SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
ICG COMMUNICATIONS, INC.
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
1) Title of each class of securities to which transaction
applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how
it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which the
offsetting fee was paid previously. Identify the previous filing
by registration statement number, or the Form or Schedule and the
date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE>
ICG COMMUNICATIONS, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To the Stockholders of ICG Communications, Inc.:
NOTICE IS HEREBY GIVEN that the 1997 Annual Meeting of Stockholders (the
"Meeting") of ICG COMMUNICATIONS, INC., a Delaware corporation (the "Company"),
will be held on Tuesday, June 17, 1997 at 9:00 a.m., local time, at the
Inverness Hotel, 200 Inverness Drive West, Englewood, Colorado to consider and
act upon the following:
1. The election of two directors to serve until the 2000 Annual Meeting of
Stockholders and until their successors have been duly elected and qualified;
2. The ratification of the appointment of KPMG Peat Marwick LLP as
independent auditors of the Company and its subsidiaries for the fiscal year
ending December 31, 1997; and
3. The transaction of such other business as may properly come before the
Meeting and at any adjournments thereof.
Only holders of record of the Company's common stock, par value $.01 per
share, at the close of business on May 12, 1997, which has been fixed as the
record date for the Meeting, shall be entitled to notice of, and to vote at, the
Meeting and any adjournment or adjournments thereof.
Stockholders are cordially invited to attend the Meeting in person. Whether
or not you plan to attend the Meeting, please sign and date the enclosed proxy
card and mail it promptly in the enclosed envelope to ensure that your shares
are represented at the Meeting. Stockholders who attend the Meeting may vote
their shares personally, even though they have sent in their proxies.
By Order of the Board of Directors
/s/ J. Shelby Bryan
J. Shelby Bryan
President and Chief Executive Officer
May 16, 1997
IMPORTANT
THE PROMPT RETURN OF PROXIES WILL SAVE THE COMPANY THE EXPENSE OF FURTHER
REQUESTS FOR PROXIES IN ORDER TO ENSURE A QUORUM. A SELF-ADDRESSED ENVELOPE IS
ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED WITHIN THE
UNITED STATES.
<PAGE>
- --------------------------------------------------------------------------------
ICG COMMUNICATIONS, INC.
PROXY STATEMENT
1997 Annual Meeting of Stockholders
June 17, 1997
GENERAL
This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of ICG COMMUNICATIONS, INC., a Delaware
corporation (the "Company"), to be voted at the 1997 Annual Meeting of
Stockholders of the Company (the "Meeting") which will be held at the Inverness
Hotel, 200 Inverness Drive West, Englewood, Colorado, on June 17, 1997, at 9:00
a.m., local time, and at any adjournment or adjournments thereof, for the
purposes set forth in the accompanying Notice of Annual Meeting of Stockholders
and in this Proxy Statement.
The principal executive offices of the Company are located at 9605
East Maroon Circle, Englewood, Colorado 80112. The approximate date on which
this Proxy Statement and accompanying Proxy will first be sent or given to
stockholders is May 16, 1997.
VOTING SECURITIES AND VOTE REQUIRED
Stockholders of record as of the close of business on May 12, 1997
(the "Record Date") will be entitled to notice of, and to vote at, the Meeting
and at any adjournments thereof. On the Record Date, there were 31,804,671
shares of the Company's common stock, par value $.01 per share (the "Common
Stock"), outstanding. There was no other class of voting securities of the
Company outstanding on such date. Each holder of Common Stock is entitled to one
vote for each share held by such holder. The presence, in person or by proxy, of
the holders of one-third of the outstanding shares of Common Stock is necessary
to constitute a quorum at the Meeting. The election of directors of the Company
requires the affirmative vote of a majority of the outstanding shares of Common
Stock voting at the Meeting or at any adjournment or adjournments thereof.
Under the rules promulgated by the Securities and Exchange Commission,
boxes and a designated blank space are provided on the proxy card for
stockholders to mark if they wish to withhold authority to vote for one or both
of the nominees for directors. Votes withheld in connection with the election of
one or both of the nominees for director will be counted as votes cast against
such individuals and will be counted toward the presence of a quorum for the
transaction of business at the Meeting. If no direction is indicated, the proxy
will be voted for the election of the nominees for director. Under the rules of
the National Association of Securities Dealers, Inc., a broker "non-vote" has no
effect on the outcome of the election of directors or the establishment of a
quorum for such election. The form of proxy does not provide for abstentions
with respect to the election of directors; however, a stockholder present at the
Meeting may abstain with respect to such election. The treatment of abstentions
and broker "non-votes" with respect to the election of directors is consistent
with applicable Delaware law and the Company's By-Laws.
VOTING OF PROXIES
A Proxy, in the accompanying form, which is properly executed, duly
returned to the Company and not revoked will be voted in accordance with the
instructions contained therein. If no specification is indicated on the Proxy,
the shares represented thereby will be voted (i) FOR the election of the two
directors, (ii) FOR ratification of the appointment of the Company's auditors
and (iii) in accordance with the judgment of the person or persons voting the
proxies on any other matter that may be properly brought before the Meeting.
Each such Proxy granted may be revoked at any time thereafter by execution and
delivery of a subsequent Proxy or by attendance and voting in person at the
Meeting, except as to any matter or matters upon which, prior to such
revocation, a vote shall have been cast pursuant to the authority conferred by
such Proxy.
<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS,
DIRECTORS, NOMINEES AND OFFICERS
- ------------------------------------------------------------------------------------------------------------------------------------
The following table sets forth, as of April 30, 1997, the number of shares
of Common Stock owned by all executive officers, directors and nominees of the
Company individually and all directors and executive officers as a group, and
each person who owned of record, or was known to own beneficially, more than 5%
of the outstanding shares of Common Stock. The persons named in the table below
have sole voting and investment power with respect to all of the shares of
Common Stock owned by them, unless otherwise noted.
<CAPTION>
Name and Address of Beneficial Owner Amount/Nature of Percent(1)
Beneficial Ownership
<S> <C> <C>
Montgomery Asset Management, L.P........................................ 3,148,328 9.9%
101 California Street
San Francisco, CA 94111
Franklin Advisers, Inc.................................................. 2,436,500(2) 7.7%
777 Mariners Island Boulevard
San Mateo, CA 94404
LGT Asset Management, Inc............................................... 2,055,100(3) 6.5%
50 California Street
San Francisco, CA 94111
William W. Becker....................................................... 1,837,198(4) 5.7%
West Bay Road
Georgetown, Cayman Island
Denver Investment Advisors LLC.......................................... 1,784,700 5.6%
1225 17th Street, 26th Floor
Denver, CO 80202
Ardsley Advisory Partners............................................... 1,630,000(5) 5.1%
646 Steamboat Road
Greenwich, CT 06836
Peter Wightman.......................................................... 1,592,200(6) 5.0%
19 Vectis Court
Southampton, U.K. S01 7LY
William J. Laggett...................................................... 60,297(7) *
Chairman of the Board of Directors
J. Shelby Bryan......................................................... 1,680,105(8) 5.0%
President, Chief Executive Officer and Director
Douglas I. Falk......................................................... 475 *
Executive Vice President-Satellite
James D. Grenfell....................................................... 12,500(7) *
Executive Vice President, Chief Financial Officer and Treasurer
Mark S. Helwege......................................................... 2,886(9) *
Executive Vice President-Network
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<PAGE>
Name and Address of Beneficial Owner Amount/Nature of Percent(1)
Beneficial Ownership
Marc E. Maassen......................................................... 33,862(10) *
Executive Vice President
William J. Maxwell...................................................... 242,501(11) *
Executive Vice-President-Telecom
Harry R. Herbst......................................................... 35,934(7) *
Director
Stan McLelland.......................................................... 14,400(12) *
Director
Jay E. Ricks............................................................ 92,180(13) *
Director
Leontis Teryazos........................................................ 55,000(7) *
Director
Kathryn Proffitt Haycock................................................ 0 *
Nominee for Director
All executive officers and directors as a group (11 persons)............ 2,230,140(14) 6.6%
<FN>
- ---------------------
* Less than one percent of the outstanding shares of Common Stock.
(1) Based on 31,804,671 issued and outstanding shares of Common Stock on April
30, 1997, plus shares of Common Stock which may be acquired by the person
or group indicated pursuant to any options and warrants exercisable, or
pursuant to any shares vesting under the Company's 401(k) Plan, within 60
days.
(2) Franklin Advisers, Inc. has reported on Schedule 13G that its parent
holding company, Franklin Resources, Inc. ("FRI"), and Charles B. Johnson
and Rupert H. Johnson, Jr., principal shareholders of FRI, beneficially own
the shares of Common Stock reflected in this table.
(3) LGT Asset Management, Inc. has reported on Schedule 13G that its
subsidiaries, Chancellor LGT Asset Management, Inc. ("CLAMI") and
Chancellor LGT Trust Company ("CLTC"), beneficially own the shares of
Common Stock reflected in this table and that CLAMI and CLTC have sole
power to vote or direct the vote, and sole power to dispose or direct the
disposition of, all of such shares.
(4) Includes 1,404,078 shares of Common Stock and options to purchase 433,120
shares of Common Stock held directly by William W. Becker.
(5) Ardsley Advisory Partners ("Ardsley") has reported on Schedule 13G that its
managing partner, Philip J. Hempleman, beneficially owns the shares of
Common Stock reflected in this table and that Ardsley and Mr. Hempleman may
be deemed to have the shared power to vote or direct the vote, and the
shared power to dispose or direct the disposition of, all of such shares.
(6) Includes 1,300,000 shares of Common Stock held by Martin Holdings Ltd. of
which Peter Wightman is chairman and sole shareholder, and 292,200 shares
of Common Stock held by Hartford Holdings, Inc. Ltd., of which Mr. Wightman
is also chairman and sole shareholder.
(7) Represents shares of Common Stock which may be acquired pursuant to the
exercise of outstanding stock options.
(8) Includes 15,000 shares of Common Stock held by Mr. Bryan, 2,000 shares of
Common Stock held in Mr. Bryan's spouse's name for which Mr. Bryan
disclaims beneficial ownership, 605 shares of Common Stock held by a 401(k)
Plan in Mr. Bryan's name and 1,662,500 shares of Common Stock which may be
acquired pursuant to the exercise of outstanding options.
(9) Represents shares of Common Stock held by a 401(k) Plan.
-3-
<PAGE>
(10) Includes 2,862 shares of Common Stock held by a 401(k) Plan in Mr.
Maassen's name and 31,000 shares of Common Stock which may be acquired
pursuant to the exercise of outstanding stock options.
(11) Includes 17,000 shares of Common Stock held jointly with Mr. Maxwell's
spouse, 3,800 shares of Common Stock held in Mr. Maxwell's spouse's name
for which Mr. Maxwell disclaims beneficial ownership, 5,951 shares of
Common Stock held by a 401(k) Plan in Mr. Maxwell's name, and 215,750
shares of Common Stock which may be acquired pursuant to the exercise of
outstanding stock options.
(12) Includes 4,400 shares of Common Stock held directly by Mr. McLelland and
10,000 shares of Common Stock which may be acquired pursuant to the
exercise of outstanding stock options.
(13) Includes 2,000 shares of Common Stock held directly by Mr. Ricks and 90,180
shares of Common Stock which may be acquired pursuant to the exercise of
outstanding stock options.
(14) As a group, executive officers and Directors beneficially own 2,173,161
shares of Common Stock through stock options which are presently
exercisable or which will become exercisable within 60 days.
</FN>
</TABLE>
- --------------------------------------------------------------------------------
PROPOSAL I
- --------------------------------------------------------------------------------
ELECTION OF DIRECTORS
A total of two directors (Class I Directors) are to be elected at the
Meeting by the holders of the Common Stock to serve until the 2000 Annual
Meeting of Stockholders and until their successors have been elected and
qualified or until their death, resignation or removal. Presently, the two Class
I Directors are Harry R. Herbst and Jay E. Ricks and their terms expire at the
Meeting. Mr. Ricks has notified the Board of Directors that he will retire from
his position as a Director effective the date of the Meeting and will not stand
for reelection. The Board of Directors recommends the election as Directors of
the nominees listed below. Should any of the nominees not remain a candidate for
election at the date of the Meeting (which contingency is not now contemplated
or foreseen by the Board of Directors), proxies solicited thereunder will be
voted in favor of those nominees who do remain candidates and may be voted for
substitute nominees selected by the Board of Directors. Assuming a quorum is
present, a vote of a majority of the shares present, in person or by proxy, at
the Meeting is required to elect each of the nominees as a director in
accordance with the Company's By-Laws.
The terms of the two Class II Directors, Stan McLelland and Leontis
Teryazos, expire at the 1998 Annual Meeting of Stockholders. The terms of the
two Class III Directors, J. Shelby Bryan and William J. Laggett, expire at the
1999 Annual Meeting of Stockholders.
There were 12 meetings of the Board of Directors of the Company (and
its predecessor, ICG Holdings (Canada), Inc. ("HoldingsCCanada")), three
meetings of the Stock Option Committee, five meetings of the Audit Committee and
two meetings of the Compensation Committee of the Board of Directors of the
Company and its predecessor held during the fiscal year ended September 30, 1996
and the three months ended December 31, 1996. All directors attended 75% or more
of the meetings of the Board and the committees on which they served.
The Company compensates its non-employee directors $2,500 for each
directors meeting or committee meeting attended (or $500 for each committee
meeting that is held on the same date as a directors meeting) and $250 for each
telephonic directors or committee meeting, plus reimbursement of expenses. In
addition, the Chairman of the Board of Directors receives an annual fee of
$80,000 payable in quarterly installments. In fiscal 1996, all non-employee
directors of the Company were granted options to purchase 20,000 shares of
Common Stock under the Company's 1996 Stock Option Plan and, during the three
months ended December 31, 1996, all non-employee directors of the Company were
granted options to purchase 5,000 shares of Common Stock under such Plan. On
January 1, 1997, all non-employee directors of the Company were granted options
to purchase 20,000 shares of Common Stock under the Company's 1996 Stock Option
Plan, which will vest as to 5,000 shares at the end of each fiscal quarter. All
non-employee directors may elect to receive stock options in lieu of cash
compensation.
-4-
<PAGE>
The following table sets forth the names of the nominees, their ages and their
current positions with the Company:
<TABLE>
Class I Directors (to serve until the 2000
Annual Meeting of Stockholders)
<CAPTION>
<S> <C> <C>
Name Age Title
Kathryn Proffitt Haycock 46 Nominee for Director
Harry R. Herbst(1) 45 Director
- --------------------
<FN>
(1) Member of Audit Committee and Stock Option Committee.
</FN>
</TABLE>
-5-
<PAGE>
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Kathryn Proffitt Haycock has been Chairman of the Board, President and
Chief Executive Officer since 1983 of KLP, Inc. d/b/a Call-America, a long
distance telecommunications service provider which she founded. In addition, Ms.
Haycock is Vice Chairman of the Competitive Telecommunications Association
(CompTel), which represents telecommunications service providers and their
suppliers.
Harry R. Herbst has been a director of the Company since August 1996 and a
director of HoldingsCCanada since October 1995. Mr. Herbst has been Vice
President of Finance and Strategic Planning of Gulf Canada Resources Ltd. since
November 1995 and was Vice President and Treasurer from January 1995 to November
1995. Previously, Mr. Herbst was Vice President of Taxation for Torch Energy
Advisors Inc. from 1991 to 1994, and tax manager for Apache Corp. from 1987 to
1990. Mr. Herbst is a Certified Public Accountant and was formerly employed by
Coopers & Lybrand.
Other Directors and Executive Officers
<TABLE>
Set forth below are the names, ages and positions of the other directors
and executive officers of the Company:
<CAPTION>
<S> <C> <C>
Name Age Position
William J. Laggett(2)(3)(4)(5)(6)............... 67 Chairman of the Board of Directors
J. Shelby Bryan(2)(3)(4)(5)..................... 51 President, Chief Executive Officer and Director
Douglas I. Falk................................. 47 Executive Vice President Satellite and President of ICG
Satellite Services, Inc.
James D. Grenfell............................... 45 Executive Vice President, Chief Financial Officer
and Treasurer
Mark S. Helwege................................. 46 Executive Vice President-Network and President
of FOTI
Marc E. Maassen................................. 46 Executive Vice President
William J. Maxwell.............................. 55 Executive Vice President-Telecom and President
of ICG Telecom Group, Inc.
Stan McLelland(1)(4)(6)......................... 51 Director
Leontis Teryazos(1)(6).......................... 54 Director
- --------------------
<FN>
(1) Term expires at annual meeting of stockholders in 1998.
(2) Term expires at annual meeting of stockholders in 1999.
(3) Member of Audit Committee.
(4) Member of Compensation Committee.
(5) Member of Executive Committee.
-6-
<PAGE>
(6) Member of Stock Option Committee.
</FN>
</TABLE>
William J. Laggett has been Chairman of the Board of Directors of the
Company since August 1996, Chairman of the Board of Directors of HoldingsCCanada
since June 1995 and a director of HoldingsCCanada since January 1995. Mr.
Laggett was the President of Centel Cellular Company from 1988 until his
retirement in 1992. From 1970 to 1988, Mr. Laggett held a variety of management
positions with Centel Corporation, including Group Vice President-Products
Group, President-Centel Services, and Senior Vice President-Centel Corporation.
Prior to joining Centel, Mr. Laggett worked for New York Telephone Company.
J. Shelby Bryan has been a director of the Company since April 1996 and was
appointed President and Chief Executive Officer of the Company in August 1996.
Mr. Bryan has also been President, Chief Executive Officer and a director of
HoldingsCCanada since May 1995. Mr. Bryan has 17 years of experience in the
telecommunications industry, primarily in the cellular business. He co-founded
Millicom International Cellular S.A. ("Millicom"), a publicly owned corporation
providing cellular service worldwide, served as its President and Chief
Executive Officer between 1985 and 1994 and has served as a director through the
present.
Douglas I. Falk has been President of ICG Satellite Services, Inc. since
August 1996 and Executive Vice PresidentCSatellite of the Company since October
1996. Prior to joining the Company, Mr. Falk held several positions in the
cruise line industry, including President of Norwegian Cruise Line, Senior Vice
PresidentCMarketing and Sales with Holland America Lines/Westours and Executive
Vice President of Royal Viking Line. Prior to his work in the cruise line
industry, Mr. Falk held executive positions with MTI Vacations, Brown and
Williamson Tobacco, Pepsico International, Glendenning Associates and The
Proctor and Gamble Company.
James D. Grenfell joined the Company as Executive Vice President, Chief
Financial Officer and Treasurer in November 1995. Previously, Mr. Grenfell
served as Director of Financial Planning for BellSouth Corporation and Vice
President and Assistant Treasurer of BellSouth Capital Funding. A Chartered
Financial Analyst, Mr. Grenfell has been a financial executive in the
telecommunications industry for over 15 years. He had been with BellSouth from
1985 through November 1995, serving previously as Finance Manager of Mergers and
Acquisitions. He handled BellSouth's financing strategies, including capital
market financings as well as public debt and banking relationships. Prior to
BellSouth, Mr. Grenfell spent two years as a project manager with Utility
Financial Services and six years with GTE of the South, a subsidiary of GTE
Corporation, including four years as Assistant Treasurer.
Mark S. Helwege has been Executive Vice President-Network of the Company
and President of Fiber Optic Technologies, Inc. ("FOTI") since August 1996.
Prior to joining the Company, Mr. Helwege was Director of Service Marketing
Support for Technology Service Solutions. From 1986 to 1995, Mr. Helwege held
various senior management roles, including Vice President of Sales, and
President and Chief Executive Officer, with Intelogic Trace. Mr. Helwege also
has held various management positions with the Computer Services Division of
General Electric, General Datacomm Industries and Western Union Telegraph
Company.
Marc E. Maassen has been Executive Vice President of the Company since
August 1996. Prior to this position, Mr. Maassen was Executive Vice
President-Network of the Company beginning in October 1995 and President of FOTI
in April 1995. Mr. Maassen joined the Company in 1991 as Vice President of Sales
and Marketing. Prior to joining the Company, Mr. Maassen held senior sales
management positions at TelWatch, Inc., an integrated network management
software company. Mr. Maassen previously worked for First Interstate as Director
of Telecommunications and for AT&T Information Systems as an account executive
and U S West as a major accounts manager.
William J. Maxwell has been Executive Vice President-Telecom of the Company
since October 1995, and President of ICG Telecom Group, Inc. since December
1992. Prior to joining the Company, Mr. Maxwell was the senior marketing
-7-
<PAGE>
executive of WilTel Inc., a full service telecommunications company. Mr.
Maxwell, who has over 25 years of general management and financial experience,
also served as President and Chief Executive Officer of MidAmerican
Communications Corporation in Omaha, Nebraska from 1987 to 1991.
Stan McLelland has been a director of the Company since October 1996 and is
Executive Vice President and General Counsel of Valero Energy Corporation in San
Antonio, Texas. Mr. McLelland also served on the Board of Directors of Valero
Natural Gas Partners, L.P., a publicly owned limited partnership traded on the
New York Stock Exchange, from 1987 to 1994. Mr. McLelland was previously
associated with the law firm of Baker & Botts in Houston, Texas and in the
private practice of law in Austin specializing in oil and gas litigation.
Leontis Teryazos has been a director of the Company since August 1996 and a
director of Holdings-Canada since June 1995. Mr. Teryazos, a Canadian resident,
has headed Letmic Management Inc., a financial consulting firm, since 1993, and
Letmic Management Reg'd., a real estate development and management company,
since 1985.
There are no family relationships between any present director or officer
or nominee for director and any other present director or officer or nominee for
director.
There are currently four committees of the Board of Directors of the
Company: Executive Committee, Audit Committee, Compensation Committee and Stock
Option Committee. The Executive Committee provides Board oversight for the
operations of the Company between Board meetings. The Audit Committee reviews
the services provided by the Company's independent auditors, consults with the
independent auditors on audits and proposed audits of the Company, reviews
certain filings with the Securities and Exchange Commission and reviews the
adequacy of internal controls. The Compensation Committee determines
compensation for most executives and reviews transactions, if any, with
affiliates. The Stock Option Committee determines stock option awards.
-8-
<PAGE>
COMPENSATION AND OTHER BENEFITS
Summary Compensation Table
The following table provides certain summary information concerning
compensation paid or accrued by the Company (or its predecessor,
HoldingsCCanada) and its subsidiaries to or on behalf of J. Shelby Bryan,
President and Chief Executive Officer of the Company, and the four other most
highly compensated executive officers of the Company and one additional officer
for whom disclosure would have been required but for the fact that such officer
was not serving as an executive officer at December 31, 1996 (the "Named
Officers") for the fiscal years ended September 30, 1996, 1995, and 1994. Due to
the Company's change during 1996 in fiscal year end from September 30 to
December 31, additional amounts are shown below, in the Option/SAR Grants Table
and in the Aggregated Option Exercises table for the 12 months ended December
31, 1996 and are referred to in such tables as "1996T." The Company has not
maintained any long-term incentive plans and the Company has not granted stock
appreciation rights.
Summary Compensation Table
<TABLE>
Annual Compensation Long-Term
Compensation
<CAPTION>
<S> <C> <C> <C> <C>
Name and Principal Position Fiscal Salary Bonus Other Annual Securities
Year Compensation Underlying
Options
- ----------------------------------------------------------------------------------------------------------------------------
J. Shelby Bryan 1996T $161,178(1) $ - $ 91,812(2) -
President and Chief Executive 1996 221,196(1) - 78,919(3) 450,000
Officer 1995 30,728 - - 1,550,000
1994 - - - -
James D. Grenfell 1996T 181,250 71,655(4) 145,360(5) 40,000
Executive Vice President, Chief 1996 148,526 46,665 138,435(6) 50,000
Financial Officer and Treasurer 1995 - - - -
1994 - - - -
Marc E. Maassen 1996T 156,244 43,125(7) 25,244(8) 7,000
Executive Vice President 1996 147,092 22,500 25,341(9) 40,000
1995 131,933 60,000 9,291(10) 15,000
1994 105,100 23,375 6,290(10) -
William J. Maxwell 1996T 228,750 147,880(11) 29,322(12) 25,000
Executive Vice President - Telecom 1996 222,917 117,160 18,632(13) 75,000
and President of ICG Telecom 1995 205,475 75,000 8,288(10) 75,000
Group, Inc. 1994 179,850 100,000 9,950(10) -
Henry R. Carabelli 1996T 113,462 91,105(14) 77,637(15) 35,000
Executive Vice President and 1996 - - - -
Chief Operating Officer of 1995 - - - -
ICG Telecom Group, Inc. 1994 - - - -
John D. Field(16) 1996T 248,491 50,000 77,520(17) -
Former Executive Vice President 1996 295,000 50,000 27,857(18) 75,000
and Secretary 1995 66,667 110,000 3,000(10) -
1994 - - - -
-9-
<PAGE>
<FN>
- --------------------
(1) Consists of amount earned pursuant to the compensation formula in Mr.
Bryan's employment agreement.
(2) Consists of $30,236 for car allowance, $49,683 for housing expenses and
Company contributions to 401(k) Defined Contribution Plan in the amount of
$11,893.
(3) Consists of $25,991 for car allowance, $43,428 for housing expenses and
Company contributions to 401(k) Defined Contribution Plan in the amount of
$9,500.
(4) Consists of bonus earned during fiscal 1996 ($46,665) and bonus earned
during the three months ended December 31, 1996 ($25,000).
(5) Consists of relocation expenses of $121,600, car allowance of $12,067, and
Company contributions to 401(k) Defined Contribution Plan in the amount of
$11,693.
(6) Consists of relocation expenses in the amount of $117,295, car allowance of
$11,640 and Company contributions to 401(k) Defined Contribution Plan in
the amount of $9,500.
(7) Consists of bonus earned during fiscal 1996 ($22,500) and bonus earned
during the three months ended December 31, 1996 ($20,625).
(8) Consists of $18,072 for car allowance and Company contributions to 401(k)
Defined Contribution Plan in the amount of $7,172.
(9) Consists of $16,428 for car allowance and Company contributions to 401(k)
Defined Contribution Plan in the amount of $8,913.
(10) Consists of Company contributions to 401(k) Defined Contribution Plan.
(11) Consists of bonus earned during fiscal 1996 ($117,160) and bonus earned
during the three months ended December 31, 1996 ($30,720).
(12) Consists of $11,300 for car allowance and Company contributions to 401(k)
Defined Contribution Plan in the amount of $18,022.
(13) Consists of $9,200 for car allowance and Company contributions to 401(k)
Defined Contribution Plan in the amount of $9,432.
(14) Consists of bonus earned during fiscal 1996 ($47,625), bonus earned during
the three months ended December 31, 1996 ($18,480) and hiring bonus
($25,000).
(15) Consists of relocation expenses of $65,973, car allowance of $2,932, and
Company contributions to 401(k) Defined Contribution Plan in the amount of
$8,732.
(16) Mr. Field is the former Executive Vice President and Secretary of the
Company, Holdings-Canada and Holdings, whose employment terminated in
November 1996.
(17) Consists of $14,515 for car allowance, Company contributions to 401(k)
Defined Contribution Plan in the amount of $14,280 and payments of $48,725
pursuant to an agreement between Mr. Field and the Company in connection
with the termination of his employment.
(18) Consists of $15,586 for car allowance and Company contributions to 401(k)
Defined Contribution Plan in the amount of $12,271.
</FN>
</TABLE>
-10-
<PAGE>
Option/SAR Grants Table
The following table provides information on option grants during the fiscal
year ended September 30, 1996 and during the 12 months ended December 31, 1996
to the Named Officers:
<TABLE>
Individual Grants Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation
for Option Term
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Name Fiscal Number of Percent of Exercise Expiration 5% 10%
Year Securities Total Price Date
Underlying Options
Options Granted to
Granted Employees in
Year
J. Shelby Bryan 1996T - - - - - -
1996 450,000 33.9 $10.00 11/13/2005 $2,830,500 $7,173,000
James D. Grenfell 1996T 40,000 7.8 19.125(1) 10/22/2006 481,104 1,219,213
1996 50,000 3.8 10.00 11/13/2005 314,500 797,000
Marc E. Maassen 1996T 7,000 1.4 19.125(1) 10/22/2006 84,193 213,362
1996 40,000 3.0 10.00 11/13/2005 251,600 637,600
William J. Maxwell 1996T 25,000 4.9 19.125(1) 10/22/2006 300,690 762,008
1996 75,000 5.7 10.00 11/13/2005 471,750 1,195,500
Henry R. Carabelli 1996T 15,000 2.9 19.125(1) 10/22/2006 180,414 457,205
1996T 20,000 3.9 15.875(1) 03/07/2006 199,674 506,013
1996 20,000 1.5 15.875(1) 03/07/2006 199,674 506,013
John D. Field 1996T - - - - - -
1996 75,000(2) 5.7 10.00 11/13/2005 471,750 1,195,500
- --------------------
<FN>
(1) In order to continue to provide non-cash incentives and retain key
employees, all employee stock options outstanding on April 16, 1997 with
exercise prices at or in excess of $15.875 were repriced by the Stock
Option Committee of the Company's Board of Directors to $10.375, the
closing price of the Company's Common Stock on April 16, 1997.
(2) 46,250 options have been canceled as a result of Mr. Field's resignation on
November 5, 1996.
</FN>
</TABLE>
-11-
<PAGE>
Aggregated Option Exercises in Last Year and Year End Option Values
The following table provides information on options exercised during
the fiscal year ended September 30, 1996 and during the 12 months ended December
31, 1996 by the Named Officers and the value of such officers' unexercised
options at September 30, 1996 and December 31, 1996, respectively.
<TABLE>
Number of Securities Underlying Value of Unexercised In-the-Money
Unexercised Options at Options at
end of period end of period (1)
------------- -----------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Name Fiscal Number of Value Exercisable Unexercisable Exercisable Unexercisable
- ---- ------ ----------- ------------- ----------- -------------
Year Shares Acquired Realized
on Exercise
J. Shelby Bryan 1996T - $ - 1,662,500 337,500 $15,873,438 $2,573,438
1996 - - 1,220,000 780,000 15,936,250 9,260,625
James D. Grenfell 1996T - - 12,500 77,500 95,313 575,938
1996 - - 0 50,000 0 550,000
Marc E. Maassen 1996T 11,000 246,174 31,000 51,000 181,606 349,730
1996 11,000 246,174 16,500 58,500 140,408 591,717
William J. Maxwell 1996T - - 215,750 159,250 1,912,216 1,005,308
1996 - - 174,500 175,500 2,252,517 1,653,968
Henry R. Carabelli 1996T - - 0 35,000 0 253,750
1996 - - 0 20,000 0 212,500
John D. Field 1996T - - 18,750 10,000 142,969 76,250
1996 - - 0 28,750 0 316,250
- --------------------
<FN>
(1) Based on the closing sale price of $21.00 and $17.625 per share of Common
Stock on September 30, 1996 and December 31, 1996, respectively, on the
American Stock Exchange.
(2) Options granted prior to fiscal 1994 contained exercise prices stated in
Canadian dollars; value listed is based on exchange rates of 1.3615 and
1.3705 which were the exchange rates on September 30, 1996 and December 31,
1996, respectively.
</FN>
</TABLE>
-12-
<PAGE>
Executive Employment Agreements
The Company has employment agreements with Messrs. J. Shelby Bryan, Douglas
I. Falk, James D. Grenfell, Mark S. Helwege and William J. Maxwell.
The Company's employment agreement with Mr. Bryan, as amended, provides for
an initial term of two years, which commenced May 30, 1995 and which may be
continued for an additional two-year term at the option of Mr. Bryan. In March
1997, Mr. Bryan indicated in writing his intent to extend the employment term
for the additional two years. As compensation, the Company will pay Mr. Bryan a
salary equal to the sum of one percent of the monthly increase in Company
revenue and three percent of the monthly increase in EBITDA. If Mr. Bryan's
salary exceeds $1,500,000 in any fiscal year, the Company may elect to pay such
excess in unregistered Common Stock. Mr. Bryan is entitled to benefits as are
generally provided to executive officers of the Company, including options under
stock option plans, a leased automobile, private club membership fees and
reimbursement of reasonable out-of-pocket expenses incurred on behalf of the
Company. The employment agreement may be terminated by the Company with or
without cause or after a disability continuing for a six-month consecutive
period, or by Mr. Bryan for cause, including breach of the agreement or
reduction in status or responsibilities, change of control or on 90 days notice
to the Company. If the employment agreement is terminated by the Company for any
reason other than for cause or by Mr. Bryan for cause or change in control, the
Company is obligated to pay Mr. Bryan a lump sum of $2.5 million and to continue
benefits for a period equal to the greater of the remainder of the employment
term or eighteen months. After termination of the employment agreement, Mr.
Bryan is subject to a confidentiality covenant and a one-year non-competition
commitment.
The Company's employment agreement with Mr. Falk, dated August 14, 1996,
has an initial one-year term commencing August 26, 1996 and continues from month
to month thereafter until either party provides 30 days notice of termination.
The agreement provides for an annual base salary and an incentive bonus
determined by the Board of Directors. Mr. Falk also receives stock options under
the Company's stock option plans. If the Company terminates the employment
agreement without cause or if the Company or Mr. Falk terminates the employment
agreement upon the occurrence of a major transaction involving the Company, then
Mr. Falk will receive his salary and insurance benefits for a period of 12
months following the date of termination. Mr. Falk is subject to a
confidentiality covenant and to a one-year non-competition commitment following
the termination of his employment.
The Company's employment agreement with Mr. Grenfell provides for an
initial two-year term which commenced November 1, 1995. Upon completion of the
first 12 months of the initial term, the agreement automatically renews from
month-to-month such that 12 months remain in the term. The agreement may be
terminated upon 30 days written notice from either party or by the Company if
Mr. Grenfell is unable to perform his duties for 140 days in any 180-day period
due to illness or incapacity. Mr. Grenfell is entitled to such other benefits as
are generally provided to executive officers of the Company, including options
under the Company's stock option plans, use of a company car and reimbursement
or direct payment of reasonable out-of-pocket expenses incurred on behalf of the
Company. The agreement provides for an annual base salary and an incentive bonus
determined by the Board of Directors. If the employment agreement is terminated
without cause by the Company or by either party upon the occurrence of a change
of control involving the Company, Mr. Grenfell will receive a termination fee
equal to his current monthly salary times the number of months remaining in the
term. Mr. Grenfell is also subject to a ten-year confidentiality covenant and a
one-year non-competition commitment.
The Company's employment agreement with Mr. Helwege, dated July 8, 1996,
provides for an initial one-year term commencing August 1, 1996 and renews
automatically thereafter until either party provides 30 days notice of
termination. The agreement provides for an annual base salary and an incentive
bonus determined by the Board of Directors. Mr. Helwege also receives stock
options under the Company's stock option plans. The Company may terminate the
employment agreement for any reason upon 30 days notice. If the Company
terminates the employment agreement without cause or if the Company or Mr.
Helwege terminates the employment agreement upon the occurrence of a major
transaction involving the Company, then Mr. Helwege will receive his salary and
insurance benefits for a period of 12 months following the date of termination.
Mr. Helwege is subject to a confidentiality covenant and to a one-year
non-competition commitment following the termination of his employment.
The Company's employment agreement with Mr. Maxwell, dated December 1,
1992, provides for an initial five-year term and thereafter one-year terms until
either party provides 30 days notice of termination prior to the end of a term.
The agreement provides for an annual base salary and an incentive bonus
determined by the Board of Directors. Mr. Maxwell also receives stock options
under the Company's stock option plans. If the Company terminates the employment
agreement without cause or if the Company or Mr. Maxwell terminates the
employment agreement upon the occurrence of a major transaction involving the
Company, then Mr. Maxwell shall receive his salary for the lesser of one year or
until the expiration of the current employment term. Mr. Maxwell is subject to a
confidentiality covenant and to a one-year non-competition commitment following
the termination of his employment.
Board Compensation Committee Report on Executive Compensation
The Compensation Committee evaluates compensation levels of senior
management and evaluates the various factors affecting compensation of the
Company's highest paid officers. The Compensation Committee believes that
compensation to the Company's executive officers should be designed to encourage
and reward management's efforts to further strengthen the Company's business and
to create added value for stockholders. Such a compensation program helps to
achieve the Company's business and financial objectives and also provides
incentives needed to attract and retain well-qualified executives. The Company
operates in a competitive marketplace and needs to attract and retain highly
qualified senior management and executive personnel in order to assist the
Company in its goals of developing new services and expansion into new
businesses and markets where the Company provides services. The Compensation
Committee also attributes a substantial portion of each executive officer's
compensation to the Company's overall performance as well as to their individual
contribution to the Company's success.
Several of the Company's executive officers have employment agreements with
the Company. See "Executive Employment Agreements" for descriptions of these
agreements. All senior management, except for J. Shelby Bryan, President and
Chief Executive Officer (whose contract controls his compensation), are
compensated with a base salary and an incentive bonus. The base salaries are
intended to compensate these executives for their ongoing leadership skills and
management responsibility. The incentive bonuses are dependent upon individual
performance. For purposes of determining the bonuses, the Compensation Committee
evaluates the accomplishment of goals set at the start of each fiscal year and
compares the Company's performance in each year to the prior year.
Based on the progress of the Company during fiscal 1996, Chairman William
J. Laggett recommended and the Compensation Committee approved bonuses for James
D. Grenfell, Executive Vice President, Chief Financial Officer and Treasurer,
Marc E. Maassen, Executive Vice President, William J. Maxwell, Executive Vice
President-Telecom and President of ICG Telecom Group, Inc., Henry R. Carabelli,
Executive Vice President and Chief Operating Officer of ICG Telecom Group, Inc.
and John D. Field, former Executive Vice President and Secretary, of $46,665,
$22,500, $117,160, $47,625 and $50,000, respectively. In addition, the
Compensation Committee approved bonuses for the three month period ended
December 31, 1996 for Messrs. Grenfell, Maassen, Maxwell and Carabelli of
$25,000, $20,625, $30,720 and $18,480, respectively.
The Stock Option Committee awarded stock options to key employees of the
Company, including executive officers, related to their performance in fiscal
1995 and fiscal 1996 and as incentives for continued efforts and success. On
November 13, 1995, J. Shelby Bryan, James D. Grenfell, Marc E. Maassen, William
J. Maxwell and John D. Field received options under the 1995 Employee Stock
Option Plan to purchase 450,000, 50,000, 40,000, 75,000 and 75,000 shares of
Common Stock, respectively. 46,250 of Mr. Field's options were canceled as a
result of his resignation on November 5, 1996. On October 22, 1996, the Stock
Option Committee awarded stock options under the 1996 Employee Stock Option Plan
to Messrs. Grenfell, Maassen, Maxwell and Carabelli to purchase 40,000, 7,000,
25,000 and 15,000 shares of Common Stock, respectively. The Compensation
Committee believes that stock options serve as an important long-term incentive
for executive officers by encouraging their continued employment and commitment
to the Company's performance. Furthermore, the Compensation Committee believes
that stock options are an excellent means to align the interest of the Company's
executive officers with those of its stockholders. The number of options granted
to executive officers is based on individual performance and responsibility. In
addition, the Compensation and Stock Option Committees strive to grant options
at a level sufficient to provide a strong incentive for executive officers to
work for the long-term success of the business. The Compensation and Stock
Option Committees do not consider the number of options currently held by all
executive officers in determining individual grants because such consideration
could create an incentive to exercise options and sell the underlying Common
Stock.
-13-
<PAGE>
The Compensation Committee has reviewed the compensation of the Company's
executive officers and has concluded that their compensation was reasonable in
view of the Company's performance and the contribution of those officers to that
performance. The Compensation Committee observed that revenue increased $57.5
million, approximately 52%, in fiscal 1996 compared to fiscal 1995. The
Company's networks have grown from approximately 627 operational fiber route
miles at the end of fiscal 1995 to approximately 2,143 operational fiber route
miles at the end of fiscal 1996. Moreover, in fiscal 1996 management identified
the opportunity to pursue strategic alliances with utility companies to take
advantage of their existing fiber optic infrastructures and customer
relationships, and has established relationships with several utilities which
the Company believes will give it the opportunity to license or lease fiber
optic facilities on a long-term basis in a more timely, cost effective manner
than by constructing facilities. The Company also raised net proceeds of $433.0
million from the issuance of notes payable and preferred stock during fiscal
1996. These accomplishments exceeded the Company's objectives for fiscal 1996.
The Compensation Committee believes that the Company appropriately awarded its
executive officers for their short- and long-term efforts.
The Compensation Committee is continually evaluating compensation of the
Company's executive officers. To develop suitable compensation packages for its
executive officers, the Compensation Committee will assess compensation reports
for comparable companies and for the telecommunications industry. The
Compensation Committee believes that maintaining suitable executive compensation
programs is necessary to support the future development of the Company and
growth in stockholder value.
William J. Laggett
J. Shelby Bryan
Stan McLelland
Jay E. Ricks
(Members of the Compensation
Committee)
-14-
<PAGE>
Comparison of Total Stockholder Return
The Company is required to include in this Proxy Statement a line-graph
presentation comparing cumulative five-year shareholder returns on an indexed
basis with the AMEX Market Index and an index of peer companies selected by the
Company ("Peer Group"). The graph below sets forth information on shareholder
return for the period since IntelCom Group Inc. Common Shares became registered
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in
April 1991, through December 31, 1996. The Company has selected the Russell 2000
index, an index of 7,000 smaller sized public corporations, for purposes of the
performance comparison which appears below.
<TABLE>
<CAPTION>
October 1, September 30, December 31,
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1991 1992 1993 1994 1995 1996 1996
----------------------------------------------------------------------------------------------------
AMEX $100 101 123 122 145 152 178
Russell 2000 100 107 140 142 172 192 201
Peer group 100 91 219 144 183 166 209
ICG 100 87 377 273 253 417 350
- --------------------
<FN>
(1) On April 6, 1991, IntelCom Group Inc. ("IntelCom") became a reporting
company under the Exchange Act. IntelCom Common Shares were traded on the
Vancouver Stock Exchange ("VSE") exclusively until March 16, 1992, when
IntelCom Common Shares also became listed on the American Stock Exchange
("AMEX") Emerging Company Marketplace. On January 4, 1993, IntelCom Common
Shares began trading on the AMEX. IntelCom data is included as reported by
the VSE from April 1, 1991, and as reported by the AMEX after March 12,
1992, and reflects (i) a one-for-five reverse stock split effective January
13, 1993, and (ii) the conversion of VSE prices from Canadian dollars to
U.S. dollars at an exchange rate of $1.1885 per Cdn $ at September 30,
1991. As a result of the Company's reincorporation on August 2, 1996,
IntelCom Common Shares ceased trading on the AMEX and ICG Common Stock
commenced trading on the AMEX on August 5, 1996. The AMEX Market Index was
used for the entire period shown. On March 25, 1997, ICG Common Stock
ceased trading on the AMEX and began trading on the Nasdaq National Market
System.
-15-
<PAGE>
(2) The industry peer group consists of competitive local exchange carriers
("CLECs") with common stock registered under the Exchange Act and trading
on a U.S. stock exchange, and includes: Intermedia Communications Inc. and
MFS Communications Company, Inc. from the dates of the initial public
offerings of their common stock on April 30, 1992 and May 20, 1993,
respectively; GST Telecommunications, Inc. from the date its common stock
began trading on the AMEX on March 11, 1994; American Communications
Services, Inc. from the date its common stock began trading on the NASDAQ
Small-Cap Market on March 3, 1995; and Brooks Fiber Properties, Inc.,
McLeod, Inc. and Teleport Communications Group, Inc. from the dates of the
initial public offerings of their common stock on May 3, 1996, June 11,
1996 and June 27, 1996, respectively.
Section 16(a) Beneficial Ownership Reporting Compliance
The following table lists the current and former directors and officers of
the Company and beneficial owners of more than 10% of the outstanding Common
Stock (or outstanding common shares of the Company's predecessor,
HoldingsCCanada) (each a "Reporting Person") that failed to file on a timely
basis reports required by Section 16(a) of the Exchange Act during the fiscal
year ended September 30, 1996 and during the three months ended December 31,
1996, the number of late reports, the number of transactions that were not
reported on a timely basis and any known failure to file a required form by each
Reporting Person:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Reporting Person Late Reports Transactions Known Failures
Untimely Reported to file Forms
William W. Becker(1) 2 (Forms 4) 14 3
Douglas I. Falk 1 (Form 4) 1 None
Harry R. Herbst 2 (Forms 4) 2 None
William J. Laggett 1 (Form 4) 1 None
Marc E. Maassen 1 (Form 4) 1 None
Jay E. Ricks 2 (Forms 4) 2 None
- --------------------
<FN>
(1) Former director.
</FN>
</TABLE>
Except as set forth above, the Company believes that during the fiscal year
ended September 30, 1996 and during the three months ended December 31, 1996,
its executive officers, directors and holders of more than 10% of the Common
Stock complied with all Section 16(a) filing requirements. In making these
statements, the Company has relied upon a review of reports on Forms 3, 4 and 5
furnished to the Company during, or with respect to, its last fiscal year and
the three months ended December 31, 1996.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
To facilitate the acquisition of certain competitive access networks and
satellite services businesses which held common carrier radio licenses subject
to foreign ownership restrictions, the common carrier licenses used by the
Company's teleports and the wireless competitive access networks are controlled
by Teleport Transmission Holdings Inc. ("TTH"), a corporation owned 33% each by
directors William Laggett and Jay Ricks, and a former director. TTH's
subsidiaries have given 15-year promissory notes to the Company to acquire FCC
licenses. As a result of the Company's reincorporation into the United States in
August 1996, the Company is in the process of filing the necessary applications
with the FCC to have the common carrier licenses transferred back to the
Company. In the event that the Company meets the requirements imposed by the
FCC, or receives appropriate waivers, and the applications to transfer the
licenses to the Company are granted by the FCC, upon completion of the transfer
of the licenses, the promissory notes will be canceled and TTH and its
subsidiaries will be dissolved. In fiscal 1996
-16-
<PAGE>
and the three months ended December 31, 1996, the Company paid or accrued $2.4
million and $0.6 million, respectively, to TTH's subsidiaries for common carrier
services, and the Company received from TTH's subsidiaries $1.9 million and $0.4
million, respectively, as payments on the promissory notes, management services,
equipment leases and technical support. In addition, $1.1 million of the note
balances were canceled in fiscal 1996 due to the sale of the licenses in
conjunction with the sale of four of the Company's teleports.
Holdings Canada and International Communications Consulting, Inc. ("ICC")
have entered into a three-year consulting agreement whereby ICC will provide
various consulting services to the Company through December 1999 in exchange for
approximately $4.2 million in consulting fees to be paid during the term of the
agreement. During fiscal 1996 and the three months ended December 31, 1996, the
Company paid $1.3 million and $0.3 million, respectively, related to this
consulting agreement. William W. Becker, a former director of the Company and
beneficial owner of 5.9% of the Common Stock, is President and Chief Executive
Officer of ICC.
As part of a resolution and settlement of certain transactions in 1995
between the Company and the Becker Group of Companies (the "Becker Group"), a
company founded by William W. Becker, the Company was assigned a note receivable
in the amount of $200,000, which had previously been advanced to John D. Field,
a former executive officer of the Company, by the Becker Group. The note
receivable is evidenced by a promissory note from Mr. Field to the Company
payable on demand, which bears interest at a rate of 7% per annum.
In order to facilitate the relocation of William J. Maxwell, the Company
advanced $200,000 to Mr. Maxwell in April 1994 pursuant to a promissory note
payable on demand, which bears interest at a rate of 7% per annum.
PROPOSAL II
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors of the Company, on the recommendation of the Audit
Committee, has appointed the firm of KPMG Peat Marwick LLP as independent
auditors of the Company to audit and report on its consolidated financial
statements for the fiscal year ended December 31, 1997 and has determined that
it would be desirable to request that the stockholders of the Company ratify
such appointment.
Representatives of KPMG Peat Marwick LLP are expected to attend the Meeting
and will be available to respond to appropriate questions. Such representatives
will also be given an opportunity to make a statement at the Meeting if they so
desire.
ANNUAL REPORT
All stockholders of record as of May 12, 1997 are being sent concurrently
with this Proxy Statement a copy of the Company's 1996 Summary Annual Report.
The 1996 Summary Annual Report is not incorporated by reference into this Proxy
Statement and is not to be deemed a part hereof. The Company's consolidated
financial statements as of September 30, 1995, September 30, 1996 and December
31, 1996 and for each of the periods ended September 30, 1994, September 30,
1995, September 30, 1996 and December 31, 1996, as well as additional
information required to be provided to stockholders pursuant to Rule 14a-3(b)
under the Exchange Act, are included in the Appendix to this Proxy Statement.
-17-
<PAGE>
STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be presented at the Company's 1998
Annual Meeting of Stockholders must be received by the Company at the Company's
principal executive offices not later than January 16, 1998. All such proposals
should be in compliance with applicable Securities and Exchange Commission
regulations.
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors of the
Company does not know of any other matters to be brought before the Meeting.
However, if any other matters not mentioned in the Proxy Statement are properly
brought before the Meeting or any adjournments thereof, the persons named in the
enclosed Proxy or their substitutes will have discretionary authority to vote
proxies given in said form, or otherwise act, in respect of such matters in
accordance with their best judgment.
All of the costs and expenses in connection with the solicitation of
proxies with respect to the matters described herein will be borne by the
Company. In addition to solicitation of proxies by use of mails, directors,
officers and employees (who will receive no compensation therefor in addition to
their regular remuneration) of the Company may solicit the return of proxies by
telephone, telegram or personal interview. The Company will request banks,
brokerage houses and other custodians, nominees and fiduciaries to forward
copies of the proxy material to their principals and to request instructions for
voting the proxies. The Company may reimburse such banks, brokerage houses and
other custodians, nominees and fiduciaries for their expenses in connection
therewith.
It is important that proxies be returned promptly. Stockholders are,
therefore, urged to fill in, date, sign and return the Proxy immediately. No
postage need be affixed if mailed in the enclosed envelope in the United States.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ J. Shelby Bryan
J. SHELBY BRYAN
President and Chief Executive Officer
May 16, 1997
-18-
<PAGE>
APPENDIX
CONTENTS
PAGE
Financial Data .................................................... A-2
Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... A-4
Independent Auditors' Report....................................... A-16
Consolidated Balance Sheets, September 30, 1995 and 1996, and
December 31, 1996............................................ A-17
Consolidated Statements of Operations, Years Ended September 30,
1994, 1995 and 1996, and the Three Months Ended December 31,
1995 (unaudited)and 1996...................................... A-19
Consolidated Statements of Stockholders' Equity (Deficit), Years
Ended September 30, 1994, 1995 and 1996, and the Three Months
Ended December 31, 1996....................................... A-21
Consolidated Statements of Cash Flows, Years Ended September 30,
1994, 1995 and 1996, and the Three Months Ended December 31,
1995 (unaudited)and 1996....................................... A-23
Notes to Consolidated Financial Statements, September 30, 1995
and 1996, and December 31, 1996................................ A-26
Market for the Company's Common Equity and Related Stockholder Matters A-53
A-2
<PAGE>
Selected Financial Data
The selected historical financial data for each fiscal year in the
five-year period ended September 30, 1996 and for the three months ended
December 31, 1996 has been derived from the audited Consolidated Financial
Statements of the Company. The information set forth below should be read in
conjunction with the Consolidated Financial Statements of the Company and the
notes thereto included elsewhere in this Proxy Statement. Results of operations
for the three months ended December 31, 1996 are not necessarily indicative of
results of operations for a full year or predictive of future periods. The
Company's development and expansion activities, including acquisitions, during
the periods shown below materially affect the comparability of this data from
one period to another. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
Three Months
Ended December
Years Ended September 30, 31,
--------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data: 1992 1993 1994 1995 1996 1996
------------ ---------- ------------ ------------ ------------ --------------
(in thousands, except per share amounts)
Revenue:
Telecom services $ 1,061 4,803 14,854 32,330 87,681 34,787
Network services 4,955 21,006 36,019 58,778 60,116 15,981
Satellite services (1) 1,468 3,520 8,121 20,502 21,297 6,188
Other 126 147 118 - - -
------------ ---------- ------------ ------------ ------------ --------------
Total revenue 7,610 29,476 59,112 111,610 169,094 56,956
Operating costs 5,423 18,961 38,165 78,846 135,253 49,929
Selling, general and administrative
expenses 3,921 10,702 28,015 62,954 76,725 24,253
Depreciation and amortization 1,602 3,473 8,198 16,624 30,368 9,825
------------ ---------- ---------- ------------ ------------ --------------
Total operating costs and expenses
10,946 33,136 74,378 158,424 242,346 84,007
------------ ---------- ------------ ------------ ------------ --------------
Operating loss (3,336) (3,660) (15,266) (46,814) (73,252) (27,051)
Interest expense (525) (2,523) (8,481) (24,368) (85,714) (24,454)
Minority interests, including
preferred stock dividends 21 (302) 435 (1,123) (25,306) (4,988)
Other income (expense), net 12 324 (556) (4,343) (1,513) 6,670
------------ ---------- ------------ ------------ ------------ --------------
Loss before income taxes and
cumulative effect of change in
accounting (3,828) (6,161) (23,868) (76,648) (185,785) (49,823)
Income tax benefit 174 1,552 - - 5,131 -
Cumulative effect of
change in accounting (2) - - - - (3,453) -
------------ ---------- ------------ ------------ ------------ --------------
Net loss $ (3,654) (4,609) (23,868) (76,648) (184,107) (49,823)
============ ========== ============ ============ ============ ==============
Loss per share $ (0.42) (0.39) (1.56) (3.25) (6.83) (1.56)
============ ========== ============ ============ ============ ==============
Weighted average number of shares
outstanding (3) 8,737 11,671 15,342 23,604 26,955 31,840
============ ========== ============ ============ ============ ==============
Other Data:
EBITDA (4) $ (1,734) (187) (7,068) (30,190) (42,884) (17,226)
Capital expenditures (5) $12,599 20,685 54,921 88,495 175,148 78,238
A-3
<PAGE>
</TABLE>
<TABLE>
At
December
31,
At September 30,
---------------------------------------------------------------------- -----------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data: 1992 1993 1994 1995 1996 1996
------------ ------------- ------------ ------------ ----------- -----------
(in thousands)
Working capital (deficit) $ (392) 7,990 (8,563) 249,089 446,164 361,601
Total assets 54,417 95,196 201,991 583,553 939,351 944,133
Notes payable and current portion of long-term
debt and capital lease obligations 991 7,657 23,118 27,310 8,282 25,500
Long-term debt and capital lease obligations,
less current portion 15,565 37,116 104,461 405,535 739,827 761,504
Redeemable preferred stock of Holdings - - - 14,986 153,318 159,120
Stockholders' equity (deficit) 21,826 34,753 39,782 82,535 (19,588) (66,080)
<FN>
(1) Revenue from Satellite Services is generated through the Company's
satellite (voice and data) operations and, after January 1995, also
includes revenue from maritime communications operations. The Company
completed the sale of four of its teleports in March, 1996, and has
reported results of operations from these assets through December 31, 1995.
(2) During fiscal 1996, the Company changed its method of accounting for
long-term telecom services contracts to recognize revenue as services are
provided. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Accounting Changes." As required by generally
accepted accounting principles, the Company has reflected the effects of
the change in accounting as if such change had been adopted as of October
1, 1995. The Company's results for the year ended September 30, 1996
reflect a charge of $3.5 million relating to the cumulative effect of this
change in accounting as of October 1, 1995. The effect of this change in
accounting for fiscal year 1996 was not significant. If the new revenue
recognition method had been applied retroactively, telecom services revenue
would have decreased by $0.3 million, $2.0 million, $0.5 million and $0.7
million for fiscal 1992, 1993, 1994 and 1995, respectively.
(3) Weighted average number of shares outstanding for fiscal years 1992, 1993,
1994 and 1995 represents Holdings-Canada common shares outstanding.
Weighted average number of shares outstanding for fiscal 1996 represents
Holdings-Canada common shares outstanding for the period October 1, 1995
through August 2, 1996, and represents ICG Common Stock and Holdings-Canada
Class A common shares (owned by third parties) outstanding for the period
August 5, 1996 through September 30, 1996. Weighted average number of
shares outstanding for the three-month period ended December 31, 1996
represents ICG Common Stock and Holdings-Canada Class A common shares
(owned by third parties) outstanding for the period October 1, 1996 through
December 31, 1996.
(4) EBITDA consists of operating loss plus depreciation and amortization.
EBITDA is provided because it is a measure commonly used in the
telecommunications industry. EBITDA is presented to enhance an
understanding of the Company's operating results and is not intended to
represent cash flow or results of operations in accordance with generally
accepted accounting principles for the periods indicated. See the Company's
Consolidated Financial Statements contained elsewhere in this Proxy
Statement.
(5) Capital expenditures include assets acquired under capital leases and
through the issuance of debt or warrants.
</FN>
</TABLE>
A-4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion includes certain forward-looking statements which
are affected by important factors including, but not limited to, dependence on
increased traffic on the Company's facilities, the successful implementation of
the Company's local dial tone and long distance strategies and actions of
competitors and regulatory authorities that could cause actual results to differ
materially from the forward-looking statements. The results for the three months
ended December 31, 1995 have been derived from the Company's unaudited
Consolidated Financial Statements included herein.
Company Overview
The Company provides Telecom Services, Network Services and Satellite
Services. Telecom Services consist primarily of the Company's CLEC operations.
The Company is one of the largest providers of competitive local telephone
services in the United States, based on estimates of the industry's 1995
revenue. Network Services consist of information technology services and
selected networking products, focusing on network design, installation,
maintenance and support. Satellite Services consist of maritime and
international satellite transmission services and provide private data networks
utilizing VSATs. As a leading participant in the rapidly growing competitive
local telecommunications industry, the Company has experienced significant
growth, with total revenues increasing from $59.1 million for fiscal 1994 to
$190.7 million for the 12-month period ended December 31, 1996. The Company's
rapid growth is the result of the initial installation, acquisition and
subsequent expansion of its fiber optic networks, the acquisition and growth of
its network systems integration business and, prior to fiscal 1996, growth in
Satellite Services.
Prior to fiscal 1996, the majority of the Company's revenue had been
derived from Network Services. However, the Company's Network Services revenue
(as well as Satellite Service revenue) will continue to represent a diminishing
percentage of the Company's consolidated revenue as the Company continues to
emphasize its Telecom Services. In March 1996, the Company completed the sale of
four of its teleports which were used in the Company's Satellite Services
operations.
The Company's operating networks have grown from 323 fiber route miles at
the end of fiscal 1994 to 2,385 fiber route miles at December 31, 1996. Telecom
Services revenue has increased from $14.9 million for fiscal 1994 to $109.0
million for the 12-month period ended December 31, 1996. The Company has
experienced declining access unit prices and increasing price competition which
have been more than offset by increasing network usage. The Company expects to
continue to experience declining access unit prices and increasing price
competition for the foreseeable future.
The Company expects to continue to experience negative operating margins
from the provision of switched access services while its networks are in the
development and construction phases, during which the Company relies on ILEC
networks to carry a significant portion of its customers' switched traffic. The
Company expects to realize improved operating margins from switched services on
a given network when (i) increased volumes of traffic are attained and build-out
enables such traffic to be carried on the Company's own network instead of ILEC
facilities, and (ii) higher margin enhanced services are provided to customers
on the Company's network. In addition, the Company believes that the unbundling
of ILEC services and the implementation of local telephone number portability,
which are mandated by the Telecommunications Act, will reduce the Company's
costs of providing switched services and facilitate the marketing of such
services. However, the Company's switched access services strategy has not yet
been profitable and may not become profitable due to, among other factors, lack
of customer demand, competition from other CLECs and downward pricing pressure
from the ILECs.
The Company believes that the provisions of the Telecommunications Act,
including the opening of the local telephone services market to competition, the
unbundling of ILEC services and the implementation of local telephone number
portability, will facilitate the Company's plan to provide a full array of
local, long distance and data communications services. In order to fully
implement its strategy, the Company must make significant capital expenditures
to provide additional switching capacity, network infrastructure and electronic
components. The Company must also make significant investments and expenditures
to develop, train and manage its marketing and sales personnel. The Company has
limited experience providing such services and there can be no assurance that
the Company will be successful.
The continued development, construction and expansion of the Company's
business requires significant capital, a large portion of which is expended
before any revenue is generated. The Company has experienced, and expects to
continue to experience, negative cash flow and significant losses while it
expands its operations to provide a wide range of telecommunications services
and establishes a sufficient revenue-generating customer base. There can be no
assurance that the Company will be able to establish or retain such a customer
base. When constructing and relying principally on its own facilities, the
Company has experienced a period of up to 18 months from initial design of a
network to revenue generation for that network. However, using leased ILEC
facilities to provide initial customer service and the Company's new agreements
to use utilities' existing fiber, the Company has experienced initial revenue
generation within nine months after commencing network design.
A-5
<PAGE>
Results of Operations
The following table provides a breakdown of revenue and operating costs
for Telecom Services, Network Services and Satellite Services and certain other
financial data for the Company for the periods indicated. The table also shows
certain revenue, expenses, operating loss and EBITDA as a percentage of the
Company's total revenue.
Results of Operations
<TABLE>
Three Months Ended
Years Ended September 30, December 31,
1994 1995 1996 1995 1996
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ % $ % $ % $ % $ %
______ ___ ______ ___ _______ ___ _______ ___ _______ ___
Revenue:
Telcom services (1) 14,854 25 32,330 29 87,681 52 13,513 38 34,787 61
Network services 36,019 61 58,778 53 60,116 36 15,718 45 15,981 28
Satellite services 8,121 14 20,502 18 21,297 12 6,168 17 6,188 11
Other 118 * - - - - - - - -
_______ ___ _______ ___ ______ ___ ______ ___ ______ ___
Total revenue 59,112 100 111,610 100 169,094 100 35,399 100 56,956 100
Operating costs:
Telecom services 7,050 21,825 78,705 11,882 34,463
Network services 26,334 45,928 46,256 11,998 12,287
Satellite services 4,697 11,093 10,292 3,230 3,179
Other 84 - - - -
______ ___ _______ ___ _______ ___ ______ ___ ______ ___
Total operating costs 38,165 65 78,846 71 135,253 80 27,110 77 49,929 88
Selling, general and
administrative 28,015 47 62,954 56 76,725 45 18,628 53 24,253 43
Depreciation and
amortization 8,198 14 16,624 15 30,368 18 4,919 14 9,825 17
______ ___ _______ ___ _______ ___ _______ ___ _______ ___
Operating loss (15,266) (26) (46,814) (42) (73,252) (43) (15,253) (43) (27,051) (47)
EBITDA (2) (7,068) (12) (30,190) (27) (42,884) (25) (10,339) (29) (17,226) (30)
- ----------
<FN>
(1) During fiscal 1996, the Company changes its methoda of accounting for long-
term telecom services contracts to recognize revenue as services are
provided. See "-Accounting Changes." The effect of this change in
accounting for the periods presented was not significant.
(2) EBITDA consists of operating loss plus depreciation and amortization.
EBITDA is provided because it is a measure commonly used in the
telecommunications industry. EBITDA is presented to enhance an
understanding of the Company's operating results and is not intended to
represent cash flow or results of operations in accordance with generally
accepted accounting principles for the periods indicated. See the Company's
Consolidated Financial Statements contained elsewhere in this Proxy
Statement.
</FN>
</TABLE>
A-6
<PAGE>
Three Months Ended December 31, 1996 Compared to Three Months Ended December 31,
1995
Revenue. Revenue for the three months ended December 31, 1996 increased
$21.6 million, or 61%, from the three months ended December 31, 1995. The
increase in total revenue reflects continued growth in Telecom Services, Network
Services and Satellite Services, offset slightly by the loss in revenue
resulting from the sale of four of the Company's teleports during the second
quarter of fiscal 1996. Telecom Services revenue increased 157% to $34.8 million
due to an increase in network usage for both special and switched access
services, offset in part by a decline in average unit pricing. Switched services
revenue increased from $6.0 million (44% of Telecom Services revenue) for the
three months ended December 31, 1995, to $23.9 million (69% of Telecom Services
revenue) for the three months ended December 31, 1996, of which $7.5 million
relates to revenue from Zycom compared to $0.9 million for the three months
ended December 31, 1995. Approximately $6.5 million of the increase in Zycom
revenue for the three months ended December 31, 1996 as compared to the same
period in 1995 relates to changes in the classification of certain operating
costs as a result of the Company entering into long-term contracts with its
major customers. Network usage as reflected in voice grade equivalents ("VGEs")
increased 53% from 488,403 VGEs on December 31, 1995 to 748,528 on December 31,
1996. On December 31, 1996, the Company had 2,069 buildings connected to its
networks compared to 1,539 buildings connected on December 31, 1995. Consistent
with expectations, Network Services revenue growth has been moderate, increasing
from $15.7 million to $16.0 million for the three months ended December 31, 1995
and 1996, respectively, while the Company continues to reposition its systems
and operations to improve operating results. Satellite Services revenue remained
relatively stable between the three-month periods ended December 31, 1995 and
1996 as a result of the offsetting effects of increased maritime minutes of use
from cruise ships and no revenue in the three months ended December 31, 1996
from the four teleports sold in March 1996. On a pro forma basis to reflect the
sale of the teleports, the Company's Satellite Services revenue for the three
months ended December 31, 1995 and 1996 was $3.7 million and $6.2 million,
respectively.
Operating costs. Total operating costs for the three months ended December
31, 1996 increased $22.8 million, or 84%, from the same period in 1995. Telecom
Services operating costs increased from $11.9 million, or 88%, of Telecom
Services revenue for the three months ended December 31, 1995, to $34.5 million,
or 99%, of Telecom Services revenue for the three months ended December 31,
1996. Telecom Services operating costs consist of payments to ILECs for the use
of network facilities to support off-net and switched access services, network
operating costs, right of way fees and other costs. The increase in operating
costs in absolute dollars is attributable to the increase in switched access
services and the addition of engineering personnel dedicated to the development
of local exchange services. The increase in operating costs as a percentage of
revenue is due primarily to the increase in switched access services revenue,
which generates negative margins as a result of the higher costs associated with
utilizing ILEC network facilities and the investment in the development of local
exchange services without the benefit of corresponding revenue in the same
period. The Company expects that the Telecom Services ratio of operating costs
to revenue will continue to increase until the Company provides a greater volume
of higher margin services, principally local telephone services, carries more
traffic on its own facilities rather than the ILEC facilities, and obtains the
right to use unbundled ILEC facilities on satisfactory terms, any or all of
which may not occur. Network Services operating costs increased 2% to $12.3
million for the three months ended December 31, 1996 and increased as a
percentage of Network Services revenue from 76% to 77% for the three month
periods ended December 31, 1995 and 1996, respectively. Network Services
operating costs include the cost of equipment sold, direct hourly labor and
other indirect project costs. Satellite Services operating costs decreased 2% to
$3.2 million for the three months ended December 31, 1996. Satellite Services
operating costs as a percentage of revenue declined to 51% of Satellite Services
revenue during the three months ended December 31, 1996, from 52% during the
three months ended December 31, 1995. The decrease in percentage of revenue as
well as absolute dollars is attributable to the decline in revenue resulting
from the sale of four of the Company's teleports in March 1996, offset by an
increase in higher margin maritime services revenue at MTN. Revenue from
teleport operations historically have yielded lower gross margins than maritime
services revenue. Satellite Services operating costs consist primarily of
satellite transponder lease costs and costs of equipment sold.
Selling, general and administrative expense. Selling, general and
administrative ("SG&A") expense for the three months ended December 31, 1996
increased $5.6 million, or 30%, compared to the three months ended December 31,
1995. This increase was principally due to the continued rapid expansion of the
Company's Telecom Services networks and related significant additions to the
Company's management information systems, customer service, marketing and sales
staffs dedicated to the expansion of the Company's networks and implementation
of the Company's expanded services strategy, primarily the development of local
telephone services. SG&A expense as a percentage of total revenue was 43% for
the three months ended December 31, 1996, compared to 53% for the same period in
1995. There is typically a period of higher administrative and marketing expense
prior to the generation of appreciable revenue from new products and services or
newly developed markets. SG&A expense for Network Services decreased both in
absolute dollars and as a percentage of Network Services revenue due to the cost
control efforts by the Company's management and due to approximately $0.7
million in non-recurring charges, primarily legal accruals, recorded during the
three months ended December 31, 1995. Satellite Services SG&A expense decreased
in absolute dollars and as a percentage of Satellite Services revenue due to
cost control efforts by the Company's management. Other corporate expenses
increased from $4.0 million, or 11% of total revenue, for the three months ended
December 31, 1995 to $5.7 million, or 10% of total revenue, for the three months
ended December 31, 1996. This increase is primarily attributable to the addition
of employees, principally human resources and regulatory personnel, for the
purpose of managing the Company's growth and its expansion into new markets as
A-7
<PAGE>
allowed under the Telecommunications Act. The Company expects SG&A expense
(principally for Telecom Services) to increase in absolute dollars over the near
term to facilitate the development and marketing of local services and the
commencement of marketing services (including long distance and data
transmission services) to business end user customers.
Depreciation and amortization expense. Depreciation and amortization
expense increased $4.9 million, or 100%, for the three months ended December 31,
1996, as compared to the same period in 1995. Depreciation of fixed assets
increased by approximately $2.3 million as a result of the shortening of
estimated depreciable lives during fiscal 1996, as discussed in "-Accounting
Changes," and an increase in depreciable fixed assets due to the continued
expansion of the Company's networks. The increase in depreciation expense was
offset slightly due to the decrease in depreciable assets resulting from the
sale of four of the Company's teleports in March 1996. The Company reports high
levels of depreciation expense relative to revenue during the early years of
operation of a new network because the full cost of a network is depreciated
using the straight line method despite the low rate of capacity utilization in
the early stages of network operation.
Interest expense. Interest expense increased by $9.3 million, from $15.2
million for the three months ended December 31, 1995 to $24.5 million for the
three months ended December 31, 1996, which included $22.7 million of non-cash
interest. This increase was attributable to an increase in long-term debt,
primarily the 12 1/2% Senior Discount Notes (the "12 1/2% Notes") issued in
April 1996, and an increase in capitalized lease obligations to finance Telecom
Services equipment used in the expansion of the Company's networks.
Interest income. Interest income increased $2.2 million from the three
months ended December 31, 1995 to $6.0 million for the three months ended
December 31, 1996. The increase is attributable to the interest earned on the
proceeds from the issuance of the 12 1/2% Notes and the 14 1/4% Exchangeable
Preferred Stock ("14 1/4% Preferred Stock") in April 1996.
Share of losses in joint venture. Effective October 1, 1996, the Company
sold its 50% interest in the Phoenix network joint venture. As a result, no
share of losses in joint venture was recorded during the three months ended
December 31, 1996, as compared to the $0.2 million recorded during the same
period in 1995. Future results will include the Company's share of losses from
the joint venture with CSW.
Other, net. Other, net fluctuated $1.7 million from $1.0 million net
expense in the three months ended December 31, 1995 to $0.7 million net income
in the three months ended December 31, 1996. Other expense recorded in the
three-month period ended December 31, 1995 represents the write-off of deferred
financing costs on a credit facility that was fully paid in December 1995. Other
income recorded in the three-month period ended December 31, 1996 is primarily
attributable to the $0.8 million gain recognized in conjunction with the sale of
the Company's 50% interest in the Phoenix network joint venture.
Minority interest in share of losses, net of accretion and preferred
dividends on subsidiary preferred stock. Minority interest in share of losses,
net of accretion and preferred dividends on subsidiary preferred stock increased
$1.8 million, from $3.2 million for the three months ended December 31, 1995 to
$5.0 million for the three months ended December 31, 1996. The increase is due
primarily to the issuance of the 14 1/4% Preferred Stock in April 1996. Minority
interest in share of losses, net of accretion and preferred dividends on
subsidiary preferred stock recorded during the current three-month period
consists of the accretion of issue costs ($0.1 million) and the accrual of the
preferred stock dividend ($5.7 million) associated with the 14 1/4% Preferred
Stock, offset by minority interest in losses of subsidiaries of $0.8 million.
Cumulative effect of change in accounting for revenue from long-term
telecom services contracts. The cumulative effect of change in accounting for
revenue from long-term telecom services contracts recorded during the three
months ended December 31, 1995 is due to the change in accounting principle as
described in "-Accounting Changes." As the change in accounting was applied
retroactively as of October 1, 1995, no similar amounts were recorded during the
three months ended December 31, 1996.
Fiscal 1996 Compared to Fiscal 1995
The following information reflects the results of operations for fiscal
1996 compared to the pro forma results of operations for fiscal 1995, assuming
the change in accounting for long-term telecom services contracts described in
"-Accounting Changes" had been applied retroactively.
Revenue. Revenue for fiscal 1996 increased $58.2 million, or 52%, from
fiscal 1995. The increase in total revenue reflects continued growth in Telecom
Services, Network Services and Satellite Services, offset slightly by the loss
in revenue resulting from the sale of four of the Company's teleports. Telecom
Services revenue increased 177% to $87.7 million due to an increase in network
usage for both special and switched access services, offset in part by a decline
in average unit prices. Switched services revenue increased from $7.2 million
(22% of Telecom Services revenue) for fiscal 1995, to $51.6 million (59% of
Telecom Services revenue) for fiscal 1996, of which $14.9 million relates to
revenue from Zycom compared to $1.4 million in fiscal 1995. Approximately $10.6
million of the increase in Zycom revenue relates to changes in the
classification of certain operating costs as a result of the Company entering
into long-term contracts with its major customers. Network usage as reflected in
VGEs increased
A-8
<PAGE>
47% from 430,535 VGEs on September 30, 1995, to 630,697 VGEs on September 30,
1996. On September 30, 1996, the Company had 2,067 buildings connected to its
networks compared to 1,375 buildings connected on September 30, 1995. Consistent
with expectations, Network Services revenue growth has been moderate, increasing
from $58.8 million to $60.1 million, while the Company continues to reposition
its systems and operations to improve operating results. Satellite Services
revenue increased 4% to $21.3 million for fiscal 1996 primarily due to increased
maritime minutes of use from cruise ships offset in part by the decrease
resulting from the sale of four of the Company's teleports. Satellite Services
revenue for fiscal 1995 and 1996, on a pro forma basis to reflect the sale of
teleports, was $11.4 million and $18.9 million, respectively. Satellite Services
revenue decreased $0.4 million from the third quarter of fiscal 1996 to the
fourth quarter of fiscal 1996. The decrease in revenue was primarily due to
three Navy vessels being in "dry dock."
Operating costs. Total operating costs for fiscal 1996 increased $56.4
million, or 72%, from fiscal 1995. Telecom Services operating costs increased
from $21.8 million, or 69% of Telecom Services revenue for fiscal 1995, to $78.7
million, or 90% of Telecom Services revenue for fiscal 1996. The increase in
operating costs in absolute dollars is attributable to the increase in switched
access services and the expansion in off-net special access service offerings.
The increase in operating costs as a percentage of total revenue is due
primarily to the increase in switched access services revenue, which generates
negative margins as a result of the higher costs associated with utilizing ILEC
network facilities and the investment in the development of local exchange
services without the benefit of corresponding revenue in the same period. The
Company expects that the Telecom Services ratio of operating costs to revenue
will continue to increase until the Company carries more traffic on its own
facilities rather than the ILEC facilities, provides a greater volume of higher
margin services, principally local telephone services, and obtains the right to
use unbundled ILEC facilities on satisfactory terms, any or all of which may not
occur. Network Services operating costs increased 1% to $46.3 million and
decreased as a percentage of Network Services revenue from 78% for fiscal 1995
to 77% for fiscal 1996. Satellite Services operating costs decreased to $10.3
million for fiscal 1996, from $11.1 million for fiscal 1995. Satellite Services
operating costs as a percentage of revenue also declined to 48% for fiscal 1996,
compared to 54% for fiscal 1995. The decrease both in absolute dollars and as a
percentage of revenue is attributable to the decline in revenue resulting from
the sale of four of the Company's teleports, partially offset by an increase in
higher margin maritime services revenue at MTN.
Selling, general and administrative expense. SG&A expense for fiscal 1996
increased $13.8 million, or 22%, compared to fiscal 1995. This increase was
principally due to the continued rapid expansion of the Company's Telecom
Services networks and related significant additions to the Company's management
information systems, marketing and sales staff dedicated to the expansion of the
Company's networks and implementation of the Company's switched services
strategy and development of local telephone services. A portion of the increase
was also attributable to approximately $1.8 million of legal, accounting, and
SEC filing fees incurred in the incorporation of a new U.S. publicly traded
holding company, ICG Communications, Inc., and approximately $1.3 million of
consulting fees related to various process improvement initiatives. SG&A expense
as a percentage of total revenue was 45% for fiscal 1996, compared to 57% for
fiscal 1995. SG&A expense for Network Services increased due to increased
engineering, marketing and sales staff to support growth in network system
installations. Satellite Services SG&A expense increased primarily due to the
growth of MTN and MCN.
Depreciation and amortization. Depreciation and amortization increased
$13.7 million, or 83%, for fiscal 1996 compared to fiscal 1995. Depreciation of
fixed assets increased by approximately $7.0 million as a result of the
shortening of estimated depreciable lives discussed in "-Accounting Changes,"
and an increase in depreciable fixed assets due to the continued expansion of
the Company's networks. The increase in depreciation expense was offset slightly
due to the decrease in depreciable assets resulting from the sale of four of the
Company's teleports.
Interest expense. Interest expense increased by $61.3 million, from $24.4
million for fiscal 1995 to $85.7 million for fiscal 1996, which included $66.5
million of non-cash interest. This increase was attributable to an increase in
long-term debt, primarily the 13 1/2% Senior Discount Notes (the "13 1/2%
Notes") issued in August 1995 and the 12 1/2% Notes issued in April 1996, and an
increase in capitalized lease obligations to finance the purchase of Telecom
Services and Satellite Services equipment. Also included in interest expense is
a charge of approximately $11.5 million for the payments made to holders of the
13 1/2% Notes with respect to consents to amendments to the indenture governing
the 13 1/2% Notes in order to permit the 1996 Offering (as defined herein) in
April 1996.
Interest income. Interest income increased $15.1 million from fiscal 1995.
The increase is attributable to the increase in cash from the proceeds of the
issuance of the 13 1/2% Notes in August 1995 and the 12 1/2% Notes and 14 1/4%
Preferred Stock in April 1996.
Share of losses in joint venture. Share of losses in the Phoenix network
joint venture, in which the Company held a 50% equity interest, increased $1.1
million, or 145%, from fiscal 1995 to $1.8 million for fiscal 1996 due to
increased losses resulting from the continued expansion and implementation of
switched access services. Effective October 1, 1996, the Company sold its
interest in the Phoenix network joint venture.
A-9
<PAGE>
Provision for impairment of goodwill, investment and notes receivable.
Provision for impairment of goodwill, investment and notes receivable increased
$2.9 million from fiscal 1995 to $9.9 million for fiscal 1996. The current year
amount includes valuation allowances for the amounts receivable for advances
made to the Phoenix network joint venture included in long-term notes receivable
($5.8 million), the investment in the Melbourne network ($2.7 million) and the
note receivable from NovoComm, Inc. ($1.3 million). The allowances were a result
of management's estimate of the realizable value of the assets as of September
30, 1996.
Other, net. Other, net increased $8.3 million for fiscal 1996 from $0.8
million for fiscal 1995 due primarily to the loss on the sale of four of the
Company's teleports and certain other satellite assets ($1.1 million), the
write-off of certain assets ($2.5 million), settlement costs of certain
litigation ($1.2 million) and the write-off of deferred financing costs upon
conversion or settlement of debt ($2.7 million).
Minority interest in share of losses, net of accretion and preferred
dividends on subsidiary preferred stock. Minority interest in share of losses,
net of accretion and preferred dividends on subsidiary preferred stock increased
$24.2 million, from $1.1 million for fiscal 1995 to approximately $25.3 million
for fiscal 1996. The increase is due to the accretion of the Unit Warrants (as
defined herein) ($14.4 million) and issue costs ($1.1 million) associated with
the issuance of the 12% redeemable preferred stock of Holdings (the "Redeemable
Preferred Stock"), accretion of issue costs associated with the 14 1/4%
Preferred Stock ($0.3 million), accrual of the preferred stock dividend on the
Redeemable Preferred Stock ($2.1 million) and the 14 1/4% Preferred Stock ($9.1
million) and the excess redemption price over the stated value of the
convertible Series B Preferred Stock of Holdings-Canada ("Convertible Preferred
Stock of Holdings-Canada") ($1.0 million), partially offset by the minority
interest in losses of subsidiaries.
Income tax benefit. Income tax benefit for fiscal 1996 was $5.1 million.
The income tax benefit is due to an adjustment to the deferred tax liability as
a result of the change in estimated depreciable lives.
Cumulative effect of change in accounting for revenue from long-term
telecom services contracts. The increase in cumulative effect of change in
accounting for revenue from long-term telecom services contracts is due to the
change in accounting as described in "-Accounting Changes."
A-10
<PAGE>
Fiscal 1995 Compared to Fiscal 1994
The following information reflects the pro forma results of operations for
fiscal 1995 compared to the pro forma results of operations for fiscal 1994,
assuming the change in accounting for long-term telecom services contracts
described in "-Accounting Changes" had been applied retroactively.
Revenue. Revenue for fiscal 1995 increased $52.2 million, or 89%, from
fiscal 1994, reflecting continued growth in Telecom Services, Network Services
and Satellite Services operations. Telecom Services revenue increased 120% to
$31.6 million. The increase in Telecom Services revenue reflects an increase in
network usage, which was partially offset by a decline in average unit prices,
and the acquisition in April 1994 of networks in the Los Angeles and San
Francisco metropolitan areas, which were included for the full year in fiscal
1995. Network usage as reflected in VGEs increased 92% from 224,072 VGEs on
September 30, 1994 to 430,535 VGEs on September 30, 1995. On September 30, 1995,
the Company had 1,375 buildings connected to its networks compared to 226
buildings connected on September 30, 1994. Network Services revenue increased
63% to $58.8 million primarily from the acquisition of DataCom Integrated
Systems Corporation ("DISC"), which was included for the full year in fiscal
1995 and which subsequently merged into Network Services, as well as from new
network system installations. The increase in network system installations
resulted from additional projects from existing customers and an increase in
general demand for local area networks due to increased business networking
requirements. Satellite Services revenue increased 152% to $20.5 million for
fiscal 1995, which resulted principally from the acquisitions of Nova-Net, MTN
and teleports located in the metropolitan Atlanta and New York areas which
generated $3.9 million, $7.5 million and $4.4 million in revenue, respectively,
for fiscal 1995. Satellite Services revenue for fiscal 1995, as adjusted to
reflect the sale of four of the Company's teleports, was $11.4 million.
Operating costs. Total operating costs for fiscal 1995 increased $40.7
million, or 107%, from fiscal 1994. Telecom Services operating costs increased
from $7.1 million, or 49% of Telecom Services revenue for fiscal 1994, to $21.8
million, or 69% of Telecom Services revenue for fiscal 1995. Telecom Services
operating costs increased in absolute terms as well as a percentage of revenue
due to an expansion in off-net service offerings, for which the Company leases
network facilities from local telephone companies, and the implementation of
switched access services, which generated negative margins due to the costs
associated with reselling ILEC network facilities. Network Services operating
costs increased 74% to $45.9 million primarily due to an increased volume of
Network Services business. Network Services operating costs as a percentage of
revenue increased from 73% for fiscal 1994 to 78% for fiscal 1995 due to rapid
expansion and the inclusion in Network Services operating costs of project
managers and operations personnel directly associated with network systems
projects in fiscal 1995, which were treated as SG&A costs in 1994. Satellite
Services operating costs increased to $11.1 million, or 54% of Satellite
Services revenue, for fiscal 1995, from $4.7 million, or 58% of Satellite
Services revenue, for fiscal 1994. This increase in absolute terms was
attributable to an increased volume of Satellite Services business primarily due
to the acquisition of Nova-Net and MTN, and increased usage of leased satellite
transponders. The decrease in operating costs as a percentage of revenue is
attributable to the higher margins associated with MTN, which represented a
larger portion of Satellite Services revenue in fiscal 1995, as opposed to video
and data transmission services.
Selling, general and administrative expense. SG&A expense for fiscal 1995
increased $34.9 million, or 125%, compared to fiscal 1994. This increase was
principally due to the continued rapid expansion of the Company's networks,
including the acquisition of networks in the Los Angeles and San Francisco
metropolitan areas during the third quarter of fiscal 1994 and related
significant additions to the Company's management information systems, marketing
and sales staffs dedicated to the expansion of the Company's networks and
implementation of the Company's switched access services strategy. SG&A expense
as a percentage of total revenue was 57% for fiscal 1995 compared to 48% for
fiscal 1994. There is typically a period of higher administrative and marketing
expense prior to the generation of appreciable revenue from newly acquired or
newly developed networks or markets. SG&A expense for Network Services increased
due to increased engineering, marketing and sales staff to support increased
growth in network systems installations. Satellite Services SG&A increased due
to the acquisitions of teleports in metropolitan Atlanta and New York, the
acquisition of the Company's VSAT operations during the third quarter of fiscal
1994, and the acquisition of MTN during the second quarter of fiscal 1995.
Depreciation and amortization. Depreciation and amortization increased
$8.4 million, or 103%, for fiscal 1995 compared to fiscal 1994. This increase
resulted from an increased investment in depreciable fixed assets as a result of
the acquisition of new networks and the expansion of existing networks and
Satellite Services facilities.
Interest expense. Interest expense increased $15.9 million, from $8.5
million for fiscal 1994 to $24.4 million for fiscal 1995, which included $15.1
million of non-cash interest. This increase was attributable to an increase in
capitalized lease obligations to finance Telecom Services and Satellite Services
equipment and an increase in long-term debt, primarily the 13 1/2% Notes issued
in August 1995.
Interest income. Interest income increased $2.4 million, or
approximately 133%, from fiscal 1994. The increase is attributable to the
increase in cash from the proceeds of the issuance of the 13 1/2% Notes in
August 1995.
Provision for impairment of goodwill, investment and notes receivable.
The $7.0 million provision for impairment of goodwill, investment and notes
receivable for fiscal 1995 is a result of a $5.0 million write-down in the
goodwill associated with the acquisition of Nova-Net and a $2.0 million
allowance for an investment. The write-downs and allowance were a result of
management's estimate of the realizable value of the assets as of September 30,
1995.
Share of losses of joint venture. The Company had a 50% equity interest
in a joint venture operating the Phoenix network. Using the equity accounting
method, the Company's share of losses in the Phoenix network joint venture was
approximately $0.7 million for fiscal 1995. The Company began recording losses
from the joint venture in the second quarter of fiscal 1994. The loss from joint
venture recorded in fiscal 1994 includes $0.4 million for losses incurred prior
to fiscal 1994. Effective October 1, 1996, the Company sold its interest in the
Phoenix network joint venture.
A-11
<PAGE>
Quarterly Results
The following table presents selected unaudited operating results for
three-month quarterly periods, beginning with the three-month period ended
December 31, 1994 and through the three-month period ended December 31, 1996.
The Company believes that all necessary adjustments have been included in the
amounts stated below to present fairly the quarterly results when read in
conjunction with the Company's Consolidated Financial Statements and related
notes included elsewhere in this Proxy Statement. Results of operations for any
particular quarter are not necessarily indicative of results of operations for a
full year or predictive of future periods. ICG's development and expansion
activities, including acquisitions, during the periods shown below materially
affect the comparability of this data from one period to another.
<TABLE>
Three
Months
Three Months Ended Three Months Ended Ended
--------------------------------------------- -------------------------------------------
<CAPTION>
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. Dec. 31,
1994 1995 1995 1995 1995 1996 1996 30, 1996 1996
----------- ----------- ----------- --------- ------------ --------- --------- ----------- ------------
(Dollars in thousands)
Statement of Operations Data:
Revenue:
Telecom services $ 5,795 7,039 9,173 10,323 13,513 17,635 24,371 32,162 34,787
Network services 15,293 13,496 14,061 15,928 15,718 13,973 14,679 15,746 15,981
Satellites services 3,546 5,387 5,825 5,744 6,168 4,336 5,596 5,197 6,188
----------- ----------- ----------- ---------- ---------- ----------- ---------- --------- ------------
Total revenue 24,634 25,922 29,059 31,995 35,399 35,944 44,646 53,105 56,956
Operating loss (6,664) (10,625) (12,443) (17,082) (15,258) (15,823) (20,262) (21,909) (27,051)
EBITDA (3,333) (6,849) (7,846) (12,162) (10,339) (8,381) (11,207) (12,957) (17,226)
Net loss before cumulative
effect of change in (9,533) (13,508) (15,916) (37,691) (31,189) (26,939) (64,721) (57,805) (49,823)
accounting
Cumulative effect of change
in accounting (1) - - - - (3,453) - - - -
=========== =========== =========== ========== =========== =========== =========== ======== ==========
Net loss $ (9,533) (13,508) (15,916) (37,691) (34,642) (26,939) (64,721) (57,805) (49,823)
=========== =========== =========== ========= ============ ========== ========== ========= ============
Statistical Data (2):
Telecom services:
Buildings connected:
On-net 244 251 273 280 304 327 384 478 522
Off-net 628 777 978 1,095 1,235 1,401 1,493 1,589 1,547(3)
----------- ----------- ----------- --------------------- ------------------------------- ------------
Total buildings 872 1,028 1,251 1,375 1,539 1,728 1,877 2,067 2,069
connected
Customer circuits in
service
(VGEs) 259,219 287,167 389,928 430,535 488,403 510,755 551,881 630,697 748,528
Switches operational 2 6 12 13 13 13 13 14 14(4)
Switched minutes of use
(in 10 32 97 144 235 362 475 563 607
millions)
Fiber route miles (5)
Operational 424 466 579 627 637 780 886 2,143 2,385
Under construction - - - - - - - - 735
Fiber strand miles (6)
Operational 19,049 21,811 25,264 27,150 28,779 36,310 45,098 70,067 75,490
Under construction - - - - - - - - 33,747
Wireless miles (7) 606 606 606 568 545 582 483 491 506
Satellite services:
VSATs 682 694 687 626 633 658 659 835 860
C-Band installations (8) - 17 25 28 33 36 48 48 54
L-Band installations (9) - - - - - 3 53 109 204
- -----------
A-12
<PAGE>
<FN>
(1) During fiscal 1996, the Company changed its method of accounting for
long-term telecom services contracts to recognize revenue as services are
provided. See "-Accounting Changes." The effect of this change in
accounting for the periods presented was not significant.
(2) Amounts presented are for three-month periods ended, or as of, the end of
the period presented.
(3) Buildings connected off-net declined from September 30, 1996 to December
31, 1996 due to the sale of the Company's 50% interest in the Phoenix joint
venture.
(4) The switch located in Melbourne, Florida is in the process of being
relocated and is not included in the statistical data.
(5) Fiber route miles refers to the number of miles of fiber optic cable,
including leased fiber. As of December 31, 1996, the Company had 2,385
fiber route miles, of which 312 fiber route miles were leased under
operating leases. Fiber route miles under construction represents fiber
under construction and fiber which is expected to be operational within six
months.
(6) Fiber strand miles refers to the number of fiber route miles, including
leased fiber, along a telecommunications path multiplied by the number of
fiber strands along that path. As of December 31, 1996, the Company had
75,490 fiber strand miles, of which 5,936 fiber strand miles were leased
under operating leases. Fiber strand miles under construction represents
fiber under construction and fiber which is expected to be operational
within six months.
(7) Wireless miles represents the total distance of the digital microwave paths
between Company transmitters which are used in the Company's networks.
(8) C-Band installations service cruise ships, U.S. Navy vessels and offshore
oil platform installations.
(9) L-Band installations service smaller maritime installations, and both
mobile and fixed land-based units.
</FN>
</TABLE>
The Company's consolidated revenue has increased every quarter since the
first fiscal quarter of 1992, primarily due to the installation and acquisition
of new networks, the expansion of existing networks and increased services
provided over existing networks. From the third quarter of fiscal 1993 until the
sale of four teleports in the second quarter of fiscal 1996, Satellite Services
also contributed to the quarterly revenue growth.
Operating and net losses have generally increased immediately preceding and
during periods of relatively rapid network acquisition and expansion activity.
The increased quarterly losses from the first quarter of fiscal 1995 through the
quarter ended December 31, 1996 resulted from a combination of increases in
negative margin switched access services revenue and increases in personnel and
other SG&A expenses to support the acquisition and expansion of Telecom Services
networks, the implementation of the Company's switched access services strategy
and development of local telephone services.
Individual operating units may experience variability in quarter to quarter
revenue due to (i) the timing and size of contract orders, (ii) the timing of
price changes and associated impact on volume, and (iii) customer usage
patterns.
A-13
<PAGE>
Net Operating Loss Carryforwards
As of December 31, 1996, the Company had net operating loss carryforwards
("NOLs") of approximately $171.9 million, which expire at various times in
varying amounts through 2011. However, due to the provisions of Section 382,
Section 1502 and certain other provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), the utilization of a portion of the NOLs will be
limited. In addition, the Company is also subject to certain state income tax
laws which may also limit the utilization of NOLs for state income tax purposes.
Section 382 of the Code provides annual restrictions on the use of NOLs, as
well as other tax attributes, following significant changes in ownership of a
corporation's stock, as defined in the Code. Investors are cautioned that future
events beyond the control of the Company could reduce or eliminate the Company's
ability to utilize the tax benefits of its NOLs. Future ownership changes under
Section 382 will require a new Section 382 computation which could further
restrict the use of the NOLs. In addition, the Section 382 limitation could be
reduced to zero if the Company fails to satisfy the continuity of business
enterprise requirement for the two-year period following an ownership change.
Liquidity and Capital Resources
The Company's growth has been funded through a combination of equity, debt
and lease financing. As of December 31, 1996, the Company had current assets of
$449.2 million, including $392.5 million of cash, cash equivalents and
short-term investments, which exceeded current liabilities of $87.6 million,
providing working capital of $361.6 million. The Company invests excess funds in
short-term, interest-bearing investment-grade securities until such funds are
used to fund the capital investments and operating needs of the Company's
business. The Company's investment objectives are safety, liquidity and yield,
in that order.
Cash Used By Operating Activities
The Company's operating activities used $7.5 million, $43.0 million and
$47.4 million in fiscal 1994, 1995 and 1996, respectively, and $5.6 million and
$8.6 million for the three months ended December 31, 1995 and 1996,
respectively. Cash used by operations is primarily due to net losses, which are
partially offset by non-cash expenses, such as depreciation, deferred interest
expense, preferred dividends on subsidiary preferred stock and changes in
working capital items.
The Company expects to continue to generate negative cash flow from
operating activities while it emphasizes the development, construction and
expansion of its Telecom Services business. Consequently, it does not anticipate
that cash provided by operations will be sufficient to fund future expansion of
existing networks or the construction and acquisition of new networks in the
near term.
Cash Used By Investing Activities
Cash used by investing activities was $51.5 million, $71.3 million and
$131.2 million (net of $21.6 million received in connection with the sale of
certain satellite equipment, including four teleports) in fiscal 1994, 1995 and
1996, respectively, and $24.2 million (net of $21.1 million received in
connection with the aforementioned sale) and $82.3 million for the three months
ended December 31, 1995 and 1996, respectively. Cash used by investing
activities includes cash expended for the acquisition of property, equipment and
other assets of $43.2 million, $49.8 million and $120.1 million for fiscal 1994,
1995 and 1996, respectively, and $25.8 million and $58.8 million for the three
months ended December 31, 1995 and 1996, respectively. The Company will continue
to use cash in 1997 for the construction of new networks and the expansion of
existing networks. The Company acquired assets under capital leases and through
the issuance of debt or warrants of $11.7 million, $38.7 million and $55.0
million in fiscal 1994, 1995 and 1996, respectively, and $0.1 million and $19.5
million for the three months ended December 31, 1995 and 1996, respectively. The
majority of assets acquired under capital leases and through the issuance of
debt during fiscal 1995 was for the purchase and installation of 12 of the
Company's 15 high capacity digital switches (one of which is located in Phoenix
and will be operational through April 1997, after which it will be relocated).
Assets acquired during the year ended September 30, 1996 under capital leases
primarily consisted of fiber optic networks included in the Company's agreement
with Southern California Edison Company ("SCE"). The Company is required to make
capital lease payments of $31.6 million, $15.6 million, $13.9 million, $14.3
million and $17.4 million during 1997, 1998, 1999, 2000 and 2001, respectively,
and $107.5 million thereafter. The Company expects to make investments of
approximately $24.2 million in 1997 in its joint venture with CSW and estimates
making additional investments therein of approximately $25.5 million through
2002. The Company is obligated to purchase all of the shares of MTN (at fair
value) that are owned by the other shareholder of MTN, if MTN has not completed
a public offering by January 3, 1998.
Cash Provided (Used) By Financing Activities
A-14
<PAGE>
Financing activities provided $49.4 million, $377.8 million and $360.2
million in fiscal 1994, 1995 and 1996, respectively, and used $8.4 million and
$0.2 million in the three months ended December 31, 1995 and 1996, respectively.
The funds to finance the Company's business acquisitions, capital expenditures,
working capital requirements and operating losses were obtained through public
and private offerings of Holdings-Canada common shares, the 12 1/2% Notes and 14
1/4% Preferred Stock, units (the "Units") consisting of the 13 1/2% Notes and
warrants (the "Unit Warrants"), the Redeemable Preferred Stock, 8% Convertible
Subordinated Notes and 7% Convertible Subordinated Notes (together the
"Convertible Subordinated Notes") and Convertible Preferred Shares of
Holdings-Canada, capital lease financings and various working capital sources,
including credit facilities.
As of December 31, 1996, an aggregate of approximately $92.8 million of
capitalized lease obligations was due prior to December 31, 2001 and an
aggregate accreted value of approximately $685.8 million was outstanding under
the 12 1/2% Notes and 13 1/2% Notes. The 12 1/2% Notes require payments of
interest to be made in cash commencing on November 1, 2001 and mature on May 1,
2006. The 13 1/2% Notes require payments of interest to be made in cash
commencing on March 15, 2001 and mature on September 15, 2005. In addition, the
14 1/4% Preferred Stock requires payment of dividends to be made in cash
commencing August 1, 2001. As of December 31, 1996, the Company had $6.5 million
of other indebtedness that matures prior to December 31, 2001. The Company may
also have additional payment obligations prior to such time, the amount of which
cannot presently be determined. See notes 3, 8, 10 and 14 to the Consolidated
Financial Statements. The Company's cash on hand and amounts expected to be
available through vendor financing arrangements will provide sufficient funds
necessary for the Company to expand its Telecom Services business as currently
planned and to fund its operating deficits through 1997 and into 1998.
Accordingly, the Company may have to refinance a substantial amount of
indebtedness and obtain substantial additional funds prior to March 2001. The
Company's ability to do so will depend on, among other things, its financial
condition at the time, the restrictions in the instruments governing it
indebtedness, and other factors, including market conditions, beyond the control
of the Company. There can be no assurance that the Company will be able to
refinance such indebtedness, including such capitalized leases, or obtain such
additional funds, and if the Company is unable to effect such refinancings or
obtain additional funds, the Company's ability to make principal and interest
payments on its indebtedness or make payments of cash dividends on, or the
mandatory redemption of, the 14 1/4% Preferred Stock, would be adversely
affected.
Capital Expenditures
The Company expects to continue to generate negative cash flow from
operating activities while it emphasizes development, construction and expansion
of its business and until the Company establishes a sufficient
revenue-generating customer base. The Company's capital expenditures (including
asset acquired under capital leases and through the issuance of debt) were $54.9
million, $88.5 million and $175.1 million in fiscal 1994, 1995 and 1996,
respectively, and $25.9 million and $78.2 million for the three months ended
December 31, 1995 and 1996, respectively. The Company anticipates that the
expansion of existing networks, construction of new networks and further
development of the Company's products and services will require capital
expenditures of approximately $250.0 million and $240.0 million during 1997 and
1998, respectively, and continued significant capital expenditures thereafter.
To facilitate the expansion of its switched services strategy and entrance into
data communications, the Company has entered into equipment purchase agreements
with various vendors under which the Company must purchase a substantial amount
of equipment and other assets, including a full range of switching systems,
fiber optic cable, network electronics, software and services. Actual capital
expenditures will depend on numerous factors, including certain factors beyond
the Company's control. These factors include the nature of future expansion and
acquisition opportunities, economic conditions, competition, regulatory
developments and the availability of equity, debt and lease financing.
General
The Company's operations have required and will continue to require
significant capital expenditures for development, construction, expansion and
acquisitions. Significant amounts of capital are required to be invested before
revenue is generated, which results in initial negative cash flow.
In view of the anticipated negative cash flow from operating activities,
the continuing development of the Company's products and services, the expansion
of existing networks and the construction, leasing and licensing of new
networks, the Company will require additional amounts of cash in the future from
outside sources. Management believes that the Company's cash on hand and amounts
expected to be available through vendor financing arrangements will provide
sufficient funds necessary for the Company to expand its Telecom Services
business as currently planned and to fund its operating deficits through 1997
and into 1998. Additional sources of cash may include public and private equity
and debt financings, sales of non-strategic assets, capitalized leases and other
financing arrangements. The Company may require additional amounts of equity
capital in the near term. In the past, the Company has been able to secure
sufficient amounts of financing to meet its capital expenditure needs. There can
be no assurance that additional financing will be available to the Company or,
if available, that it can be obtained on terms acceptable to the Company.
A-15
<PAGE>
The failure to obtain sufficient amounts of financing could result in the
delay or abandonment of some or all of the Company's development and expansion
plans, which could have a material adverse effect on the Company's business. In
addition, the inability to fund operating deficits with the proceeds of
financings until the Company establishes a sufficient revenue generating
customer base could have a material adverse effect on the Company's liquidity.
Accounting Changes
During fiscal 1996, the Company changed its method of accounting for
long-term telecom services contracts. Under the new method, the Company
recognizes revenue as services are provided and continues to charge direct
selling expenses to operations as incurred. The Company had previously
recognized revenue in an amount equal to the noncancelable portion of the
contract, which is a minimum of one year on a three-year or longer contract, at
the inception of the contract and upon activation of service to the customer, to
the extent of direct installation and selling expense incurred in obtaining
customers during the period in which such revenue was recognized. Revenue
recognized in excess of normal monthly billings during the year was limited to
an amount which did not exceed such installation and selling expense. The
remaining revenue from the contract had been recognized ratably over the
remaining noncancelable portion of the contract. The Company believes the new
method is preferable because it provides a better matching of revenue and
related operating expenses and is more consistent with accounting practices
within the telecommunications industry.
As required by generally accepted accounting principles, the Company has
reflected the effects of the change in accounting as if such change had been
adopted as of October 1, 1995. The Company's results for fiscal 1996 include a
charge of $3.5 million ($0.13 per share) relating to the cumulative effect of
this change in accounting as of October 1, 1995. The effect of this change in
accounting was not significant for fiscal 1996. If the new revenue recognition
method had been applied retroactively, Telecom Services revenue would have
decreased by $0.5 million and $0.7 million for fiscal 1994 and 1995,
respectively. See the Company's Consolidated Financial Statements and the
related notes thereto contained elsewhere in this Proxy Statement.
In addition, the Company has shortened the estimated depreciable lives for
substantially all of its fixed assets. These estimates were changed to better
reflect the estimated periods during which these assets will remain in service
and result in useful lives which are more consistent with industry practice. The
changes in estimates of depreciable lives have been made on a prospective basis,
beginning January 1, 1996. This change in estimate increased depreciation
expense during fiscal year 1996 by approximately $7.0 million ($0.26 per share).
The change would have had an estimated annual effect of approximately $9.0
million had the change been in effect for the entire year. Deferred tax
liability has been adjusted for the effect of this change in estimated
depreciable lives, which resulted in an income tax benefit of $5.3 million in
fiscal 1996.
A-16
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
ICG Communications, Inc.:
We have audited the accompanying consolidated balance sheets of ICG
Communications, Inc. and subsidiaries as of September 30, 1995 and 1996, and
December 31, 1996 and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for each of the years in the
three-year period ended September 30, 1996, and the three-month period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ICG Communications,
Inc. and subsidiaries as of September 30, 1995 and 1996, and December 31, 1996,
and the results of their operations and their cash flows for each of the years
in the three-year period ended September 30, 1996, and the three-month period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As explained in note 2 to the consolidated financial statements, during the year
ended September 30, 1996, the Company changed its method of accounting for
long-term telecom services contracts.
KPMG Peat Marwick LLP
Denver, Colorado
February 21, 1997
A-17
<PAGE>
<TABLE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1995 and 1996, and December 31, 1996
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
September 30, December 31,
---------------------------------------
<S> <C> <C> <C>
Assets 1995 1996 1996
------------------- ------------------ --------------------
(in thousands)
Current assets:
Cash and cash equivalents $ 269,416 451,082 359,934
Short-term investments - 6,832 32,601
Receivables:
Trade, net of allowance of $2,217, $2,509 and
$2,515 at September 30, 1995 and 1996, and December 31,
1996, respectively 23,483 34,818 41,131
Revenue earned, but unbilled (note 2) 7,046 4,062 6,053
Joint venture and affiliate (note 3) 732 - -
Other (note 7) 1,430 1,955 1,440
------------------- ----------------- --------------------
32,691 40,835 48,624
Inventory 2,165 3,206 2,845
Prepaid expenses and deposits 3,424 4,109 5,019
Notes receivable, net (note 4) 1,761 263 200
------------------- ------------------ --------------------
Total current assets 309,457 506,327 449,223
------------------- ------------------ --------------------
Property and equipment (notes 5, 8 and 9) 228,609 383,435 460,477
Less accumulated depreciation (note 2) (26,605) (47,298) (56,545)
------------------- ------------------ --------------------
Net property and equipment 202,004 336,137 403,932
------------------- ------------------ --------------------
Investments (note 3) 5,209 5,169 5,170
Long-term notes receivable, net (note 3) 7,599 6,618 623
Restricted cash (note 14) - 13,333 13,333
Other assets, net of accumulated amortization:
Goodwill (note 3) 29,199 32,175 31,881
Deferred financing costs 16,018 22,584 21,963
Transmission and other licenses 10,792 8,611 8,526
Other (note 6) 3,275 8,397 9,482
------------------- ------------------ --------------------
59,284 71,767 71,852
------------------- ------------------ --------------------
$ 583,553 939,351 944,133
=================== ================== ====================
</TABLE>
A-18
<PAGE>
<TABLE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
- ------------------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
------------------------------------
<CAPTION>
<S> <C> <C> <C>
Liabilities and Stockholders' Equity (Deficit) 1995 1996 1996
- ---------------------------------------------- ------------------- ---------------- --------------------
(in thousands)
Current liabilities:
Accounts payable $ 14,712 19,071 24,813
Accrued liabilities 18,346 32,810 37,309
Line-of-credit payable (note 8) 3,692 - -
Current portion of long-term debt (note 8) 14,454 795 817
Current portion of capital lease obligations (notes 9 and 14) 9,164 7,487 24,683
------------------- ---------------- --------------------
Total current liabilities 60,368 60,163 87,622
Long-term debt, net of discount, less current portion (note 8) 379,100 668,989 690,358
Capital lease obligations, less current portion (note 9) 26,435 70,838 71,146
Deferred income taxes (note 15) 5,702 - -
Share of losses of joint venture in excess of
investment (note 3) 1,037 2,851 -
------------------- ---------------- --------------------
Total liabilities 472,642 802,841 849,126
------------------- ---------------- --------------------
Minority interests 4,040 2,780 1,967
Redeemable preferred stock of subsidiary ($30.5 million, $159.1 million and
$164.8 million liquidation value at September 30, 1995 and 1996, and
December 31, 1996, respectively) (notes 8 and 10)
14,986 153,318 159,120
Convertible Series B Preferred Stock of subsidiary (note 11) 9,350 - -
Stockholders' equity (deficit):
Common stock (notes 1, 2 and 12) 190,753 275,355 278,686
Additional paid-in capital 26,492 23,874 23,874
Accumulated deficit (134,710) (318,817) (368,640)
------------------- ---------------- --------------------
Total stockholders' equity (deficit) 82,535 (19,588) (66,080)
------------------- ---------------- --------------------
Commitments and contingencies (notes 3, 7, 8, 9, 10 and 14)
$ 583,553 939,351 944,133
=================== ================ ====================
</TABLE>
See accompanying notes to consolidated financial statements.
A-19
<PAGE>
<TABLE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended September 30, 1994, 1995 and 1996,
and the Three Months Ended December 31, 1995 (unaudited) and 1996
----------------------------------------------------------------------------------------------------------------------------------
Three months ended
Years ended September 30, December 31,
-------------------------------------------- -----------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1995 1996
--------------- ------------- -------------- -------------- -------------
(unaudited)
(in thousands, except per share data)
Revenue:
Telecom services (note 2) $ 14,854 32,330 87,681 13,513 34,787
Network services (note 17) 36,019 58,778 60,116 15,718 15,981
Satellite services (note 13) 8,121 20,502 21,297 6,168 6,188
Other 118 - - - -
--------------- ----------- -------------- ------------- --------------
Total revenue 59,112 111,610 169,094 35,399 56,956
--------------- ------------- -------------- -------------- --------------
Operating costs and expenses:
Operating costs 38,165 78,846 135,253 27,110 49,929
Selling, general and administrative expenses 28,015 62,954 76,725 18,628 24,253
Depreciation and amortization (note 2) 8,198 16,624 30,368 4,919 9,825
--------------- ------------- -------------- -------------- --------------
Total operating costs and expenses 74,378 158,424 242,346 50,657 84,007
Operating loss (15,266) (46,814) (73,252) (15,258) (27,051)
Other income (expense):
Interest expense (8,481) (24,368) (85,714) (15,215) (24,454)
Interest income 1,788 4,162 19,300 3,750 5,962
Share of losses of joint venture and investment (1,481) (741) (1,814) (228) -
Provision for impairment of goodwill, investment
and notes receivable (notes 3 and 4) - (7,000) (9,917) - -
Other, net (note 3) (863) (764) (9,082) (1,023) 708
--------------- ------------- -------------- -------------- --------------
(9,037) (28,711) (87,227) (12,716) (17,784)
--------------- ------------- -------------- -------------- --------------
Loss before minority interest, income taxes and
cumulative effect of change in accounting (24,303) (75,525) (160,479) (27,974) (44,835)
Minority interest in share of losses, net of
accretion and preferred dividends on subsidiary
preferred stock (notes 10 and 11) 435 (1,123) (25,306) (3,215) (4,988)
--------------- ------------- -------------- -------------- --------------
Loss before income taxes and cumulative effect of
change in accounting (23,868) (76,648) (185,785) (31,189) (49,823)
Income tax benefit (note 15) - - 5,131 - -
--------------- ------------- -------------- ------------ ---------------
Loss before cumulative effect of change in accounting (23,868) (76,648) (180,654) (31,189) (49,823)
Cumulative effect of change in accounting for revenue
from long-term telecom services contracts (note 2)
- - (3,453) (3,453) -
=============== ============= ============== ============== ==============
Net loss $ (23,868) (76,648) (184,107) (34,642) (49,823)
=============== ============= ============== ============== ==============
</TABLE>
A-20
<PAGE>
<TABLE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations, Continued
----------------------------------------------------------------------------------------------------------------------------------
Three months ended
Years ended September 30, December 31,
-------------------------------------------- -----------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1995 1996
--------------- ------------- -------------- -------------- --------------
(unaudited)
(in thousands, except per share data)
Loss per share (note 2):
Loss before cumulative effect of change in
accounting $ (1.56) (3.25) (6.70) (1.24) (1.56)
Cumulative effect of change in accounting - - (0.13) (0.14) -
--------------- ------------- -------------- ------------- -------------
Loss per share $ (1.56) (3.25) (6.83) (1.38) (1.56)
--------------- ------------- -------------- ------------- --------------
Weighted average number of shares outstanding 15,342 23,604 26,955 25,139 31,840
=============== ============= ============== ============== ==============
Pro forma amounts before cumulative effects of change
in accounting assuming The new method of
accounting for revenue from long-term telecom
services contracts is applied retroactively:
Telecom services revenue $ 14,395 31,617 87,681 13,513 34,787
Total revenue 58,653 110,897 169,094 35,399 56,956
Operating loss (15,725) (47,527) (73,252) (15,258) (27,051)
Net loss (24,327) (77,361) (180,654) (31,189) (49,823)
Loss per share (1.59) (3.28) (6.70) (1.24) (1.56)
</TABLE>
See accompanying notes to consolidated financial statements.
A-21
<PAGE>
<TABLE>
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years Ended September 30, 1994, 1995 and 1996, and the Three Months Ended
December 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C>
Additional
Common stock paid-in Accumulated stockholders'
Shares Amount capital deficit equity (deficit)
------------ ------------- ------------- --------------- ----------------
(in thousands)
Balances at October 1, 1993 13,868 $56,201 200 (21,648) 34,753
Private placement offering costs - (89) - - (89)
Shares issued for cash-exercise of options and warrants
(note 12) 737 4,539 - - 4,539
Shares issued as repayment of debt and related accrued
interest (note 8) 110 883 - - 883
Shares issued in connection with business combination
(note 3) 1,485 23,537 - - 23,537
Shares issued in exchange for notes receivable (note 3) 256 3,050 - - 3,050
Shares issued as contribution to 401(k) plan (note 16) 20 257 - - 257
Warrants issued in connection with acquisition of
equipment - - 982 - 982
Issuance of bonus and penalty shares (note 12) 197 - - - -
Acquisition of minority interest of ICG Holdings, Inc.
(note 7) 374 7,228 107 (12,449) (5,114)
Change in foreign currency translation adjustment - - - (59) (59)
Compensation expense related to issuance of common stock
options - - 911 - 911
Net loss - - - (23,868) (23,868)
------------ ------------- ------------- ---------------- -----------
Balances at September 30, 1994 17,047 95,606 2,200 (58,024) 39,782
Shares issued for cash (note 12):
Public offering and private placements 6,312 84,498 - - 84,498
Public offering and private placement costs - (6,162) - - (6,162)
Exercise of options and warrants 338 1,471 - - 1,471
Shares issued as repayment of debt and related accrued -
interest (note 8) 683 9,482 - 9,482
Shares issued in connection with business combinations
(note 3) 130 1,737 - - 1,737
Conversion of ICG Holdings (Canada), Inc. preferred
shares (note 11) 302 2,000 - - 2,000
Shares issued as contribution to 401(k) plan (note 16) 38 490 - - 490
Warrants issued in connection with offerings (notes 8,
10 and 12) - - 24,134 - 24,134
Change in foreign currency translation adjustment - - - (38) (38)
Compensation expense related to issuance of common stock
options - - 158 - 158
Shares issued in exchange for investments and other
assets 123 1,398 - - 1,398
Shares issued as payment of trade payables 18 233 - - 233
Net loss - - - (76,648) (76,648)
------------ ------------- ------------- ---------------- ------------
Balances at September 30, 1995 24,991 $190,753 26,492 (134,710) 82,535
</TABLE>
A-22
<PAGE>
<TABLE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit), Continued
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C>
Additional Total
Common stock paid-in Accumulated stockholders'
Shares Amount capital deficit equity(deficit)
------------- ------------ ------------- ----------- ----------------
(in thousands)
Shares issued for cash-exercise of options and warrants 1,522 $1,894 - - 1,894
Shares issued as repayment of debt and related accrued
interest (note 8) 130 687 - - 687
Shares issued in connection with business combinations
(note 3) 67 749 - - 749
Conversion of ICG Holdings (Canada), Inc. preferred
shares (note 11) 496 3,780 - - 3,780
Shares issued as contribution to 401(k) plan (note 16) 87 1,156 - - 1,156
Shares issued upon conversion of subordinated notes
(note 8) 4,413 76,336 - - 76,336
Repurchase of warrants - - (2,671) - (2,671)
Compensation expense related to issuance of common
stock options - - 53 - 53
Net loss - - - (184,107) (184,107)
------------- ------------ ------------- ---------------- -----------
Balances at September 30, 1996 31,703 275,355 23,874 (318,817) (19,588)
Shares issued for cash-exercise of options and warrants 132 2,084 - - 2,084
Shares issued in connection with business combination
(note 3) 18 350 - - 350
Shares issued as contribution to 401(k) plan (note 16) 19 480 - - 480
Shares issued upon conversion of subordinated notes
(note 8) 23 417 - - 417
Net loss - - - (49,823) (49,823)
------------- ------------ ------------- ---------------- -----------
Balances at December 31, 1996 31,895 $278,686 23,874 (368,640) (66,080)
============= ============ ============= ================ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
A-23
<PAGE>
<TABLE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended September 30, 1994, 1995 and 1996,
and the Three Months Ended December 31, 1995 (unaudited) and 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Three months ended
Years ended September 30, December 31,
<CAPTION>
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1995 1996
-------------- ------------- ------------ -------------- ------------
(unaudited)
(in thousands)
Cash flows from operating activities:
Net loss $ (23,868) (76,648) (184,107) (34,642) (49,823)
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 1,481 741 1,814 228 -
Minority interest in share of (losses), net of
accretion and non-cash preferred dividends
on subsidiary preferred stock (435) 656 24,279 2,188 4,988
Depreciation and amortization 8,198 16,624 30,368 4,919 9,825
Compensation expense related to issuance of
common stock options 911 158 53 14 -
Interest expense deferred and included in long-
term debt and non-cash interest expense 4,885 14,068 63,951 12,004 22,087
Amortization of deferred financing costs
included in interest expense 615 989 2,573 527 612
Write-off of deferred finance costs upon
conversion or repayment of debt - - 2,650 - -
Contribution to 401(k) plan
through issuance of common shares 257 490 1,156 405 480
Deferred income tax benefit - - (5,329) - -
Provisions for impairment of goodwill,
investment and notes receivable - 7,000 9,917 - -
Loss on sale of certain Satellite Services assets - - 1,124 - -
Gain on sale of interest in joint venture - - - - (776)
Decrease (increase) in operating assets, excluding
the effects of business acquisitions,
dispositions and non-cash transactions:
Accounts receivable (13,208) (6,092) (13,293) (3,742) (7,789)
Inventory (84) (447) (1,200) (272) 361
Prepaid expenses and deposits 317 (2,482) (2,975) (459) (910)
Increase in operating liabilities, excluding the
effects of business acquisitions, dispositions
and non-cash transactions:
Accounts payable and accrued liabilities 13,399 1,904 18,205 9,749 12,306
--------------- ----------- -------------- -------------- -------------
Net cash used by operating activities $ (7,532) (43,039) (47,361) (5,628) (8,639)
--------------- ----------- -------------- -------------- -------------
</TABLE>
A-24
<PAGE>
<TABLE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C>
------------------------------------------- ----------------------------
1994 1995 1996 1995 1996
------------ -------------- ------------ ---------------- -----------
(unaudited)
(in thousands)
Cash flows from investing activities:
Notes receivable $ (5,249) 348 348 (1,263) 133
Advances to affiliates - (2,184) (109) (15) -
Investment in and advances to joint venture (1,185) (5,452) (4,308) - (1)
Payments for business acquisitions, net of cash
acquired (1,811) (8,168) (8,441) - -
Acquisition of property, equipment and other
assets, net of dispositions (43,207) (49,825) (120,118) (25,768) (58,759)
Purchase of short-term investments - - (6,832) (4,979) (25,769)
Restricted cash - - (13,333) (13,333) -
Proceeds from the sale of certain Satellite
Services assets - - 21,593 21,146 -
Proceeds from sale of interest in joint venture - - - - 2,057
Other investments - (6,061) - - -
------------ ------------- ------------- --------------- -----------
Net cash used by investing activities (51,452) (71,342) (131,200) (24,212) (82,339)
------------ ------------- ------------- --------------- -----------
Cash flows from financing activities:
Issuance of common shares for cash - 84,498 - - -
Issuance of preferred shares of subsidiary for cash - 16,000 - - -
Issuance of redeemable preferred stock of
subsidiary - 28,800 144,000 - -
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 exercise of stock options and
warrants 4,539 1,471 1,894 101 2,084
Proceeds from advances from related parties 3,334 - - - -
Payments on advances from related parties (7,744) - - - -
Principal payments on capital lease obligations (1,264) (6,271) (12,304) (2,991) (1,975)
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 57,340 305,613 300,034 - -
Principal payments on long-term debt (4,144) (29,333) (16,920) (13,761) (279)
Deferred debt issuance costs (2,633) (13,641) (11,915) - -
------------ ------------- ------------- --------------- ------------
Net cash provided (used) by financing
activities 49,428 377,772 360,227 (8,413) (170)
------------ ------------- ------------- --------------- -----------
Net (decrease) increase in cash and cash
equivalents (9,556) 263,391 181,666 (38,253) (91,148)
Cash and cash equivalents, beginning of period 15,581 6,025 269,416 269,416 451,082
============ ============= ============= =============== ===========
Cash and cash equivalents, end of period $ 6,025 269,416 451,082 231,163 359,934
============ ============= ============= =============== ===========
</TABLE>
A-25
<PAGE>
<TABLE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C>
Years ended September 30, December 31,
------------------------------------------ --------------------------
1994 1995 1996 1995 1996
------------- ----------- ------------ ------------- -----------
(unaudited)
(in thousands)
Supplemental disclosure of cash flow information:
Cash paid for interest $ 2,981 9,311 19,190 2,684 1,755
============= =========== ============ ============= ===========
Supplemental schedule of non-cash financing and investing activities:
Common shares issued in connection with
business combinations, repayment of
debt or conversion of liabilities to equity $ 31,647 11,452 77,772 - 350
============= =========== ============ ============= ===========
Common shares issued in exchange for notes
receivable, investments and other assets $ 3,050 1,398 - - -
============= =========== ============ ============= ===========
Assets acquired under capital leases and
through the issuance of debt or warrants
(note 14) $ 11,714 38,670 55,030 84 19,479
============= =========== ============ ============= ===========
Liability related to business combination $ 8,746 - - - -
============= =========== ============ ============= ===========
Reclassification of investment in joint
venture to long-term notes receivable $ - 6,882 - - -
============= =========== ============ ============= ===========
Conversion of notes receivable related to
business combinations $ - 6,330 - - -
============= =========== ============ ============= ===========
See accompanying notes to consolidated financial statements.
</TABLE>
A-26
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995 and 1996, and December 31, 1996
- --------------------------------------------------------------------------------
(1) Organization and Nature of Business
ICG Communications, Inc. ("ICG"), a Delaware corporation, was incorporated
on April 11, 1996, for the purpose of becoming the new publicly-traded U.S.
parent company of ICG Holdings (Canada), Inc. ("Holdings-Canada"), a Canadian
federal corporation (formerly known as IntelCom Group Inc.), ICG Holdings, Inc.
("Holdings"), a Colorado corporation (formerly known as IntelCom Group (U.S.A.),
Inc.), and its subsidiaries (collectively, the "Company"). Pursuant to a Plan of
Arrangement (the "Arrangement"), which was approved by Holdings-Canada
shareholders on July 30, 1996, and by the Ontario Court of Justice on August 2,
1996, each shareholder of Holdings-Canada exchanged their common shares on a
one-for-one basis for either (i) shares of $.01 par value common stock of ICG
(the "Common Stock"), or (ii) Class A common shares of Holdings-Canada (which
are exchangeable at any time on a one-for-one basis into shares of ICG Common
Stock). On August 2, 1996, 28,795,132, or approximately 98%, of the total issued
and outstanding common shares of Holdings-Canada were exchanged for an equal
number of shares of Common Stock of ICG. In accordance with generally accepted
accounting principles, the Arrangement was accounted for in a manner similar to
a pooling of interests since ICG and Holdings-Canada 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.
The Company's principal business activity is telecommunications services,
including Telecom Services, Network Services and Satellite Services. Telecom
Services consists of the Company's competitive local exchange carrier ("CLEC")
operations. CLECs seek to provide an alternative to the incumbent local exchange
telephone company for a full range of telecommunications services. The Company's
Telecom Services customers are primarily long distance carriers and resellers,
as well as business end users. Network Services supplies information technology
services and selected networking products, focusing on network design,
installation, maintenance and support for a variety of end users, including
Fortune 1000 firms and other large businesses and telecommunications companies.
Satellite Services provides satellite voice and data services to major cruise
ship lines, the commercial shipping industry, yachts, the U.S. Navy and offshore
oil platforms.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States,
and include the accounts of the Company and its majority and wholly owned
subsidiaries. Financial information prior to the completion of the Arrangement
on August 2, 1996, represents the financial position and results of operations
of Holdings-Canada and Holdings, which are considered predecessor entities to
ICG.
In addition, the accompanying consolidated financial statements include the
accounts of Teleport Transmission Holdings, Inc. ("TTH"), which holds certain
transmission licenses acquired in connection with certain of the Company's
business combinations in 1994. As of December 31, 1996, TTH is owned one-third
each by two U.S. directors and one former director. TTH's financial statements
have been consolidated with the financial statements of the Company due to
common ownership and control.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
(b) Change in Fiscal Year End
The Company has elected to change its fiscal year end to December 31 from
September 30, effective January 1, 1997. References to fiscal 1996 relate to the
year ended September 30, 1996.
A-27
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995 and 1996, and December 31, 1996
- --------------------------------------------------------------------------------
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.
(c) Cash Equivalents and Short-term Investments
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. The Company invests
primarily in high grade short-term investments which consist of money market
instruments, commercial paper, certificates of deposit, government obligations
and corporate bonds, all of which are considered to be available for sale. The
Company's investment objectives are safety, liquidity and yield, in that order.
The Company carries all cash equivalents and short-term investments at cost,
which approximates fair value.
(d) Inventory
Inventory, consisting of satellite systems equipment and equipment to be
utilized in the installation of communications systems and networks for
customers, is recorded at the lower of cost or market, using the first-in,
first-out method of accounting for cost.
(e) Investments
Investments in joint ventures are accounted for using the equity method,
under which the Company's share of earnings or losses of the joint ventures are
reflected in operations and dividends are credited against the investment when
received. Losses recognized in excess of the Company's investment due to
additional investment or financing requirements, or guarantees, are recorded as
a liability in the accompanying consolidated financial statements. Other
investments representing an interest of 20% or more, but less than 50%, are
accounted for using the equity method of accounting. Investments of less than
20% are accounted for using the cost method, unless the Company exercises
significant influence and/or control over the operations of the investee
company, in which case the equity method is used.
(f) Property and Equipment
Property and equipment are stated at cost. Costs of construction are
capitalized, including interest costs related to construction. Equipment held
under capital leases is stated at the lower of the fair value of the asset or
the net present value of the minimum lease payments at the inception of the
lease. Depreciation is provided using the straight-line method over the
estimated useful lives of the assets owned and the related lease term for
equipment held under capital leases.
Effective January 1, 1996, the Company shortened the estimated depreciable
lives for substantially all of its fixed assets. These estimates were changed to
better reflect the estimated periods during which these assets will remain in
service and result in useful lives which are more consistent with industry
practice. The changes in estimates of depreciable lives were made on a
prospective basis, beginning January 1, 1996. The effect of this change was to
increase depreciation expense and net loss for the year ended September 30, 1996
by approximately $7.0 million ($0.26 per share).
Estimated useful lives of major categories of property and equipment before
and after January 1, 1996 are as follows:
Before After
January 1, 1996 January 1, 1996
------------------- -----------------------
Office furniture and equipment 5 to 7 years 3 to 7 years
Buildings and improvements 31.5 years 31.5 years
Machinery and equipment 7 to 15 years 3 to 8 years
Switch equipment 15 years 10 years
fiber optic transmission system 30 years 20 years
A-28
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995 and 1996, and December 31, 1996
- --------------------------------------------------------------------------------
(g) Other Assets
Amounts related to the acquisition of transmission and other licenses are
recorded at cost. Amortization is provided using the straight-line method over
20 years. Goodwill results from the application of the purchase method of
accounting for business combinations. Amortization is provided using the
straight-line method over a maximum of 20 years.
Rights of way, minutes of use, and non-compete agreements are recorded at
cost, and amortized using the straight-line method over the terms of the
agreements, 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.
(h) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates.
(i) Revenue Recognition
During fiscal 1996, the Company changed its method of accounting for
long-term telecom services contracts. Under the new method, the Company
recognizes revenue as services are provided and continues to charge direct
selling expenses to operations as incurred. The Company had previously
recognized revenue in an amount equal to the non-cancelable portion of the
contract, which is a minimum of one year on a three-year or longer contract, at
the inception of the contract and upon activation of service to the customer to
the extent of direct installation and selling expenses incurred in obtaining
customers during the period in which such revenue was recognized. Revenue
recognized in excess of normal monthly billings during the year was limited to
an amount which did not exceed such installation and selling expense. The
remaining revenue from the contract had been recognized ratably over the
remaining non-cancelable portion of the contract. The Company believes the new
method is preferable because it provides a better matching of revenue and
related operating expenses and is more consistent with accounting practices
within the telecommunications industry.
As required by generally accepted accounting principles, the Company has
reflected the effects of the change in accounting as if such change had been
adopted as of October 1, 1995, and has presented the pro forma effects on prior
periods assuming the change had been applied retroactively. The Company's
results for fiscal 1996 reflect a charge of approximately $3.5 million relating
to the cumulative effect of this change in accounting as of October 1, 1995. The
effect of this change in accounting for fiscal 1996 was not significant.
Revenue from Satellite Services is recognized as services are rendered.
Revenue from Network Services contracts for the design and installation of
communication systems and networks, which are generally short-term in duration,
is recognized primarily using the percentage of completion method of accounting.
Maintenance revenue is recognized as services are provided.
Uncollectible trade receivables are accounted for using the allowance
method.
(j) Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS
109"). Under the asset and liability method of SFAS 109, deferred tax assets
A-29
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995 and 1996, and December 31, 1996
- --------------------------------------------------------------------------------
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
(k) Loss Per Share
Loss per share is calculated by dividing the net loss by the weighted
average number of shares outstanding. Weighted average number of shares
outstanding for fiscal years 1994 and 1995 and the three months ended December
31, 1995 represents outstanding Holdings-Canada common shares. Weighted average
number of shares outstanding for fiscal 1996 represents outstanding
Holdings-Canada common shares for the period October 1, 1995 through August 2,
1996, and outstanding ICG Common Stock and Holdings-Canada Class A common shares
(owned by third parties) for the period August 5, 1996 through September 30,
1996 and for the three-month period ended December 31, 1996.
Common stock equivalents, which include options, warrants and convertible
subordinated notes and preferred stock, are not included in the loss per share
calculation as their effect is anti-dilutive.
(l) Stock-Based Compensation
The Company accounts for its stock-based employee and non-employee director
compensation plans using the intrinsic value based method prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations ("APB 25"). The Company has provided pro
forma disclosures of net loss and loss per share as if the fair value based
method of accounting for these plans, as prescribed by Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS
123"), had been applied. Pro forma disclosures include the effects of employee
and non-employee director stock options granted during fiscal 1996 and the three
months ended December 31, 1996.
(m) Impairment of Long-Lived Assets
Effective October 1, 1996 the Company adopted 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. The adoption of SFAS 121 had no
effect on the consolidated financial statements of the Company.
(n) Reclassifications
Beginning in fiscal 1996, network operating costs, which were previously
classified as selling, general and administrative expenses, have been
reclassified as operating costs to conform with current industry practice. Such
expenses amounted to $2.6 million, $2.1 million, and $13.7 million in fiscal
1994, 1995 and 1996, respectively, and $2.4 million and $5.8 million for the
three months ended December 31, 1995 and 1996, respectively. All prior financial
information has been restated to conform with the current presentation.
Certain other prior period amounts have been reclassified to conform with
the current period's presentation.
(3) Business Combinations and Investments
(a) Acquisitions and Investments During the Year Ended September 30, 1996
A-30
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995 and 1996, and December 31, 1996
- --------------------------------------------------------------------------------
In January 1996, the Company purchased the remaining 49% minority interest
of Fiber Optic Technologies, Inc. ("FOTI"), making FOTI a wholly owned
subsidiary. Consideration for the purchase was approximately $2.0 million in
cash and 66,236 common shares of Holdings-Canada valued at approximately $0.8
million, for total consideration of approximately $2.8 million.
In February 1996, the Company entered into an agreement with Linkatel
California, L.P. ("Linkatel") and its other partners, Linkatel Communications,
Inc. and The Copley Press, Inc., under which the Company acquired a 60% interest
in Linkatel for an aggregate purchase price of $10.0 million in cash and became
the general partner of Linkatel. In April 1996, the partnership was renamed ICG
Telecom of San Diego, L.P. ("ICG Telecom of San Diego").
In March 1996, the Company acquired a 90% equity interest in Maritime
Cellular Tele-Network, Inc. ("MCN"), a Florida-based provider of cellular and
satellite communications for commercial ships, private vessels, offshore oil
platforms and land-based mobile units, for approximately $0.7 million in cash
and approximately $0.1 million of assumed debt, for total consideration of
approximately $0.8 million.
In August 1996, the Company acquired the Signaling System 7 ("SS7")
business of Pace Network Services, Inc. ("Pace"), a division of Pace Alternative
Communications, Inc. SS7 is used by local exchange companies, long-distance
carriers, wireless carriers and others to signal between network elements,
creating faster call set-up resulting in a more efficient use of network
resources. 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 above acquisitions have been accounted for using the purchase method of
accounting and, accordingly, the net assets and results of operations are
included in the consolidated financial statements from the date of acquisition.
Revenue, net loss and loss per share on a pro forma basis are not significantly
different from the Company's historical results for the periods presented
herein. The aggregate purchase price of the 1996 acquisitions, in which the
Company obtained a controlling interest, was allocated based on fair values as
follows (in thousands):
Current assets $ 6,563
Property and equipment 7,542
Other assets, including goodwill 10,647
Current liabilities (775)
Long-term liabilities (6,314)
Minority interest (1,422)
===================
$ 16,241
===================
(b) Acquisitions and Investments During the Year Ended September 30, 1995
In January 1995, the Company and an unaffiliated entity formed Maritime
Telecommunications Network, Inc. ("MTN") to provide wireless communications
through satellites to the maritime cruise industry, U.S. Navy vessels and
offshore oil platforms. The Company acquired (i) approximately 64% of MTN, (ii)
approximately $4.4 million in notes receivable from MTN and (iii) consulting and
non-compete agreements valued at an aggregate of approximately $0.3 million in
exchange for (i) approximately $9.0 million in cash, (ii) the surrender and
cancellation of a note to the Company from the other entity for $0.6 million
plus interest, (iii) 408,347 Holdings-Canada common shares valued at
approximately $5.1 million (of which 256,303 common shares were issued in the
fourth quarter of fiscal year 1994, and (iv) the Company's commitment to provide
additional convertible working capital advances to MTN as required by MTN. The
other shareholder of MTN contributed the assets of a predecessor business to
MTN.
MTN also assumed approximately $2.1 million of obligations of such
predecessor business. The Company paid a $0.5 million finder's fee obligation of
the predecessor to a third party. The Company has also agreed that the Company
will purchase the MTN shares owned by the other shareholder of MTN at fair
value, as defined, if MTN has not completed a public offering of common stock by
January 3, 1998.
A-31
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995 and 1996, and December 31, 1996
- --------------------------------------------------------------------------------
In March 1995, the Company purchased a 56% interest and in July 1995, an
additional 2% interest in Zycom Corporation ("Zycom"), an Alberta, Canada
corporation whose shares are traded on the Alberta Stock Exchange. Consideration
for the purchase was approximately $0.8 million in cash, the conversion of $2.0
million in notes receivable, and the assumption of approximately $0.7 million in
debt for total consideration of approximately $3.5 million. In March 1996, the
Company acquired an additional approximate 12% equity interest in Zycom by
converting a $3.2 million receivable due from Zycom.
The above acquisitions were accounted for using the purchase method of
accounting. The aggregate purchase price of the 1995 acquisitions, in which the
Company obtained a controlling interest, was allocated based on fair values as
follows (in thousands):
Current assets $ 1,835
Property and equipment 9,086
Other assets, including goodwill 16,986
Current liabilities (2,764)
Long-term liabilities (6,779)
Minority interest (4,850)
----------------------
$ 13,514
======================
In November 1994 and January 1995, the Company purchased an aggregate of
571,428 shares of InterAmericas Communications Corporation ("InterAmCom") for
total cash consideration of $2.0 million, which represented an approximate 6%
interest. During fiscal 1995, the Company recorded an allowance of $2.0 million
for the impairment of the investment based on management's estimate of the net
realizable value of the investment.
During fiscal 1995, the Company invested approximately $5.2 million ($3.9
million in cash, $1.1 million in common shares of Holdings-Canada, and the
conversion of approximately $0.2 million in notes receivable) in StarCom
International Optics Corporation ("StarCom"), for which the Company received a
25% equity interest in each of StarCom's wholly owned operating subsidiaries.
The total acquisition price is included in investments in the accompanying
consolidated financial statements. The 25% equity interest has been pledged as
collateral for StarCom financings.
(c) Acquisitions During the Year Ended September 30, 1994
In August 1994, the Company acquired DataCom Integrated Systems Corporation
("DataCom"). The Company issued 141,654 Holdings-Canada common shares (14,854 of
which were issued in fiscal 1995) valued at approximately $2.0 million as
consideration for the purchase. Based on the performance of that business since
the acquisition date, the Company issued to the previous owners of DataCom
17,908 shares of ICG Common Stock valued at approximately $0.4 million during
the three months ended December 31, 1996.
In July 1994, the Company completed the acquisition of FiberCap, Inc.
Consideration for the purchase was approximately $0.2 million in cash, 57,250
common shares of Holdings-Canada valued at approximately $0.8 million and a note
payable of $0.1 million, for total consideration of $1.1 million.
In April 1994, the Company acquired Mid-American Cable Inc. for an
aggregate price of $1.6 million. Consideration for the purchase was $0.2 million
in cash and 84,401 common shares of Holdings-Canada valued at $1.4 million.
In April 1994, the Company acquired PTI Harbor Bay, Inc./UpSouth
Corporation ("Bay Area Teleport"). Total consideration paid for the purchase was
approximately $0.3 million in cash and 1,183,147 common shares of
Holdings-Canada valued at approximately $19.0 million, for total consideration
of approximately $19.3 million.
In April 1994, the Company acquired substantially all the business assets
of Mtel Digital System, Inc. ("Mtel DS"). Consideration for the purchase was
approximately $0.7 million in cash and a note payable for approximately $6.9
million, bearing interest at 7.5% per annum, for total consideration of
approximately $7.6 million. The note was paid during 1995.
A-32
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995 and 1996, and December 31, 1996
- --------------------------------------------------------------------------------
In connection with the Bay Area Teleport and Mtel DS acquisitions, the
Company paid an aggregate amount of approximately $0.5 million to an
unaffiliated third party as a finder's fee, which is included in the cost of the
acquisitions. The fee was satisfied through the issuance of 31,513 common shares
of Holdings-Canada.
In February 1994, the Company agreed to acquire Nova-Net Communications,
Inc. ("Nova-Net"). The Company assumed management control of Nova-Net effective
May 1, 1994 and completed the acquisition on November 2, 1994. Consideration for
the purchase was $0.7 million in cash, assumption of approximately $1.4 million
in outstanding debt, after payments subsequent to September 30, 1994, and
approximately $6.6 million in common shares of Holdings-Canada, for an aggregate
price of approximately $8.7 million. During fiscal 1995, the Company recorded a
provision for impairment of the goodwill recorded in connection with the
Nova-Net acquisition of $5.0 million, based on management's estimate of the net
realizable value of the investment.
In October 1993, the Company purchased all the real and personal property
and licenses of an earth station in Steele Valley, California, for consideration
of approximately $0.9 million, which was satisfied through the issuance of 2,253
common shares of Holdings-Canada valued at approximately $0.1 million and $0.8
million in cash.
The above acquisitions were accounted for using the purchase method of
accounting. The aggregate purchase price of the 1994 acquisitions was allocated
based on fair values as follows (in thousands):
Current assets $ 4,848
Property and equipment 23,278
Other assets, including goodwill 19,531
Current liabilities (5,588)
===================
$ 42,069
===================
(d) Investments in Joint Venture and Affiliate
In January 1997, the Company announced a joint venture with Central and
Southwest Corporation ("CSW") which will develop and market telecommunications
services in Texas and Oklahoma (and may expand to Arkansas and Louisiana). Each
party has a 50% equity interest and is required to make additional pro rata
capital contributions as prescribed in the joint venture agreement. The Company
estimates its contributions to be approximately $24.2 million in 1997, with
aggregate contributions of approximately $49.7 million over the next five years.
The joint venture will be accounted for using the equity method of accounting.
A-33
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995 and 1996, and December 31, 1996
- --------------------------------------------------------------------------------
In September 1992, the Company entered into a joint venture agreement with
Greenstar Technologies Inc. (now GST Telecommunications, Inc. ("GST")) in which
each party had a 50% equity interest. The purpose of the joint venture was to
design, construct and operate a competitive access network in Phoenix. In return
for its 50% interest, the Company was required to provide equity or debt
financing. As of September 30, 1996, the Company had provided financing of $11.7
million, including working capital advances, which is included in long-term
notes receivable and had established a valuation allowance of $5.8 million due
to uncertainty of collection. Working capital advances totaled $0.4 million and
were included in Receivables-Joint Venture and Affiliate as of September 30,
1995. The Company began to record losses for its 50% interest in the joint
venture in the second quarter of fiscal 1994, and as of September 30, 1996, had
recorded a total loss of $3.7 million, including a loss of $1.5 million for the
year ended September 30, 1996. The Company's equity contribution to the joint
venture through September 30, 1996 totaled $1.2 million. Effective October 1,
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. The
Company may receive and additional $2.0 million based upon the future
performance of the business. The $0.8 million gain on sale of the investment is
included in other income for the three-month period ended December 31, 1996.
Also included in Receivables-Joint Venture and Affiliate at September 30,
1995, is $0.3 million due from an affiliate of the Company's Mexican subsidiary.
The Company is in the process of selling its investment in Mexico. The gain or
loss on the sale is not expected to be significant.
(4) Notes Receivable
Notes receivable due within one year are comprised of the following:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
September 30, December 31,
-------------------------------- --------------------
1995 1996 1996
-------------- --------------- --------------------
(in thousands)
Due from Crescomm Telecommunications
Services, Inc., with interest at approximately 8% $ 250 - -
Due from NovoComm, Inc., with interest at 8% 1,500 200 200
Other 11 63 -
--------------- -------------- -------------------
$ 1,761 263 200
============== =============== ====================
</TABLE>
The NovoComm, Inc. note receivable at September 30, 1996 and December 31,
1996 is net of a valuation allowance of $1.3 million based on management's
uncertainty as to collection.
A-34
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995 and 1996, and December 31, 1996
- --------------------------------------------------------------------------------
(5) Property and Equipment
Property and equipment, including assets owned under capital leases, is
comprised of the following:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
September 30, December 31,
--------------------------------
1995 1996 1996
-------------- ------------- -----------------
(in thousands)
Land $1,519 - -
Buildings and improvements 3,676 2,684 2,684
Furniture, fixtures and office equipment 13,666 25,143 29,214
Machinery and equipment 25,195 21,057 21,398
Fiber optic equipment 39,104 77,354 89,874
Satellite equipment 15,044 18,024 20,195
Switch equipment 20,302 53,413 58,571
Fiber optic transmission system 74,251 111,172 120,548
Building/site preparation - - 21
Construction in progress (see note 14) 35,852 74,588 117,972
-------------- -------------- ---------------------
228,609 383,435 460,477
Less accumulated depreciation (26,605) (47,298) (56,545)
--------------- ------------- ---------------------
$202,004 336,137 403,932
============== ============== =====================
</TABLE>
Property and equipment includes approximately $118.0 million of equipment
which has not been placed in service at December 31, 1996, and accordingly is
not being depreciated. The majority of this amount is related to new network
construction (see note 14).
Certain of the above assets have been pledged as security for long-term
debt and capital lease obligations at December 31, 1996. The following is a
summary of property and equipment owned under capital leases:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
September 30, December 31,
-------------------------------------------------
1995 1996 1996
---------------------- ----------------------- ----------------------
(in thousands)
Machinery and equipment $ 10,349 7,882 8,043
Fiber optic equipment 663 395 377
Switch equipment 17,529 26,509 25,733
Construction in progress 13,935 52,645 71,842
---------------------- ----------------------- ----------------------
42,476 87,431 105,995
Less accumulated depreciation (2,117) (4,362) (5,171)
====================== ======================= ======================
$ 40,359 83,069 100,824
====================== ======================= ======================
</TABLE>
A-35
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995 and 1996, and December 31, 1996
- --------------------------------------------------------------------------------
(6) Other Assets
Other assets are comprised of the following:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
September 30, December 31,
---------------------------------------------
1995 1996 1996
--------------------- ------------------- ----------------------
(in thousands)
Deposits $ 811 3,514 3,579
PACE customer base - 1,580 2,581
Rights of way 1,091 1,707 1,739
Minutes of use agreement - 1,421 1,421
Non-compete agreements 602 602 902
Risk premium 2,004 - -
Other 552 800 807
--------------------- -------------------- ----------------------
5,060 9,624 11,029
Less accumulated amortization (1,785) (1,227) (1,547)
===================== ==================== ======================
Other $ 3,275 8,397 9,482
===================== ==================== ======================
</TABLE>
(7) Related Party Transactions
During fiscal 1996, Holdings-Canada and International Communications
Consulting, Inc. ("ICC") entered into a consulting agreement whereby ICC will
provide various consulting services to the Company through December 1999 in
exchange for approximately $4.2 million in consulting fees to be paid during the
term of the agreement. During fiscal 1996 and for the three-month period ended
December 31, 1996, the Company paid $1.3 million and $0.3 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 September 30, 1995 and 1996, and December 31, 1996, receivables from
officers and employees in the amount of approximately $0.6 million are primarily
comprised of notes bearing interest at 7% and are included in Receivables-Other
in the accompanying consolidated financial statements. The notes receivable
relate to relocation expenses of officers.
Effective May 31, 1994, the Company acquired the remaining 4% minority
interest in Holdings from Worldwide Condominium Developments, Inc. ("WWCDI"), a
related entity. The 4% interest was exchanged for (i) the transfer of the
Company's oil and gas properties (at an estimated value of approximately $0.9
million), (ii) the surrender and cancellation of two demand promissory notes
receivable from William W. Becker, owner of WWCDI (the "Becker Interests"), in
the total principal amount of approximately $4.0 million and (iii) 373,663
common shares of Holdings-Canada. The 4% minority interest in Holdings was
valued at approximately $12.2 million by the non-related members of the
Company's Board of Directors. The transaction was approved unanimously by
Holdings-Canada's non-related directors, and ratified by Holdings-Canada's
non-related shareholders. Due to the related party nature of the purchase, the
investment has been recorded at the historical basis of WWCDI. As a result,
consideration in excess of the historical basis has been recorded in a manner
similar to a dividend.
A-36
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995 and 1996, and December 31, 1996
- --------------------------------------------------------------------------------
(8) Long-term Debt and Short-term Notes Payable
<TABLE>
Long-term debt is summarized as follows:
<CAPTION>
<S> <C> <C> <C>
September 30, December 31,
-------------------------------------
1995 1996 1996
------------------ --------------- ----------------------
(in thousands)
12 1/2% Senior discount notes, net of discount (a) $ 315,626 325,530
-
13 1/2% Senior discount notes, net of discount (b) 299,934 343,772 355,955
Convertible subordinated notes (c) 74,434 491 65
Credit facility (d) 13,515 - -
Notepayable with interest at the 90-day commercial paper rate plus 4.75%
(10.09% at December 31, 1996), due 2001, secured by certain
telecommunications equipment
- 5,888 5,815
Note payable with interest at 11%, due monthly
through fiscal 1999, secured by equipment 3,493 2,803 2,625
Mortgage payable with interest at 8.5%, due monthly through
2009, secured by building 1,242 1,194 1,177
Notes payable to sellers of FOTI and FOTDS (e) 600 - -
Other 336 10 8
------------------ --------------- ---------------------
$ 393,554 669,784 691,175
Less current portion (14,454) (795) (817)
------------------ --------------- ---------------------
$ 379,100 668,989 690,358
============ (a) 12 1/2% Senior Discount Notes
</TABLE>
On April 30, 1996, Holdings completed a private placement (the "1996
Private Offering") of 12 1/2% Senior Discount Notes (the "12 1/2% Notes") and of
14 1/4% Exchangeable Preferred Stock (the "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 12
1/2% Note indenture contains certain covenants which provide for limitations on
indebtedness, dividends, asset sales and certain other transactions.
The 12 1/2% Notes were originally recorded at approximately $300.0 million.
The discount on the 12 1/2% Notes and the debt issuance costs are being accreted
over ten years until maturity at May 1, 2006. The accretion of the discount and
debt issuance costs is included in interest expense in the accompanying
consolidated financial statements.
Approximately $35.3 million of the proceeds from the 1996 Private Offering
were used to redeem the 12% redeemable preferred stock of Holdings (the
"Redeemable Preferred Stock") issued in August 1995 ($30.0 million), pay accrued
preferred dividends ($2.6 million) and to repurchase 916,666 warrants of the
Company ($2.7 million) issued in connection with the Redeemable Preferred Stock.
The Company recognized a charge to minority interest in share of losses, net of
accretion and preferred dividends on subsidiary preferred stock of approximately
$12.3 million for the excess of the
A-37
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995 and 1996, and December 31, 1996
- --------------------------------------------------------------------------------
redemption price of the Redeemable Preferred Stock over the carrying amount at
April 30, 1996, and recognized a charge to interest expense of approximately
$11.5 million for the payments made to noteholders with respect to consents to
amendments to the indenture governing the 13 1/2% Notes to permit the 1996
Private Offering.
(b) 13 1/2% Senior Discount Notes
On August 8, 1995, Holdings completed a high yield debt offering (the "1995
Private Offering") through the issuance of 58,430 units (the "Units"), each Unit
consisting of ten $1,000, 13 1/2% Senior Discount Notes (the "13 1/2% Notes")
due September 15, 2005, and warrants to purchase 33 common shares of
Holdings-Canada (the "Unit Warrants"), resulting in net proceeds of
approximately $286.0 million, net of approximately $14.0 million in issuance
costs. The 13 1/2% Notes were sold at approximately 51% of the stated maturity
of $584.3 million, and will mature on September 15, 2005. Interest accrues at
the rate of 13 1/2% per annum beginning September 15, 2000 and is payable in
cash each March 15 and September 15 commencing March 15, 2001.
The 13 1/2% Notes were originally recorded at approximately $294.0 million,
which represents the $300.0 million in proceeds less the approximate $6.0
million value assigned to the Unit Warrants, which is included in additional
paid-in capital. The discount on the 13 1/2% Notes is being accreted using the
interest method over five years until September 15, 2000, the date at which the
13 1/2% Notes can first be redeemed. The value assigned to the Unit Warrants,
representing additional debt discount, is also being accreted to the debt over
the five-year period. The accretion of the total discount is included in
interest expense in the accompanying consolidated financial statements.
Holdings may redeem the 13 1/2% Notes on or after September 15, 2000, in
whole or in part, at the redemption prices set forth in the agreement, plus
unpaid interest, if any, at the date of redemption. The 13 1/2% Notes are
guaranteed on a senior, unsecured basis by ICG and Holdings-Canada. The 13 1/2%
Note indenture contains certain covenants which provide for limitations on
indebtedness, dividends, asset sales, and certain other transactions.
The Unit Warrants entitle the holder to purchase one common share of
Holdings-Canada at the exercise price of $12.51 per share and are exercisable at
any time between August 8, 1996 and August 8, 2005 (see note 12 (c)).
In connection with the issuance of the 13 1/2% Notes, the Company obtained
$6.0 million of interim financing from the placement agent and certain private
investors in exchange for the issuance of an aggregate of 520,000 Series A
Warrants (see note 12 (c)). The $6.0 million was repaid with a portion of the
proceeds from the 1995 Private Offering. As a result of the repayment of the
interim financing, the value assigned to the Series A Warrants totaling
approximately $3.0 million, representing debt discount, was charged to interest
expense during the year ended September 30, 1995.
(c) Convertible Subordinated Notes
Effective September 17, 1993, Holdings-Canada issued $18.0 million in
convertible subordinated notes with interest at 8% ("8% Notes"). Interest was
payable, at the option of the Company, in cash or through the issuance of
additional 8% Notes. The 8% Notes were subordinated to all present and future
senior debt.
The 8% Notes, excluding unpaid interest, were convertible, at the option of
the holder, at any time into common shares of Holdings-Canada at a conversion
price of $15.60 for each common share. During fiscal 1995, approximately $1.1
million of the 8% Notes, including approximately $0.1 million of interest paid
in 8% Notes, were converted to 69,230 common shares of Holdings-Canada. During
fiscal 1996, the remaining $17.0 million of the 8% Notes and approximately $3.1
million of interest paid in 8% Notes were converted into 1,289,738 shares of
Holdings-Canada.
A-38
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995 and 1996, and December 31, 1996
- --------------------------------------------------------------------------------
The Company, in conjunction with the issuance of the 8% Notes, paid to its
placement agent a private placement fee of $0.9 million. The private placement
fee was included in deferred financing costs as of September 30, 1995 and was
being amortized over the term of the 8% Notes. During the year ended September
30, 1996, the remaining $0.5 million of deferred financing costs were written
off upon conversion of the 8% Notes.
Effective October 28, 1993, the Company issued approximately $47.8 million
in convertible subordinated notes with interest at 7% ("7% Notes"). The 7% Notes
were due October 30, 1998, unless earlier converted or redeemed. Interest was
payable, at the option of the Company, in cash or through the issuance of
additional 7% notes. The 7% Notes were subordinated to all present and future
senior debt.
All or any portion of the outstanding principal amount of any note and
interest are convertible, at the option of the holder, into common shares of
Holdings-Canada at a conversion price of $18.00 for each common share.
During fiscal 1996, the Company notified the holders of the 7% Notes of its
intent to redeem the 7% Notes, together with accrued interest. As of December
31, 1996, approximately $47.8 million of the 7% Notes and approximately $8.9
million of interest paid in 7% Notes were converted into 3,146,283 shares of
Holdings-Canada. As of December 31, 1996, approximately $0.1 million of interest
paid in 7% Notes remains outstanding, which are in the process of being
converted.
The Company paid to the placement agent a private placement fee of
approximately $2.4 million. The private placement fee, included in deferred
financing costs, was being amortized over the term of the 7% Notes. During the
year ended September 30, 1996, approximately $1.1 million of deferred financing
costs were written off upon conversion of the 7% Notes.
(d) Credit Facility
Effective November 16, 1990, the Company, through Teleport Denver Ltd.
("TDL"), a subsidiary of Holdings, entered into an $18.0 million financing
arrangement with Communications Credit Corp. ("CCC"), a subsidiary of Northern
Telecom Finance Corporation, to provide for the acquisition, construction,
installation, operation, maintenance and expansion of a fiber optic transmission
system. The promissory notes accrued interest at 5.5% over the 90-day high grade
commercial paper rate with a maximum rate of 14.5%.
In December 1995, the Company refinanced this credit facility as part of
the short-term financing agreement with Norwest Bank Colorado, N.A. ("Norwest"),
described below, which was repaid in March, 1996. During the year ended
September 30, 1996, $1.1 million of deferred financing costs were written off
upon payment of the credit facility.
(e) Notes Payable to Sellers of FOTI and FOTDS
In conjunction with the 1992 acquisitions of FOTI and Fiber Optic
Technologies Data Systems, Inc. ("FOTDS"), the Company issued notes payable of
approximately $2.0 million bearing interest at 7% per annum, payable annually in
cash or common shares of Holdings-Canada at the option of the Company. The
principal was payable through the issuance of 266,800 common shares of
Holdings-Canada, at a deemed value of $7.50 per common share. As of September
30, 1995, 186,800 Holdings-Canada common shares had been issued. On January 3,
1996, the final payment was satisfied at a discount, with the Company issuing
76,027 common shares of Holdings-Canada pursuant to an agreement to purchase the
remaining 49% of FOTI (see note 3).
A-39
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995 and 1996, and December 31, 1996
- --------------------------------------------------------------------------------
Scheduled principal maturities of long-term debt as of December 31, 1996
are as follows (in thousands):
Due within:
One year $ 817
Two years 1,774
Three years 1,680
Four years 1,287
Five years 938
Thereafter (a) 1,137,794
---------------------
1,144,290
Less unaccreted discount on the
12 1/2% Notes and 13 1/2% Notes (453,115)
---------------------
$ 691,175
=====================
(a) Includes $550.3 million of 12 1/2% Notes and $584.3 million of 13 1/2%
Notes due at maturity.
Short-term Note Payable and Line of Credit
At September 30, 1995, FOTI maintained a $4.0 million line of credit
bearing interest at the prime rate plus 5% that was payable on demand. In
December 1995, the Company refinanced the line of credit as part of a short-term
facility with Norwest described below.
In December 1995, Holdings obtained $17.5 million of short-term financing
with Norwest, with interest at 2.5% above the Money Market Account yield, to
refinance certain of the Company's debt. The Company paid off this debt and
accrued interest in March 1996.
(9) Capital Lease Obligations
The Company is obligated under various capital lease agreements for
equipment at September 30, 1995 and 1996, and December 31, 1996. Capital lease
obligations increased in fiscal 1996 primarily due to the Company's agreement
with Southern California Edison Company to license fiber optic cable in Southern
California (see note 14(a)).
The future required payments under the Company's capital lease obligations
subsequent to December 31, 1996 are as follows (in thousands):
Due within:
One year $ 31,552
Two years 15,644
Three years 13,914
Four years 14,340
Five years 17,352
Thereafter 107,532
---------------------
Total minimum lease payments 200,334
Less amounts representing interest (104,505)
---------------------
Present value of net minimum lease
payments 95,829
Less current portion (24,683)
---------------------
$ 71,146
=====================
(10) Redeemable Preferred Stock of Subsidiary
12% Redeemable Preferred Stock
A-40
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995 and 1996, and December 31, 1996
- --------------------------------------------------------------------------------
In August 1995, Holdings-Canada completed a private placement of preferred
stock (the "Private Placement") in connection with the 1995 Private Offering
discussed in note 8. The Private Placement consisted of 300,000 shares of
Redeemable Preferred Stock and warrants to purchase 2,750,000 common shares of
Holdings-Canada (see note 12(c)) for net proceeds of $28.8 million, after
payment of $1.2 million in issuance costs. The Redeemable Preferred Stock
accrued dividends quarterly at an annual rate of 12% per annum.
The Redeemable Preferred Stock was originally recorded at approximately
$13.7 million, which represents the $28.8 million in net proceeds less the
approximate $15.1 million value assigned to the warrants, which was included in
additional paid-in capital of the Company. The value assigned to the warrants,
representing a discount on the Redeemable Preferred Stock, was accreted through
the time the Redeemable Preferred Stock was redeemed on April 30, 1996 with a
portion of the proceeds from the 1996 Private Offering.
14 1/4% Exchangeable Preferred Stock
The 14 1/4% Preferred Stock consists of 150,000 shares of preferred stock
that bear a cumulative dividend at the rate of 14 1/4% per annum. The dividend
is payable quarterly in arrears each February 1, May 1, August 1 and November 1
commencing August 1, 1996. Through May 1, 2001, the dividend is payable, at the
option of the Company, in cash or additional shares of 14 1/4% Preferred Stock.
The Company 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.
Included in minority interest in share of losses, net of accretion and
preferred dividends on subsidiary preferred stock for the years ended September
30, 1995 and 1996, and the three months ended December 31, 1996, is
approximately $1.3 million, $27.0 million and $5.8 million, respectively,
associated with the Redeemable Preferred Stock (fiscal 1995 and fiscal 1996) and
the 14 1/4% Preferred Stock (fiscal 1996 and the three months ended December 31,
1996), including the accretion of warrants issued in connection with the
Redeemable Preferred Stock, accretion of issuance costs and a 12% and 14 1/4%
preferred stock dividend accrual on the Redeemable Preferred Stock and the 14
1/4% Preferred Stock, respectively. These costs are partially offset by the
minority interest share of losses in subsidiaries of approximately $0.6 million,
$2.7 million and $0.8 million for the years ended September 30, 1995 and 1996,
and the three months ended December 31, 1996, respectively.
(11) Convertible Preferred Stock of Subsidiary
Convertible Series B Preferred Stock, no par value, 2,000,000 shares
authorized; 990,000 shares issued and outstanding at September 30,
1995.
In May and June 1995, Holdings-Canada sold an aggregate of 1,600,000
convertible preferred shares, having an aggregate stated value of $16.0 million.
Net proceeds to the Company, after issuance costs of approximately $0.9 million,
were approximately $15.1 million. The convertible preferred shares were
convertible at the holders' election into common shares of Holdings-Canada
commencing in July 1995, at a discount from the market price at the time of
conversion equal to 18.5% for $6.0 million of the convertible preferred shares
("Series A Preferred Stock") and 17.5% for $10.0 million of the convertible
preferred shares ("Series B Preferred Stock").
In July 1995, 10,000 shares of the Series B Preferred Stock were
repurchased for $0.1 million in cash. In August and September 1995, 200,000
shares of the Series A Preferred Stock were converted to 302,029 common shares
of Holdings-Canada valued at $2.0 million, and 400,000 shares of the Series A
Preferred Stock were repurchased for approximately $4.2 million in cash. The
excess of the repurchase price over the stated value of the Series A and Series
B Preferred Stock repurchased of approximately $0.5 million was treated as a
preferred stock dividend and is included in minority interest in share of
losses, net of accretion and preferred dividends on subsidiary preferred stock
in the accompanying consolidated financial statements.
During fiscal 1996, the Company repurchased approximately $5.6 million of
the Series B Preferred Stock, and approximately $3.8 million of the Series B
Preferred Stock was converted to Holdings-Canada common shares. The excess of
the
A-41
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995 and 1996, and December 31, 1996
- --------------------------------------------------------------------------------
repurchase and conversion price over the stated value of the Series B Preferred
Stock of approximately $1.0 million has been treated as a preferred stock
dividend and is included in minority interest in share of losses, net of
accretion and preferred stock dividends on subsidiary preferred stock in the
accompanying consolidated financial statements. No convertible preferred shares
remained outstanding at September 30, 1996.
(12) Stockholders' Equity (Deficit)
Common Stock
Common stock outstanding at December 31, 1996 represents the issued and
outstanding Common Stock of ICG and Class A common shares of Holdings-Canada
(owned by third parties) which are exchangeable at any time, on a one-for-one
basis, for ICG Common Stock. The following table sets forth the number of shares
outstanding for ICG and Holdings-Canada on a separate company basis as of
December 31, 1996:
<TABLE>
<CAPTION>
<S> <C> <C>
Shares owned by ICG Shares owned by
third parties
-------------------- -------------------
ICG Common Stock, $.01 par value, 100,000,000 shares
authorized; 0, 29,888,376 and 31,087,825 shares issued
and outstanding at September 30, 1995 and 1996, and
December 31, 1996, respectively - 31,087,825
Holdings-Canada Class A common shares, no par value,
100,000,000 shares authorized; 24,990,839, 31,672,103 and
31,795,270 shares issued and outstanding at September 30,
1995 and 1996, and December 31, 1996, respectively: Class A
common shares, exchangeable on a one-for-one basis for ICG
Common Stock at any time
- 807,054
Class A common shares owned by ICG 30,988,216 -
-------------------
Total shares outstanding 31,894,879
===================
</TABLE>
(a) Private Placements
In May and June 1995, the Company privately placed 595,000 common shares of
Holdings-Canada for $7.50 per share. Net proceeds to the Company, after issuance
costs of approximately $0.4 million, were approximately $4.0 million. Pursuant
to a private placement memorandum dated June 1993, for the issue of 1,500,000
common shares for approximately $8.3 million, the Company agreed to file a
registration statement with the Securities and Exchange Commission of the United
States that was to become effective on or before October 11, 1993. The
registration statement did not become effective on or
A-42
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995 and 1996, and December 31, 1996
- --------------------------------------------------------------------------------
before that date. As a result, the Company issued, for no additional
consideration, an additional 197,250 shares to the investors. The issuance of
these additional shares was recorded as a capital transaction during the year
ended September 30, 1994.
(b) Stock Options and Employee Stock Purchase Plan
In fiscal years 1991, 1992 and 1993, the Company's Board of Directors
approved incentive stock option plans and replenishments to those plans which
provide for the granting of options to directors, officers, employees and
consultants of the Company to purchase 285,000, 724,400 and 1,692,700 shares,
respectively, of the Company's Common Stock, with exercise prices between 80%
and 100% of the fair value of the shares at the date of grant. A total of
1,849,600 options have been granted under these plans with exercise prices
ranging from approximately $2.92 to $14.03. Compensation expense has been
recorded for options granted at an exercise price below the fair market value of
the Company's Common Stock at the date of grant, pursuant to the provisions of
APB 25. The options granted under these plans are subject to various vesting
requirements and expire in five and ten years from the date of grant.
In fiscal years 1994, 1995 and 1996, and the three months ended December
31, 1996, the Company's Board of Directors approved incentive and non-qualified
stock option plans and replenishments to those plans which provide for the
granting of options to certain directors, officers and employees to purchase
2,536,000 shares of the Company's Common Stock under the 1994 plan and an
aggregate of 2,700,000 shares of the Company's Common Stock under the 1995 and
1996 plans. A total of 4,177,381 options have been granted under these plans at
exercise prices ranging from $7.94 to $26.25, none of which were less than 100%
of the fair market value of the shares underlying options on the date of grant,
and, accordingly, date of grant, and accordingly, no compensation expense has
been 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 October 1996, the Company established an Employee Stock Purchase Plan
whereby employees can elect to designate 1% to 30% of their annual salary, up to
a limit of $25,000 per year, to be used to purchase shares of the Company's
Common Stock at a 15% discount to fair market value. Stock purchases will occur
four times a year on February 1, May 1, August 1 and November 1, with the price
per share equaling the lower of 85% of the market price at the beginning or end
of the offering period. The Company is authorized to issue a total of 1,000,000
shares of Common Stock to participants in the plan. No shares of the Company's
Common Stock had been sold to employees under this plan as of December 31, 1996.
On February 1, 1997, the Company sold 22,330 shares of the Company's Common
Stock to employees under this plan.
The Company recorded compensation expense in connection with its
stock-based employee and non-employee director compensation plans of $0.9
million, $0.2 million, $0.1 million and $0.2 million for fiscal years 1994, 1995
and 1996, and the three months ended December 31, 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 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 and the three
months ended December 31, 1996.
Year ended Three months ended
September 30, 1996 December 31, 1996
--------------------- ---------------------
(in thousands, except per share amounts)
Net loss:
As reported $(184,107) (49,823)
Pro forma (186,831) (50,819)
Loss per share:
As reported $(6.83) (1.56)
Pro forma (6.93) (1.60)
A-43
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995 and 1996, and December 31, 1996
- --------------------------------------------------------------------------------
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions for the year ended September 30, 1996 and the three months ended
December 31, 1996: an expected option life of three years for directors,
officers and other executives, and two years for other employees, for both
periods; expected volatility of 50% for both periods; and risk-free interest
rates ranging from 5.03% to 6.57% for directors, officers and other executives
and 5.22% to 6.10% for other employees, for both periods. Risk-free interest
rates, as were currently available on the grant date, were assigned to each
granted option based on the zero-coupon rate of U.S. Treasury bills to be held
for the same period as the assumed option life. Since the Company does not
anticipate issuing any dividends on its Common Stock, the dividend yield was
assumed to be zero. The weighted average fair market value of options granted
during the year ended September 30, 1996 and the three months ended December 31,
1996 was approximately $5.28 and $9.42 per option, respectively.
As options outstanding at December 31, 1996 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 of applying a fair value
based method of accounting for stock-based compensation for the year ended
September 30, 1996 and the three months ended December 31, 1996 are not
necessarily indicative of the effects on net loss and loss per share in future
periods.
The following table summarizes the status of the Company's stock-based
compensation plans as of and for the fiscal years ended September 30, 1994, 1995
and 1996, and as of and for the three months ended December 31, 1996:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Shares underlying Weighted average Options
options exercise price exercisable
------------------------- ------------------------- -------------------
(in thousands) (in thousands)
Outstanding at October 1, 1993 865
Granted 516 $ 12.23
Exercised (62) 3.34
-------------------------
Outstanding at September 30, 1994 1,319 6.81 769
Granted 2,520 9.73
Exercised (264) 3.32
Canceled (201) 13.25
-------------------------
Outstanding at September 30, 1995 3,374 9.08 940
Granted 1,322 11.78
Exercised (248) 7.55
Canceled (243) 11.12
-------------------------
Outstanding at September 30, 1996 4,205 9.77 2,264
Granted 335 18.59
Exercised (31) 8.95
Canceled (56) 12.65
-------------------------
Outstanding at December 31, 1996 4,453 10.34 2,969
=========================
</TABLE>
A-44
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995 and 1996, and December 31, 1996
- --------------------------------------------------------------------------------
The following table summarizes information about options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
--------------------------------------------------------- -----------------------------------
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)
$ 2.92 - 6.74 353 5.93 $ 3.23 353 $ 3.23
7.94 1,550 8.41 7.94 1,550 7.94
8.50 - 10.00 1,027 8.81 9.76 377 9.36
10.88 - 19.13 1,430 8.24 14.35 687 12.80
19.25 - 26.25 93 9.65 22.09 2 21.00
-------------------- --------------------
4,453 2,969
==================== ====================
</TABLE>
(c) Warrants
During the years ended September 30, 1994, 1995 and 1996, and the three
months ended December 31, 1996, the Company's warrant activity was as follows:
(i) During the year ended September 30, 1993, the Company
issued to WWCDI bonus warrants to purchase 6,680 Holdings-Canada common
shares at an exercise price of $7.50. At September 30, 1994, all of
these warrants had been exercised for $50,100.
(ii) During the year ended September 30, 1993, the Company
issued to a debt holder warrants to purchase 17,067, 3,255 and 11,039
common shares at exercise prices of $6.56, $7.38 and $7.88,
respectively. During the year ended September 30, 1994, 17,067 warrants
were exercised for proceeds of $111,960. In addition, during the year
ended September 30, 1994, the Company issued to the same debt holder
additional warrants to purchase 1,989, 15,260 and 3,665 common shares
of Holdings-Canada at $21.51, $20.01 and $11.80 per share, exercisable
on or before November 10, 1998, March 24, 1999, and July 8, 1999,
respectively. An additional 7,725 warrants were issued on July 10, 1995
at an exercise price of $14.50, which expire on July 9, 2000. Also
issued on July 10, 1995 were 60,000 additional warrants to an affiliate
of the debt holder at an exercise price of $14.50, which expire on July
9, 2000. During the three-month period ended December 31, 1996, 1,231
of the $7.38 warrants, 4,456 of the $7.88 warrants and 2,215 of the
$11.80 warrants were canceled. Total warrants outstanding held by the
debt holder and affiliates were 95,031 at December 31, 1996.
(iii) During the year ended September 30, 1994, the Company
issued to two financial advisors warrants to purchase 75,000 and
200,000 common shares of Holdings-Canada. These warrants have an
exercise price of $7.94 and $18.00 and are exercisable for two- and
five- year periods, respectively. During the years ended September 30,
1995 and 1996, 74,335 and 665 of the 75,000 warrants were exercised for
proceeds of $590,035 and $5,278, respectively. During the three-month
period ended December 31, 1996, 100,000 of the 200,000 warrants were
exercised for proceeds of $1.8 million. At December 31, 1996, 100,000
warrants remained outstanding.
A-45
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995 and 1996, and December 31, 1996
- --------------------------------------------------------------------------------
(iv) Pursuant to a private placement during the year ended
September 30, 1992, the Company issued to William W. Becker, a former
director of the Company, warrants to purchase 600,000 common shares of
Holdings-Canada at exercise prices of $5.65 and $6.51 on or before
February 11, 1993 and 1994, respectively. During the year ended
September 30, 1994, these warrants were exercised for proceeds of
approximately $3.8 million.
(v) Pursuant to a private placement of the Redeemable
Preferred Stock and the interim financing arrangement during the year
ended September 30, 1995, the Company issued 1,895,000 Series A
Warrants and 1,375,000 Series B Warrants to purchase an equal number of
common shares of Holdings-Canada. The exercise prices are $7.94 and
$8.73, respectively, and the warrants expire on July 14, 2000. None of
the warrants had been exercised as of September 30, 1995. During the
year ended September 30, 1996, the Company repurchased 458,333 each of
the Series A and Series B Warrants for $3.21 and $2.52, respectively
(see note 8). In addition, 1,853,334 warrants were exercised in June
1996 through a cashless exercise in which 1,271,651 Holdings-Canada
common shares were issued. As of December 31, 1996, 250,000 Series A
Warrants and 250,000 Series B Warrants remain outstanding.
(vi) In connection with the 1995 Private Offering, the Company
issued 1,928,190 warrants to purchase an equal number of common shares
of Holdings-Canada. The warrants are exercisable beginning August 8,
1996 at $12.51 per share and expire on August 6, 2005. As of December
31, 1996, all of these warrants remain outstanding.
The following table summarizes warrant activity for the three years ended
September 30, 1996 and the three months ended December 31, 1996:
<TABLE>
<CAPTION>
<S> <C> <C>
Outstanding Price
warrants range
------------------------ -----------------------
(in thousands)
Outstanding, October 1, 1993 689 $5.65 - 7.88
Granted 296 7.94 - 21.51
Exercised (675) 5.96 - 7.50
------------------------
Outstanding, September 30, 1994 310 7.38 - 21.51
Granted 5,266 7.94 - 14.50
Exercised (74) 7.94 - 7.94
------------------------
Outstanding, September 30, 1995 5,502 7.38 - 21.51
Repurchased (917) 2.52 - 3.21
Exercised (1,854) 7.94 - 8.73
------------------------
Outstanding, September 30, 1996 2,731 7.38 - 21.51
Canceled (8) 7.38 - 11.80
Exercised (100) 18.00
18.00
------------------------
Outstanding, December 31, 1996 2,623 7.38 - 21.51
========================
</TABLE>
A-46
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995 and 1996, and December 31, 1996
- --------------------------------------------------------------------------------
The warrants outstanding expire on the following dates as of December 31,
1996:
<TABLE>
<CAPTION>
<S> <C> <C>
Outstanding Exercise
Expiration date warrants price
------------------------ ------------------------
(in thousands)
June 18, 1998 2 $ 7.38
July 16, 1998 7 7.88
November 10, 1998 2 21.51
December 17, 1998 100 18.00
March 24, 1999 15 20.01
July 8, 1999 1 11.80
July 9, 2000 68 14.50
July 14, 2000 250 7.94
July 14, 2000 250 8.73
August 6, 2005 1,928 12.51
========================
2,623
</TABLE>
=================
(13) Sale of Teleports
In December 1995, the Company received approximately $21.1 million as
partial payment for the sale of four of its teleports and certain related
assets, and entered into a management agreement with the purchaser whereby the
purchaser assumed control of the teleport operations. Upon approval of the
transaction by the Federal Communications Commission ("FCC"), the Company
completed the sale in March 1996 and received an additional $0.4 million due to
certain closing adjustments, for total proceeds of $21.5 million. The Company
recognized a loss of approximately $1.1 million on the sale. Revenue associated
with these operations was approximately $5.9 million, $9.1 million and $2.5
million for fiscal years ended September 30, 1994, 1995 and 1996, respectively.
The Company has reported results of operations from these assets
through December 31, 1995.
(14) Commitments and Contingencies
(a) Network Construction
In November 1995, the Company signed an agreement with City Public Service
of San Antonio ("CPS") to license excess fiber optic facilities on a new
300-mile fiber network being built by the municipally-owned electric and gas
utility to provide for its communications needs in the greater metropolitan
area. Pursuant to this agreement, the Company has provided a $12.0 million
irrevocable letter of credit to secure payment of the Company's portion of the
construction costs. The letter of credit is secured by cash collateral of $13.3
million.
The legal ability of CPS, as a municipally-owned utility, to enter into
this contract with the Company has been challenged by SBC Communications, Inc.
("SBC") before the San Antonio City Council as being in violation of a May 1995
Texas state law. The Company has filed a petition with the FCC requesting a
declaratory ruling that the federal Telecommunications Act of 1996 preempts the
Texas state law to the extent that it precludes implementation of the agreement
between CPS and the Company, and has also filed a declaratory ruling request
with a Texas state court. Both of these actions are pending. The Company has
also filed a civil suit against SBC, and the Company's appeal of a dismissal of
that suit is also pending.
In February 1996, the Company entered into a 20-year agreement with
WorldCom, Inc. ("WorldCom"), under which the Company will pay approximately $8.8
million for the right to use fiber along a 330-mile fiber optic network in Ohio.
The network is being constructed by WorldCom in conjunction with the Company. An
aggregate of approximately $2.7 million has been paid by the Company through
December 31, 1996, with the balance due upon the completion of specified
segments of the network.
A-47
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995 and 1996, and December 31, 1996
- --------------------------------------------------------------------------------
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
San Diego. Under the terms of this agreement, SCE will be entitled to receive an
annual fee for ten years, certain fixed quarterly payments, including a
quarterly payment equal to a percentage of certain network revenue, and certain
other installation and fiber connection fees. The aggregate fixed payments
remaining under this 25-year agreement totaled approximately $149.4 million at
December 31, 1996. The agreement has been accounted for as a capital lease in
the accompanying consolidated balance sheets at December 31, 1996.
In March 1996, the Company entered into a long-term agreement with a
subsidiary of The Southern Company ("Southern") and Alabama Power Company
("Alabama Power") for the right to use 22 miles of existing fiber and 122 miles
of additional Alabama Power rights of way and facilities to reach the three
major business centers in Birmingham. Southern will, in conjunction with the
Company, construct the network and provide maintenance services with respect to
the fiber installed. Southern also will provide consulting services to the
Company relating to the build-out of the network and potential enhancements to
the Company's products and services.
Under the agreement, the Company also is required to pay Southern a
quarterly fee based on specified percentages of the Company's revenue for
services provided through this network. The Company's estimated costs to
complete the network are approximately $4.0 million, which are expected to be
incurred during 1997.
In July 1996, the Company entered into a 20-year agreement with
subsidiaries of American Electric Power ("AEP") to jointly build a 45-mile
network addition in metropolitan Columbus, plus a 138-mile long-haul link to
Canton, Ohio. The Company's estimated costs to complete the construction are
approximately $4.7 million, which are expected to be incurred during 1997.
(b) Company Headquarters
The Company has acquired property for its new headquarters and has
commenced construction of an office building that the Company expects will
accommodate all of the Company's Colorado operations. The total cost of the
project is expected to be approximately $44.0 million, of which $9.4 million had
been incurred as of December 31, 1996 and is included in construction in
progress. The Company is currently negotiating financing arrangements under
which the Company will lease the office space under a long-term operating lease,
and expects an agreement to be reached in the near future.
(c) Purchase Commitments
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.
In December 1996, the Company entered into an equipment and software
licensing agreement with Northern Telecom, Inc. under which the Company has
agreed to purchase $100.0 million of telecommunications equipment and software
over the next three years.
In September 1996, the Company entered into a 30-year agreement and two
indefeasible rights of use ("IRU") agreements with the Los Angeles Department of
Water and Power ("LADWP") for 105 miles of fiber optic capacity throughout
downtown Los Angeles, Century City, West Los Angeles, Mid-Wilshire and Sherman
Oaks. The agreements were subject to acceptance testing and, in January 1997,
the Company paid approximately $17.5 million upon the inception of the
agreements. The amount paid was included in construction in progress and current
portion of capital lease obligations in the accompanying consolidated balance
sheets at December 31, 1996.
A-48
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995 and 1996, and December 31, 1996
- --------------------------------------------------------------------------------
In addition to the above, the Company has entered into certain commitments
to purchase assets with an aggregate purchase price of approximately $34.0
million at December 31, 1996.
(d) Leases
The Company leases office space and equipment under non-cancelable
operating leases. Lease expense for the years ended September 30, 1994, 1995 and
1996, and the three months ended December 31, 1996, was approximately $1.3
million, $2.8 million, $5.1 million and $1.3 million, respectively. Estimated
future minimum lease payments for the years subsequent to December 31, 1996 are
(in thousands):
Due within:
One year $ 5,592
Two years 4,368
Three years 3,049
Four years 2,112
Five years 1,369
Thereafter 4,721
======================
$ 21,211
======================
(e) Litigation
The Company is a party to certain litigation which has arisen in the
ordinary course of business. In the opinion of management and legal counsel, the
ultimate resolution of these matters will not have a significant effect on the
financial condition of the Company.
(15) Income Taxes
Income tax expense (benefit) for the year ended September 30, 1996 is
as follows (in thousands):
Year ended
September 30, 1996
-----------------------------
Current income tax expense $ 198
Deferred income tax benefit (5,329)
---------------------------------
Total $ (5,131)
=================================
Current income tax expense for the year ended September 30, 1996 represents
state income tax relating to operations of companies in states requiring
separate entity tax returns. Accordingly, these entities' taxable income cannot
be offset by the Company's net operating loss carryforwards. No income tax
expense or benefit was recorded in fiscal 1994, fiscal 1995 or the three months
ended December 31, 1996.
Income tax expense (benefit) differs from the amounts computed by applying
the U.S. federal income tax rate to loss before income taxes primarily because
the Company has not recognized the income tax benefit of certain of its net
operating loss carryforwards and other deferred tax assets due to the
uncertainty of realization.
During the year ended September 30, 1996, the deferred tax liability was
adjusted for the effects of certain changes in estimated lives of property and
equipment as discussed in note 2 (f). As a result, the Company recognized an
income tax benefit of $5.3 million.
A-49
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995 and 1996, and December 31, 1996
- --------------------------------------------------------------------------------
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at September
30, 1995 and 1996, and December 31, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
September 30, December 31,
----------------------------------
1995 1996 1996
----------------- -------------- --------------------
(in thousands)
Deferred income tax liabilities:
Property and equipment, due to excess
purchase price of tangible assets and
differences in depreciation for book and
tax purposes $ 14,935 15,011 14,106
----------------- -------------- ---------------------
Deferred income tax assets:
Net operating loss carryforwards (37,695) (54,197) (68,740)
Accrued interest on high yield debt obligations
deductible when paid - (26,800) (32,873)
Accrued expenses not currently deductible for
tax purposes - (4,351) (2,031)
Less valuation allowance 28,462 70,337 89,538
----------------- -------------- ---------------------
Net deferred income tax asset (9,233) (15,011) (14,106)
----------------- -------------- ---------------------
Net deferred income tax liability $ 5,702 - -
</TABLE>
==========
As of December 31, 1996, the Company has net operating losses ("NOLs") of
approximately $171.9 million for U.S. tax purposes which expire in varying
amounts through 2011. However, due to the provisions of Section 382, Section
1502 and certain other provisions of the Internal Revenue Code (the "Code"), the
utilization of these NOLs will be limited. The Company is also subject to
certain state income tax laws, which will also limit the utilization of NOLs.
The net deferred tax asset related to the Company's NOL carryforwards
represents the portion of the NOLs that the Company estimates will be utilized
to reduce future taxable income resulting from the reversal of temporary
differences. A valuation allowance has been provided for the remainder of the
deferred tax asset relating to the NOLs, as management cannot determine when the
Company will generate future taxable income.
A-50
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995 and 1996, and December 31, 1996
- --------------------------------------------------------------------------------
(16) Employee Benefit Plans
The Company has established salary reduction savings plans under Section
401(k) of the Code which the Company administers for participating employees.
All full-time employees are covered under the plan after meeting minimum service
and age requirements. The Company contributes a matching contribution of its
Common Stock (up to 6% of annual salary) which totaled approximately $0.3
million, $0.5 million, $1.2 million and $0.5 million during the years ended
September 30, 1994, 1995 and 1996, and the three months ended December 31, 1996,
respectively.
(17) Significant Customer
During the year ended September 30, 1995, the Company had revenue from a
single customer which comprised 11% of total revenue and accounts receivable
which comprised 8% of the total accounts receivable balance at September 30,
1995. There were no customers which accounted for greater than 10% of revenue or
accounts receivable as of, or for the years ended September 30, 1994 and 1996,
or for the three months ended December 31, 1996.
(18) Summarized Financial Information of ICG Holdings, Inc.
As discussed in note 8(a) and (b), the 12 1/2% Notes and 13 1/2% Notes
issued by Holdings during 1996 and 1995, respectively, are guaranteed by ICG and
Holdings-Canada. The separate complete financial statements of Holdings have not
been included herein because such disclosure is not considered to be material to
the holders of the 12 1/2% Notes and 13 1/2% Notes. However, summarized combined
financial information for Holdings and subsidiaries and affiliates as of
September 30, 1995 and 1996, and December 31, 1996 and for the years ended
September 30, 1994, 1995 and 1996, and for the three months ended December 31,
1996 is as follows:
Summarized Consolidated Balance Sheet Information
<TABLE>
<CAPTION>
<S> <C> <C> <C>
September 30, December 31,
---------------------------------------------
1995 1996 1996
--------------------- --------------------- ---------------------
(in thousands)
Current assets $ 309,208 506,150 449,059
Property and equipment, net 201,983 336,137 403,932
Other non-current assets, net 66,737 94,046 88,183
Current liabilities 60,036 59,963 87,423
Long-term debt, less current portion 304,666 668,498 690,293
Due to parent 238,282 8,595 11,485
Other long-term liabilities 37,214 76,469 73,113
Preferred stock 14,986 153,318 159,120
Stockholders' deficit (77,256) (30,510) (80,260)
</TABLE>
A-51
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995 and 1996, and December 31, 1996
- --------------------------------------------------------------------------------
Summarized Consolidated and Combined Statement of Operations Information (a)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three months
ended
Years ended September 30, December 31,
---------------------------------------------------
1994 1995 1996 1996
-------------- -------------- ----------------- -----------------
(in thousands)
Total revenue $ 58,995 111,610 169,094 56,956
Total operating costs
and expenses 72,509 157,384 238,908 83,934
Operating loss (13,514) (45,774) (69,814) (26,978)
Net loss (15,194) (68,760) (172,687) (49,750)
</TABLE>
(a) The 1994 amounts include FOTI and its subsidiaries which was 51%
owned by Holdings-Canada. Holdings-Canada's 51% interest in FOTI was contributed
to Holdings effective in February 1995 (the remaining 49% was purchased in
January 1996) and, accordingly, FOTI's operations have been included in the
consolidated amounts subsequent to that date.
(19) Condensed Financial Information of ICG Holdings (Canada), Inc.
Condensed financial information for Holdings-Canada only as of
September 30, 1995 and 1996, and December 31, 1996 and for the years ended
September 30, 1994, 1995 and 1996 and for three months ended December 31, 1996
is as follows:
Condensed Balance Sheet Information
<TABLE>
<CAPTION>
<S> <C> <C> <C>
September 30, December 31,
--------------------------------------------
1995 1996 1996
-------------------- ------------------- ----------------------
(in thousands)
Current assets $ 249 177 165
Advances to subsidiaries 238,282 8,595 11,485
Property and equipment, net 21 - -
Other non-current assets, net 5,355 2,841 2,793
Current liabilities 332 200 199
Long-term debt, less current portion 74,434 491 65
Due to parent - 453 1,566
Share of losses of subsidiary 77,256 30,510 80,260
Shareholders' equity (deficit) 91,885 (20,041) (67,647)
</TABLE>
A-52
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995 and 1996, and December 31, 1996
- --------------------------------------------------------------------------------
Condensed Statement of Operations Information
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
months ended
Years ended September 30, December 31,
------------------------------------------------------
1994 1995 1996 1996
------------------- --------------- ---------------- -------------------
(in thousands)
Total revenue $ - - - -
Total operating costs and expenses 1,024 1,309 3,438 73
Operating loss (1,024) (1,309) (3,438) (73)
Losses from subsidiaries (15,194) (68,760) (172,687) (49,750)
Net loss attributable to common
shareholders (23,868) (76,648) (184,107) (49,823)
(20) Condensed Financial Information of ICG Communications, Inc. (Parent
company)
The sole asset of ICG is its investment in Holdings-Canada. ICG has no
operations other than those of Holdings-Canada and its subsidiaries.
A-53
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995 and 1996, and December 31, 1996
- --------------------------------------------------------------------------------
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ICG Common Stock, $.01 par value per share, has been listed on the Nasdaq
National Market System ("Nasdaq NMS") since March 25, 1997 under the symbol
"ICGX." From August 5, 1996 through March 24, 1997, ICG Common Stock was listed
on the American Stock Exchange ("AMEX") under the symbol "ICG." Prior to August
5, 1996, Holdings-Canada's Common Shares had been listed on the AMEX under the
symbol "ITR" from January 14, 1993 through February 28, 1996, and under the
symbol "ICG" thereafter through August 2, 1996. Holdings-Canada Common Shares
ceased trading on the AMEX at the close of trading on August 2, 1996.
Holdings-Canada Class A Common Shares, which were listed on the Vancouver
Stock Exchange ("VSE") under the symbol "IHC.A", ceased trading on the VSE at
the close of trading on March 12, 1997.
The following table sets forth, for the fiscal periods indicated, the high
and low sale prices of the Common Shares as reported on the AMEX through August
2, 1996, and the VSE through March 12, 1997, and the high and low sales prices
of the Common Stock as reported on (i) the AMEX from August 5, 1996 through
March 24, 1997 and (ii) the Nasdaq NMS from March 25, 1997 through the date
indicated below. The table also sets forth the average of the monetary exchange
rates on the last day of each such fiscal period.
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
American Stock Exchange/
Vancouver
Nasdaq National Market(1) Stock Exchange
Exchange (1) Rate
--------------------------- ---------------------------------
High Low High Low (C$/$)
----------- ------------ ------------- ---------------- -----------
Fiscal Year Ended September 30, 1995
First Quarter $ 17.88 $ 12.38 C$ 33.50 C$ 18.50 1.38
Second Quarter 14.13 9.38 19.75 17.38 1.40
Third Quarter 13.25 6.63 18.00 18.00 1.36
Fourth Quarter 14.00 8.00 - - 1.34
Fiscal Year Ended September 30, 1996
First Quarter $ 12.75 $ 8.63 C$ - C$ - 1.36
Second Quarter 17.88 10.25 - - 1.37
Third Quarter 27.38 17.13 17.50 17.50 1.36
Fourth Quarter 25.88 19.13 - - 1.36
Three Months Ended December 31, 1996 (2) $ 22.25 $ 14.00 C$ 28.35 C$ 28.35 1.37
Fiscal Year Ended December 31, 1997 (2)
First Quarter $ 18.13 $ 10.38 C$ - C$ - 1.38
Second Quarter (through May 12, 1997) 15.63 8.63 NA NA NA
- ----------------
<FN>
(1) Effective at the close of trading on August 2, 1996, Holdings-Canada's
Common Shares ceased trading on the AMEX and the Common Stock commenced
trading on the AMEX on August 5, 1996. Effective March 25, 1997, the Common
Stock commenced trading on the Nasdaq NMS and ceased trading on the AMEX.
The Common Stock has never traded on the VSE. The Class A Common Shares
traded on the VSE through March 12, 1997 and all information reported on
the above table from August 5, 1996 through March 12, 1997 with respect to
the VSE relates only to the Class A Common Shares.
(2) The Company has changed its fiscal year end to December 31 from
September 30, effective January 1, 1997.
On May 12, 1997, the last reported sale price for the Common Stock on the
Nasdaq NMS was $15.25 per share. On May 12, 1997, there were 31,804,671 shares
of Common Stock outstanding and 106 holders of record.
The Company has never declared or paid dividends on the Common Stock and
does not intend to pay cash dividends on the Common Stock in the foreseeable
future. ICG intends to retain future earnings, if any, to finance the
development and expansion of its business. In addition, the payment of any
dividends on the Common Stock is effectively prohibited by the restrictions
contained in the Company's indentures and in the Second Amended and Restated
Articles of Incorporation of Holdings, which prohibits Holdings from making any
material payment to the Company. Certain of the Company's debt facilities
contain covenants which also may restrict the Company's ability to pay cash
dividends.
The Company did not make any sales of unregistered securities during fiscal
1996 or the three months ended December 31, 1996.
A-54
<PAGE>
JUNE 17, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
COMMUNICATIONS, INC.,
The undersigned stockholder of ICGa Delaware orporation (the "Company"),
acknowledges receipt of the Notice of Annual Meeting of Stockholders and Proxy
Statement, dated May 16, 1997, and hereby constitutes and appoints J. Shelby
Bryan and James D. Grenfell, or either of them acting singly in the absence of
the other, with the power of substitution in either of them, the proxies of the
undersigned to vote with the same force and effect as the undersigned all shares
of Common Stock of the Company held by the undersigned at the Annual Meeting of
Stockholders of the Company to be held at the Inverness Hotel, 200 Inverness
Drive West, Englewood, Colorado, on June 17, 1997, at 9:00 A.M., local time, and
at any adjournment or adjournments thereof, hereby revoking any proxy or proxies
heretofore given and ratifying and confirming all that said proxies may do or
cause to be done by virtue thereof with respect to the following matters:
A-55
<PAGE>
[X] PLEASE MARK YOUR
VOTES AS IN THIS
EXAMPLE.
FOR ALL NOMINEES WITHOLD
LISTED BELOW (EXCEPT AS AUTHORITY TO VOTE
AS MARKED TO THE CONTRARY) FOR NOMINEES BELOW
[_] [_]
1. Election of Directors
NOMINEES: Kathryn Proffitt Haycock, Harry R. Herbst
Instruction: To withhold authority to vote for any individual nominee or
nominees, write such nominee's or nominees' name(s) in the space provided below.
- --------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
2. Ratification
of the appointment of KPMG [_] [_] [_]
Peat Marwick LLP as independent auditors
of the Company and its subsidiaries for
the fiscal year ending December 31, 1997.
3. Transaction of such other business as
may properly come before the Meeting
nd any adjournments thereof.
The proxy when properly executed will be voted as directed. If no
direction is indicated, the proxy will be voted FOR the election of
the two named individuals as directors, the ratification of the
appointment of the independent auditors and the transaction of such
other business as may properly come before the Meeting.
PLEASE SIGN, DATE AND MAIL THIS PROXY IMMEDIATELY IN THE ENCLOSED ENVELOPE.
PLEASE CHECK HERE IF YOU PLAN TO
ATTEND THE ANNUAL MEETING OF
STOCKHOLDERS AT 9:00 A.M. ON
JUNE 17, 1997. [_]
Signature ____________ Date _____ Signature______________________Date _____
Signature if held jointly
NOTE:Please sign your name exactly as it appears hereon. When signing as
attorney, executor, administrator, trustee or guardian, please give your
full title as it appears hereon. When signing as joint tenants, all parties
in the joint tenancy must sign. When a proxy is given by a corporation, it
should be signed by an authorized officer and the corporate seal affixed.
No postage is required if returned in the enclosed envelope and mailed in
the United States.
</TABLE>
