FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) June 12, 1998
ICG COMMUNICATIONS, INC.
ICG FUNDING, LLC
ICG HOLDINGS (CANADA), INC.
ICG HOLDINGS, INC.
(Exact name of registrants as specified in their charters)
- ------------------ ------------------------ ----------------------------------
Delaware 1-11965 84-1342022
Delaware 333-40495 84-1434980
Canada 1-11052 Not applicable
Colorado 33-96540 84-1158866
(State or other (Commission File Number) (IRS Employer Identification No.)
jurisdiction of
incorporation)
- ---------------------------------- -------------------------------------------
161 Inverness Drive West Not applicable
Englewood, Colorado 80112
161 Inverness Drive West Not applicable
Englewood, Colorado 80112
1710-1177 West Hastings Street c/o ICG Communications, Inc.
Vancouver, BC V6E 2L3 161 Inverness Drive West
P.O. Box 6742
Englewood, Colorado 80155-6742
161 Inverness Drive West Not applicable
Englewood, Colorado 80112
(Address of principal (Address of U.S. agent for service)
executive offices) (Zip Code)
- ---------------------------------- -------------------------------------------
Registrants' telephone numbers, including area codes:
(888) 424-1144 or (303) 414-5000
<PAGE>
ITEM 5. OTHER EVENTS.
On January 21, 1998, ICG Communications, Inc. ("ICG" or the "Company"),
a Delaware corporation, completed a merger with NETCOM On-Line Communication
Services, Inc. ("NETCOM"), a Delaware corporation. At the effective time of the
merger, each outstanding share of NETCOM common stock, $.01 par value ("NETCOM
Common Stock"), became automatically convertible into shares of ICG common
stock, $.01 par value ("ICG Common Stock"), at an exchange ratio of 0.8628
shares of ICG Common Stock per share of NETCOM Common Stock.
The business combination of ICG and NETCOM has been accounted for as a
pooling of interests, and accordingly, the Company's Consolidated Financial
Statements, included in Exhibit 99.1, have been restated to include the
operations of NETCOM for all historical periods.
ITEM 7. EXHIBITS.
(23) Consents.
23.1: Consent of KPMG Peat Marwick LLP, Independent Auditors.
23.2: Consent of Ernst & Young LLP, Independent Auditors.
(99) Additional Exhibits.
99.1:Consolidated Financial Statements of ICG Communications, Inc. and
Subsidiaries for the Fiscal Years Ended September 30, 1995 and
1996, the Three Months Ended December 31, 1996 and the Fiscal
Year Ended December 31, 1997.
99.2:Financial Statement Schedule II: Valuation and Qualifying
Accounts for the Fiscal Years Ended September 30, 1995 and 1996,
the Three Months Ended December 31, 1996 and the Fiscal Year
Ended December 31, 1997, and the Independent Auditors' Report
Thereon.
99.3:Report of Ernst & Young LLP, Independent Auditors, Regarding the
Consolidated Financial Statements of NETCOM On-Line Communication
Services, Inc. as of December 31, 1996 and 1997 and for each of
the Three Years in the Period Ended December 31, 1997.
99.4:Report of Ernst & Young LLP, Independent Auditors, Regarding the
Consolidated Financial Statements of NETCOM On-Line Communication
Services, Inc. as of December 31, 1996 and for the Three Months
Then Ended.
<PAGE>
EXHIBIT 23.1
Consent of KPMG Peat Marwick LLP, Independent Auditors.
<PAGE>
Consent of KPMG Peat Marwick LLP, Independent Auditors
The Board of Directors
ICG Communications, Inc.:
We consent to incorporation by reference in the registration statements Nos.
33-96660 and 33-08729 on Form S-3 of IntelCom Group Inc., Nos. 333-18839,
333-38823, 333-40495 and 333-40495-01 on Form S-3 of ICG Communications, Inc.
and Nos. 33-14127, 333-25957, 333-39737 and 333-45213 on Form S-8 of ICG
Communications, Inc. of our reports dated April 16, 1998, relating to the
consolidated balance sheets of ICG Communications, Inc. and subsidiaries as of
December 31, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the fiscal years
ended September 30, 1995 and 1996, the three-month period ended December 31,
1996, and the fiscal year ended December 31, 1997, and the related financial
statement schedule, which reports appear in the Current Report on Form 8-K of
ICG Communications, Inc., ICG Funding, LLC, ICG Holdings (Canada), Inc. and ICG
Holdings, Inc., dated June 12, 1998.
As explained in note 2 to the consolidated financial statements, during the
fiscal year ended September 30, 1996, the Company changed its method of
accounting for long-term telecom services contracts.
KPMG Peat Marwick LLP
Denver, Colorado
June 11, 1998
<PAGE>
EXHIBIT 23.2
Consent of Ernst & Young LLP, Independent Auditors.
<PAGE>
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Forms S-3 of IntelCom Group Nos. 33-96660 and 33-08729; Forms S-3 of ICG
Communications, Inc. Nos. 333-18839, 333-38823, 333-40495 and 333-40495-01; and
Forms S-8 of ICG Communications, Inc. Nos. 33-14127, 333-25957, 333-39737, and
333-45213) of our reports (a) dated February 13, 1998 with respect to the
consolidated balance sheets of NETCOM On-Line Communication Services, Inc. as of
December 31, 1996 and 1997 and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997 (not presented separately herein), and (b) dated April
16, 1998 with respect to the consolidated balance sheet of NETCOM On-Line
Communication Services, Inc. as of December 31, 1996 and the related statements
of operations, stockholders' equity and cash flows for the three months then
ended (not presented separately herein), included in this Current Report on Form
8-K of ICG Communications, Inc., ICG Funding, LLC, ICG Holdings (Canada), Inc.
and ICG Holdings, Inc. dated June 12, 1998.
Ernst & Young LLP
San Jose, California
June 12, 1998
<PAGE>
EXHIBIT 99.1
Consolidated Financial Statements of ICG
Communications, Inc. and Subsidiaries for the Fiscal
Years Ended September 30, 1995 and 1996, the Three Months Ended
December 31, 1996 and the Fiscal Year Ended December 31, 1997.
<PAGE>
F-1
FINANCIAL STATEMENTS
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets, December 31, 1996 and 1997 . . . . . . F-4
Consolidated Statements of Operations, Fiscal Years Ended
September 30, 1995 and 1996, the Three Months Ended
December 31, 1995 (unaudited) and 1996, and Fiscal Year Ended
Fiscal Year Ended December 31, 1997 . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Stockholders' Equity (Deficit), Fiscal
Years Ended September 30, 1995 and 1996, the Three Months Ended
December 31, 1996, and Fiscal Year Ended December 31, 1997 . . . . . F-8
Consolidated Statements of Cash Flows, Fiscal Years Ended
September 30, 1995 and 1996, the Three Months Ended
December 31, 1995 (unaudited) and 1996, and Fiscal Year Ended
December 31, 1997. . . . . . . . . . . . . . . . . . . . . . . . . . F-10
. . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements, December 31, 1996
and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-13
<PAGE>
F-2
Independent Auditors' Report
The Board of Directors and Stockholders
ICG Communications, Inc.:
We have audited the accompanying consolidated balance sheets of ICG
Communications, Inc. ("ICG") and subsidiaries (the "Company") as of December 31,
1996 and 1997 and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for the fiscal years ended
September 30, 1995 and 1996, the three-month period ended December 31, 1996, and
the fiscal year ended December 31, 1997. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits. We did not audit the consolidated financial statements of NETCOM On-Line
Communication Services, Inc. ("NETCOM"), a wholly owned subsidiary of the
Company, which consolidated statements reflect total assets constituting 15.2
percent in fiscal 1996 and 11.7 percent in fiscal 1997, and total revenue
constituting 32.0 percent in fiscal 1995, 41.6 percent in fiscal 1996, 39.0
percent in the three months ended December 31, 1996, and 37.0 percent in fiscal
1997 of the related consolidated totals. Those consolidated financial statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for NETCOM, is based
solely on the reports of the other auditors.
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, based on the audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of ICG Communications, Inc. and
subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for the fiscal years ended September 30, 1995
and 1996, the three-month period ended December 31, 1996, and the fiscal year
ended December 31, 1997, in conformity with generally accepted accounting
principles.
<PAGE>
F-3
As explained in note 2 to the consolidated financial statements, during the
fiscal year ended September 30, 1996, the Company changed its method of
accounting for long-term telecom services contracts.
KPMG Peat Marwick LLP
Denver, Colorado
April 16, 1998
<PAGE>
F-4
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets December 31, 1996 and 1997 (Restated, see notes 1
and 2)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
Assets 1996 1997
- ------
------------------------ ----------------------
(in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 433,342 182,202
Short-term investments available for sale (note 4) 33,450 112,281
Receivables:
Trade, net of allowance of $3,411 and $7,004 at
December 31, 1996 and 1997, respectively 42,415 61,439
Revenue earned, but unbilled 6,053 8,599
Due from affiliate (note 6) - 9,384
Other (note 9) 1,440 1,696
------------------------ ----------------------
49,908 81,118
------------------------ ----------------------
Inventory 3,309 4,242
Prepaid expenses and deposits 7,503 14,097
Notes receivable, net 200 -
------------------------ ----------------------
Total current assets 527,712 393,940
------------------------ ----------------------
Property and equipment (notes 7, 10 and 11) 567,697 860,495
Less accumulated depreciation (79,648) (155,383)
------------------------ ----------------------
Net property and equipment 488,049 705,112
------------------------ ----------------------
Investments (note 3) 5,170 -
Long-term notes receivable from affiliate and others,
net (note 6) 623 10,375
Restricted cash (notes 12 and 16) 13,333 24,649
Other assets, net of accumulated amortization:
Goodwill (note 3) 31,881 77,562
Deferred financing costs (note 11) 21,963 23,196
Deferred subscriber acquisition costs 5,595 3,115
Transmission and other licenses 8,526 6,031
Other (note 8) 10,915 10,531
------------------------ ----------------------
78,880 120,435
------------------------ ----------------------
$ 1,113,767 1,254,511
======================== ======================
</TABLE>
(Continued)
<PAGE>
F-5
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
Liabilities and Stockholders' Equity (Deficit) 1996 1997
- ---------------------------------------------- ------------------------ ---------------------
(in thousands)
<S> <C> <C>
Current liabilities:
Accounts payable $ 32,330 38,457
Accrued liabilities 46,286 71,678
Deferred revenue 8,349 10,219
Current portion of capital lease obligations (notes 10 and 16) 24,683 8,128
Current portion of long-term debt (note 11) 817 1,784
------------------------ ---------------------
Total current liabilities 112,465 130,266
------------------------ ---------------------
Capital lease obligations, less current portion (note 10) 71,146 70,489
Long-term debt, net of discount, less current portion (note 11) 690,358 890,568
------------------------ ---------------------
Total liabilities 873,969 1,091,323
------------------------ ---------------------
Minority interests 1,967 -
Redeemable preferred stock of subsidiary ($164.8 million and $301.2 million
liquidation value at December 31, 1996
and 1997, respectively) (notes 11 and 12) 159,120 292,442
Company-obligated mandatorily redeemable preferred securities
of subsidiary limited liability company which holds solely Company preferred
stock ($133.4 million liquidation value at
December 31, 1997) (note 12) - 127,729
Stockholders' equity (deficit):
Common stock (notes 1 and 13) 8,189 749
Additional paid-in capital 499,993 533,541
Accumulated deficit (430,682) (791,417)
Cumulative foreign currency translation adjustment and other 1,211 144
------------------------ ---------------------
Total stockholders' equity (deficit) 78,711 (256,983)
------------------------ ---------------------
Commitments and contingencies (notes 9, 10, 11, 12 and 16)
$ 1,113,767 1,254,511
======================== =====================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
F-6
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Fiscal Years Ended September 30, 1995 and 1996,
the Three Months Ended December 31, 1995 (unaudited) and 1996, and Fiscal Year
Ended December 31, 1997 (Restated, see notes 1 and 2)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal years ended Three months ended Fiscal year ended
September 30, December 31, December 31,
------------------------------ --------------------------
1995 1996 1995 1996 1997
-------------- -------------- ------------ ------------ ----------------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenue:
Telecom services (note 2) $ 32,330 87,681 13,513 34,787 177,690
Internet services 52,422 120,540 19,672 36,379 160,660
Network services 58,778 60,116 15,718 15,981 65,678
Satellite services (note 14) 20,502 21,297 6,168 6,188 29,986
-------------- -------------- ------------ ------------ ----------------
Total revenue 164,032 289,634 55,071 93,335 434,014
-------------- -------------- ------------ ------------ ----------------
Operating costs and expenses:
Operating costs 108,396 208,798 38,006 72,428 341,916
Selling, general and administrative expenses 90,816 142,531 29,195 41,171 216,405
Depreciation and amortization (note 2) 26,569 59,994 9,008 19,179 91,881
Net loss (gain) on disposal of long-lived
assets (note 3) 1,552 6,614 1,644 (610) 50
Provision for impairment of long-lived assets
(note 3) 7,000 9,994 - - 11,950
Restructuring and related charges (note 15) - - - - 1,879
-------------- -------------- ------------ ------------ ----------------
Total operating costs and expenses 234,333 427,931 77,853 132,168 664,081
-------------- -------------- ------------ ------------ ----------------
Operating loss (70,301) (138,297) (22,782) (38,833) (230,067)
Other income (expense):
Interest expense (note 11) (24,368) (85,714) (15,215) (24,454) (118,279)
Interest income 6,344 25,015 4,787 7,033 26,152
Other, net (note 11) (508) (3,911) 22 (59) (691)
-------------- -------------- ------------ ------------ ----------------
(18,532) (64,610) (10,406) (17,480) (92,818)
-------------- -------------- ------------ ------------ ----------------
Loss before income taxes, minority interest, share
of losses and cumulative effect of change
in accounting (88,833) (202,907) (33,188) (56,313) (322,885)
Income tax (expense) benefit (note 17) (15) 5,108 (4) (12) (38)
-------------- -------------- ------------ ------------ ----------------
Loss before minority interest, share of losses and
cumulative effect of change in accounting (88,848) (197,799) (33,192) (56,325) (322,923)
Minority interest in share of losses, net of
accretion and preferred dividends on preferred
securities of subsidiaries (note 12) (1,123) (25,306) (3,215) (4,988) (37,812)
Share of losses of joint venture and investment
(note 3) (741) (1,814) (228) - -
-------------- -------------- ------------ ------------ ----------------
Loss before cumulative effect of change in
accounting (90,712) (224,919) (36,635) (61,313) (360,735)
Cumulative effect of change in accounting - (3,453) (3,453) - -
-------------- -------------- ------------ ------------ ----------------
Net loss $ (90,712) (228,372) (40,088) (61,313) (360,735)
============== ============== ============ ============ ================
(Continued)
</TABLE>
<PAGE>
F-7
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations, Continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal year
Fiscal years ended Three months ended ended
September 30, December 31, December 31,
---------------------------------- ----------------------------
1995 1996 1995 1996 1997
------------------ -------------- --------------- ------------ ----------------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net loss per share - basic and diluted:
Net loss before cumulative effect of
change in accounting $ (2.94) (6.10) (1.13) (1.47) (8.49)
Cumulative effect of change in accounting - (0.09) (0.11) - -
------------------ -------------- -------------- ------------ ----------------
Net loss per share (2.94) (6.19) (1.24) (1.47) (8.49)
================== ============== ============== ============ =================
Weighted average number of shares
outstanding - basic and diluted 30,808 36,875 32,343 41,760 42,508
================== ============== ============== ============ =================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
F-8
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Fiscal Years Ended September 30, 1995 and 1996, the Three Months Ended
December 31, 1996, and Fiscal Year Ended December 31, 1997 (Restated, see notes
1 and 2)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional
Common stock paid-in Accumulated
Shares Amount capital deficit
-------------- -------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Balances at October 1, 1994 22,849 $ 95,664 33,819 (61,737)
Shares issued for cash (note 13):
Public offering and private placements, net of offering costs 9,547 78,369 169,182 -
Exercise of options and warrants 836 1,476 1,074 -
Shares issued as repayment of debt and related accrued interest 683 9,482 - -
(note 11)
Shares issued in connection with business combinations (note 3) 169 1,737 1,300 -
Conversion of ICG Holdings (Canada), Inc. preferred shares 302 2,000 - -
Shares issued as contribution to 401(k) plan (note 19) 38 490 - -
Warrants issued in connection with offerings (notes 11, 12 and 13) - - 24,134 -
Change in foreign currency translation adjustment - - - (38)
Compensation expense related to issuance of common stock options - - 158 -
Shares issued in exchange for investments and other assets 123 1,398 - -
Shares issued as payment of trade payables 18 233 - -
Cumulative foreign currency translation adjustment - - - -
Net loss - - - (90,712)
-------------- -------------- ------------- -------------
Balances at September 30, 1995 34,565 190,849 229,667 (152,487)
Shares issued for cash in connection with the exercise of options
and warrants 1,983 1,747 2,498 -
Shares issued as repayment of debt and related accrued interest 130 687 - -
Shares issued in connection with business combinations (note 3) 64 749 - -
Conversion of ICG Holdings (Canada), Inc. preferred shares 496 3,780 - -
Shares issued as contribution to 401(k) plan (note 19) 87 856 300 -
Shares issued upon conversion of subordinated notes (note 11) 4,413 76,336 - -
Repurchase of warrants - - (2,671) -
Compensation expense related to issuance of common stock options - - 53 -
Exchange of ICG Holdings (Canada), Inc. common shares for ICG - (248,682) 248,682 -
common stock
Unrealized gains on available for sale investments - - - -
Cumulative foreign currency translation adjustment - - - -
Net loss - - - (228,372)
-------------- -------------- ------------- -------------
Balances at September 30, 1996 41,738 $ 26,322 478,529 (380,859)
(Continued)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Cumulative foreign Total
currency translation stockholders'
adjustment and other equity (deficit)
----------------------- -------------------
(in thousands)
<S> <C> <C>
Balances at October 1, 1994 - 67,746
Shares issued for cash (note 13):
Public offering and private placements, net of offering costs - 247,551
Exercise of options and warrants - 2,550
Shares issued as repayment of debt and related accrued interest - 9,482
(note 11)
Shares issued in connection with business combinations (note 3) - 3,037
Conversion of ICG Holdings (Canada), Inc. preferred shares - 2,000
Shares issued as contribution to 401(k) plan (note 19) - 490
Warrants issued in connection with offerings (notes 11, 12 and 13) - 24,134
Change in foreign currency translation adjustment - (38)
Compensation expense related to issuance of common stock options - 158
Shares issued in exchange for investments and other assets - 1,398
Shares issued as payment of trade payables - 233
Cumulative foreign currency translation adjustment (28) (28)
Net loss - (90,712)
----------------------- -------------------
Balances at September 30, 1995 (28) 268,001
Shares issued for cash in connection with the exercise of options
and warrants - 4,245
Shares issued as repayment of debt and related accrued interest
(note 11) - 687
Shares issued in connection with business combinations (note 3) - 749
Conversion of ICG Holdings (Canada), Inc. preferred shares - 3,780
Shares issued as contribution to 401(k) plan (note 19) - 1,156
Shares issued upon conversion of subordinated notes (note 11) - 76,336
Repurchase of warrants - (2,671)
Compensation expense related to issuance of common stock options - 53
Exchange of ICG Holdings (Canada), Inc. common shares for ICG
common stock - -
Unrealized gains on available for sale investments 540 540
Cumulative foreign currency translation adjustment 699 699
Net loss - (228,372)
----------------------- -------------------
Balances at September 30, 1996 1,211 125,203
(Continued)
</TABLE>
<PAGE>
F-9
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit), Continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional
Common stock paid-in Accumulated
Shares Amount capital deficit
------------- ------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Shares issued for cash in connection with the exercise of options
and warrants 132 $ 1,800 284 -
Shares issued in connection with business combination (note 3) 18 - 350 -
Shares issued as contribution to 401(k) plan (note 19) 19 - 480 -
Shares issued upon conversion of subordinated notes (note 11) 23 417 - -
Exchange of ICG Holdings (Canada), Inc. common shares for ICG
common stock - (20,350) 20,350 -
Net loss - - - (61,313)
Net loss of NETCOM for the three months ended December 31, 1996
(note 2) - - - 11,490
------------- ------------- ------------- --------------
Balances at December 31, 1996 41,930 8,189 499,993 (430,682)
Shares issued for cash in connection with the exercise of options
and warrants 1,069 6 5,813 -
Shares issued in connection with business combination (note 3) 687 7 15,953 -
Shares issued for cash in connection with employee stock purchase
plan 109 1 1,318 -
Shares issued as contribution to 401(k) plan (note 19) 179 2 3,008 -
Exchange of ICG Holdings (Canada), Inc. common shares for ICG
common stock - (7,456) 7,456 -
Reversal of unrealized gains on short-term investments available
for sale - - - -
Cumulative foreign currency translation adjustment - - - -
Net loss - - - (360,735)
------------- ------------- ------------- --------------
Balances at December 31, 1997 43,974 $ 749 533,541 (791,417)
============= ============= ============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Cumulative foreign Total
currency translation stockholders'
adjustment and other equity (deficit)
-------------------------- -------------------
(in thousands)
<S> <C> <C>
Shares issued for cash in connection with the exercise of options
and warrants - 2,084
Shares issued in connection with business combination (note 3) - 350
Shares issued as contribution to 401(k) plan (note 19) - 480
Shares issued upon conversion of subordinated notes (note 11) - 417
Exchange of ICG Holdings (Canada), Inc. common shares for ICG
common stock - -
Net loss - (61,313)
Net loss of NETCOM for the three months ended December 31, 1996
(note 2) - 11,490
-------------------------- -------------------
Balances at December 31, 1996 1,211 78,711
Shares issued for cash in connection with the exercise of options
and warrants - 5,819
Shares issued in connection with business combination (note 3) - 15,960
Shares issued for cash in connection with employee stock purchase
plan - 1,319
Shares issued as contribution to 401(k) plan (note 19) - 3,010
Exchange of ICG Holdings (Canada), Inc. common shares for ICG
common stock - -
Reversal of unrealized gains on short-term investments available
for sale (540) (540)
Cumulative foreign currency translation adjustment (527) (527)
Net loss - (360,735)
--------------------------- -------------------
Balances at December 31, 1997 144 (256,983)
=========================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
F-10
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Fiscal Years Ended September 30, 1995 and 1996,
the Three Months Ended December 31, 1995 (unaudited) and 1996, and Fiscal Year
Ended December 31, 1997 (Restated, see notes 1 and 2)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal years ended Three months ended
September 30, December 31, Fiscal year ended
--------------------------- -------------------------- December 31,
1995 1996 1995 1996 1997
------------- ------------- ------------- ------------ -------------------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (90,712) (228,372) (40,088) (61,313) (360,735)
Adjustments to reconcile net loss to net cash
used by operating activities:
Cumulative effect of change in accounting - 3,453 3,453 - -
Share of losses of joint venture and investment 741 1,814 228 - -
Minority interest in share of losses, net of
accretion and non-cash preferred dividends
on preferred securities of subsidiaries 656 24,279 2,188 4,988 35,457
Depreciation and amortization 26,569 59,994 9,008 19,179 91,881
Compensation expense related to issuance of
common stock options 158 53 14 - -
Interest expense deferred and included in
long-term debt 14,068 63,951 12,004 22,087 102,947
Amortization of deferred financing costs
included in interest expense 989 2,573 527 612 2,514
Write-off of non operating assets - 2,650 - - 1,192
Contribution to 401(k) plan through issuance
of common shares 490 1,156 405 480 3,010
Deferred income tax benefit - (5,329) - - -
Provision for impairment of long-lived assets 7,000 9,994 - - 11,950
Net loss (gain) on disposal of long-lived
assets 1,552 6,614 1,644 (610) 50
Change in operating assets and liabilities,
excluding the effects of business
acquisitions, dispositions and non-cash
transactions:
Receivables (6,095) (13,124) (3,436) (6,265) (25,565)
Inventory (562) (1,458) (302) 408 (2,699)
Prepaid expenses and deposits (3,629) (4,645) (491) (1,366) (6,425)
Deferred subscriber acquisition costs (5,505) (14,368) (3,093) (2,379) (6,542)
Accounts payable and accrued liabilities 9,836 22,623 16,822 8,404 22,011
Deferred revenue 1,185 3,134 (503) 2,454 1,870
------------- ------------- ------------- -------------- -------------------
Net cash used by operating activities $ (43,259) (65,008) (1,620) (13,321) (129,084)
------------- ------------- ------------- -------------- -------------------
(Continued)
</TABLE>
<PAGE>
F-11
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal years ended Three months ended
September 30, December 31, Fiscal year ended
------------------------- ------------------------- December 31,
1995 1996 1995 1996 1997
------------ ------------ ------------- ----------- ------------------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Cash flows from investing activities:
(Increase) decrease in notes receivable from
affiliate and others $ 348 4 (1,263) 133 (9,552)
Advances to affiliates (2,184) (109) (15) - -
Investment in and advances to joint venture (6,652) (4,308) - - -
Payments for business acquisitions, net of cash
acquired (8,109) (8,441) - - (45,861)
Acquisition of property, equipment and other
assets (93,667) (176,269) (39,946) (59,372) (280,458)
Payments for construction of new headquarters - (1,501) - (7,945) (29,432)
Proceeds from disposition of property, equipment
and other assets - 21,593 21,146 2,057 17,403
Purchase of short-term investments - (6,832) (4,979) (25,769) (65,580)
Increase in restricted cash - (13,333) (13,333) - (25,416)
Other investments (6,061) - - - -
------------ ------------ ------------- ----------- ------------------
Net cash used by investing activities (116,325) (189,196) (38,390) (90,896) (438,896)
------------ ------------ ------------- ----------- ------------------
Cash flows from financing activities:
Proceeds from issuance of common stock:
Common stock offering 254,792 2,351 120,442 13 -
Business combination (note 3) - - - - 15,960
Exercise of stock options and warrants 1,471 1,894 101 2,084 4,116
Employee stock purchase plan - - - - 3,022
Proceeds from issuance of redeemable preferred
securities of subsidiaries, net of issuance
costs 28,800 144,000 - - 223,628
Proceeds from issuance of convertible stock of
subsidiary 16,000 - - - -
Offering costs related to common and preferred
stock offerings (5,565) - - - -
Redemption of preferred shares (3,800) (5,570) (5,570) - -
Repurchase of redeemable preferred stock of
subsidiary and payment of accrued dividend - (32,629) - - -
Repurchase of redeemable warrants - (2,671) - - -
Proceeds from issuance of short-term debt - 17,500 17,500 - -
Principal payments on short-term debt - (21,192) (3,692) - -
Proceeds from issuance of long-term debt 305,613 300,034 - - 101,486
Deferred debt issuance costs (13,641) (11,915) - - (3,554)
Principal payments on long-term debt (29,333) (16,920) (13,761) (279) (2,161)
Principal payments on capital lease obligations (6,271) (12,304) (2,991) (1,975) (25,425)
------------ ----------- ------------- ----------- ------------------
Net cash provided (used) by financing
activities 548,066 362,578 112,029 (157) 317,072
------------ ----------- ------------- ----------- ------------------
Net (decrease) increase in cash and cash
equivalents 388,482 108,374 72,019 (104,374) (250,908)
Effect of exchange rates on cash (28) 699 (28) 544 (232)
Cash and cash equivalents, beginning of period 26,963 415,417 305,173 537,172 433,342
------------ ----------- ------------- ----------- ------------------
Cash and cash equivalents, end of period $ 415,417 524,490 377,164 433,342 182,202
============ =========== ============= =========== ==================
(Continued)
</TABLE>
<PAGE>
F-12
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal years ended Three months ended
September 30, December 31, Fiscal year ended
------------------------- ------------------------- December 31,
1995 1996 1995 1996 1997
------------ ----------- ----------- ------------ -------------------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Restated disclosure of cash flows information:
Cash paid for interest $ 9,318 19,190 2,684 1,755 12,577
============ =========== =========== ============ ===================
Cash paid for income taxes $ 8 23 - 12 26
============ =========== =========== ============ ===================
Restated schedule of non-cash investing and
financing activities:
Common shares issued in connection with
business combinations, repayment of debt or
conversion of liabilities to equity $ 11,452 77,772 - 350 -
============ =========== =========== ============ ===================
Common shares issued in exchange for notes
receivable, investments and other assets $ 2,698 - - - -
============ =========== =========== ============ ===================
Assets acquired under capital leases and
through the issuance of debt or warrants $ 38,670 55,030 84 19,479 6,393
(note 16)
============ =========== =========== ============ ===================
Reclassification of investment in joint
venture to long-term notes receivable $ 6,882 - - - -
============ =========== =========== ============ ===================
Conversion of notes receivable related to
business combinations $ 6,330 - - - -
============ =========== =========== ============ ===================
Capitalized interest on assets under
construction $ - 4,916 - 1,966 3,179
============ =========== =========== ============ ===================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
F-13
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1997
- ----------------------------------------------------------------------------
(1) Organization and Nature of Business
ICG Communications, Inc., a Delaware corporation ("ICG"), was
incorporated on April 11, 1996, for the purpose of becoming the new
publicly-traded U.S. parent company of ICG Holdings (Canada), Inc., a
Canadian federal corporation ("Holdings-Canada"), ICG Holdings, Inc., a
Colorado corporation ("Holdings"), and its subsidiaries. Pursuant to a
Plan of Arrangement (the "Arrangement"), which was approved by
Holdings-Canada shareholders on July 30, 1996, and by the Ontario Court
of Justice on August 2, 1996, each shareholder of Holdings-Canada
exchanged their common shares on a one-for-one basis for either (i)
shares of $.01 par value common stock of ICG (the "ICG Common Stock"),
or (ii) Class A common shares of Holdings-Canada (which are
exchangeable at any time on a one-for-one basis into shares of ICG
Common Stock). On August 2, 1996, 28,795,132, or approximately 98%, of
the total issued and outstanding common shares of Holdings-Canada were
exchanged for an equal number of shares of Common Stock of ICG. In
accordance with generally accepted accounting principles, the
Arrangement was accounted for in a manner similar to a pooling of
interests since ICG and Holdings-Canada had common shareholders, and
the number of shares outstanding and the weighted average number of
shares outstanding reflect the equivalent shares outstanding for the
combined companies. On September 17, 1997, ICG formed a new special
purpose entity, ICG Funding, LLC, a Delaware limited liability company
and wholly owned subsidiary of ICG ("ICG Funding").
On January 21, 1998, the Company completed a merger with NETCOM On-Line
Communication Services, Inc. ("NETCOM"). At the effective time of the
merger, each outstanding share of NETCOM common stock, $.01 par value,
became automatically convertible into shares of ICG Common Stock at an
exchange ratio of 0.8628 shares of ICG Common Stock per NETCOM common
share. The business combination has been accounted for as a pooling of
interests, and accordingly, the Company's accompanying consolidated
financial statements have been restated to include the operations of
NETCOM for all historical periods presented. NETCOM was incorporated in
the state of California in August 1992 and reincorporated in the state
of Delaware in October 1994. ICG and its subsidiaries, including
NETCOM, are collectively referred to as the "Company." All references
to common shares of the Company represent either shares of ICG Common
Stock or common shares of NETCOM, adjusted for the exchange ratio noted
above.
<PAGE>
F-14
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1997
- ----------------------------------------------------------------------------
(1) Organization and Nature of Business (continued)
The Company's principal business activity is telecommunications services,
including Telecom Services, Internet Services, Network Services and
Satellite Services. Telecom Services consists of the Company's competitive
local exchange carrier operations which provide services to business end
users, long distance carriers and resellers. Internet Services consists of
the operations of NETCOM which includes Internet access, World Wide Web
(the "Web") site hosting services and other value-added connectivity
services, which are primarily targeted to small and medium-sized business
customers in the United States, Canada and the United Kingdom. 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. To better focus on its core Telecom Services unit, the Company
entered into definitive agreements on April 1, 1998 to sell the capital
stock of the two main subsidiaries within its Satellite Services
operations.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying consolidated financial statements have been restated
to give retroactive effect to the merger of ICG and NETCOM on January
21, 1998, which has been accounted for as a pooling of interests for
all periods presented, and includes 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 combined financial position and results of operations
of NETCOM as well as Holdings-Canada and Holdings, which are
considered to be predecessor entities to ICG.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
<PAGE>
F-15
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
(b) Fiscal Year Ends of ICG and NETCOM
The Company changed its fiscal year end to December 31 from September
30, effective January 1, 1997. References to fiscal 1995, 1996 and
1997 relate to the years ended September 30, 1995 and 1996 and
December 31, 1997, respectively.
Unaudited consolidated statements of operations and cash flows for the
three months ended December 31, 1995 have been included in the
accompanying consolidated financial statements for comparative
purposes.
Prior to the merger, NETCOM's consolidated financial statements were
prepared using a year end of December 31. Accordingly, the
consolidated statements of operations for fiscal 1995 and 1996 reflect
the combination of NETCOM's results of operations for the years ended
December 31 with ICG's results of operations for the years ended
September 30. The accompanying consolidated statements of
stockholders' equity (deficit) excludes the activity of NETCOM for the
three months ended December 31, 1994. Additionally, NETCOM's results
of operations for the three months ended December 31, 1996 have been
combined with ICG's results of operations for the same period in the
accompanying consolidated statement of operations. Revenue, operating
costs and expenses and net loss of NETCOM for the three months ended
December 31, 1996 was $36.4 million, $48.9 million and $(11.5)
million, respectively. The net loss of NETCOM for the three months
ended December 31, 1996 has been eliminated in the consolidated
statement of stockholders' equity (deficit).
(c) Cash Equivalents and Short-term Investments Available for Sale
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. The Company
invests primarily in high grade short-term investments which consist
of money market instruments, commercial paper, certificates of
deposit, government obligations and corporate bonds, all of which are
considered to be available for sale and generally have maturities of
one year or less. The Company's short-term investment objectives are
safety, liquidity and yield, in that order. The Company carries all
cash equivalents at cost, which approximates fair value. Short-term
investments available for sale are carried at fair market value based
on quoted market prices with unrealized gains and
<PAGE>
F-16
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
losses, net of tax, reported as a separate component of stockholders'
equity (deficit). Realized gains and losses and declines in value
judged to be other than temporary are included in the statement of
operations.
(d) Inventory
Inventory, consisting of satellite systems equipment and equipment to
be utilized in the installation of communications systems, services
and networks for customers, is recorded at the lower of cost or
market, using the first-in, first-out method of accounting for cost.
(e) Investments
Investments in joint ventures are accounted for using the equity
method, under which the Company's share of earnings or losses of the
joint ventures are reflected in operations and dividends are credited
against the investment when received. Losses recognized in excess of
the Company's investment due to additional investment or financing
requirements, or guarantees, are recorded as a liability in the
consolidated financial statements. Other investments representing an
interest of 20% or more, but less than 50%, are accounted for using
the equity method of accounting. Investments of less than a 20% equity
interest are accounted for using the cost method, unless the Company
exercises significant influence and/or control over the operations of
the investee company, in which case the equity method is used.
(f) Property and Equipment
Property and equipment are stated at cost. Costs of construction are
capitalized, including interest costs related to construction.
Equipment held under capital leases is stated at the lower of the fair
value of the asset or the net present value of the minimum lease
payments at the inception of the lease. For equipment held under
capital leases, depreciation is provided using the straight-line
method over the estimated useful lives of the assets owned, or the
related lease term, whichever is shorter.
<PAGE>
F-17
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
Estimated useful lives of major categories of property and equipment
are as follows:
Office furniture and equipment 3 to 7 years
Buildings and improvements 31.5 years
Machinery and equipment 3 to 8 years
Switch equipment 10 years
Fiber optic transmission system 20 years
The Company capitalizes the direct costs associated with the
installation of dial tone customers' service, including labor and an
allocation of overhead costs, and amortizes these costs over two
years, the estimated average customer contract term.
(g) Deferred Subscriber Acquisition Costs
The Company expenses the costs of advertising as incurred, except
direct response advertising expenses relating to Internet services
which are included in deferred subscriber acquisition costs.
Subscriber acquisition costs are deferred and amortized over a period
determined by calculating the ratio of current revenue related to the
direct response advertising versus the total expected revenue, or 12
months, whichever is shorter. These costs relate directly to
subscriber solicitations and principally include the printing,
production and shipping of starter packages and the costs of obtaining
qualified prospects by various targeted direct marketing programs. No
indirect costs are included in subscriber acquisition costs. To date,
all subscriber acquisition costs have been incurred for the
solicitation of specifically identified prospects. It is possible that
these estimates of anticipated gross revenue could be reduced in the
future based on management's current evaluation of the estimates used.
As a result, the carrying value and/or the amortization period of the
subscriber acquisition costs could be reduced in the future.
(h) Other Assets
Amounts related to the acquisition of transmission and other licenses
are recorded at cost and amortized over 20 years using the
straight-line method. Goodwill results from the application of the
purchase method of accounting for business combinations and is
amortized over a maximum of 20 years using the straight-line method.
<PAGE>
F-18
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
Rights of way, minutes of use, and non-compete agreements are recorded
at cost, and amortized using the straight-line method over the terms
of the agreements, ranging from 2 to 12 years.
Amortization of deferred financing costs is provided over the life of
the related financing agreement, the maximum term of which is 10
years.
(i) Foreign Currency Translation Adjustments
The functional currency for all foreign operations is the local
currency. As such, all assets and liabilities denominated in foreign
currencies are translated at the exchange rate on the balance sheet
date. Revenue and costs and expenses are translated at weighted
average rates of exchange prevailing during the period. Translation
adjustments are recorded as a separate component of stockholders'
equity (deficit). Gains and losses resulting from foreign currency
transactions are included in operations and are not significant for
the periods presented.
(j) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting periods. Actual results
could differ from those estimates.
(k) Revenue Recognition
The Company recognizes Telecom Services, Internet Services and
Satellite Services revenue as services are provided and charges direct
selling expenses to operations as incurred. Revenue from Network
Services contracts for the design and installation of communication
systems and networks, which are generally short-term in duration, is
recognized using the percentage of completion method of accounting.
Maintenance revenue is recognized as services are provided.
Uncollectible trade receivables are accounted for using the allowance
method.
<PAGE>
F-19
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
Revenue which has been earned under the percentage of completion
method, but has not been billed to the customer is included in
receivables-revenue earned, but unbilled in the consolidated financial
statements. Deferred revenue includes monthly advance billings to
customers for certain services provided by the Company's Telecom
Services, Internet Services and Satellite Services, as well as Network
Services revenue which has been billed to the customer in compliance
with contract terms, but not yet earned under the percentage of
completion method.
Prior to January 1, 1996, the Company recognized Telecom Services
revenue in an amount equal to the non-cancelable portion of the
contract, which is a minimum of one year on a three-year or longer
contract, at the inception of the contract and upon activation of
service to the customer to the extent of direct installation and
selling expenses incurred in obtaining customers during the period in
which such revenue was recognized. Revenue recognized in excess of
normal monthly billings during the year was limited to an amount which
did not exceed such installation and selling expense. The remaining
revenue from the contract was recognized ratably over the remaining
non-cancelable portion of the contract. The Company believes the new
method is preferable because it provides a better matching of revenue
and related operating expenses and is more consistent with accounting
practices within the telecommunications industry. As required by
generally accepted accounting principles, the Company has reflected
the effects of the change in accounting as if such change had been
adopted as of October 1, 1995, and has included in the results of
operations for fiscal 1996 a charge of approximately $3.5 million
relating to the cumulative effect of this change in accounting. Other
than the cumulative effect of adopting this new method of accounting,
the effect of this change in accounting for the periods presented was
not significant.
(l) 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
<PAGE>
F-20
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
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.
(m) Net Loss Per Share
Net loss per share is calculated by dividing the net loss by the
weighted average number of shares outstanding. Weighted average number
of shares outstanding for fiscal year 1995 and the three months ended
December 31, 1995 represents outstanding Holdings-Canada common shares
and ICG Common Stock resulting from the exchange of NETCOM common
shares. Weighted average number of shares outstanding for fiscal 1996,
the three months ended December 31, 1996 and fiscal 1997 represents
Holdings-Canada common shares outstanding for the period October 1,
1995 through August 2, 1996, and combined ICG Common Stock and
Holdings-Canada Class A common shares outstanding for the periods
subsequent to August 5, 1996.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share ("SFAS 128") which revises the
calculation and presentation provisions of Accounting Principles Board
Opinion No. 15 and related interpretations. Under SFAS 128, basic loss
per share is computed on the basis of weighted average common shares
outstanding. Diluted loss per share considers potential common stock
instruments in the calculation. The Company adopted SFAS 128 for its
fiscal year ending December 31, 1997, including the requirement for
retroactive application. The adoption of SFAS 128 had no effect on the
Company's previously reported loss per share. Potential common stock
instruments, which include options, warrants and convertible
subordinated notes and preferred securities, are not included in the
loss per share calculation as their effect is anti-dilutive.
(n) Stock-Based Compensation
The Company accounts for its stock-based employee and non-employee
director compensation plans using the intrinsic value based method
prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related Interpretations ("APB 25").
The Company has provided pro forma
<PAGE>
F-21
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
disclosures of net loss and loss per share as if the fair value based
method of accounting for these plans, as prescribed by Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"), had been applied. Pro forma disclosures
include the effects of employee and non-employee director stock
options granted during fiscal 1996, the three months ended December
31, 1996 and fiscal 1997.
(o) Impairment of Long-Lived Assets
The Company provides for the impairment of long-lived assets pursuant
to Statement of Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of ("SFAS 121") which requires that long-lived assets and
certain identifiable intangibles held and used by an entity be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable.
An impairment loss is recognized when estimated undiscounted future
cash flows expected to be generated by the asset is less than its
carrying value. Measurement of the impairment loss is based on the
fair value of the asset, which is generally determined using valuation
techniques such as the discounted present value of expected future
cash flows.
(p) Reclassifications
Certain prior period amounts have been reclassified to conform with
the current period's presentation.
<PAGE>
F-22
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(3) Business Combinations and Investments
(a) Merger with NETCOM Subsequent to December 31, 1997
As discussed in note 1, on January 21, 1998, ICG completed a merger
with NETCOM which has been accounted for under the
pooling-of-interests method of accounting. The following information
presents the combined results of operations of ICG and NETCOM as if
the business combination had been consummated on October 1, 1994:
<TABLE>
<CAPTION>
Fiscal years ended Three months ended Fiscal year ended
September 30, December 31, December 31,
------------------------------------
1995 1996 1996 1997
---------------- ---------------- ------------------------- ----------------------
(in thousands)
<S> <C> <C> <C> <C>
Revenue:
ICG $ 111,610 169,094 56,956 273,354
NETCOM 52,422 120,540 36,379 160,660
---------------- ---------------- ------------------------- ----------------------
Combined $ 164,032 289,634 93,335 434,014
================ ================ ========================= ======================
Net loss:
ICG (76,648) (184,107) (49,823) (327,643)
NETCOM (14,064) (44,265) (11,490) (33,092)
---------------- ---------------- ------------------------- ----------------------
Combined $ (90,712) (228,372) (61,313) (360,735)
================ ================ ========================= ======================
Loss per share -
basic and diluted:
ICG $ (3.25) (6.83) (1.56) (10.11)
================ ================ ========================= ======================
NETCOM $ (1.95) (4.46) (1.15) (3.27)
================ ================ ========================= ======================
Combined $ (2.94) (6.19) (1.46) (8.49)
================ ================ ========================= ======================
</TABLE>
(b) Acquisition During Fiscal 1997
On October 17, 1997, the Company purchased approximately 91% of the
outstanding capital stock of Communications Buying Group, Inc.
("CBG"), an Ohio based local exchange and centrex reseller. The
Company paid total consideration of approximately $46.5 million, plus
the assumption of certain liabilities. Separately, on October 17,
1997, the Company sold 687,221 shares of ICG Common Stock for
<PAGE>
F-23
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
approximately $16.0 million to certain shareholders of CBG. Subsequent
to December 31, 1997, the Company purchased the remaining
approximately 9% interest in CBG for approximately $2.9 million in
cash.
The Company has accounted for the acquisition under the purchase
method of accounting, and accordingly, the operations of CBG have been
included in the Company's operations since the acquisition date. The
excess of the purchase price over the fair value of the net
identifiable assets acquired of $48.8 million has been recorded as
goodwill and is being amortized on a straight-line basis over six
years. Revenue, net loss and loss per share on a pro forma combined
basis are not significantly different from the Company's historical
results for the periods presented herein.
(c) Acquisitions and Investments During Fiscal 1996
In January 1996, the Company purchased the remaining 49% minority
interest of Fiber Optic Technologies, Inc. ("FOTI"), making FOTI a
wholly owned subsidiary. Consideration for the purchase was
approximately $2.0 million in cash and 66,236 common shares of
Holdings-Canada valued at approximately $0.8 million, for total
consideration of approximately $2.8 million.
In February 1996, the Company entered into an agreement with Linkatel
California, L.P. ("Linkatel") and its other partners, Linkatel
Communications, Inc. and The Copley Press, Inc., under which the
Company acquired a 60% interest in Linkatel for an aggregate purchase
price of $10.0 million in cash and became the general partner of
Linkatel. In April 1996, the partnership was renamed ICG Telecom of
San Diego, L.P.
In March 1996, the Company acquired a 90% equity interest in MarineSat
Communications Network, Inc. ("MCN"), (formally Maritime Cellular
Tele-network, Inc.), a Florida-based provider of cellular and
satellite communications for commercial ships, private vessels,
offshore oil platforms and land-based mobile units, for approximately
$0.7 million in cash and approximately $0.1 million of assumed debt,
for total consideration of approximately $0.8 million. In April 1997,
the Company received the remaining 10% interest in MCN as partial
consideration
<PAGE>
F-24
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
for the sale of its investment in Mexico. In the fourth quarter of
fiscal 1997, the Company recorded a provision for impairment of $2.9
million to reflect management's estimate of the net realizable value
of the Company's investment in MCN.
In August 1996, the Company acquired certain Signaling System 7
("SS7") assets of Pace Network Services, Inc. ("Pace"), a division of
Pace Alternative Communications, Inc. SS7 is used by local exchange
companies, long-distance carriers, wireless carriers and others to
signal between network elements, creating faster call set-up resulting
in a more efficient use of network resources. The Company paid cash
consideration of $1.6 million as of September 30, 1996 and an
additional $1.0 million in January 1997, based on the operating
results of the underlying business since the date of acquisition.
The acquisitions described above have been accounted for using the
purchase method of accounting, and accordingly, the net assets and
results of operations are included in the consolidated financial
statements from the respective dates of acquisition. Revenue, net loss
and loss per share on a pro forma basis are not significantly
different from the Company's historical results for the periods
presented herein.
(d) Acquisitions and Investments During Fiscal 1995
In January 1995, the Company and an unaffiliated entity formed
Maritime Telecommunications Network, Inc. ("MTN") to provide wireless
communications through satellites to the maritime cruise industry,
U.S. Navy vessels and offshore oil platforms. The Company acquired (i)
approximately 64% of MTN, (ii) approximately $4.4 million in notes
receivable from MTN and (iii) consulting and non-compete agreements
valued at an aggregate of approximately $0.3 million in exchange for
(i) approximately $9.0 million in cash, (ii) the surrender and
cancellation of a note to the Company from the other entity for $0.6
million plus interest, (iii) 408,347 Holdings-Canada common shares
valued at approximately $5.1 million (of which 256,303 common shares
were issued in the fourth quarter of fiscal 1994), and (iv) the
Company's commitment to provide additional convertible
<PAGE>
F-25
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
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.
During fiscal 1995, the Company purchased a 58% interest in Zycom
Corporation ("Zycom"), an Alberta, Canada corporation whose shares are
traded on the Alberta Stock Exchange. Consideration for the purchase
was approximately $0.8 million in cash, the conversion of $2.0 million
in notes receivable, and the assumption of approximately $0.7 million
in debt for total consideration of approximately $3.5 million. In
March 1996, the Company acquired an additional approximate 12% equity
interest in Zycom by converting a $3.2 million receivable due from
Zycom into common stock. In the fourth quarter of fiscal 1997, the
Company recorded a provision for impairment of $2.7 million to reflect
management's estimate of the net realizable value of the Company's
investment in Zycom.
In August 1995, NETCOM completed the acquisition of Professional
Internet Consulting, Inc. ("PICnet") pursuant to an Agreement and Plan
of Reorganization in a transaction accounted for using the purchase
method of accounting. As consideration for all of the outstanding
shares of PICnet, the Company issued 27,788 shares of Common Stock at
an approximate fair market value of $35.99 per share with a total
value of approximately $1.0 million. Additionally, the Company
acquired net liabilities with a fair value of approximately $0.4
million. The resulting consideration in excess of the fair values of
the underlying assets acquired totaling $1.4 million represents
goodwill, which was amortized over a period of 18 months.
The acquisitions described above were accounted for using the purchase
method of accounting, and accordingly, the net assets and the results
of operations are included in the consolidated financial statements
from the respective dates of acquisition. Revenue, net loss and loss
per share on a pro forma basis are not significantly different from
the Company's historical results for the periods presented herein.
<PAGE>
F-26
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
In June 1995, NETCOM acquired Series A Common Stock in the McKinley
Group, Inc. ("McKinley") in exchange for $1.2 million in cash and
approximately $0.3 million in Common Stock. During fiscal 1996,
Excite, Inc. ("Excite") acquired all of the outstanding shares of
McKinley and the Company received common shares of Excite in exchange
for its investment in McKinley. The Company recorded a loss of $1.2
million in fiscal 1996 to reflect management's estimate of the value
of the shares received. During fiscal 1997, the Company sold its
shares of Excite and recorded a net gain of approximately $1.3
million, which is included in net loss (gain) on disposal of
long-lived assets in the Company's consolidated statements of
operations.
During fiscal 1995, the Company invested approximately $5.2 million
($3.9 million in cash, $1.1 million in common shares of
Holdings-Canada, and the conversion of approximately $0.2 million in
notes receivable) in StarCom International Optics Corporation
("StarCom"), for which the Company received a 25% equity interest in
each of Starcom's wholly owned operating subsidiaries. In December
1997, a senior secured creditor of StarCom notified the Company that
it intended to foreclose on its collateral in StarCom, and in January
1998, StarCom commenced bankruptcy proceedings. Based on management's
estimate of the net realizable value of its investment, the Company
recorded a provision for impairment of its investment of $5.2 million
in fiscal 1997.
(e) Investments in Joint Venture and Affiliate and Other Investments
In September 1992, the Company entered into a joint venture agreement
with Greenstar Technologies Inc. (now GST Telecommunications, Inc.
("GST")) to design, construct and operate a competitive access network
in Phoenix. The Company and GST each had a 50% equity interest in the
joint venture. All financing provided to the joint venture by the
Company, as well as the recognition of the Company's share of the
joint venture's losses, were recorded according to the equity method
of accounting. During fiscal 1996, the Company recorded a valuation
allowance of approximately $5.8 million for the amounts receivable
arising from advances made to the Phoenix network joint venture, based
on management's estimate of the net realizable value of the
receivable.
<PAGE>
F-27
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
In October 1996, the Company sold its interest in the joint venture to
GST. The Company received approximately $2.1 million in cash,
representing $1.3 million of consideration for its 50% interest and
$0.8 million for equipment and amounts advanced to the joint venture.
In addition, the Company received equipment with a net book value of
$2.4 million and assumed liabilities of $0.3 million. A gain on sale
of the joint venture of approximately $0.8 million was recorded in the
consolidated financial statements during the three months ended
December 31, 1996.
(4) Short-term Investments Available for Sale
Short-term investments available for sale are comprised of the following:
December 31,
----------------------------------------
1996 1997
------------------- ----------------
(in thousands)
Money market instruments $ 10,000 -
Commercial paper 5,500 4,000
U.S. Treasury securities 17,101 94,181
Equity securities 849 -
=================== ================
$ 33,450 98,181
=================== ================
At December 31, 1996 and 1997, the estimated fair value of the Company's
money market instruments, commercial paper and U.S. Treasury securities
approximated cost, and the amount of gross unrealized gains was not
significant. At December 31, 1996, the cost of equity securities was $0.3
million and unrealized gains for fiscal 1996 were $0.5 million. All money
market instruments, commercial paper and U.S. Treasury securities mature
within one year.
<PAGE>
F-28
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(5) Subscriber Acquisition and Advertising Costs
Subscriber acquisition costs deferred during fiscal years 1995 and 1996,
the three months ended December 31, 1996 and fiscal 1997 were $5.5 million,
$14.4 million, $2.4 million and $6.5 million, respectively. Amortization
and write-offs for the same periods were $2.8 million, $12.2 million, $4.3
million and $8.9 million, respectively, and have been included in
depreciation and amortization expense in the Company's consolidated
statements of operations.
The amount charged to advertising expense was $4.5 million in fiscal 1995,
$7.5 million in fiscal 1996, $1.6 million in the three months ended
December 31, 1996 and $4.7 million in fiscal 1997.
(6) Notes Receivable and Due from Affiliate
In January 1997, the Company announced a strategic alliance with Central
and South West Corporation ("CSW") which is developing and marketing
telecommunications services in certain cities in Texas. The venture entity,
a limited partnership named CSW/ICG ChoiceCom, L.P. ("ChoiceCom"), is based
in Austin, Texas. CSW holds 100% of the interest in ChoiceCom, and CSW and
the Company each have two representatives on the Management Committee of
the general partner of ChoiceCom. The Company has committed to loan
ChoiceCom $15.0 million under two promissory notes, which are payable on
demand and earn interest at LIBOR plus 2% per annum (7.97% at December 31,
1997). Advances under these promissory notes were $10.0 million at December
31, 1997.
Additionally, the Company has agreed to perform certain administrative
services for ChoiceCom and make certain payments to vendors on behalf of
ChoiceCom, for which such services and payments are to be conducted on an
arm's length basis and reimbursed by ChoiceCom. At December 31, 1997,
amounts outstanding under this arrangement and justify included in due from
affiliate were approximately $9.4 million, and were collected in full
during the subsequent fiscal quarter.
<PAGE>
F-29
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(7) Property and Equipment
Property and equipment, including assets held under capital leases, is
comprised of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1996 1997
------------------ -----------------
(in thousands)
<S> <C> <C>
Land $ 306 709
Buildings and improvements 10,193 10,855
Furniture, fixtures and office equipment 46,190 58,606
Machinery and equipment 10,764 31,630
Fiber optic and point of presence equipment 230,904 257,062
Satellite equipment 19,408 29,760
Switch equipment 58,199 85,546
Fiber optic transmission system 117,281 192,756
Build out/site preparation 13,284 13,898
Construction in progress (see note 16) 61,168 179,673
------------------ -----------------
567,697 860,495
Less accumulated depreciation (79,648) (155,383)
================== =================
$ 488,049 705,112
================== =================
</TABLE>
Property and equipment includes approximately $179.7 million of equipment
which has not been placed in service at December 31, 1997, and accordingly,
is not being depreciated. The majority of this amount is related to new
network construction (see note 16).
Certain of the assets described above have been pledged as security for
long-term debt and are held under capital leases at December 31, 1997. The
following is a summary of property and equipment held under capital leases:
<PAGE>
F-30
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(7) Property and Equipment (continued)
December 31,
---------------------------------------
1996 1997
------------------ ------------------
(in thousands)
Machinery and equipment $ 1,842 3,926
Fiber optic and point of presence
equipment 7,514 12,707
Switch equipment 22,280 21,380
Fiber optic transmission system 55,746 58,806
Construction in progress 20,187 17,895
------------------ ------------------
107,569 114,714
Less accumulated depreciation (4,424) (10,385)
================== ==================
$ 103,145 104,329
================== ==================
(8) Other Assets
Other assets are comprised of the following:
December 31,
----------------------------------------
1996 1997
------------------ ------------------
(in thousands)
Deposits $ 4,416 3,296
Pace customer base 2,581 2,805
Rights of way 1,739 425
Minutes of use agreement 1,421 -
Non-compete agreements 902 1,386
Right of entry - 5,019
Other 1,403 1,099
------------------ ------------------
12,462 14,030
Less accumulated amortization (1,547) (3,499)
================== ==================
Other $ 10,915 10,531
================== ==================
<PAGE>
F-31
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(9) Related Party Transactions
During fiscal 1996, Holdings-Canada and International Communications
Consulting, Inc. ("ICC") entered into a consulting agreement whereby ICC
will provide various consulting services to the Company through December
1999 for approximately $4.2 million to be paid during the term of the
agreement. During fiscal 1996, the three months ended December 31, 1996 and
fiscal 1997, the Company paid approximately $1.3 million, $0.3 million and
$1.1 million, respectively, related to this consulting agreement. William
W. Becker, a stockholder and former director of the Company, is President
and Chief Executive Officer of ICC.
At December 31, 1996 and 1997, receivables from officers and employees of
approximately $1.0 million and $0.9 million, respectively, are primarily
comprised of promissory notes from officers for relocation expenses, which
are generally payable on demand and bear interest at 7% per annum, and are
included in receivables-other in the accompanying consolidated financial
statements.
(10) Capital Lease Obligations
The Company has payment obligations under various capital lease agreements
for equipment. The future required payments under the Company's capital
lease obligations subsequent to December 31, 1997 are as follows (in
thousands):
Due December 31:
1998 $ 18,874
1999 16,976
2000 15,247
2001 16,350
2002 11,009
Thereafter 93,584
---------------------
Total minimum lease payments 172,040
Less amounts representing interest (93,423)
---------------------
Present value of net minimum lease payments 78,617
Less current portion (8,128)
---------------------
$ 70,489
=====================
<PAGE>
F-32
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(11) Long-term Debt
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1996 1997
---------------------- ----------------------
(in thousands)
<S> <C> <C>
11 5/8% Senior discount notes, net of discount (a) $ - 109,436
12 1/2% Senior discount notes, net of discount (b) 325,530 367,494
13 1/2% Senior discount notes, net of discount (c) 355,955 407,409
Note payable with interest at the 90-day
commercial paper rate plus 4 3/4% (10.3% at
December 31, 1997), due 2001, secured by
certain telecommunications equipment 5,815 4,932
Note payable with interest at 11%, due monthly
through fiscal 1999, secured by equipment 2,625 1,860
Mortgage payable with interest at 8 1/2%, due
monthly through 2009, secured by building 1,177 1,131
Other 73 90
---------------------- ---------------------
691,175 892,352
Less current portion (817) (1,784)
---------------------- ---------------------
$ 690,358 890,568
====================== =====================
</TABLE>
(a) 11 5/8% Notes
On March 11, 1997, Holdings completed a private placement (the "1997
Private Offering") of 11 5/8% Senior Discount Notes due 2007 (the "11
5/8% Notes") and 14% Exchangeable Preferred Stock Mandatorily
Redeemable 2008 (the "14% Preferred Stock") for gross proceeds of
$99.9 million and $100.0 million, respectively. Net proceeds from the
1997 Private Offering, after costs of approximately $7.5 million, were
approximately $192.4 million.
The 11 5/8% Notes are unsecured senior obligations of Holdings
(guaranteed by ICG) that mature on March 15, 2007, at a maturity value
of $176.0 million. Interest will accrue at 11 5/8% per annum,
beginning March 15, 2002, and is payable each March 15 and September
15, commencing September 15, 2002. The indenture for the
<PAGE>
F-33
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(11) Long-term Debt (continued)
11 5/8% Notes contains certain covenants which provide for limitations
on indebtedness, dividends, asset sales and certain other transactions
and effectively prohibits the payment of cash dividends.
The 11 5/8% Notes were originally recorded at approximately $99.9
million. The discount on the 11 5/8% Notes is being accreted through
March 15, 2002, the date on which the 11 5/8% Notes may first be
redeemed. The accretion of the discount and debt issuance costs is
included in interest expense in the accompanying consolidated
financial statements.
(b) 12 1/2% Notes
On April 30, 1996, Holdings completed a private placement (the "1996
Private Offering") of 12 1/2% Senior Discount Notes due 2006 (the "12
1/2% Notes") and of 14 1/4% Exchangeable Preferred Stock Manditorily
Redeemable 2007 (the "14 1/4% Preferred Stock") for gross proceeds of
$300.0 million and $150.0 million, respectively. Net proceeds from the
1996 Private Offering, after issuance costs of approximately $17.0
million, were approximately $433.0 million.
The 12 1/2% Notes are unsecured senior obligations of Holdings
(guaranteed by ICG and Holdings-Canada) that mature on May 1, 2006,
with a maturity value of $550.3 million. Interest will accrue at 12
1/2% per annum, beginning May 1, 2001, and is payable each May 1 and
November 1, commencing November 1, 2001. The indenture for the 12 1/2%
Notes contains certain covenants which provide for limitations on
indebtedness, dividends, asset sales and certain other transactions
and effectively prohibits the payment of cash dividends.
The 12 1/2% Notes were originally recorded at approximately $300.0
million. The discount on the 12 1/2% Notes is being accreted through
May 1, 2001, the date on which the 12 1/2 % Notes may first be
redeemed. The accretion of the discount and debt issuance costs is
included in interest expense in the accompanying consolidated
financial statements.
<PAGE>
F-34
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(11) Long-term Debt (continued)
Approximately $35.3 million of the proceeds from the 1996 Private
Offering were used to redeem the 12% redeemable preferred stock of
Holdings (the "Redeemable Preferred Stock") issued in August 1995
($30.0 million), pay accrued preferred dividends ($2.6 million) and to
repurchase 916,666 warrants of the Company ($2.7 million) issued in
connection with the Redeemable Preferred Stock. The Company recognized
a charge to minority interest in share of losses, net of accretion and
preferred dividends on preferred securities of subsidiaries of
approximately $12.3 million for the excess of the redemption price of
the Redeemable Preferred Stock over the carrying amount at April 30,
1996, and recognized a charge to interest expense of approximately
$11.5 million for the payments made to noteholders with respect to
consents to amendments to the indenture governing the 13 1/2% Notes to
permit the 1996 Private Offering.
(c) 13 1/2% Notes
On August 8, 1995, Holdings completed a private placement (the "1995
Private Offering") through the issuance of 58,430 units (the "Units"),
each Unit consisting of ten $1,000, 13 1/2% Senior Discount Notes due
2005 (the "13 1/2% Notes") and warrants to purchase 33 common shares
of Holdings-Canada (the "Unit Warrants"). Net proceeds from the 1995
Private Offering, after issuance costs of approximately $14.0 million,
were approximately $286.0 million.
The 13 1/2% Notes are unsecured senior obligations of Holdings
(guaranteed by ICG and Holdings-Canada) that mature on September 15,
2005, with a maturity value of $584.3 million. Interest will accrue at
the rate of 13 1/2% per annum, beginning September 15, 2000, and is
payable in cash each March 15 and September 15, commencing March 15,
2001. The indenture for the 13 1/2% Notes contains certain covenants
which provide for limitations on the indebtedness, dividends, asset
sales and certain other transactions and effectively prohibits the
payment of cash dividends.
The 13 1/2% Notes were originally recorded at approximately $294.0
million, which represents the $300.0 million in proceeds less the
approximate $6.0 million value assigned to the Unit Warrants, which is
included in additional paid-in capital. The discount on the 13 1/2%
Notes and the debt issuance costs are being accreted over five years
until September 15, 2000, the date at which the 13 1/2% Notes can
first be
<PAGE>
F-35
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(11) Long-term Debt (continued)
redeemed. The value assigned to the Unit Warrants, representing
additional debt discount, is also being accreted over the five-year
period. The accretion of the total discount is included in interest
expense in the accompanying consolidated financial statements.
Holdings may redeem the 13 1/2% Notes on or after September 15, 2000,
in whole or in part, at the redemption prices set forth in the
agreement, plus unpaid interest, if any, at the date of redemption.
The Unit Warrants entitle the holder to purchase one common share of
Holdings-Canada, which is exchangeable into one share of ICG Common
Stock, at the exercise price of $12.51 per share and are exercisable
at any time between August 8, 1996 and August 8, 2005.
In connection with the issuance of the 13 1/2% Notes, the Company
obtained $6.0 million of interim financing from the placement agent
and certain private investors in exchange for the issuance of an
aggregate of 520,000 Series A Warrants (see note 13 (c)). The $6.0
million was repaid with a portion of the proceeds from the 1995
Private Offering. As a result of the repayment of the interim
financing, the value assigned to the Series A Warrants totaling
approximately $3.0 million, representing debt discount, was charged to
interest expense during the year ended September 30, 1995.
<PAGE>
F-36
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(11) Long-term Debt (continued)
Scheduled principal maturities of long-term debt as of December 31,
1997 are as follows (in thousands):
Due December 31:
1998 $ 1,784
1999 1,686
2000 1,290
2001 938
2002 938
Thereafter (a) 1,311,976
--------------------
1,318,612
Less unaccreted discount on the 11 5/8% Notes,
the 12 1/2% Notes and the 13 1/2% Notes (426,260)
--------------------
$ 892,352
====================
(a) Includes $176.0 million, $550.3 million and $584.3 million of 11
5/8% Notes, 12 1/2% Notes, and 13 1/2% Notes, respectively, due
at maturity.
(e) Private Placement of Senior Discount Notes Completed Subsequent to
December 31, 1997
On February 12, 1998, ICG Services, Inc., a Delaware corporation and
new wholly owned subsidiary of ICG ("ICG Services"), completed a
private placement of 10% Senior Discount Notes due 2008 (the "10%
Notes") for gross proceeds of approximately $300.6 million. Net
proceeds from the offering, after underwriting costs of approximately
$9.0 million, were approximately $291.6 million.
The 10% Notes are unsecured senior obligations of ICG Services that
mature on February 15, 2008, at a maturity value of $490.0 million.
Interest will accrue at 10% per annum, beginning February 15, 2003,
and is payable each February 15 and August 15, commencing August 15,
2003. The indenture for the 10% Notes contains certain covenants which
provide limitations on indebtedness, dividends, asset sales and
certain other transactions.
<PAGE>
F-37
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(11) Long-term Debt (continued)
The 10% Notes were originally recorded at approximately $300.6
million. The discount on the 10% Notes will be accreted through
February 15, 2003, the date on which the 10% Notes may first be
redeemed.
(12) Redeemable Preferred Securities of Subsidiaries
Redeemable preferred stock of subsidiary is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1996 1997
----------------- ----------------
(in thousands)
<S> <C> <C>
14% Exchangeable preferred stock, mandatorily
redeemable in 2008 (a) $ - 108,022
14 1/4% Exchangeable preferred stock,
mandatorily redeemable in 2007 (b) 159,120 184,420
----------------- ----------------
$ 159,120 292,442
================= ================
</TABLE>
(a) 14% Preferred Stock
In connection with the 1997 Private Offering, Holdings sold 100,000
shares of exchangeable preferred stock that bear a cumulative dividend
at the rate of 14% per annum. The dividend is payable quarterly in
arrears each March 15, June 15, September 15, and December 15, and
commenced June 15, 1997. Through March 15, 2002, the dividend is
payable at the option of Holdings in cash or additional shares of 14%
Preferred Stock. Holdings may exchange the 14% Preferred Stock into
14% Senior Subordinated Exchange Debentures at any time after the
exchange is permitted by certain indenture restrictions. The 14%
Preferred Stock is subject to mandatory redemption on March 15, 2008.
(b) 14 1/4% Preferred Stock
In connection with the 1996 Private Offering, Holdings sold 150,000
shares of exchangeable preferred stock that bear a cumulative dividend
at the rate of 14 1/4% per annum. The dividend is payable quarterly in
arrears each February 1, May 1, August 1 and November 1, and commenced
August 1, 1996. Through
<PAGE>
F-38
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(12) Redeemable Preferred Securities of Subsidiaries (continued)
May 1, 2001, the dividend is payable, at the option of Holdings, in
cash or additional shares of 14 1/4% Preferred Stock. Holdings may
exchange the 14 1/4% Preferred Stock into 14 1/4% Senior Subordinated
Exchange Debentures at any time after the exchange is permitted by
certain indenture restrictions. The 14 1/4% Preferred Stock is subject
to mandatory redemption on May 1, 2007.
(c) 6 3/4% Preferred Securities
During fiscal 1997, a new subsidiary of the Company, ICG Funding,
completed a private placement of 6 3/4% Exchangeable Limited Liability
Company Preferred Securities Mandatorily Redeemable 2009 (the "6 3/4%
Preferred Securities") for gross proceeds of $132.25 million. Net
proceeds from the private placement, after offering costs, were
approximately $127.6 million. Restricted cash at December 31, 1997 of
$24.6 million includes the proceeds from the offering which are
designated for the payment of cash dividends on the 6 3/4% Preferred
Securities through November 15, 2000.
The 6 3/4% Preferred Securities consist of 2,645,000 exchangeable
preferred securities of ICG Funding that bear a cumulative dividend at
the rate of 6 3/4% per annum. The dividend is paid quarterly in
arrears each February 15, May 15, August 15 and November 15, and
commenced November 15, 1997. The dividend is payable in cash through
November 15, 2000 and, thereafter, in cash or shares of ICG Common
Stock, at the option of ICG Funding. The 6 3/4% Preferred Securities
are exchangeable, at the option of the holder, at any time prior to
November 15, 2009 into shares of ICG Common Stock at an exchange rate
of 2.0812 shares of Common Stock per preferred security, or an
exchange price of $24.025 per share, subject to adjustment. ICG
Funding may, at its option, redeem the 6 3/4% Preferred Securities at
any time on or after November 18, 2000. Prior to that time, ICG
Funding may redeem the 6 3/4% Preferred Securities if the current
market value of ICG Common Stock equals or exceeds the exchange price,
for at least 20 days of any 30-day trading period, by 170% prior to
November 16, 1998; 160% from November 16, 1998 through November 15,
1999; and 150% from November 16, 1999 through November 15, 2000. The 6
3/4% Preferred Securities are subject to mandatory redemption on
November 15, 2009.
<PAGE>
F-39
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(12) Redeemable Preferred Securities of Subsidiaries (continued)
On February 15, 1998, ICG Funding used the remaining proceeds from the
private placement of the 6 3/4% Preferred Securities to purchase
$112.4 million of ICG Communications, Inc. Preferred Stock ("ICG
Preferred Stock") which pays dividends each February 15, May 15,
August 15 and November 15 in additional shares of ICG Preferred Stock
through November 15, 2000. Subsequent to November 15, 2000, dividends
are payable in cash or shares of ICG Common Stock, at the option of
ICG. The ICG Preferred Stock is exchangeable, at the option of ICG
Funding, at any time prior to November 15, 2009 into shares of ICG
Common Stock at an exchange rate based on the exchange rate of the 6
3/4% Preferred Securities. The ICG Preferred Stock is subject to
mandatory redemption on November 15, 2009.
The accreted value of the 6 3/4% Preferred Securities is included in
Company-obligated mandatorily redeemable preferred securities of
subsidiary limited liability company which holds solely Company
preferred stock in the accompanying consolidated balance sheet at
December 31, 1997.
Included in minority interest in share of losses, net of accretion and
preferred dividends on preferred securities of subsidiaries is
approximately $1.3 million, $27.0 million, $5.8 million and $39.8 million
for fiscal 1995 and 1996, the three months ended December 31, 1996 and
fiscal 1997, respectively, associated with the accretion of issuance costs,
discount and preferred security dividend accruals for the 6 3/4% Preferred
Securities, the 14% Preferred Stock, the 14 1/4% Preferred Stock and the
Redeemable Preferred Stock (issued in connection with the 1995 Private
Offering and redeemed in April 1996). These costs are partially offset by
the minority interest share in losses of subsidiaries of approximately $0.6
million, $2.7 million, $0.8 million and $2.0 million for fiscal 1995 and
1996, the three months ended December 31, 1996 and fiscal 1997,
respectively.
(13) Stockholders' Deficit
(a) Common Stock
Common stock outstanding at December 31, 1997 represents the issued
and outstanding Common Stock of ICG and Class A common shares of
Holdings-Canada (not owned by ICG) which are exchangeable at any time,
on a one-for-one basis, for ICG Common Stock. The following table sets
forth the number of shares
<PAGE>
F-39
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(13) Stockholders' Deficit (continued)
outstanding for ICG and Holdings-Canada on a separate company basis as
of December 31, 1997:
<TABLE>
<CAPTION>
Shares Shares not owned
owned by ICG by ICG
-------------------- -------------------
<S> <C> <C>
ICG Common Stock, $.01 par value, 100,000,000
shares authorized; 41,122,966 and 43,950,959
shares issued and outstanding at December 31,
1996 and 1997, respectively - 43,950,959
Holdings-Canada Class A common shares, no par
value, 100,000,000 shares authorized;
31,795,270 and 31,822,756 shares issued and
outstanding at December 31, 1996 and 1997,
respectively:
Class A common shares, exchangeable on a
one-for-one basis for ICG Common Stock
at any time - 23,700
Class A common shares owned by ICG 31,799,056 -
-------------------
Total shares outstanding 43,974,659
===================
</TABLE>
(b) Stock Options and Employee Stock Purchase Plan
In fiscal years 1991, 1992 and 1993, the Company's Board of Directors
approved incentive stock option plans and replenishments to those
plans which provide for the granting of options to directors,
officers, employees and consultants of the Company to purchase
285,000, 724,400 and 1,692,700 shares, respectively, of ICG Common
Stock, with exercise prices between 80% and 100% of the fair value of
the shares at the date of grant. A total of 1,849,600 options have
been granted under these plans with exercise prices ranging from
approximately $2.92 to $14.03. Compensation expense has been recorded
for options granted at an exercise price below the fair market value
of ICG Common Stock at the date of grant, pursuant to the provisions
of APB 25. The options granted under these plans are subject to
various vesting requirements and expire in five and ten years from the
date of grant.
<PAGE>
F-41
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(13) Stockholders' Deficit (continued)
The NETCOM 1993 Stock Option Plan has been assumed and approved by
ICG's Board of Directors as an incentive and non-qualified stock
option plan which provides for the granting of options to certain
directors, officers and employees to purchase 2,720,901 shares of ICG
Common Stock. A total of 4,380,099 options have been granted under
this plan at exercise prices ranging from $0.65 to $92.14, none of
which were less than 100% of the fair market value of the shares
underlying options on the date of grant, and accordingly, no
compensation expense was recorded for these options under APB 25. The
options granted under this plan are subject to various vesting
requirements, generally three and five years, and expire within ten
years from the date of grant.
In fiscal years 1994, 1995 and 1996, the three months ended December
31, 1996 and fiscal 1997, the Company's Board of Directors approved
incentive and non-qualified stock option plans and replenishments to
plans which provide for the granting of options to certain directors,
officers and employees to purchase 2,536,000 shares of ICG Common
Stock under the 1994 plan and an aggregate of 2,700,000 shares of the
Company's Common Stock under the 1995 and 1996 plans. A total of
5,709,426 options have been granted under these plans at original
exercise prices ranging from $7.94 to $27.06, none of which were less
than 100% of the fair market value of the shares underlying options on
the date of grant, and accordingly, no compensation expense was
recorded for these options under APB 25. The options granted under
these plans are subject to various vesting requirements and expire in
five and ten years from the date of grant.
In order to continue to provide non-cash incentives and retain key
employees, all employee stock options outstanding on April 16, 1997
with exercise prices at or in excess of $15.875 were canceled by the
Stock Option Committee of the Company's Board of Directors and
regranted with an exercise price of $10.375, the closing price of ICG
Common Stock on the Nasdaq National Market on April 16, 1997. A total
of 597,600 options, with original exercise prices ranging from $15.875
to $26.25, were canceled and regranted. There was no effect on the
Company's consolidated financial statements as a result of the
cancellation and regranting of options.
In October 1996, the Company established an Employee Stock Purchase
Plan whereby employees can elect to designate 1% to 30% of their
annual salary, to be used to purchase shares of ICG Common Stock, up
to a limit of $25,000 in ICG
<PAGE>
F-42
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(13) Stockholders' Deficit (continued)
Common Stock each year, at a 15% discount to fair market value. Stock
purchases will occur four times a year on February 1, May 1, August 1
and November 1, with the price per share equaling the lower of 85% of
the market price at the beginning or end of the offering period. The
Company is authorized to issue a total of 1,000,000 shares of ICG
Common Stock to participants in the plan. During fiscal 1997, the
Company sold 109,213 shares of ICG Common Stock to employees under
this plan.
During fiscal 1994, NETCOM's Board of Directors approved and adopted
an Employee Stock Purchase Plan which was dissolved upon NETCOM's
merger with ICG. Shares purchased under this plan have been converted
into an estimated 119,000 shares of ICG Common Stock.
The Company recorded compensation expense in connection with its
stock-based employee and non-employee director compensation plans of
$0.2 million and $0.1 million for fiscal 1995 and 1996, respectively,
pursuant to the intrinsic value based method of APB 25. Had
compensation expense for the Company's plans been determined based on
the fair market value of the options at the grant dates for awards
under those plans consistent with the provisions of SFAS 123, the
Company's pro forma net loss and net loss per share would have been as
presented below. Pro forma disclosures include the effects of employee
and non-employee director stock options granted during fiscal 1996,
the three months ended December 31, 1996 and fiscal 1997.
<TABLE>
<CAPTION>
Fiscal years ended
September 30, Three months ended Fiscal year ended
----------------------------------- December 31, December 31,
1995 1996 1996 1997
--------------- ---------------- -------------------------- --------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net loss:
As reported $ (90,712) (228,372) (61,313) (360,735)
Pro forma (101,423) (242,974) (64,985) (369,677)
Net loss per share -
basic and diluted:
As reported $ (2.94) (6.19) (1.47) (8.49)
Pro forma (3.29) (6.59) (1.56) (8.70)
</TABLE>
<PAGE>
F-43
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(13) Stockholders' Deficit (continued)
The fair value of each option grant to employees and non-employee
directors other than NETCOM employees and non-employee directors was
estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions: an expected
option life of three years for directors, officers and other
executives, and two years for other employees, for all periods;
expected volatility of 50% for all periods; and risk-free interest
rates ranging from 5.03% to 7.42% for fiscal 1995 and 1996 and the
three months ended December 31, 1996, and risk-free interest rates
ranging from 5.61% to 6.74% for fiscal 1997. Risk-free interest rates,
as were currently available on the grant date, were assigned to each
granted option based on the zero-coupon rate of U.S. Treasury bills to
be held for the same period as the assumed option life. The fair value
of each option grant to NETCOM employees and non-employee directors
was estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions: an
expected option life of 1.6 years; expected volatility of 80%; and
risk free interest rates of 6%. Since the Company does not anticipate
issuing any dividends on its Common Stock, the dividend yield for all
options granted was assumed to be zero. The weighted average fair
market value of combined ICG and NETCOM options granted during fiscal
1995 and 1996, the three months ended December 31, 1996 and fiscal
1997 was approximately $7.83, $11.10, $9.48 and $10.31 per option,
respectively.
As options outstanding at December 31, 1997 will continue to vest in
subsequent periods and additional options are expected to be awarded
under existing and new plans, the above pro forma results are not
necessarily indicative of the impact on net loss and net loss per
share in future periods.
<PAGE>
F-44
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(13) Stockholders' Deficit (continued)
The following table summarizes the status of the Company's stock-based
compensation plans:
<TABLE>
<CAPTION>
Shares Weighted
underlying average Options
options exercise price exercisable
------------------- -------------------- ------------------------
(in thousands) (in thousands)
<S> <C> <C> <C>
Outstanding at October 1, 1994 1,921 $ 6.79 1,059
Granted 3,612 17.42
Exercised (487) 3.16
Canceled (218) 14.02
-------------------
Outstanding at September 30, 1995 4,828 14.92 1,230
Granted 2,054 18.30
Exercised (415) 7.35
Canceled (631) 24.73
-------------------
Outstanding at September 30, 1996 5,836 15.49 2,771
Granted 335 18.59
Exercised (31) 8.95
Canceled (56) 12.65
-------------------
Outstanding at December 31, 1996 6,084 15.68 3,476
Granted 3,377 14.94
Exercised (709) 8.13
Canceled (2,604) 25.32
-------------------
Outstanding at December 31, 1997 6,148 11.97 3,532
===================
</TABLE>
<PAGE>
F-45
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(13) Stockholders' Deficit (continued)
The following table summarizes information about options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
--------------------------------------------------------- ---------------------------------
Weighted
average Weighted Weighted
Range of remaining average average
exercise Number contractual exercise Number exercise
prices outstanding life price exercisable price
------------------ ------------------ ----------------- ------------------ ----------------- -------------
(in thousands) (in years) (in thousands)
<S> <C> <C> <C> <C> <C>
$2.60 - 6.25 111 5.10 $ 4.08 111 $ 4.08
7.94 1,550 7.41 7.94 1,550 7.94
8.50 - 10.38 1,737 8.31 9.99 651 9.67
10.50 - 26.88 2,703 8.69 15.61 1,210 14.34
27.06 - 46.65 47 9.17 27.94 9 29.48
------------------ ------------------
6,148 3,531
================== ==================
</TABLE>
(c) Warrants
During fiscal 1995 and 1996, the three months ended December 31, 1996
and fiscal 1997, the Company's warrant activity was as follows:
(i) During fiscal 1993, the Company issued to a debt holder warrants
to purchase 17,067, 3,255 and 11,039 common shares at exercise
prices of $6.56, $7.38 and $7.88, respectively. During fiscal
1994, 17,067 warrants were exercised for proceeds of
approximately $0.1 million. In addition, during fiscal 1994, the
Company issued to the same debt holder additional warrants to
purchase 1,989, 15,260 and 3,665 common shares of Holdings-Canada
at $21.51, $20.01 and $11.80 per share, exercisable on or before
November 10, 1998, March 24, 1999, and July 8, 1999,
respectively. An additional 7,725 warrants were issued on July
10, 1995 at an exercise price of $14.50, which expire on July 9,
2000. Also issued on July 10, 1995 were 60,000 additional
warrants to an affiliate of the debt holder at an exercise price
of $14.50, which expire on July 9, 2000. During the three months
ended December 31, 1996, 1,231 of
<PAGE>
F-46
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(13) Stockholders' Deficit (continued)
the $7.38 warrants, 4,456 of the $7.88 warrants and 2,215 of the
$11.80 warrants were canceled. During fiscal 1997, 2,024 of the
$7.38 warrants, 6,583 of the $7.88 warrants, 1,450 of the $11.80
warrants and 17,429 of the $14.50 warrants were exercised in
exchange for Holdings-Canada Class A common shares. In addition,
50,296 of the $14.50 warrants were canceled. At December 31,
1997, a total of 17,249 of these warrants remained outstanding.
(ii) During fiscal 1994, the Company issued to two financial advisors
warrants to purchase 75,000 and 200,000 common shares of
Holdings-Canada. These warrants have an exercise price of $7.94
and $18.00 and are exercisable for two- and five-year periods,
respectively. During fiscal 1995 and 1996, 74,335 and 665 of the
75,000 warrants were exercised for total proceeds of
approximately $0.6 million. During the three months ended
December 31, 1996, 100,000 of the 200,000 warrants were exercised
for proceeds of approximately $1.8 million. At December 31, 1997,
100,000 warrants remained outstanding.
(iii)Pursuant to a private placement of the Redeemable Preferred
Stock and the interim financing arrangement during fiscal 1995,
the Company issued 1,895,000 Series A Warrants and 1,375,000
Series B Warrants to purchase an equal number of common shares of
Holdings-Canada with exercise prices of $7.94 and $8.73,
respectively, which expire on July 14, 2000. During fiscal 1996,
the Company repurchased 458,333 each of the Series A and Series B
Warrants for $3.21 and $2.52, respectively (see note 11 (c)). In
addition, 1,853,334 warrants were exercised in June 1996 through
a cashless exercise in which 1,271,651 Holdings-Canada common
shares were issued. During fiscal 1997, the remaining 500,000
warrants of the Series A and Series B warrants were exercised in
exchange for 346,014 common shares of Holdings-Canada, which were
in turn converted into an equal number of shares of ICG Common
Stock.
<PAGE>
F-47
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(13) Stockholders' Deficit (continued)
(iv) In connection with the 1995 Private Offering, the Company issued
1,928,190 warrants to purchase an equal number of common shares
of Holdings-Canada. The warrants were exercisable beginning
August 8, 1996 at $12.51 per share and expire on August 6, 2005.
During fiscal 1997, 71,775 warrants were exercised for total
proceeds of approximately $0.9 million and were in turn converted
into an equal number of shares of ICG Common Stock. At December
31, 1997, 1,856,415 of these warrants remained outstanding.
The following table summarizes warrant activity for fiscal 1995 and 1996,
the three months ended December 31, 1996 and fiscal 1997:
<TABLE>
<CAPTION>
Outstanding Price
warrants range
-------------------- -------------------------
(in thousands)
<S> <C> <C>
Outstanding, October 1, 1994 310 $ 7.38 - 21.51
Granted 5,266 7.94 - 14.50
Exercised (74) 7.94
--------------------
Outstanding, September 30, 1995 5,502 7.38 - 21.51
Exercised (1,854) 7.94 - 8.73
Repurchased (917) 2.52 - 3.21
--------------------
Outstanding, September 30, 1996 2,731 7.38 - 21.51
Exercised (100) 18.00
Canceled (8) 7.38 - 11.80
--------------------
Outstanding, December 31, 1996 2,623 7.38 - 21.51
Exercised (599) 7.38 - 14.50
Canceled (50) 14.50
--------------------
Outstanding, December 31, 1997 1,974 12.51 - 21.51
====================
</TABLE>
<PAGE>
F-48
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(13) Stockholders' Deficit (continued)
The warrants outstanding on December 31, 1997 expire on the following
dates:
<TABLE>
<CAPTION>
Outstanding Exercise
Expiration date warrants price
-------------------------- -------------------- --------------------
(in thousands)
<S> <C> <C>
November 10, 1998 2 $ 21.51
December 17, 1998 100 18.00
March 24, 1999 15 20.01
August 6, 2005 1,857 12.51
====================
1,974
====================
</TABLE>
(14) Sale of Teleports
In December 1995, the Company received approximately $21.1 million as
partial payment for the sale of four of its teleports and certain related
assets, and entered into a management agreement with the purchaser whereby
the purchaser assumed control of the teleport operations. Upon approval of
the transaction by the Federal Communications Commission ("FCC"), the
Company completed the sale in March 1996 and received an additional $0.4
million due to certain closing adjustments, for total proceeds of $21.5
million. The Company recognized a loss of approximately $1.1 million on the
sale. Revenue associated with these operations was approximately $9.1
million and $2.5 million for fiscal 1995 and 1996, respectively. The
Company has reported results of operations from these assets through
December 31, 1995.
(15) Restructuring and Related Charges
Restructuring and related charges of $1.9 million recorded during fiscal
1997 are the result of a decision by management to restructure operations
of NETCOM's subsidiary in the United Kingdom. The restructuring charge
includes $1.4 million in accrued expenses for costs to terminate excess
leased office facilities and a write-off of office equipment, furniture and
building improvements as a result of consolidating office space, a $0.3
million write-down of previously capitalized deferred subscriber
acquisition costs and $0.2 million for severance costs.
<PAGE>
F-49
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(16) Commitments and Contingencies
(a) Network Construction
In March 1996, the Company and Southern California Edison Company
("SCE") jointly entered into a 25-year agreement under which the
Company will lease 1,258 miles of fiber optic cable in Southern
California, and can install up to 500 additional miles of fiber optic
cable. This network, which will be maintained and operated primarily
by the Company, stretches from Los Angeles to southern Orange County.
Under the terms of this agreement, SCE will be entitled to receive an
annual fee for ten years, certain fixed quarterly payments, a
quarterly payment equal to a percentage of certain network revenue,
and certain other installation and fiber connection fees. The
aggregate fixed payments remaining under the agreement totaled
approximately $144.7 million at December 31, 1997. The agreement has
been accounted for as a capital lease in the accompanying consolidated
balance sheets.
In May 1997, the Company entered into a long-term agreement with The
Southern Company ("Southern") that will permit the Company to
construct a 100-mile fiber optic network in the Atlanta metropolitan
area. The Company paid $5.5 million upon execution of the agreement
and is responsible for reimbursement to Southern for costs of network
design, construction, installation, maintenance and repair.
Additionally, the Company is also required to pay Southern a quarterly
fee based on specified percentages of the Company's revenue derived
from services provided over this network. Network construction on the
initial 43-mile build is expected to be completed by May of 1998. The
Company estimates costs to complete the initial build to be
approximately $5.2 million. Other than the initial $5.5 million
payment, no costs have been incurred as of December 31, 1997.
In January 1997, the Company announced the formation of ChoiceCom, a
strategic alliance between the Company and CSW, which is expected to
develop and market telecommunications services in certain cities in
Texas. CSW holds 100% of the partnership interest in ChoiceCom and the
Company has an option to purchase a 50% interest at any time prior to
July 1, 2003. Subsequent to July 1, 1999, if the Company has not
exercised its option, CSW will have the right to sell, at a price
pursuant to the terms of the limited partnership agreement, either 51%
or 100% of the partnership interest in ChoiceCom to the Company.
Additionally, the Company has committed to loan $15.0 million to
ChoiceCom under two promissory
<PAGE>
F-50
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(16) Commitments and Contingencies (continued)
notes, of which $10.0 million was advanced as of December 31, 1997 and
the remaining $5.0 million was advanced during the first quarter of
fiscal 1998.
In June 1997, the Company entered into an indefeasible right of use
("IRU") agreement with Qwest Communications Corporation ("Qwest") for
approximately 1,800 miles of fiber optic network and additional
broadband capacity in California, Colorado, Ohio and the Southeast.
Network construction is ongoing and is expected to be complete by
December 1998. The Company is responsible for payment on the
construction as segments of the network are completed and has incurred
approximately $8.0 million as of December 31, 1997, with total costs
anticipated to be approximately $35.0 million. Additionally, the
Company has committed to purchase $6.0 million in network capacity
from Qwest prior to the end of 1998.
(b) Company Headquarters
During the three months ended December 31, 1996, the Company acquired
property for its new headquarters and commenced construction of an
office building that will accommodate most of the Company's Colorado
operations. The total cost of the project is expected to be
approximately $44.2 million, of which $29.4 million had been incurred
as of December 31, 1997 and is included in construction in progress.
In January 1998, the Company sold the substantially completed building
to a third party and entered into an agreement to lease back all of
the office space under a 15-year operating lease which includes two
ten-year renewal terms.
(c) Other Commitments
As part of the terms of the original purchase agreement, the Company
was obligated to purchase, at fair market value, all of the shares of
Maritime Telecommunications Network, Inc. ("MTN"), a 64% owned
subsidiary of the Company, that were owned by the minority
shareholders, upon demand of the minority shareholders, if a
transaction was not effected which converted the minority shares into
publicly traded securities or cash by January 3, 1998. As of the
current date, no such demand has been made by the minority
shareholders.
<PAGE>
F-51
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(16) Commitments and Contingencies (continued)
NETCOM has guaranteed monthly usage levels with its primary
communications vendor, which if not met, will obligate NETCOM for a
total of $9.3 million in each of fiscal 1998 and 1999, $7.6 million in
fiscal 2000 and $4.2 million in fiscal 2001. These amounts are
exclusive of usage discounts.
The Company has entered into various equipment purchase agreements
with certain of its vendors. Under these agreements, if the Company
does not meet a minimum purchase level in any given year, the vendor
may discontinue for that year certain discounts, allowances and
incentives otherwise provided to the Company. In addition, the
agreements may be terminated by either the Company or the vendor upon
prior written notice.
Additionally, the Company has entered into certain commitments to
purchase capital assets with an aggregate purchase price of
approximately $19.5 million at December 31, 1997.
(d) Operating Leases
The Company leases office space and equipment under non-cancelable
operating leases. Lease expense was approximately $4.4 million, $10.3
million, $2.4 million and $18.0 million for fiscal 1995 and 1996, the
three months ended December 31, 1996 and fiscal 1997, respectively.
Estimated future minimum lease payments for the years subsequent to
December 31, 1997 are (in thousands):
Due December 31:
1998 $ 18,933
1999 15,116
2000 10,860
2001 9,478
2002 7,140
Thereafter 53,909
=========================
$ 115,436
=========================
<PAGE>
F-52
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(16) Commitments and Contingencies (continued)
(e) Reciprocal Compensation
The Company has recorded revenue of approximately $4.9 million for
fiscal 1997 for reciprocal compensation relating to the transport and
termination of local traffic to Internet service providers from
customers of incumbent local exchange carriers pursuant to various
interconnection agreements. These local exchange carriers have not
paid most of the bills they have received from the Company and have
disputed substantially all of these charges based on the belief that
such calls are not local traffic as defined by the various agreements
and under state and federal laws and public policies. The resolution
of these disputes will be based on rulings by state public utility
commissions and/or by the Federal Communications Commission ("FCC").
To date, there have been favorable rulings from 16 states, favorable
preliminary decisions from three additional states and no unfavorable
final rulings by any state public utility commission or the FCC that
would indicate that calls placed by end users to Internet service
providers would not qualify as local traffic subject to the payment of
reciprocal compensation. In addition, cases are pending before six
other states. While the Company believes that all revenue recorded
through December 31, 1997 is collectible and that future reciprocal
compensation revenue will be realized, there can be no assurance that
such future regulatory rulings will be favorable to the Company.
(f) Litigation
On April 4, 1997, certain shareholders of the Company's majority owned
subsidiary, Zycom Corporation ("Zycom"), an Alberta, Canada
corporation, filed a shareholder derivative suit and class action
complaint for unspecified damages, purportedly on behalf of all of the
minority shareholders of Zycom, in the District Court of Harris
County, Texas (Cause No. 97-17777) against the Company, Zycom and
certain of their subsidiaries. This complaint alleges that the Company
and certain of its subsidiaries breached certain duties owed to the
plaintiffs. The Company is vigorously defending the claims. While it
is not possible to predict the outcome of this litigation, management
believes these proceedings will not have a material adverse effect on
the Company's financial condition, results of operations or cash
flows.
<PAGE>
F-53
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(16) Commitments and Contingencies (continued)
The Company is a party to certain other litigation which has arisen in
the ordinary course of business. In the opinion of management, the
ultimate resolution of these matters will not have a material adverse
effect on the Company's financial condition, results of operations or
cash flows.
(17) Income Taxes
The components of income tax (expense) benefit are as follows:
<TABLE>
<CAPTION>
Fiscal years ended Three months ended
September 30, December 31, Fiscal year ended
--------------------------- ----------------------------- December 31,
1995 1996 1995 1996 1997
------------ ------------- --------------- ------------ ----------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Current income tax expense $ (15) (221) (4) (12) (38)
Deferred income tax benefit - 5,329 - - -
------------ ------------- --------------- ------------ ----------------------
Total $ (15) 5,108 (4) (12) (38)
============ ============= =============== ============ ======================
</TABLE>
Current income tax expense represents foreign and state income taxes
relating to operations of subsidiary companies in foreign countries and in
states requiring separate entity tax returns. Accordingly, these entities'
taxable income cannot be offset by the Company's net operating loss
carryforwards.
During fiscal 1996, the deferred tax liability was adjusted for the effects
of certain changes in estimated lives of property and equipment as
discussed in note 2 (l). As a result, the Company recognized an income tax
benefit of $5.3 million.
Income tax benefit differs from the amounts computed by applying the U.S.
federal income tax rate to loss before income taxes primarily because the
Company has not recognized the income tax benefit of certain of its net
operating loss carryforwards and other deferred tax assets due to the
uncertainty of realization.
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1997 are as follows:
<PAGE>
F-54
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(17) Income Taxes (continued)
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1996 1997
------------------- --------------------
(in thousands)
<S> <C> <C>
Deferred income tax liabilities:
Property and equipment, due to excess
purchase price of tangible assets and
differences in depreciation for book and
tax purposes $ 14,268 8,542
Deferred subscriber acquisition costs 1,153 939
------------------- --------------------
15,421 9,481
------------------- --------------------
Deferred income tax assets:
Net operating loss carryforwards (96,569) (184,201)
Accrued interest on high yield debt obligations
deductible when paid (32,873) (72,330)
Accrued expenses not currently deductible for
tax purposes, including deferred revenue (6,621) (12,777)
Less valuation allowance 120,642 259,827
------------------- --------------------
(15,421) (9,481)
------------------- --------------------
Net deferred income tax liability $ - -
=================== ====================
</TABLE>
As of December 31, 1997, the Company has net federal and foreign operating
losses ("NOLs") of approximately $442.0 million and $27.0 million
respectively, which expire in varying amounts through 2012. However, due to
the provisions of Section 382, Section 1502 and certain other provisions of
the Internal Revenue Code (the "Code"), the utilization of these NOLs will
be limited. The Company is also subject to certain state income tax laws,
which will also limit the utilization of NOLs. As a result of ICG's merger
with NETCOM, which created a change in ownership of NETCOM of greater than
50%, the NOLs generated by NETCOM prior to January 21, 1998 that can be
used to reduce future taxable income are limited to approximately $15.0
million per year.
A valuation allowance has been provided for the deferred tax asset relating
to the Company's NOLs, as management cannot determine when the Company will
generate future taxable income.
<PAGE>
F-55
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(18) 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 plans after
meeting minimum service and age requirements. Under the plan available to
NETCOM employees, the Company makes a matching contribution of 100% of each
NETCOM employee's contribution up to a maximum of 3% of the employee's
eligible earnings. Prior to 1997, the Company's matching contribution was
limited to 50% of each NETCOM employee's contribution up to a maximum of 6%
of the employee's eligible earnings. Under the plan available to all other
Company employees, the Company makes a matching contribution of ICG Common
Stock up to a maximum of 6% of an employee's eligible earnings. Aggregate
matching contributions under the Company's employee benefit plans were
approximately $0.7 million, $1.6 million, $0.6 million and $3.6 million
during fiscal 1995 and 1996, the three months ended December 31, 1996 and
fiscal 1997, respectively.
(19) Summarized Financial Information of ICG Holdings, Inc.
As discussed in note 11, the 11 5/8% Notes issued by Holdings during 1997
are guaranteed by ICG. The 12 1/2% Notes and 13 1/2% Notes issued by
Holdings during fiscal 1996 and 1995, respectively, are also guaranteed by
ICG and Holdings-Canada. The separate complete financial statements of
Holdings have not been included herein because such disclosure is not
considered to be material to the holders of the 11 5/8% Notes, the 12 1/2%
Notes and the 13 1/2% Notes. However, summarized combined financial
information for Holdings and subsidiaries and affiliates is as follows:
<PAGE>
F-56
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(19) Summarized Financial Information of ICG Holdings, Inc. (continued)
<TABLE>
<CAPTION>
Summarized Consolidated Balance Sheet Information
December 31,
---------------------------------------
1996 1997
------------------ ------------------
(in thousands)
<S> <C> <C>
Current assets $ 449,059 215,817
Property and equipment, net 403,676 632,167
Other non-current assets, net 88,439 122,768
Current liabilities 87,423 98,351
Long-term debt, less current portion 690,293 890,503
Due to parent 11,485 30,970
Other long-term liabilities 73,113 66,939
Preferred stock 159,120 292,442
Stockholders' deficit (80,260) (408,453)
</TABLE>
<TABLE>
<CAPTION>
Summarized Consolidated and Combined Statement of Operations Information (a)
Fiscal years ended Three months ended Fiscal year ended
September 30, December 31, December 31,
--------------------------------- --------------------------------
1995 1996 1995 1996 1997
--------------- ---------------- ---------------- --------------- ----------------------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Total revenue $ 111,610 169,094 35,399 56,956 273,354
Total operating costs
and expenses 157,384 238,908 50,296 83,934 465,517
Operating loss (45,774) (69,814) (14,897) (26,978) (192,163)
Net loss (68,760) (172,687) (34,281) (49,750) (328,193)
</TABLE>
(a) Holdings-Canada's 51% interest in FOTI was contributed to Holdings
effective in February 1995 (the remaining 49% was purchased in January
1996) and, accordingly, FOTI's operations have been included in the
consolidated amounts subsequent to that date.
<PAGE>
F-57
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(20) Financial Information of ICG Holdings (Canada), Inc.
Condensed financial information for Holdings-Canada only is as follows:
Condensed Balance Sheet Information
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1996 1997
---------------------- ----------------------
(in thousands)
<S> <C> <C>
Current assets $ 165 162
Advances to subsidiaries 11,485 30,790
Non-current assets, net 2,793 3,800
Current liabilities 199 107
Long-term debt, less current portion 65 65
Due to parent 1,566 22,162
Preferred stock 127,729 -
Share of losses of subsidiary 80,260 408,453
Shareholders' deficit (67,647) (396,035)
</TABLE>
<TABLE>
<CAPTION>
Condensed Statement of Operations Information
Fiscal years ended Three months ended
September 30, December 31, Fiscal year ended
--------------------------------- ------------------------------- December 31,
1995 1996 1995 1996 1997
----------------- -------------- --------------- -------------- ----------------------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Total revenue $ - - - - -
Total operating costs
and expenses 1,309 3,438 361 73 195
Operating loss (1,309) (3,438) (361) (73) (195)
Losses from subsidiaries (68,760) (172,687) (34,281) (49,750) (328,193)
Net loss attributable to
common shareholders (76,648) (184,107) (34,642) (49,823) (328,388)
</TABLE>
<PAGE>
F-58
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(21) Summarized Financial Information of ICG Funding, LLC
As discussed in note 12, the 6 3/4% Preferred Securities issued by ICG
Funding during fiscal 1997 are guaranteed by ICG. The separate complete
financial statements of ICG Funding have not been included herein because
such disclosure is not considered to be material to the holders of the 6
3/4% Preferred Securities. For fiscal 1997, the statement of operations of
ICG Funding included only the preferred dividends paid and accrued on the 6
3/4% Preferred Securities and interest income earned on the proceeds from
the offering of such securities. The summarized balance sheet information
for ICG Funding is as follows:
Summarized Balance Sheet Information
December 31,
1997
-------------------------
(in thousands)
Cash, cash equivalents and short-term
investments available for sale $ 108,282
Restricted cash 24,649
Dividends payable 1,218
Due to parent 4,642
Preferred securities 132,250
Member deficit (537)
(22) Condensed Financial Information of ICG Communications, Inc. (Parent
company)
At December 31, 1997, the primary asset of ICG was its investment in
Holdings-Canada. Certain corporate expenses of the parent company are
included in ICG's statement of operations and were approximately $1.2
million for fiscal 1997. At December 31, 1997, ICG had no operations other
than those of ICG Funding, Holdings-Canada and its subsidiaries.
<PAGE>
F-59
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(23) Events Subsequent to Date of Independent Auditors' Report (Unaudited)
(a) Sale of Satellite Services Operating Subsidiaries
On April 1, 1998, the Company entered into definitive agreements to
sell the capital stock of MTN and MCN, the two main subsidiaries
within the Company's Satellite Services operations, for aggregate
consideration of approximately $34.8 million. The sales are expected
to close later this year and are subject to certain conditions,
including regulatory approvals.
At December 31, 1997, the Company owned a 64.5% interest in MTN. In
April 1998, the Company paid the minority shareholders of MTN
approximately $3.1 million for the minority interest of MTN as well as
other settlement costs.
(b) 9 7/8% Notes
On April 27, 1998, ICG Services completed a private placement of 9
7/8% Senior Discount Notes due 2008 (the "9 7/8% Notes") for gross
proceeds of approximately $250.0 million. Net proceeds from the
offering, after underwriting costs of approximately $7.5 million, were
approximately $242.5 million.
The 9 7/8% Notes are unsecured senior obligations of ICG Services that
mature on May 1, 2008, at a maturity value of $405.3 million. Interest
will accrue at 9 7/8% per annum, beginning May 1, 2003, and is payable
each May 1 and November 1, commencing November 1, 2003. The indenture
for the 9 7/8% Notes contains certain covenants which provide
limitations on indebtedness, dividends, asset sales and certain other
transactions.
The 9 7/8% Notes were originally recorded at approximately $250.0
million. The discount on the 9 7/8% Notes will be accreted through May
1, 2003, the date on which the 9 7/8% Notes may first be redeemed.
<PAGE>
EXHIBIT 99.2
Financial Statement Schedule II : Valuation and Qualifying Accounts for the
Fiscal Years Ended September 30, 1995 and 1996, the Three Months Ended
December 31, 1996 and the Fiscal Year Ended December 31,
1997, and the Independent Auditors' Report Thereon.
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
ICG Communications, Inc.:
Under the date of April 16, 1998, we reported on the consolidated balance sheets
of ICG Communications, Inc. and subsidiaries as of December 31, 1996 and 1997
and the related consolidated statements of operations, stockholders equity
(deficit) and cash flows for the fiscal years ended September 30, 1995 and 1996,
the three months ended December 31, 1996, and the fiscal year ended December 31,
1997. In connection with our audits of the aforementioned consolidated financial
statements, we have also audited the related financial statement Schedule II:
Valuation and Qualifying Accounts. 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. We did not
audit the consolidated financial statements of NETCOM On-Line Communication
Services, Inc. ("NETCOM"), a wholly owned subsidiary of the Company, which
consolidated statements reflect total assets constituting 15.2 percent in fiscal
1996 and 11.7 percent in fiscal 1997, and total revenue constituting 32.0
percent in fiscal 1995, 41.6 percent in fiscal 1996, 39.0 percent in the three
months ended December 31, 1996, and 37.0 percent in fiscal 1997 of the related
consolidated totals. Those consolidated financial statements were audited by
other auditors whose report has been furnished to us, and our opinion, insofar
as it relates to the amounts included in the financial statement schedule for
NETCOM, is based solely on the reports of the other auditors.
In our opinion, based on the audits and the reports of the other auditors, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as whole, presents fairly, in all
material respects, the information set forth therein.
As explained in note 2 to the consolidated financial statements, during the
fiscal year ended September 30, 1996, the Company changed its method of
accounting for long-term telecom services contracts.
KPMG Peat Marwick LLP
Denver, Colorado
April 16, 1998
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Schedule II: Valuation and Qualifying Accounts
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additions
-----------------------------
Balance at Charged to Charged to Balance at
beginning costs and other end of
Description of period expenses accounts Deductions period
- --------------------------------------------- ------------ -------------- ------------- -------------- -------------
(in thousands)
Allowance for uncollectible trade receivables:
<S> <C> <C> <C> <C> <C>
Fiscal year ended September 30, 1995 $ 1,106 2,560 - (1,224) 2,442
------------- -------------- ------------- -------------- -------------
Fiscal year ended September 30, 1996 $ 2,442 3,436 - (2,473) 3,405
------------- -------------- ------------- -------------- -------------
Three months ended December 31, 1996 $ 3,405 1,190 - (1,184) 3,411
------------- -------------- ------------- -------------- -------------
Fiscal year ended December 31, 1997 $ 3,411 5,520 - (1,927) 7,004
------------- -------------- ------------- -------------- -------------
Allowance for uncollectible note receivable:
Fiscal year ended September 30, 1995 $ - 175 - - 175
------------- -------------- ------------- -------------- -------------
Fiscal year ended September 30, 1996 $ 175 7,100 - - 7,275
------------- -------------- ------------- -------------- -------------
Three months ended December 31, 1996 $ 7,275 - - - 7,275
------------- -------------- ------------- -------------- -------------
Fiscal year ended December 31, 1997 $ 7,275 - - 3,975 3,300
------------- -------------- ------------- -------------- -------------
Allowance for investment impairment:
Fiscal year ended September 30, 1995 $ - 2,000 - - 2,000
------------- -------------- ------------- -------------- -------------
Fiscal year ended September 30, 1996 $ 2,000 - - - 2,000
------------- -------------- ------------- -------------- -------------
Three months ended December 31, 1996 $ 2,000 - - - 2,000
------------- -------------- ------------- -------------- -------------
Fiscal year ended December 31, 1997 $ 2,000 5,170 - 2,000 5,170
------------- -------------- ------------- -------------- -------------
</TABLE>
See accompanying independent auditors' report.
<PAGE>
EXHIBIT 99.3
Report of Ernst & Young LLP, Independent Auditors,
Regarding the Consolidated Financial Statements
of NETCOM On-Line Communication Services, Inc. as
of December 31, 1996 and 1997 and for each of the
Three Years in the Period
Ended December 31, 1997.
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
NETCOM On-Line Communication Services, Inc.
We have audited the consolidated balance sheet of NETCOM On-Line
Communication Services, Inc. as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997 (not presented
separately herein). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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 consolidated financial position of
NETCOM On-Line Communication Services, Inc. at December 31, 1996 and 1997 and
the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
San Jose, California
February 13, 1998
<PAGE>
EXHIBIT 99.4
Report of Ernst & Young LLP, Independent Auditors,
Regarding the Consolidated Financial Statements of
NETCOM On-Line Communication Services, Inc. as of
December 31, 1996 and for the Three Months Then Ended.
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
NETCOM On-Line Communication Services, Inc.
We have audited the consolidated balance sheet of NETCOM On-Line
Communication Services, Inc. as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the three months then ended (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
NETCOM On-Line Communication Services, Inc. at December 31, 1996 and the
consolidated results of its operations and its cash flows for the three months
then ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Jose, California
April 16, 1998
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ICG Communications, Inc.
Date: June 12, 1998 By: /s/James D. Grenfell
--------------------
James D. Grenfell
Executive Vice President and
Chief Financial Officer
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ICG Funding, LLC
By: ICG Communications, Inc.
Common Member and Manager
Date: June 12, 1998 By: /s/James D. Grenfell
--------------------
James D. Grenfell
Executive Vice President and
Chief Financial Officer
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ICG Holdings (Canada), Inc.
Date: June 12, 1998 By: /s/James D. Grenfell
--------------------
James D. Grenfell
Executive Vice President and
Chief Financial Officer
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ICG Holdings, Inc.
Date: June 12, 1998 By: /s/James D. Grenfell
--------------------
James D. Grenfell
Executive Vice President,
Chief Financial Officer and
Director
