and 1996,
respectively. All prior year financial information has been restated
to conform with this year's presentation.
Certain other prior year amounts have been reclassified to conform
with the current year's presentation.
(3) Business Combinations and Investments
(a) Acquisitions and Investments During the Year Ended September 30, 1996
In January 1996, the Company purchased the remaining 49% minority
interest of Fiber Optic Technologies, Inc. ("FOTI"), making FOTI a
wholly owned subsidiary. Consideration for the purchase was
approximately $2.0 million in cash and 66,236 common shares of
Holdings-Canada valued at approximately $0.8 million, for total
consideration of approximately $2.8 million.
In February 1996, the Company entered into an agreement with Linkatel
California, L.P. ("Linkatel") and its other partners, Linkatel
Communications, Inc. and The Copley Press, Inc., under which the
Company acquired a 60% interest in Linkatel for an aggregate purchase
price of $10.0 million in cash and became the general partner of
Linkatel. In April 1996, the partnership was renamed ICG Telecom of San
Diego, L.P. ("ICG Telecom of San Diego").
In March 1996, the Company acquired a 90% equity interest in Maritime
Cellular Tele-Network, Inc. ("MCN"), a Florida-based provider of
cellular and satellite communications for commercial ships, private
vessels, offshore oil platforms and land-based mobile units, for
approximately $0.7 million in cash and approximately $0.1 million of
assumed debt, for total consideration of approximately $0.8 million.
F-17
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
In August 1996, the Company acquired the Signaling System 7 ("SS7")
business of Pace Network Services, Inc. ("Pace"), a division of Pace
Alternative Communications, Inc. SS7 is used by local exchange
companies, long-distance carriers, wireless carriers and others to
signal between network elements, creating faster call set-up resulting
in a more efficient use of network resources. Consideration paid for
the purchase was $1.8 million in cash as of September 30, 1996. This
amount is subject to purchase price adjustments based on future
operating results of the underlying business.
The above acquisitions have been accounted for using the purchase
method of accounting and, accordingly, the net assets and results of
operations are included in the consolidated financial statements from
the date of acquisition. Revenue, net loss and loss per share on a pro
forma basis are not significantly different from the Company's
historical results for the periods presented herein. The aggregate
purchase price of the 1996 acquisitions, in which the Company obtained
a controlling interest, was allocated based on fair values as follows
(in thousands):
Current assets $ 6,563
Property and equipment 7,542
Other assets, including
goodwill 9,647
Current liabilities (775)
Long-term liabilities (6,314)
Minority interest (1,422)
===========
$15,241
===========
(b) Acquisitions and Investments During the Year Ended September 30, 1995
In January 1995, the Company and an unaffiliated entity formed Maritime
Telecommunications Network, Inc. ("MTN") to provide wireless
communications through satellites to the maritime cruise industry, U.S.
Navy vessels and offshore oil platforms. The Company acquired (i)
approximately 64% of MTN, (ii) approximately $4.4 million in notes
receivable from MTN and (iii) consulting and non-compete agreements
valued at an aggregate of approximately $0.3 million in exchange for
(i) approximately $9.0 million in cash, (ii) the surrender and
cancellation of a note to the Company from the other entity for $0.6
million plus interest, (iii) 408,347 Holdings-Canada common shares
valued at approximately $5.1 million (of which 256,303 common shares
were issued in the fourth quarter of
F-18
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
fiscal year 1994) and (iv) the Company's commitment to provide up to
$2.7 million in additional convertible working capital advances to MTN
as required by MTN. The other shareholder of MTN contributed the assets
of a predecessor business to MTN. MTN also assumed approximately $2.1
million of obligations of such predecessor business. The Company paid a
$0.5 million finder's fee obligation of the predecessor to a third
party. The Company has also agreed that the Company will purchase the
MTN shares owned by the other shareholder of MTN at fair value, as
defined, if MTN has not completed a public offering of common stock by
January 3, 1998. In March 1995, the Company purchased a 56% interest
and in July 1995, an additional 2% interest in Zycom Corporation
("Zycom"), an Alberta, Canada corporation whose shares are traded on
the Alberta Stock Exchange. Consideration for the purchase was
approximately $0.8 million in cash, the conversion of $2.0 million in
notes receivable, and the assumption of approximately $0.7 million in
debt for total consideration of approximately $3.5 million. In March
1996, the Company acquired an additional approximate 12% equity
interest in Zycom by converting a $3.2 million receivable due from
Zycom.
The above acquisitions were accounted for using the purchase method of
accounting. The aggregate purchase price of the 1995 acquisitions, in
which the Company obtained a controlling interest, was allocated based
on fair values as follows (in thousands):
Current assets $ 1,835
Property and equipment 9,086
Other assets, including
goodwill 16,986
Current liabilities (2,764)
Long-term liabilities (6,779)
Minority interest (4,850)
-------------
$ 13,514
=============
In November 1994 and January 1995, the Company purchased an aggregate
of 571,428 shares of InterAmericas Communications Corporation
("InterAmCom") for total cash consideration of $2.0 million, which
represented an approximate 6% interest. During fiscal 1995, the Company
recorded an allowance of $2.0 million for the impairment of the
investment based on management's estimate of the net realizable value
of the investment.
F-19
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
During fiscal 1995, the Company invested approximately $5.2 million
($3.9 million in cash, $1.1 million in common shares of
Holdings-Canada, and the conversion of approximately $0.2 million in
notes receivable) in StarCom International Optics Corporation
("StarCom"), for which the Company received a 25% equity interest in
each of Starcom's wholly owned operating subsidiaries. The total
acquisition price is included in investments in the accompanying
consolidated financial statements. The 25% equity interest has been
pledged as collateral for StarCom financings.
(c) Acquisitions During the Year Ended September 30, 1994
In August 1994, the Company acquired DataCom Integrated Systems
Corporation. The Company issued 141,654 Holdings-Canada common shares
(14,854 of which were issued in fiscal 1995) valued at approximately
$2.0 million as consideration for the purchase. In addition, the
Company may be required to make an additional payment, payable in
Common Stock of the Company, up to a maximum of $3.5 million, based on
future performance of that business.
In July 1994, the Company completed the acquisition of FiberCap, Inc.
Consideration for the purchase was approximately $0.2 million in cash,
57,250 common shares of Holdings-Canada valued at approximately $0.8
million and a note payable of $0.1 million, for total consideration of
$1.1 million.
In April 1994, the Company acquired Mid-American Cable Inc. for an
aggregate price of $1.6 million. Consideration for the purchase was
$0.2 million in cash and 84,401 common shares of Holdings-Canada
valued at $1.4 million.
In April 1994, the Company acquired PTI Harbor Bay, Inc./UpSouth
Corporation ("Bay Area Teleport"). Total consideration paid for the
purchase was approximately $0.3 million in cash and 1,183,147 common
shares of Holdings-Canada valued at approximately $19.0 million, for
total consideration of approximately $19.3 million.
In April 1994, the Company acquired substantially all the business
assets of Mtel Digital System, Inc. ("Mtel DS"). Consideration for the
purchase was approximately $0.7 million in cash and a note payable for
approximately $6.9 million, bearing interest at 7.5% per annum, for
total consideration of approximately $7.6 million. The note was paid
during 1995.
F-20
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
In connection with the Bay Area Teleport and Mtel DS acquisitions, the
Company paid an aggregate amount of approximately $0.5 million to an
unaffiliated third party as a finder's fee, which is included in the
cost of the acquisitions. The fee was satisfied through the issuance of
31,513 common shares of Holdings-Canada. In February 1994, the Company
agreed to acquire Nova-Net Communications, Inc. ("Nova-Net"). The
Company assumed management control of Nova-Net effective May 1, 1994
and completed the acquisition on November 2, 1994. Consideration for
the purchase was $0.7 million in cash, assumption of approximately $1.4
million in outstanding debt, after payments subsequent to September 30,
1994, and approximately $6.6 million in common shares of
Holdings-Canada, for an aggregate price of approximately $8.7 million.
During fiscal 1995, the Company recorded a provision for impairment of
the goodwill recorded in connection with the Nova-Net acquisition of
$5.0 million, based on management's estimate of the net realizable
value of the investment.
In October 1993, the Company purchased all the real and personal
property and licenses of an earth station in Steele Valley, California,
for consideration of approximately $0.9 million, which was satisfied
through the issuance of 2,253 common shares of Holdings-Canada valued
at approximately $0.1 million and $0.8 million in cash.
The above acquisitions were accounted for using the purchase method of
accounting. The aggregate purchase price of the 1994 acquisitions was
allocated based on fair values as follows (in thousands):
Current assets $ 4,848
Property and equipment 23,278
Other assets, including
goodwill 19,181
Current liabilities (5,588)
============
$ 41,719
============
(d) Investments in Joint Venture and Affiliate
In September 1992, the Company entered into a joint venture agreement
with Greenstar Technologies Inc . (now GST Telecommunications, Inc.
("GST")) in which each party has a 50% equity interest. The purpose of
the joint venture was to design,
F-21
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
construct and operate a competitive access network in Phoenix. In
return for its 50% interest, the Company was required to commit to
provide equity or debt financing on or before January 24, 1994, which
commitment was provided on January 21, 1994. As of September 30, 1996,
the Company had provided financing of $11.7 million, including working
capital advances, which is included in long-term notes receivable and
had established a valuation allowance of $5.8 million due to
uncertainty of collection. Working capital advances totaled $0.4
million and were included in Receivables-Joint Venture and Affiliate as
of September 30, 1995. The Company began to record losses for its 50%
interest in the joint venture in the second quarter of fiscal 1994, and
as of September 30, 1996, had recorded a total loss of $3.7 million,
including a loss of $1.5 million for the year ended September 30, 1996.
The Company's equity contribution to the joint venture through
September 30, 1996, totaled $1.2 million. As of September 30, 1996, the
Company had entered into negotiations with GST under which GST would
purchase the Company's interest in the joint venture. The gain or loss
on the sale is not expected to be significant.
Also included in Receivables-Joint Venture and Affiliate at September
30, 1995, is $0.3 million due from an affiliate of the Company's
Mexican subsidiary. The Company is in the process of selling its
investment in Mexico. The gain or loss on the sale is not expected to
be significant.
(4) Notes Receivable
Notes receivable due within one year are comprised of the following as of
September 30:
1995 1996
----------- -----------
(in thousands)
Due from Crescomm
Telecommunications Services,
Inc., with interest at
approximately 8% $ 250 -
Due from NovoComm, Inc., with
interest at 8% 1,500 200
Other 11 63
----------- -----------
$1,761 263
=========== ===========
The NovoComm, Inc. note receivable at September 30, 1996 is net of a
valuation allowance of $1.3 million based on management's uncertainty as
to collection. The Company expects to receive $0.2 million in partial
payment prior to December 31, 1996.
F-22
<PAGE>
ICG COMMUNICATIONS , INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
------------------------------------------------------------------------
(5) Property and Equipment
Property and equipment, including assets owned under capital leases,
at September 30 is comprised of the following:
1995 1996
------------ -------------
(in thousands)
Land $ 1,519 -
Buildings and improvements 3,676 2,684
Furniture, fixtures and
office equipment 13,666 25,143
Machinery and equipment 25,195 21,057
Fiber optic equipment 39,104 77,354
Satellite equipment 15,044 18,024
Switch equipment 20,302 53,413
Fiber optic transmission
system 74,251 111,172
Construction in progress 35,852 74,588
------------ -------------
228,609 383,435
Less accumulated depreciation (26,605) (47,298)
------------ -------------
$ 202,004 336,137
============ =============
Property and equipment includes approximately $74.6 million of
equipment which has not been placed in service at September 30, 1996,
and, accordingly is not being depreciated. The majority of this
amount is related to an agreement with Southern California Edison
Company (see note 14(a)) under which the Company is licensing fiber
optic cable.
Certain of the above assets have been pledged as security for
long-term debt and capital lease obligations at September 30, 1996.
The following is a summary of property and equipment owned under
capital leases at September 30:
1995 1996
------------ -------------
(in thousands)
Machinery and equipment $ 10,349 7,882
Fiber optic equipment 663 395
Switch equipment 17,529 26,509
Construction in progress 13,935 52,645
------------ -------------
42,476 87,431
Less accumulated depreciation (2,117) (4,362)
============ =============
$ 40,359 83,069
============ =============
F-23
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(6) Other Assets
Other assets at September 30 are comprised of the following:
1995 1996
----------- ------------
(in thousands)
Goodwill $ 32,315 37,262
Less accumulated amortization (3,116) (5,087)
----------- ------------
Goodwill $ 29,199 32,175
=========== ============
Deferred financing costs $ 17,930 24,749
Less accumulated amortization (1,912) (2,165)
----------- -----------
Deferred financing costs $ 16,018 22,584
=========== ============
Transmission and other licenses $ 12,480 10,255
Less accumulated amortization (1,688) (1,644)
----------- -----------
Transmission and other licenses $ 10,792 8,611
=========== ============
Deposits $ 811 3,514
PACE customer base - 1,805
Rights of way 1,091 1,707
Minutes of use agreement - 1,421
Non-compete agreement 602 602
Risk premium 2,004 -
Other 552 575
----------- ------------
5,060 9,624
Less accumulated amortization (1,785) (1,227)
=========== ============
Other $ 3,275 8,397
=========== ============
(7) Related Party Transactions
During fiscal 1996, Holdings-Canada and International Communications
Consulting, Inc. ("ICC") entered into a consulting agreement whereby ICC
will provide various consulting services to the Company through December
1999 in exchange for approximately $4.2 million in consulting fees to be
paid during the term of the agreement. During fiscal 1996, the Company
paid $1.3 million related to this consulting agreement. William W. Becker,
a director and stockholder of the Company, is President and Chief
Executive Officer of ICC.
F-24
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(7) Related Party Transactions (continued)
At September 30, 1995 and 1996, receivables from officers and employees in
the amount of approximately $0.6 million are primarily comprised of notes
bearing interest at 7% and are included in Receivables-Other in the
accompanying consolidated financial statements. The notes receivable
relate to relocation expenses of officers.
Effective May 31, 1994, the Company acquired the remaining 4% minority
interest in Holdings from Worldwide Condominium Developments, Inc.
("WWCDI"), a related entity. The 4% interest was exchanged for (i) the
transfer of the Company's oil and gas properties (at an estimated value of
approximately $0.9 million), (ii) the surrender and cancellation of two
demand promissory notes receivable from William W. Becker, owner of WWCDI
(the "Becker Interests"), in the total principal amount of approximately
$4.0 million and (iii) 373,663 of Holdings-Canada common shares. The 4%
minority interest in Holdings was valued at approximately $12.2 million by
the non-related members of the Company's Board of Directors. The
transaction was approved unanimously by Holdings-Canada's non-related
directors, and ratified by Holdings-Canada's non-related shareholders. Due
to the related party nature of the purchase, the investment has been
recorded at the historical basis of WWCDI. As a result, consideration in
excess of the historical basis has been recorded in a manner similar to a
dividend.
The Company recognized telecommunications revenue of approximately $1.3
million for the year ended September 30, 1994 from companies beneficially
owned by the Becker Interests. No such revenue was recognized for the
years ended September 30, 1995 or 1996.
F-25
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(8) Long-term Debt and Short-term Notes Payable
Long-term debt at September 30 is summarized as follows:
<TABLE>
<CAPTION>
1995 1996
---------- -----------
(in thousands)
<S> <C> <C>
12 1/2% Senior discount notes, net of
discount (a) $ - 315,626
13 1/2% Senior discount notes, net of
discount (b) 299,934 343,772
Convertible subordinated notes (c) 74,434 491
Credit facility (d) 13,515 -
Note payable with interest at the 90-day
commercial paper rate plus 4.75%
(10.11% at September 30, 1996),
due 2001, secured by certain
telecom equipment - 5,888
Note payable with interest at 11%, due
monthly through fiscal 1999,
secured by equipment 3,493 2,803
Mortgage payable with interest at 8.5%,
due monthly through 2009, secured by
building 1,242 1,194
Notes payable to sellers of FOTI and
FOTDS (e) 600 -
Other $ 336 10
---------- -----------
393,554 669,784
Less current portion (14,454) (795)
---------- -----------
$ 379,100 668,989
========== ===========
</TABLE>
(a) 12 1/2% Senior Discount Notes
On April 30, 1996, Holdings completed a private placement (the "1996
Private Offering") of 12 1/2% Senior Discount Notes (the "12 1/2%
Notes") and of 14 1/4% Exchangeable Preferred Stock (the "Exchangeable
Preferred Stock") for gross proceeds of $300.0 million and $150.0
million, respectively. Net proceeds from the 1996 Private Offering
after issue costs of approximately $17.0 million were approximately
$433.0 million.
The 12 1/2% Notes are unsecured senior obligations of Holdings
(guaranteed by ICG and Holdings-Canada) that mature on May 1, 2006,
with a maturity value of $550.3 million. Interest will accrue at 12
1/2% per annum beginning May 1, 2001, and is payable each May 1 and
November 1 commencing November 1, 2001. The 12 1/2% Note indenture
contains certain covenants which provide for limitations on
indebtedness, dividends, asset sales and certain other transactions.
F-26
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(8) Long-term Debt and Short-term Notes Payable (continued)
The 12 1/2% Notes were originally recorded at approximately $300.0
million. The discount on the 12 1/2% Notes and the debt issue costs are
being accreted over ten years until maturity at May 1, 2006. The
accretion of the discount and debt issue costs is included in interest
expense in the accompanying consolidated financial statements.
Approximately $35.3 million of the proceeds from the 1996 Private
Offering were used to redeem the 12% redeemable preferred stock of
Holdings (the "Redeemable Preferred Stock") issued in August 1995
($30.0 million), pay accrued preferred dividends ($2.6 million) and to
repurchase 916,666 warrants of the Company ($2.7 million) issued in
connection with the Redeemable Preferred Stock. The Company recognized
a charge to minority interest in share of losses, net of accretion and
preferred dividends on subsidiary preferred stock of approximately
$12.3 million for the excess of the redemption price of the Redeemable
Preferred Stock over the carrying amount at April 30, 1996, and
recognized a charge to interest expense of approximately $11.5 million
for the payments made to noteholders with respect to consents to
amendments to the indenture governing the 13 1/2% Notes to permit the
1996 Private Offering.
(b) 13 1/2% Senior Discount Notes
On August 8, 1995, Holdings completed a high yield debt offering (the
"1995 Private Offering") through the issuance of 58,340 units (the
"Units"), each Unit consisting of ten $1,000, 13 1/2% Senior Discount
Notes ("the 13 1/2% Notes") due September 15, 2005, and warrants to
purchase 33 common shares of Holdings-Canada (the "Unit Warrants"),
resulting in net proceeds of approximately $286.0 million, net of
approximately $14.0 million in issue costs. The 13 1/2% Notes were sold
at approximately 51% of the stated maturity of $584.3 million, and will
mature on September 15, 2005. Interest accrues at the rate of 13 1/2%
per annum beginning September 15, 2000 and is payable in cash each
March 15 and September 15 commencing March 15, 2001.
The 13 1/2% Notes were originally recorded at approximately $294.0
million, which represents the $300.0 million in proceeds less the
approximate $6.0 million value assigned to the Unit Warrants, which is
included in additional paid-in capital. The discount on the 13 1/2%
Notes is being accreted using the interest method over five years until
September 15, 2000, the date at which the 13 1/2% Notes can first be
F-27
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(8) Long-term Debt and Short-term Notes Payable (continued)
redeemed. The value assigned to the Unit Warrants, representing
additional debt discount, is also being accreted to the debt over the
five-year period. The accretion of the total discount is included in
interest expense in the accompanying consolidated financial statements.
Holdings may redeem the 13 1/2% Notes on or after September 15, 2000,
in whole or in part, at the redemption prices set forth in the
agreement, plus unpaid interest, if any, at the date of redemption. The
13 1/2% Notes are guaranteed on a senior, unsecured basis by ICG and
Holdings-Canada. The 13 1/2% Note indenture contains certain covenants
which provide for limitations on indebtedness, dividends, asset sales,
and certain other transactions.
The Unit Warrants entitle the holder to purchase one common share of
Holdings-Canada at the exercise price of $12.51 per share and are
exercisable at any time between August 8, 1996 and August 8, 2005 (See
note 12 (d)).
In connection with the issuance of the 13 1/2% Notes, the Company
obtained $6.0 million of interim financing from the placement agent and
certain private investors in exchange for the issuance of an aggregate
of 520,000 Series A Warrants (See note 12 (d)). The $6.0 million was
repaid with a portion of the proceeds from the 1995 Private Offering.
As a result of the repayment of the interim financing, the value
assigned to the Series A Warrants totaling approximately $3.0 million,
representing debt discount, was charged to interest expense during the
year ended September 30, 1995.
(c) Convertible Subordinated Notes
Effective September 17, 1993, Holdings-Canada issued $18.0 million in
convertible subordinated notes with interest at 8% ("8% Notes").
Interest was payable, at the option of the Company, in cash or through
the issuance of additional 8% Notes. The 8% Notes were subordinated to
all present and future senior debt.
The 8% Notes, excluding unpaid interest, were convertible, at the
option of the holder, at any time into common shares of Holdings-Canada
at a conversion price of $15.60 for each common share. During fiscal
1995, approximately $1.1 million of the 8% Notes, including
approximately $0.1 million of interest paid in 8% Notes, were converted
to 69,230 common shares of Holdings-Canada. During fiscal 1996,
F-28
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(8) Long-term Debt and Short-term Notes Payable (continued)
the remaining $17.0 million of the 8% Notes and approximately $3.1
million of interest paid in 8% Notes were converted into 1,289,738
shares of Holdings-Canada.
The Company, in conjunction with the issuance of the 8% Notes, paid to
its placement agent a private placement fee of $0.9 million. The
private placement fee was included in deferred financing costs as of
September 30, 1995 and was being amortized over the term of the 8%
Notes. During the year ended September 30, 1996, the remaining $0.5
million of deferred financing costs were written off upon conversion of
the 8% Notes.
Effective October 28, 1993, the Company issued approximately $47.8
million in convertible subordinated notes with interest at 7% ("7%
Notes"). The 7% Notes were due October 30, 1998, unless earlier
converted or redeemed. Interest was payable, at the option of the
Company, in cash or through the issuance of additional 7% notes. The 7%
Notes were subordinated to all present and future senior debt.
All or any portion of the outstanding principal amount of any note and
interest are convertible, at the option of the holder, into common
shares of Holdings-Canada at a conversion price of $18.00 for each
common share.
During fiscal 1996, the Company notified the holders of the 7% Notes of
its intent to redeem the 7% Notes, together with accrued interest. As
of September 30, 1996, approximately $47.8 million of the 7% Notes and
approximately $7.9 million of interest paid in 7% Notes were converted
into 3,123,116 shares of Holdings-Canada. As of September 30, 1996,
approximately $0.5 million of interest paid in 7% Notes remains
outstanding, which are in the process of being converted.
The Company paid to the placement agent a private placement fee of
approximately $2.4 million. The private placement fee, included in
deferred financing costs, was being amortized over the term of the 7%
Notes. During the year ended September 30, 1996, approximately $1.1
million of deferred financing costs were written off upon conversion of
the 7% Notes.
F-29
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(8) Long-term Debt and Short-term Notes Payable (continued)
(d) Credit Facility
Effective November 16, 1990, the Company, through Teleport Denver Ltd.
("TDL"), a subsidiary of Holdings, entered into an $18.0 million
financing arrangement with Communications Credit Corp. ("CCC"), a
subsidiary of Northern Telecom Finance Corporation, to provide for the
acquisition, construction, installation, operation, maintenance and
expansion of a fiber optic transmission system. The promissory notes
accrued interest at 5.5% over the 90-day high grade commercial paper
rate with a maximum rate of 14.5%.
In December 1995, the Company refinanced this credit facility as part
of the short-term financing agreement with Norwest Bank Colorado, N.A.
("Norwest"), described below, which was repaid in March, 1996. During
the year ended September 30, 1996, $1.1 million of deferred financing
costs were written off upon payment of the credit facility.
(e) Notes Payable to Sellers of FOTI and FOTDS
In conjunction with the 1992 acquisitions of FOTI and Fiber Optic
Technologies Data Systems, Inc. (`FOTDS"), the Company issued notes
payable of approximately $2.0 million bearing interest at 7% per annum,
payable annually in cash or common shares of Holdings-Canada at the
option of the Company. Principal was payable through the issuance of
266,800 common shares of Holdings-Canada, at a deemed value of $7.50
per common share. As of September 30, 1995, 186,800 Holdings-Canada
common shares had been issued. On January 3, 1996, the final payment
was satisfied at a discount, with the Company issuing 76,027 common
shares of Holdings-Canada pursuant to an agreement to purchase the
remaining 49% of FOTI (see note 3).
F-30
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(8) Long-term Debt and Short-term Notes Payable (continued)
Scheduled principal maturities of long-term debt as of September 30, 1996
are as follows (in thousands):
Year ending September 30:
1997 $ 795
1998 6,774
1999 1,282
2000 537
2001 50
Thereafter (a) 1,135,548
------------
1,144,986
Less unaccreted discount on the
12 1/2% Notes and 13 1/2% Notes (475,202)
------------
$ 669,784
============
(a) Includes $550.3 million of 12 1/2% Notes and $584.3 million of 13 1/2%
Notes due at maturity.
Short-term Note Payable and Line-of-Credit
At September 30, 1995, FOTI maintained a $4.0 million line of credit
bearing interest at the prime rate plus 5% that was payable on demand. In
December 1995, the Company refinanced the line of credit as part of a
short-term facility with Norwest described below.
In December 1995, Holdings obtained $17.5 million of short-term financing
with Norwest, with interest at 2.5% above the Money Market Account yield,
to refinance certain of the Company's debt. The Company paid off this
debt and accrued interest in March 1996.
(9) Capital Lease Obligations
The Company is obligated under various capital lease agreements for
equipment at September 30, 1995 and 1996. Capital lease obligations
increased in fiscal 1996 primarily due to the Company's agreement with
Southern California Edison Company to license fiber optic cable in
Southern California (see note 14(a)).
F-31
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(9) Capital Lease Obligations (continued)
The future required payments under the Company's capital lease obligations
subsequent to September 30, 1996 are as follows (in thousands):
Year ending September 30:
1997 $ 14,571
1998 16,336
1999 14,034
2000 14,252
2001 18,154
Thereafter 107,591
------------
Total minimum lease payments 184,938
Less amounts representing interest (106,613)
------------
Present value of net minimum lease
payments 78,325
Less current portion (7,487)
------------
$ 70,838
============
(10) Redeemable Preferred Stock of Subsidiary
12% Redeemable Preferred Stock
In August 1995, Holdings-Canada completed a private placement of preferred
stock (the "Private Placement") in connection with the 1995 Private
Offering discussed in note 8. The Private Placement consisted of 300,000
shares of Redeemable Preferred Stock and warrants to purchase 2,750,000
common shares of Holdings-Canada (see note 12(d)) for net proceeds of
$28.8 million, after payment of $1.2 million in issue costs. The
Redeemable Preferred Stock accrued dividends quarterly at an annual rate
of 12% per annum.
The Redeemable Preferred Stock was originally recorded at approximately
$13.7 million, which represents the $28.8 million in net proceeds less the
approximate $15.1 million value assigned to the warrants, which is
included in additional paid-in-capital of the Company. The value assigned
to the warrants, representing a discount on the Redeemable Preferred
Stock, was accreted through the time the Redeemable Preferred Stock was
redeemed on April 30, 1996 with a portion of the proceeds from the 1996
Private Offering.
F-32
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(10) Redeemable Preferred Stock of Subsidiary (continued)
14 1/4% Exchangeable Preferred Stock
The Exchangeable Preferred Stock consists of 150,000 shares of preferred
stock that bear a cumulative dividend at the rate of 14 1/4% per annum.
The dividend is payable quarterly in arrears each February 1, May 1,
August 1 and November 1 commencing August 1, 1996. Through May 1, 2001,
the dividend is payable, at the option of the Company, in cash or
additional shares of Exchangeable Preferred Stock. The Company may
exchange the Exchangeable Preferred Stock into 14 1/4% Senior Subordinated
Exchange Debentures at any time after the exchange is permitted by certain
indenture restrictions. The Exchangeable Preferred Stock is subject to
mandatory redemption on May 1, 2007.
Included in minority interest in share of losses, net of accretion and
preferred dividends on subsidiary preferred stock for the years ended
September 30, 1995 and 1996 is approximately $1.3 million and $27.0
million, respectively, associated with the Redeemable Preferred Stock
(fiscal 1995 and fiscal 1996) and the Exchangeable Preferred Stock (fiscal
1996 only), including the accretion of warrants issued in connection with
the Redeemable Preferred Stock, accretion of issue costs and a 12% and 14
1/4% preferred stock dividend accrual on the Redeemable Preferred Stock
and the Exchangeable Preferred Stock, respectively. These costs are
partially offset by the minority interest share of losses in subsidiaries
of approximately $0.6 million and $2.7 million for the years ended
September 30, 1995 and 1996, respectively.
(11) Convertible Preferred Stock of Subsidiary
Convertible Series B Preferred Stock, no par value, 2,000,000 shares
authorized; 990,000 shares issued and outstanding at September 30, 1995.
In May and June 1995, Holdings-Canada sold an aggregate of 1,600,000
convertible preferred shares, having an aggregate stated value of $16.0
million. Net proceeds to the Company, after issue costs of approximately
$0.9 million, were approximately $15.1 million. The convertible preferred
shares were convertible at the holders' election into common shares of
Holdings-Canada commencing in July 1995, at a discount from the market
price at the time of conversion equal to 18.5% for $6.0 million of the
convertible preferred shares ("Series A Preferred Stock") and 17.5% for
$10.0 million of the convertible preferred shares ("Series B Preferred
Stock").
F-33
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------
(11) Convertible Preferred Stock of Subsidiary (continued)
In July 1995, 10,000 shares of the Series B Preferred Stock were
repurchased for $0.1 million in cash. In August and September 1995,
200,000 shares of the Series A Preferred Stock were converted to 302,029
common shares of Holdings-Canada valued at $2.0 million, and 400,000
shares of the Series A Preferred Stock were repurchased for approximately
$4.2 million in cash. The excess of the repurchase price over the stated
value of the Series A and Series B Preferred Stock repurchased of
approximately $0.5 million was treated as a preferred stock dividend and
is included in minority interest in share of losses, net of accretion and
preferred dividends on subsidiary preferred stock in the accompanying
consolidated financial statements.
During fiscal 1996, the Company repurchased approximately $5.6 million of
Series B Preferred Stock, and approximately $3.8 million of the Series B
Preferred Stock was converted to Holdings-Canada common shares. The excess
of the repurchase and conversion price over the stated value of the Series
B Preferred Stock of approximately $1.0 million has been treated as a
preferred stock dividend and is included in minority interest in share of
losses, net of accretion and preferred stock dividends on subsidiary
preferred stock in the accompanying consolidated financial statements. No
convertible preferred shares remain outstanding as of September 30, 1996.
F-34
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit)
Common Stock
Common stock outstanding at September 30, 1996 represents the issued and
outstanding Common Stock of ICG and Class A common shares of
Holdings-Canada (owned by third parties) which are exchangeable at any
time, on a one-for-one basis, for ICG Common Stock. The following table
sets forth the number of shares outstanding for ICG and Holdings-Canada on
a separate company basis as of September 30, 1996:
Shares Shares
owned by owned by
ICG third
parties
------------ ------------
ICG Common Stock, $.01 par value,
100,000,000 shares authorized;
0 and 29,888,376 shares issued
and outstanding at September 30,
1995 and 1996, respectively - 29,888,376
Holdings-Canada Class A common
shares, no par value, 100,000,000
shares authorized; 24,990,839 and
31,672,103 shares issued and
outstanding at September 30, 1995
and 1996, respectively:
Class A common shares,
exchangeable on a
one-for-one basis for ICG Common
Stock at any time - 1,815,101
Class A common shares owned
by ICG 29,857,002 -
------------
Total shares outstanding 31,703,477
============
(a) Public Offering
On October 24, 1994, Holdings-Canada completed a public offering of its
common shares, whereby 6,900,000 shares, including 1,183,147 shares
sold by selling shareholders, were sold at $14 per share. Net proceeds
to the Company, net of issue costs of approximately $5.7 million, were
approximately $74.3 million.
(b) Private Placements
In May and June 1995, the Company privately placed 595,000 common
shares of Holdings-Canada for $7.50 per share. Net proceeds to the
Company, after issue costs of approximately $0.4 million, were
approximately $4.0 million. Pursuant to a private placement memorandum
dated June 1993, for the issue of 1,500,000 common
F-35
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
shares for approximately $8.3 million, the Company agreed to file a
registration statement with the Securities and Exchange Commission of
the United States that was to become effective on or before October 11,
1993. The registration statement did not become effective on or before
that date. As a result, the Company issued, for no additional
consideration, an additional 197,250 shares to the investors. The
issuance of these additional shares was recorded as a capital
transaction during the year ended September 30, 1994.
(c) Stock Option Plans
In 1991, 1992 and 1993 the Company's Board of Directors approved
incentive stock option plans which provide for the granting of options
to directors, officers, employees and consultants of the Company to
purchase 285,000, 446,000 and 546,000 common shares of the Company,
respectively, at 80% and 100% of the fair value of the common shares at
the date of grant. Compensation expense has been recorded for options
granted at an exercise price below the fair value of the Company's
common shares at the date of grant. The options granted under these
plans are subject to various vesting requirements. During the year
ended September 30, 1993, the Company's Board of Directors approved the
replenishment of 549,500 options available to be granted under the 1993
plan. As of September 30, 1996, 362,058 of these options remain
outstanding.
During the year ended September 30, 1994, the Company granted options
to certain directors, officers and employees to purchase 516,000 common
shares at exercise prices ranging from $4.52 to $14.39 per share for a
period of 10 years. As of September 30, 1996, 308,100 of these options
remain outstanding.
During the year ended September 30, 1995, the Company granted options
to certain directors, officers and employees to purchase 1,550,000,
800,000 and 170,000 common shares at exercise prices of $7.94, $13.25
and $8.50 per share, respectively. As of September 30, 1996, 1,550,000,
568,000 and 160,000 of these options, respectively, remain outstanding.
During the year ended September 30, 1996, the Company granted options
to certain directors, officers and employees to purchase 1,321,843
common shares at exercise prices ranging from $10.00 to $26.25 per
share for a period of 10 years. As of September 30, 1996, 1,256,793
options remain outstanding.
F-36
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
The following table summarizes stock option activity for the three
years ended September 30, 1996:
Outstanding Price
options range
------------- --------------
(in thousands)
Outstanding, October 1, 1993 865 $2.99 - 7.34
Granted 516 4.52 - 14.39
Exercised (62) 2.99 - 5.43
-------------
Outstanding, September 30,
1994 1,319 2.99 - 14.39
Granted 2,520 7.94 - 13.25
Exercised (264) 2.88 - 6.68
Canceled (201) 2.88 - 14.39
-------------
Outstanding, September 30,
1995 3,374 2.99 - 13.25
Granted 1,322 10.00 - 26.25
Exercised (248) 2.90 - 13.25
Canceled (243) 2.94 - 13.25
=============
Outstanding, September 30,
1996 4,205 2.94 - 26.25
=============
As of September 30, 1996, there were 4,204,951 options exercisable at
prices ranging from $2.94 to $26.25, expiring at various dates through
September 30, 2006.
F-37
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
(d Warrants
During the years ended September 30, 1994, 1995 and 1996 the Company's
warrant activity was as follows:
(i) During the year ended September 30, 1993, the Company issued to
WWCDI bonus warrants to purchase 6,680 Holdings-Canada common
shares at an exercise price of $7.50. At September 30, 1994, all
of these warrants had been exercised for $50,100.
(ii)During the year ended September 30, 1993, the Company issued to a
debt holder warrants to purchase 17,067, 3,255 and 11,039 common
shares at exercise prices of $6.56, $7.38 and $7.88, respectively.
During the year ended September 30, 1994, 17,067 warrants were
exercised for proceeds of $111,960. In addition, during the year
ended September 30, 1994, the Company issued to the same debt
holder additional warrants to purchase 1,989, 15,260 and 3,665
common shares of Holdings-Canada at $21.51, $20.01 and $11.80 per
share, exercisable on or before November 10, 1998, March 24, 1999,
and July 8, 1999, respectively. An additional 7,725 warrants were
issued on July 10, 1995 at an exercise price of $14.50, which
expire on July 9, 2000. Also issued on July 10, 1995 were 60,000
additional warrants to an affiliate of the debt holder at an
exercise price of $14.50, which expire on July 9, 2000. Total
warrants outstanding held by the debt holder were 102,933 at
September 30, 1996.
(iii) During the year ended September 30, 1994, the Company issued to
two financial advisors warrants to purchase 75,000 and 200,000
common shares of Holdings-Canada. These warrants have an exercise
price of $7.94 and $18.00 and are exercisable for two- and five-
year periods, respectively. During the years ended September 30,
1995 and 1996, 74,335 and 665 of the 75,000 warrants were
exercised for proceeds of $590,035 and $5,278, respectively. At
September 30, 1996, the 200,000 warrants remain outstanding.
Subsequent to September 30, 1996, 100,000 of the 200,000 warrants
were exercised for proceeds of $1.8 million.
F-38
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
(iv) Pursuant to a private placement during the year ended September
30, 1992, the Company issued to William W. Becker, a director of
the Company, warrants to purchase 600,000 common shares of
Holdings-Canada at exercise prices of $5.65 and $6.51 on or before
February 11, 1993 and 1994, respectively. During the year ended
September 30, 1994, these warrants were exercised for proceeds of
approximately $3.8 million.
(v) Pursuant to a private placement during the year ended September
30, 1992, the Company issued warrants to purchase 41,000 common
shares of Holdings-Canada at an exercise price of $5.65 on or
before July 17, 1993. During the year ended September 30, 1994,
all of these warrants were exercised for proceeds of $216,582.
(vi) The Company issued to a consultant of the Company warrants to
purchase 10,000 common shares of Holdings-Canada at an exercise
price of $6.40 on or before May 1, 1994. During the year ended
September 30, 1994, these warrants were exercised for $59,600.
(vii) Pursuant to a private placement of the Redeemable Preferred Stock
and the interim financing arrangement during the year ended
September 30, 1995, the Company issued 1,895,000 Series A Warrants
and 1,375,000 Series B Warrants to purchase an equal number of
common shares of Holdings-Canada. The exercise prices are $7.94
and $8.73, respectively, and the warrants expire on July 14, 2000.
None of the warrants had been exercised as of September 30, 1995.
During the year ended September 30, 1996, the Company repurchased
458,333 each of the Series A and Series B Warrants for $3.21 and
$2.52, respectively (see note 8). In addition, 1,853,334 warrants
were exercised in June 1996 through a cashless exercise in which
1,271,651 Holdings-Canada common shares were issued. As of
September 30, 1996, 250,000 Series A Warrants and 250,000 Series B
Warrants remain outstanding.
(viii) In connection with the 1995 Private Offering, the Company issued
1,928,190 warrants to purchase an equal number of common shares of
Holdings-Canada. The warrants are exercisable beginning August 8,
1996 at $12.51 per share and expire on August 6, 2005. As of
September 30, 1996, all of these warrants remain outstanding.
F-39
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
The following table summarizes warrant activity for the three years ended
September 30, 1996:
Outstanding Price
warrants range
--------------- -------------
(in thousands)
Outstanding, October 1,
1993 689 $5.65 - 7.88
Granted 296 7.94 - 21.51
Exercised (675) 5.96 - 7.50
---------------
Outstanding,
September 30, 1994 310 7.38 - 21.51
Granted 5,266 7.94 - 14.50
Exercised (74) 7.94 - 7.94
---------------
Outstanding,
September 30, 1995 5,502 7.38 - 21.51
Repurchased (917) 2.52 - 3.21
Exercised (1,854) 7.94 - 8.73
---------------
Outstanding,
September 30, 1996 2,731 7.38 - 21.51
===============
The warrants outstanding are exercisable on the following basis as of
September 30, 1996:
Outstanding Exercise
Expiration date warrants price
--------------- --------------- -------------
(in thousands)
June 18, 1998 3 $ 7.38
July 16, 1998 11 7.88
November 10, 1998 2 21.51
December 17, 1998 200 18.00
March 24, 1999 15 20.01
July 8, 1999 4 11.80
July 9, 2000 68 14.50
July 14, 2000 250 7.94
July 14, 2000 250 8.73
August 6, 2005 1,928 12.51
===============
2,731
===============
F-40
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
(e) Employee Stock Purchase Plan
Subsequent to September 30, 1996, the Company established an Employee
Stock Purchase Plan whereby employees can elect to designate 1% to 30%
of their annual salary, up to a limit of $25,000 per year, to be used
to purchase ICG Common Stock at a 15% discount to market. The Company
may issue a total of 1,000,000 shares of ICG Common Stock to
participants in the plan.
(13) Sale of Teleports
In December 1995, the Company received approximately $21.1 million as
partial payment for the sale of four of its teleports and certain related
assets, and entered into a management agreement with the purchaser whereby
the purchaser assumed control of the teleport operations. Upon approval of
the transaction by the Federal Communications Commission ("FCC"), the
Company completed the sale in March 1996 and received an additional $0.4
million due to certain closing adjustments, for total proceeds of $21.5
million. The Company recognized a loss of approximately $1.1 million on
the sale. Revenue associated with these operations was approximately $5.9
million, $9.1 million and $2.5 million for fiscal years ended September
30, 1994, 1995 and 1996, respectively. The Company has reported results of
operations from these assets through December 31, 1995.
(14) Commitments and Contingencies
(a) Network Construction
In November 1995, the Company signed an agreement with City Public
Service of San Antonio ("CPS") to license excess fiber optic facilities
on a new 300-mile fiber network being built by the municipally-owned
electric and gas utility to provide for its communications needs in the
greater metropolitan area. Pursuant to this agreement, the Company has
provided a $12.0 million irrevocable letter of credit to secure payment
of the Company's portion of the construction costs. The letter of
credit is secured by cash collateral of $13.3 million.
The legal ability of CPS, as a municipally-owned utility, to enter into
this contract with the Company has been challenged by SBC
Communications, Inc. ("SBC") before the San Antonio City Council as
being violative of May 1995 Texas state law.
F-50
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
The Company has filed a petition with the FCC requesting a declaratory
ruling that the federal Telecommunications Act of 1996 preempts the
Texas state law to the extent that it precludes implementation of the
agreement between CPS and the Company, and has also filed a declaratory
ruling request with a Texas state court. Both of these actions are
pending. The Company has also filed a civil suit against SBC, and the
Company's appeal of a dismissal of that suit is also pending.
In February 1996, the Company entered into a 20-year agreement with
WorldCom, Inc. ("WorldCom"), under which the Company will pay
approximately $8.8 million for the right to use fiber along a 330-mile
fiber optic network in Ohio. The network is being constructed by
WorldCom in conjunction with the Company. An aggregate of approximately
$2.7 million has been paid by the Company through September 30, 1996,
with the balance due upon the completion of specified segments of the
network.
In March 1996, the Company and Southern California Edison Company
("SCE") jointly entered into a 25-year agreement under which the
Company will lease 1,258 miles of fiber optic cable in Southern
California, and can install up to 500 additional miles of fiber optic
cable. This network, which will be maintained and operated by the
Company, stretches from Los Angeles to San Diego. Under the terms of
this agreement, SCE will be entitled to receive an annual fee for ten
years, certain fixed quarterly payments, including a quarterly payment
equal to a percentage of certain network revenue, and certain other
installation and fiber connection fees. The aggregate fixed payments
remaining under this 25-year agreement totaled approximately $149.7
million at September 30, 1996. The agreement has been accounted for as
a capital lease in the accompanying consolidated balance sheets at
September 30, 1996.
In March 1996, the Company entered into a long-term agreement with a
subsidiary of The Southern Company ("Southern") and Alabama Power
Company ("Alabama Power") for the right to use 22 miles of existing
fiber and 122 miles of additional Alabama Power rights of way and
facilities to reach the three major business centers in Birmingham.
Southern will, in conjunction with the Company, construct the network
and provide maintenance services with respect to the fiber installed.
Southern also will provide consulting services to the Company relating
to the build-out of the network and potential enhancements to the
Company's products and services.
F-41
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
Under the agreement, the Company also is required to pay Southern a
quarterly fee based on specified percentages of the Company's revenue
for services provided through this network. The Company's estimated
costs to complete the network are approximately $4.0 million, which are
expected to be incurred during fiscal year 1997. In July 1996, the
Company entered into a 20-year agreement with subsidiaries of American
Electric Power ("AEP") to jointly build a 45-mile network addition in
metropolitan Columbus, plus a 138-mile long-haul link to Canton, Ohio.
The Company's estimated costs to complete the construction are
approximately $4.7 million, which are expected to be incurred during
fiscal year 1997.
(b) Company Headquarters
The Company has acquired property for its new headquarters and has
commenced construction of an office building that the Company expects
will accommodate all of the Company's Colorado operations. The total
cost of the project is expected to be approximately $44.0 million, of
which $1.7 million had been incurred as of September 30, 1996 and is
included in construction in progress. The Company is currently
negotiating financing arrangements under which the Company will lease
the office space under a long-term operating lease, and expects an
agreement to be reached in early 1997.
(c) Purchase Commitments
In September 1996, the Company entered into a seven-year, $1.0 billion
equipment purchase agreement for advanced telecommunications products
and services with Lucent Technologies, Inc. ("Lucent"). Lucent will
provide the Company with a full range of systems, software and services
which will be used by the Company to build and expand the Company's
advanced communications networks, including 5ESS(R)-2000 switching
systems, SONET equipment, access equipment, power plants, application
software systems, Advanced Intelligent Network platforms, data
networking products and fiber cable. Lucent will also provide
engineering, installation, on-site technical support and professional
services. Under the agreement with Lucent, the Company has agreed to
purchase certain minimum levels of equipment and services during each
year of the agreement, and if it does not meet a minimum level in any
given year, Lucent may discontinue certain discounts, allowances and
incentives otherwise provided to the Company for the year in which the
minimum level was not met. In addition, the agreement may be terminated
by
F-42
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
either the Company or Lucent upon sixty days prior written notice. In
September 1996, the Company entered into a 30-year agreement and two
indefeasible rights of use ("IRU") agreements with the Los Angeles
Department of Water and Power ("LADWP") for 105 miles of fiber optic
capacity throughout downtown Los Angeles, Century City, West Los
Angeles, Mid-Wilshire and Sherman Oaks. The agreements are subject to
acceptance testing and require the Company to pay approximately $17.5
million upon inception of the agreements.
In addition to the above, the Company has entered into certain
commitments to purchase assets with an aggregate purchase price of
approximately $24.0 million at September 30, 1996.
(d) Leases
The Company leases office space and equipment under non-cancelable
operating leases. Lease expense for the years ended September 30, 1994,
1995 and 1996 was approximately $1.3 million, $2.8 million and $5.1
million, respectively. As of September 30, 1996, estimated future
minimum lease payments for the years ending September 30 are (in
thousands):
1997 $ 6,299
1998 4,678
1999 3,535
2000 2,345
2001 1,435
Thereafter 4,909
============
$ 23,201
============
(e) Litigation
Four putative class action complaints have been filed in the U.S.
District Court for the District of Colorado by stockholders of the
Company naming the Company and certain of its current and former
officers and directors as defendants. The complaints allege that the
defendants violated the Securities Exchange Act of 1934, as amended,
with respect to the content and timing of certain disclosures.
F-43
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
The Company reached a settlement agreement with the plaintiffs in
September 1996, and has accrued approximately $0.8 million at
September 30, 1996 for its estimated settlement costs. The Company is
a party to certain other litigation which has arisen in the ordinary
course of business. In the opinion of management and legal counsel,
the ultimate resolution of these matters will not have a significant
effect on the financial condition of the Company.
(15) Income Taxes
Income tax expense (benefit) for the year ended September 30, 1996 was as
follows (in thousands):
Current income tax expense $ 198
Deferred income tax benefit (5,329)
============
Total $ (5,131)
============
Current income tax expense for the year ended September 30, 1996 represents
state income tax relating to operations of companies in states requiring
separate entity tax returns. Accordingly, these entities' taxable income
cannot be offset by the Company's net operating loss carryforwards. No
income tax expense or benefit was recorded in fiscal 1994 or 1995.
Income tax expense (benefit) differs from the amounts computed by applying
the U.S. federal income tax rate to loss before income taxes primarily
because the Company has not recognized the income tax benefit of certain of
its net operating loss carryforwards and other deferred tax assets due to
the uncertainty of realization.
During the year ended September 30, 1996, the deferred tax liability was
adjusted for the effects of certain changes in estimated lives of property
and equipment as discussed in note 2 (f). As a result, the Company
recognized an income tax benefit of $5.3 million.
F-44
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(15) Income Taxes (continued)
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
September 30 are as follows:
1995 1996
------------ ----------
(in thousands)
Deferred income tax liabilities:
Property and equipment:
Excess purchase price of
tangible assets $ 8,433 7,617
Differences in depreciation for
book and tax purposes 6,502 7,394
------------ ----------
Total gross deferred tax
liabilities 14,935 15,011
Deferred income tax asset - net
operating loss carryforwards (37,695) (54,197)
Accrued interest on high yield debt
obligations deductible when paid - (26,800)
Accrued expenses not currently
deductible for tax purposes - (4,351)
Less valuation allowance 28,462 70,337
------------ ----------
Net deferred income tax
asset (9,233) (15,011)
------------ ----------
Net deferred income tax
liability $ 5,702 -
============ ==========
As of September 30, 1996, the Company has net operating losses ("NOLs") of
approximately $135.5 million for U.S. tax purposes which expire in varying
amounts through 2010. However, due to the provisions of Section 382,
Section 1502 and certain other provisions of the Internal Revenue Code
(the "Code"), the utilization of these NOLs will be limited. The Company
is also subject to certain state income tax laws, which will also limit
the utilization of NOLs.
The net deferred tax asset related to the Company's NOL carryforwards
represents the portion of the NOLs that the Company estimates will be
utilized to reduce future taxable income resulting from the reversal of
temporary differences. A valuation allowance has been provided for the
remainder of the deferred tax asset relating to the NOLs, as management
cannot determine when the Company will generate future taxable income.
F-45
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(16) Employee Benefit Plans
The Company has established salary reduction savings plans under Section
401(k) of the Code which the Company administers for participating
employees. All full-time employees are covered under the plan after
meeting minimum service and age requirements. The Company contributes a
matching contribution of its Common Stock (up to 6% of annual salary)
which totaled approximately $0.3 million, $0.5 million and $1.2 million
during the years ended September 30, 1994, 1995 and 1996, respectively.
(17) Significant Customer
During the year ended September 30, 1995, the Company had revenue from a
single customer which comprised 11% of total revenue and accounts
receivable which comprised 8% of the total accounts receivable balance at
September 30, 1995. There were no customers which accounted for greater
than 10% of revenue or accounts receivable as of, or for the years ended
September 30, 1994 and 1996.
F-46
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(18) Summarized Financial Information of ICG Holdings, Inc.
As discussed in note 8(a) and (b), the 12 1/2% Notes and 13 1/2% Notes
issued by Holdings during 1996 and 1995, respectively, are guaranteed by
ICG and Holdings-Canada. The separate complete financial statements of
Holdings have not been included herein because such disclosure is not
considered to be material to the holders of the 12 1/2% Notes and 13 1/2%
Notes. However, summarized combined financial information for Holdings and
subsidiaries and affiliates as of September 30, 1995 and 1996 and for the
years ended September 30, 1994, 1995 and 1996 is as follows:
Summarized Consolidated Balance Sheet Information
September 30,
---------------------------
1995 1996
------------ -------------
(in thousands)
$ 309,208 506,151
Property and equipment, net 201,983 336,137
Other non-current assets, net 66,737 94,046
Current liabilities 60,036 59,963
Long-term debt, less current
portion 304,666 668,498
Due to parent 238,282 8,595
Other long-term liabilities 37,214 76,470
Preferred stock 14,986 153,318
Stockholders' deficit (77,256) (30,510)
Summarized Consolidated and Combined Statement of
Operations Information (a)
Years ended
September 30,
------------------------------------
1994 1995 1996
----------- ----------- ---------
(in thousands)
Total revenue $ 58,995 111,610 169,094
Total operating costs
and expenses 72,509 157,384 238,908
Operating loss (13,514) (45,774) (69,814)
Net loss (15,194) (68,760) (172,687)
(a) The 1994 amounts include FOTI and its subsidiaries which was 51% owned
by Holdings-Canada. Holdings-Canada's 51% interest in FOTI was
contributed to Holdings effective in February 1995 (the remaining 49%
was purchased in January 1996) and, accordingly, FOTI's operations
have been included in the consolidated amounts subsequent to that
date.
F-47
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(19) Condensed Financial Information of ICG Holdings (Canada),Inc.(Stand alone)
Condensed financial information of Holdings-Canada as of September 30,
1995 and 1996 and for the years ended September 30, 1994, 1995 and 1996 is
as follows:
Condensed Balance Sheet Information
September 30,
---------------------------
1995 1996
------------ -------------
(in thousands)
Current assets $ 249 177
Advances to subsidiaries 238,282 8,595
Property and equipment, net 21 -
Other non-current assets, net 5,355 2,841
Current liabilities 332 200
Long-term debt, less current
portion 74,434 491
Other long-term liabilities 77,256 30,963
Shareholders' equity (deficit) 91,885 (20,041)
Condensed Statement of Operations Information
Years ended September 30,
-----------------------------------
1994 1995 1996
----------- ----------- ---------
(in thousands)
Total revenue $ - - -
Total operating costs
and expenses 1,024 1,309 3,438
Operating loss (1,024) (1,309) (3,438)
Losses from subsidiaries (15,194) (68,760) (172,687)
Net loss attributable
to common shareholders (23,868) (76,648) (184,107)
(20) Condensed Financial Information of ICG Communications, Inc. (Parent only)
The sole asset of ICG is its investment in Holdings-Canada. ICG has no
operations other than those of Holdings-Canada and its subsidiaries.
F-48
<PAGE>
FINANCIAL STATEMENT SCHEDULES
ICG Communications, Inc. Page
-----
Independent Auditors' Report S-2
Schedule II: Valuation and Qualifying Accounts S-3
S-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
ICG Communications, Inc.:
Under the date of November 18, 1996, we reported on the consolidated balance
sheets of ICG Communications, Inc. and subsidiaries as of September 30, 1995 and
1996, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the years in the three-year period
ended September 30, 1996, as contained in the Company's Annual Report on Form
10-K for fiscal year 1996. In connection with our audits of the aforementioned
consolidated financial statements, we have also audited the related financial
statement schedule as listed in the accompanying index. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits.
In our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as whole, presents
fairly, in all material respects, the information set forth therein.
As explained in note 2 to the consolidated financial statements, during fiscal
1996, the Company changed its method of accounting for long-term telecom
services contracts.
KPMG Peat Marwick LLP
Denver, Colorado
November 18, 1996
S-2
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES Schedule II
Valuation and Qualifying Accounts
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands)
Balance Balance
at Charged to at
Beginning Costs and Deductions/ End of
of Period Expenses Writeoffs Period
--------- --------- ---------- --------
<S> <C> <C> <C> <C>
Allowance for uncollectible
trade receivables:
Year ended September 30,
1994 $ 111 1,791 (841) 1,061
--------- --------- ---------- --------
Year ended September 30,
1995 $ 1,061 2,360 (1,204) 2,217
--------- --------- ---------- --------
Year ended September 30,
1996 $ 2,217 1,585 (1,293) 2,509
--------- --------- ---------- --------
Allowance for uncollectible
note receivable:
Year ended September 30,
1994 $ - - - -
--------- --------- ---------- --------
Year ended September 30,
1995 $ - 175 - 175
--------- --------- ---------- --------
Year ended September 30,
1996 $ 175 7,100 - 7,275
--------- --------- ---------- --------
Allowance for investment
impairment:
Year ended September 30,
1994 $ - - - -
--------- --------- ---------- --------
Year ended September 30,
1995 $ - 2,000 - 2,000
--------- --------- ---------- --------
Year ended September 30,
1996 $ 2,000 - - 2,000
--------- --------- ---------- --------
</TABLE>
See accompanying independent auditors' report.
S-3
<PAGE>
INDEX TO EXHIBITS
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
<PAGE>
ANNUAL REPORT ON FORM 10-K
for year ended September 30, 1996
Filed Pursuant to Section 13 of the Securities Exchange Act of 1934
<PAGE>
EXHIBITS
10.39: Employment Agreement between Fiber Optic Technologies, Inc. and Mark
S. Helwege, dated July 8, 1996.
10.41: Employment Agreement between ICG Satellite Services, Inc. and
Douglas I. Falk, dated August 14, 1996.
10.42: ICG Communications, Inc. 401(k) Wrap Around Deferred Compensation
Plan.
21: Subsidiaries of the Registrant.
23.1: Consent of KPMG Peat Marwick LLP.
27: Financial Data Schedule.
<PAGE>
EXHIBIT 10.39
Employment Agreement between Fiber Optic Technologies, Inc.
and Mark S. Helwege, dated July 8, 1996.
<PAGE>
EXHIBIT 10.41
Employment Agreement between ICG Satellite Services, Inc.
and Douglas I. Falk, dated August 14, 1996.
<PAGE>
EXHIBIT 10.42
ICG Communications, Inc. 401(k) Wrap Around
Deferred Compensation Plan
EXHIBIT 21
<PAGE>
EXHIBIT 23.1
Consent of KPMG Peat Marwick LLP
<PAGE>
EXHIBIT 27
Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on December 18, 1996.
ICG Communications, Inc.
By: /s/ J. Shelby Bryan
---------------------
J. Shelby Bryan
President, Chief Executive Officer and
Director
Pursuant to the requirements of the Securities Act of 1934, this Report has been
signed by the following persons in the capacities and on the dates indicated:
Signature Title Date
- ------------------------- ------------------------------ -------------------
Chairman of the Board of
/s/ William J. Laggett Directors December 18, 1996
- --------------------------
William J. Laggett
President, Chief Executive
Officer and Director (Principal
/s/ J. Shelby Bryan Executive Officer) December 18, 1996
- --------------------------
J. Shelby Bryan
Executive Vice President,
Chief Financial
Officer and Treasurer
/s/ James D. Grenfell (Principal Financial Officer) December 18, 1996
- --------------------------
James D. Grenfell
Vice President and Corporate
Controller (Principal
/s/ Richard Bambach Accounting Officer) December 18, 1996
- --------------------------
Richard Bambach
/s/ William W. Becker Director December 18, 1996
- --------------------------
William W. Becker
/s/ Harry R. Herbst Director December 18, 1996
- --------------------------
Harry R. Herbst
/s/ Stan McLelland Director December 18, 1996
- --------------------------
Stan McLelland
/s/ Jay E. Ricks Director December 18, 1996
- --------------------------
Jay E. Ricks
/s/ Leontis Teryazos Director December 18, 1996
- --------------------------
Leontis Teryazos
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on December 18, 1996.
ICG Holdings (Canada), Inc.
By: /s/ J. Shelby Bryan
------------------------
J. Shelby Bryan
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Act of 1934, this Report has been
signed by the following persons in the capacities and on the dates indicated:
Signature Title Date
- ----------------------- ----------------------------- ---------------------
/s/ William J. Laggett Directors December 18, 1996
- --------------------------
William J. Laggett
President, Chief Executive
Officer and Director (Principal
/s/ J. Shelby Bryan Executive Officer) December 18, 1996
- --------------------------
J. Shelby Bryan
Executive Vice President, Chief
Financial Officer and Treasurer
/s/ James D. Grenfell (Principal Financial Officer) December 18, 1996
- --------------------------
James D. Grenfell
Vice President and Corporate
Controller (Principal
/s/ Richard Bambach Accounting Officer) December 18, 1996
- --------------------------
Richard Bambach
/s/ William W. Becker Director December 18, 1996
- --------------------------
William W. Becker
/s/ Harry R. Herbst Director December 18, 1996
- -------------------------
Harry R. Herbst
/s/ Jay E. Ricks Director December 18, 1996
- --------------------------
Jay E. Ricks
/s/ Gregory C.K. Smith Director December 18, 1996
- --------------------------
Gregory C.K. Smith
/s/ Leontis Teryazos Director December 18, 1996
- --------------------------
Leontis Teryazos
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on December 18, 1996.
ICG Holdings, Inc.
By: /s/ J. Shelby Bryan
------------------------
J. Shelby Bryan
Chairman of the Board of Directors,
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this Report has been
signed by the following persons in the capacities and on the dates indicated:
Signature Title Date
- --------------------- ------------------------------------- ------------------
Chairman of the Board of Directors,
President and Chief Executive Officer
/s/ J. Shelby Bryan (Principal Executive Officer) December 18, 1996
- ---------------------
J. Shelby Bryan
Executive Vice President, Chief
Financial Officer, Treasurer and
/s/James D. Grenfell Director (Principal Financial Officer) December 18, 1996
- ---------------------
James D. Grenfell
Vice President and Corporate
Controller (Principal
/s/ Richard Bambach Accounting Officer) December 18, 1996
- ---------------------
Richard Bambach
Executive Vice President-Telecom and
/s/William J. Maxwell Director December 18, 1996
- ---------------------
William J. Maxwell
Executive Vice President-Network and
/s/ Mark S. Helwege Director December 18, 1996
- ---------------------
Mark S. Helwege
