SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 [X] Definitive Proxy
Statement Statement
[ ] Definitive Additional [ ] Soliciting Materials
Materials Pursuant to
[ ] Confidential, for use of Section 240.14a-11(c)
the Commission Only (as or Section 240.14a-12
permitted by Rule 14a-6(e)(2))
ICG COMMUNICATIONS, INC.
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(Name of Registrant as Specified in its Charter)
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(Name of Person(s) Filing Proxy Statement
if other than 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)(4) and 0-11.
1) Title of each class of securities to which transaction
applies:
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2) Aggregate number of securities to which transaction
applies:
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3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth
amount on which the filing fee is calculated and state
how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[ ] 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:
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2) Form, Schedule or Registration Statement No:
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3) Filing Party:
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4) Date Filed:
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<PAGE>
ICG COMMUNICATIONS, INC.
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To the Stockholders of ICG Communications, Inc.:
NOTICE IS HEREBY GIVEN that the 1998 Annual Meeting of
Stockholders (the "Meeting") of ICG COMMUNICATIONS, INC., a
Delaware corporation (the "Company"), will be held on Wednesday,
June 3, 1998 at 9:30 a.m., local time, at the Company's principal
executive offices at 161 Inverness Drive West, Englewood,
Colorado to consider and act upon the following:
1. The election of two directors to serve until the 2001
Annual Meeting of Stockholders and until their successors have
been duly elected and qualified;
2. The approval of the adoption by the Board of Directors
of the Company's 1998 Stock Option Plan (the "Option Plan");
3. 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, 1998; and
4. 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 1, 1998,
which has been fixed as the record date for the Meeting, will 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 (the "Proxy") 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 5, 1998
IMPORTANT
THE PROMPT RETURN OF PROXIES WILL SAVE THE COMPANY THE EXPENSE OF
FURTHER REQUESTS FOR PROXIES IN ORDER TO ENSURE A QUORUM. A
MAILING ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE AND NO POSTAGE
IS REQUIRED IF IT IS MAILED WITHIN THE UNITED STATES.
<PAGE>
ICG COMMUNICATIONS, INC.
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PROXY STATEMENT
1998 ANNUAL MEETING OF STOCKHOLDERS
JUNE 3, 1998
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GENERAL
This Proxy Statement (the "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 1998 Annual Meeting of
Stockholders of the Company (the "Meeting") which will be held at
the Company's principal executive offices at 161 Inverness Drive
West, Englewood, Colorado, on June 3, 1998, at 9:30 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 161 Inverness Drive West, Englewood, Colorado 80112. The
approximate date on which this Proxy Statement and accompanying
Proxy will first be sent or given to stockholders is May 5, 1998.
VOTING SECURITIES AND VOTE REQUIRED
Stockholders of record as of the close of business on
May 1, 1998 (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 44,676,251 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. If a quorum is present, for
all matters other than the election of directors, the affirmative
vote of the majority of shares present in person or represented
by proxy at the Meeting and entitled to vote on the subject
matter shall be required to approve any matter presented at the
Meeting. Directors shall be elected by a plurality of the votes
of the shares present in person or represented by proxy.
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 more of the nominees for directors.
Votes withheld in connection with the election of one or more 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. 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. Abstentions and broker "non-votes" are counted as present
and entitled to vote and are, therefore, included for purposes of
determining whether a quorum of shares is present at a meeting.
However, broker "non-votes" are not deemed to be "votes cast."
As a result, broker "non-votes" are not included in the
tabulation of the voting results on the election of directors or
issues requiring approval of a majority of the votes cast and,
therefore, do not have the effect of votes in opposition in such
tabulations. A broker "non-vote" occurs when a nominee holding
shares for a beneficial owner does not vote on a particular
proposal because the nominee does not have discretionary voting
power with respect to that item and has not received instructions
from the beneficial owner.
<PAGE>
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 the approval of the adoption by the Board of
Directors of the Option Plan; (iii) FOR ratification of the
appointment of the Company's auditors and (iv) 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.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS,
DIRECTORS, NOMINEES AND OFFICERS
The following table sets forth, as of March 31, 1998, 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.
AMOUNT/NATURE OF
BENEFICIAL
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP PERCENT(1)
------------------------------------ ---------------- -------
Montgomery Asset Management, LLC. . 4,158,000(2) 9.3%
101 California Street
San Francisco, CA 94111
FMR Corporation . . . . . . . . . . 3,245,923(3) 7.3%
82 Devonshire Street
Boston, MA 02109
Franklin Advisers, Inc. . . . . . . 3,182,130(4) 7.1%
777 Mariners Island Boulevard
San Mateo, CA 94404
William J. Laggett . . . . . . . . 80,297(5) *
Chairman of the Board of Directors
J. Shelby Bryan . . . . . . . . . . 1,796,968(6) 3.9%
President, Chief Executive Officer
and Director
Douglas I. Falk . . . . . . . . . . 2,563(7) *
Executive Vice President --
Satellite and President of ICG
Satellite Services, Inc.
David W. Garrison . . . . . . . . . 256,136(8) *
Executive Vice President and
Director; Chairman of the Board of
Directors and Chief Executive
Officer of NETCOM On-Line
Communication Services, Inc.
James D. Grenfell . . . . . . . . . 38,075(9) *
Executive Vice President and Chief
Financial Officer
Marc E. Maassen . . . . . . . . . . 50,741(10) *
Executive Vice President --
Strategic Planning
Sheldon S. Ohringer . . . . . . . . 62,757(11) *
Executive Vice President -- Telecom
and President of ICG Telecom Group,
Inc.
H. Don Teague . . . . . . . . . . . 12,500(5) *
Executive Vice President, General
Counsel and Secretary
Harry R. Herbst . . . . . . . . . . 55,934(5) *
Director
Leontis Teryazos . . . . . . . . . 75,000(5) *
Director
Walter Threadgill . . . . . . . . . 5,000(5) *
Director
All executive officers and directors
as a group (11 persons) . . . . . 2,435,971(12) 5.2%
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<PAGE>
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* Less than one percent of the outstanding shares of Common
Stock.
(1) Based on 44,662,878 issued and outstanding shares of Common
Stock on March 31, 1998, plus shares of Common Stock that 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) Montgomery Asset Management, LLC ("Montgomery") reported on
Schedule 13G that, as of December 31, 1997, it beneficially
owns the shares of Common Stock reflected in this table.
Montgomery reported that it has sole dispositive power with
respect to 4,158,000 of the shares and sole voting power with
respect to 3,066,000 of the shares.
(3) FMR Corporation ("FMR") reported on Schedule 13G that, as of
December 31, 1997, FMR, Edward C. Johnson 3d, Chairman of
FMR, and Abigail P. Johnson, an FMR director, beneficially
own the shares of Common Stock reflected in this table. FMR
reported that Fidelity Management & Research Company
("Fidelity"), a wholly owned subsidiary of FMR and a
registered investment advisor, is the beneficial owner of
3,046,723 of the shares. Each of Mr. Johnson, FMR, through
its control of Fidelity, and the funds it controls, has sole
dispositive power with respect to 3,046,723 of the shares.
Neither Mr. Johnson nor FMR has the sole voting power with
respect to the shares. Fidelity Management Trust Company
("FMTC"), a wholly owned subsidiary of FMR, is the beneficial
owner of 199,200 of the shares. Each of Mr. Johnson and FMR,
through its control of FMTC, has sole dispositive power with
respect to 199,200 of the shares and sole voting power with
respect to 197,900 of the shares, and no voting power with
respect to 1,300 of such shares.
(4) Franklin Advisers, Inc. ("Franklin") reported on Schedule 13G
that, as of December 31, 1997, it beneficially owns the
shares of Common Stock reflected in this table. Franklin's
parent holding company, Franklin Resources, Inc. ("FRI"), and
Charles B. Johnson and Rupert H. Johnson, Jr., principal
shareholders of FRI, each disclaim any beneficial ownership
of shares of Common Stock reflected in this table. Franklin
reported that it has sole voting power and sole dispositive
power with respect to 3,176,200 of the shares and that
Franklin Management, Inc., an investment advisory subsidiary
of Franklin, has sole dispositive power with respect to 5,930
of the shares.
(5) Represents shares of Common Stock that may be acquired
pursuant to the exercise of outstanding stock options.
(6) 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,
4,968 shares of Common Stock held by a 401(k) Plan in Mr.
Bryan's name and 1,775,000 shares of Common Stock that may be
acquired pursuant to the exercise of outstanding stock
options.
(7) Includes 475 shares of Common Stock held by Mr. Falk, 838
unrestricted shares of Common Stock held by an Employee Stock
Purchase Plan and 1,250 shares of Common Stock that may be
acquired pursuant to the exercise of outstanding stock
options.
(8) Includes 8,628 shares of Common Stock held directly by Mr.
Garrison and 247,508 shares of Common Stock that may be
acquired pursuant to the exercise of outstanding stock
options.
(9) Includes 744 shares of Common Stock held by a 401(k) Plan,
456 unrestricted shares of Common Stock held by an Employee
Stock Purchase Plan and 36,875 shares of Common Stock that
may be acquired pursuant to the exercise of outstanding stock
options.
(10) Includes 3,730 shares of Common Stock held by a 401(k)
Plan, 386 unrestricted shares of Common Stock held by
an Employee Stock Purchase Plan and 46,625 shares of
Common Stock that may be acquired pursuant to the
exercise of outstanding stock options.
(11) Includes 20,800 shares of Common Stock held directly by
Mr. Ohringer, 1,107 shares of Common Stock held by a
401(k) Plan, 1,475 unrestricted shares of Common Stock
held by an Employee Stock Purchase Plan and 39,375
shares of Common Stock that may be acquired pursuant to
the exercise of outstanding stock options.
(12) Includes 46,903 shares of Common Stock held directly by
the executive officers and directors as a group, 10,549
shares of Common Stock held by a 401(k) Plan, 3,155
shares of Common Stock held by an Employee Stock
Purchase Plan and 2,375,364 shares of Common Stock that
may be acquired pursuant to the exercise of outstanding
stock options.
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<PAGE>
PROPOSAL I
ELECTION OF DIRECTORS
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A total of two directors (Class II Directors) are to be
elected at the Meeting by the holders of the Common Stock to
serve until the 2001 Annual Meeting of Stockholders and until
their successors have been elected and qualified or until their
death, resignation or removal. The two Class II Directors are
Leontis Teryazos and Walter Threadgill and their terms expire at
the Meeting. 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 plurality of the
votes 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 III Directors, J. Shelby
Bryan and William J. Laggett, expire at the 1999 Annual Meeting
of Stockholders. The terms of the two Class I Directors, Harry
R. Herbst and David W. Garrison, expire at the 2000 Annual
Meeting of Stockholders.
There were 10 meetings of the Board of Directors of the
Company, two meetings of the Stock Option Committee, four
meetings of the Audit Committee and three meetings of the
Compensation Committee of the Board of Directors of the Company
held during the fiscal year ended December 31, 1997. 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 $250
for telephonic meetings and $2,500 for each directors meeting or
committee meeting attended, or $500 for committee meetings
attended in conjunction with a Board of Directors meeting, plus
reimbursement of expenses. In addition, the Chairman of the
Board of Directors receives an annual fee of $80,000 payable in
quarterly installments. 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, with the exception of Walter Threadgill who commenced his
term as director on December 9, 1997. On June 17, 1997, all non-
employee directors of the Company were granted an additional
option to purchase 5,000 shares of Common Stock under the
Company's 1996 Stock Option Plan. On January 1, 1998, all non-
employee directors of the Company were granted options to
purchase 20,000 shares of Common Stock under the 1996 Stock
Option Plan, which vest as to 5,000 shares at the end of each
fiscal quarter.
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<PAGE>
The following table sets forth the names of the
nominees, their ages and their current positions with the
Company:
CLASS II DIRECTORS (TO SERVE UNTIL THE 2001
ANNUAL MEETING OF STOCKHOLDERS)
NAME AGE TITLE
---- --- -----
Leontis Teryazos(1)(2) 55 Director
Walter Threadgill(1)(2) 52 Director
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(1) Member of Compensation Committee.
(2) Member of Stock Option Committee.
Leontis Teryazos has been a Director since June 1995.
----------------
Mr. Teryazos, a Canadian resident, has headed Letmic Management
Inc., a financial consulting firm, since 1993, and Letmic
Management Reg'd., a real estate development and management
company, since 1985.
Walter Threadgill has been a Director since December 1997
-----------------
and is the Managing General Partner of Atlantic Coastal Ventures,
L.P. Previously, Mr. Threadgill was the President and CEO of
Multimedia Broadcast Investment Corporation. He also held
tenures as Divisional Vice President of Fiduciary Trust Company
in New York, and as Senior Vice President and Chief Operating
Officer of United National Bank in Washington, D.C. Mr.
Threadgill chaired the Presidential Small Business Advisory
Committee and served the National Association of Investment
Companies as Director, Treasurer and Legislative Committee
Chairman. Mr. Threadgill is a member of the Federal
Communications Bar Association.
Other Directors and Executive Officers
Set forth below are the names, ages and positions of the other
directors and executive officers of the Company:
NAME AGE POSITION
---- --- --------
William J. Laggett(1)
(3)(4)(5)(6) . . . . . . . 68 Chairman of the Board of
Directors
J. Shelby Bryan(1)(5) . . . . 52 President, Chief Executive
Officer and Director
Douglas I. Falk . . . . . . . 48 Executive Vice President
-- Satellite and
President of ICG
Satellite Services, Inc.
David W. Garrison(2)(3) . . . 42 Executive Vice President
and Director; Chairman of
the Board of Directors
and Chief Executive
Officer of NETCOM On-Line
Communication Services,
Inc.
James D. Grenfell . . . . . . 46 Executive Vice President
and Chief Financial
Officer
Harry R. Herbst(2)(3)(4)(6) . 46 Director
Marc E. Maassen . . . . . . . 47 Executive Vice President
-- Strategic Planning
Sheldon S. Ohringer . . . . . 41 Executive Vice President
-- Telecom and President
of ICG Telecom Group,
Inc.
H. Don Teague . . . . . . . . 55 Executive Vice President,
General Counsel and
Secretary
-6-
<PAGE>
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(1) Term expires at annual meeting of stockholders in 1999.
(2) Term expires at annual meeting of stockholders in 2000.
(3) Member of Audit Committee.
(4) Member of Compensation Committee.
(5) Member of Executive Committee.
(6) Member of Stock Option Committee.
William J. Laggett has been Chairman of the Board of
------------------
Directors since June 1995 and a Director since January 1995. Mr.
Laggett was the President of Centel Cellular Company from 1988
until his retirement in 1993. From 1970 to 1988, Mr. Laggett
held a variety of management positions with Centel Corporation,
including Group Vice President-Products Group, President-Centel
Services, and Senior Vice President-Centel Corporation. Prior to
joining Centel, Mr. Laggett worked for New York Telephone
Company.
J. Shelby Bryan was appointed President, Chief Executive
---------------
Officer and a Director in May 1995. Mr. Bryan has 18 years of
experience in the telecommunications industry, primarily in the
cellular business. He co-founded Millicom International Cellular
S.A., a publicly owned corporation providing cellular service
internationally, served as its President and Chief Executive
Officer from 1985 to 1994 and has served as a Director through
the present.
Douglas I. Falk has been President of ICG Satellite
---------------
Services, Inc. since August 1996 and Executive Vice President --
Satellite since October 1996. Prior to joining the Company, Mr.
Falk held several positions in the cruise line industry,
including President of Norwegian Cruise Line, Senior Vice
President -- Marketing and Sales with Holland America
Lines/Westours and Executive Vice President of Royal Viking Line.
Prior to his work in the cruise line industry, Mr. Falk held
executive positions with MTI Vacations, Brown and Williamson
Tobacco, Pepsico International, Glendenning Associates and The
Proctor and Gamble Company.
David W. Garrison has been a Director of the Company since
-----------------
January 1998. In March 1996, Mr. Garrison was appointed Chairman
of the Board of Directors of NETCOM On-Line Communication
Services, Inc. ("NETCOM") and, since April 1995, Mr. Garrison has
been NETCOM's Chief Executive Officer. Prior thereto, he served
as its President and a Director from February 1995. Mr. Garrison
also served as NETCOM's Chief Operating Officer from February
1995 to April 1995. Mr. Garrison also serves on the Boards of
Directors of Ameritrade Holding Corporation, Traveling Software,
Inc. and the Internet Service Association. From December 1990 to
September 1994, Mr. Garrison was President of SkyTel, a division
of Mobil Telecommunications, Inc. ("MTEL"). During his
association with MTEL (1990 to 1994), Mr. Garrison also held
positions as Senior Vice President and Vice President. From 1986
to 1990, Mr. Garrison served successively as Chief Operating
Officer, President, Chief Executive Officer and Chairman for Dial
Page, a regional paging carrier based in Greenville, South
Carolina.
James D. Grenfell, Executive Vice President and Chief
-----------------
Financial Officer, joined the Company in November 1995.
Previously, Mr. Grenfell served as Director of Financial Planning
for BellSouth Corporation and Vice President and Assistant
Treasurer of BellSouth Capital Funding. A Chartered Financial
Analyst, Mr. Grenfell has been a telephone industry financial
executive for over 20 years. He was with BellSouth from 1985
through November 1996, serving previously as Finance Manager of
Mergers and Acquisitions. He handled BellSouth's financing
strategies, including capital market financings as well as public
debt and banking relationships. Prior to BellSouth, Mr. Grenfell
spent two years as a Project Manager with Utility Financial
Services and six years with GTE of the South, a subsidiary of GTE
Corporation, including four years as Assistant Treasurer.
Harry R. Herbst has been a Director since October 1995 and
---------------
has been Vice President of Finance and Strategic Planning of Gulf
Canada Resources Ltd. since November 1995. He was Vice President
and Treasurer of Gulf Canada Resources Ltd. from January to
November 1995. Previously, Mr. Herbst was Vice President of
Taxation for Torch Energy Advisors Inc. from 1991 to 1994, and
tax manager for Apache Corp. from 1987 to 1990. Mr. Herbst is a
certified public accountant, formerly with Coopers & Lybrand.
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<PAGE>
Marc E. Maassen has been Executive Vice President --
---------------
Strategic Planning since August 1996. Prior to this position,
Mr. Maassen was Executive Vice President -- Network of ICG in
October 1995 and President of ICG Fiber Optic Technologies, Inc.
in April 1995. Mr. Maassen joined the Company in 1991 as Vice
President of Sales and Marketing. Prior to joining the Company,
Mr. Maassen held senior sales management positions at TelWatch,
Inc., an integrated network management software company. Mr.
Maassen previously worked for First Interstate as Director of
Telecom and for AT&T Information Systems as an Account Executive
and for U S West as a Major Accounts Manager.
Sheldon S. Ohringer has been Executive Vice President --
-------------------
Telecom of ICG and President of ICG Telecom Group, Inc. since
September 1997. Prior to this position, Mr. Ohringer was Senior
Vice President of Business Development and Strategic Planning for
ICG Telecom Group, Inc. since 1994. Prior to joining the
Company, Mr. Ohringer was Senior Vice President of Sales and
Business Development for U.S. Long Distance from May 1991 until
October 1994. From May 1984 until August 1990, Mr. Ohringer held
key management and executives positions with Telecom* USA, a
major long distance carrier which was acquired by MCI in 1990.
H. Don Teague joined the Company as Executive Vice
-------------
President, General Counsel and Secretary in May 1997. Prior to
this position, Mr. Teague was Senior Vice President,
Administration and Legal with Falcon Seaboard Holdings, L.P. and
its predecessors from April 1994 through April 1997. From 1974
to April 1994, Mr. Teague was a partner in the law firm of Vinson
& Elkins L.L.P.
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.
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<PAGE>
COMPENSATION AND OTHER BENEFITS
SUMMARY COMPENSATION TABLE
The following table provides certain summary
information concerning compensation paid or accrued by the
Company and its subsidiaries, to or on behalf of J. Shelby Bryan,
the Company's President and Chief Executive Officer, the four
other most highly compensated executive officers of the Company
and one additional officer for whom disclosure would have been
required but for the fact that the individual was not serving as
an executive officer at December 31, 1997 (the "Named Officers"),
for the fiscal years ended December 31, 1997, September 30, 1996
and 1995. As a result of the Company's change in year end during
1996 from September 30 to December 31, additional amounts are
shown below 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
ANNUAL COMPENSATION
----------------------
FISCAL
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS($)
-----------------------------------------------------------------
J. Shelby Bryan 1997 473,065(1) --
President and Chief Executive 1996T 161,178(1) --
Officer 1996 221,196(1) --
1995 30,728 --
James D. Grenfell 1997 200,000 68,000
Executive Vice President 1996T 181,250 71,655(7)
and Chief Financial Officer 1996 148,526 46,665
1995 -- --
Sheldon S. Ohringer 1997 164,792 73,245
Executive Vice President -- 1996T 135,000 42,865(11)
Telecom and President of 1996 130,000 28,945
ICG Telecom Group, Inc. 1995 110,000 --
Marc E. Maassen 1997 165,000 56,332
Executive Vice President -- 1996T 156,244 43,125(14)
Strategic Planning 1996 147,092 22,500
1995 131,933 60,000
Henry R. Carabelli 1997 178,333 58,984
Executive Vice President and 1996T 113,462 91,105(19)
Chief of Operations of 1996 -- --
ICG Telecom Group, Inc. 1995 -- --
William J. Maxwell 1997 222,727 69,480
Former President 1996T 228,750 147,880(22)
of ICG Enterprises Division 1996 222,917 117,160
1995 205,475 75,000
ANNUAL LONG-TERM
COMPEN- COMPEN-
SATION SATION
---------- ----------
OTHER
ANNUAL SECURITIES
FISCAL COMPEN- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SATION ($) OPTIONS
------------------------------------------------------------------
J. Shelby Bryan 1997 86,095(2) --
President and Chief Executive 1996T 91,812(3) --
Officer 1996 78,919(4) 450,000
1995 -- 1,550,000
James D. Grenfell 1997 26,600(5) 47,500(6)
Executive Vice President 1996T 145,360(8) 40,000
and Chief Financial Officer 1996 138,435(9) 50,000
1995 -- --
Sheldon S. Ohringer 1997 15,112(10) 17,500(6)
Executive Vice President -- 1996T 9,687(12) 7,500
Telecom and President of 1996 3,600 40,000
ICG Telecom Group, Inc. 1995 3,600 15,000
Marc E. Maassen 1997 30,723(13) 10,500(6)
Executive Vice President -- 1996T 25,244(15) 7,000
Strategic Planning 1996 25,341(16) 40,000
1995 9,291(17) 15,000
Henry R. Carabelli 1997 14,605(18) 50,000(6)
Executive Vice President and 1996T 77,637(20) 35,000
Chief of Operations of 1996 -- --
ICG Telecom Group, Inc. 1995 -- --
William J. Maxwell 1997 47,977(21) 50,000(6)
Former President 1996T 29,322(23) 25,000
of ICG Enterprises Division 1996 18,632(24) 75,000
1995 8,288(17) 75,000
-9-
<PAGE>
--------------------
(1) Consists of amount earned pursuant to the compensation
formula in Mr. Bryan's employment agreement.
(2) Consists of $40,777 for car allowance, $44,422 for housing
expenses and Company contributions to 401(k) Defined
Contribution Plan in the amount of $896.
(3) Consists of $30,236 for car allowance, $49,683 for housing
expenses and Company contributions to 401(k) Defined
Contribution Plan in the amount of $11,893.
(4) Consists of $25,991 for car allowance, $43,428 for housing
expenses and Company contributions to 401(k) Defined
Contribution Plan in the amount of $9,500.
(5) Consists of $15,292 for car allowance and Company
contributions to 401(k) Defined Contribution Plan in the
amount of $11,308.
(6) Includes options regranted as a result of the repricing of
the Company's options on April 16, 1997. See "-Ten-Year
Option/SAR Repricings."
(7) Consists of bonus earned during fiscal 1996 ($46,665) and
bonus earned during the three months ended December 31, 1996
($25,000).
(8) Consists of relocation expense in the amount of $121,600,
car allowance of $12,067 and Company contributions to 401(k)
Defined Contribution Plan in the amount of $11,693.
(9) Consists of relocation expenses in the amount of $117,295,
car allowance of $11,640 and Company contributions to 401(k)
Defined Contribution Plan in the amount of $9,500.
(10) Consists of $7,000 for car allowance, $234 for club dues
and Company contributions to 401(k) Defined Contribution
Plan in the amount of $7,878.
(11) Consists of bonus earned during fiscal 1996 ($28,945) and
bonus earned during the three months ended December 31,
1996 ($13,920).
(12) Consists of $3,600 for car allowance and Company
contributions to 401(k) Defined Contribution Plan in the
amount of $6,087.
(13) Consists of $21,394 for car allowance and Company
contributions to 401(k) Defined Contribution Plan in the
amount of $9,329.
(14) Consists of bonus earned during fiscal 1996 ($22,500) and
bonus earned during the three months ended December 31,
1996 ($20,625).
(15) Consists of $18,072 for car allowance and Company
contributions to 401(k) Defined Contribution Plan in the
amount of $7,172.
(16) Consists of $16,428 for car allowance and Company
contributions to 401(k) Defined Contribution Plan in the
amount of $8,913.
(17) Consists of Company contributions to 401(k) Defined
Contribution Plan.
(18) Consists of $7,500 for car allowance and Company
contributions to 401(k) Defined Contribution Plan in the
amount of $7,105.
(19) Consists of bonus earned during fiscal 1996 ($47,625),
bonus earned during the three months ended December 31,
1996 ($18,480) and hiring bonus ($25,000).
(20) Consists of relocation expense of $65,973, car allowance
of $2,932, and Company contributions to 401(k) Defined
Contribution Plan in the amount of $8,732.
(21) Consists of $11,000 for car allowance, $23,076 for
vacation and Company contributions to 401(k) Defined
Contribution Plan in the amount of $13,901.
(22) Consists of bonus earned during fiscal 1996 ($117,160)
and bonus earned during the three months ended
December 31, 1996 ($30,720).
(23) Consists of $11,300 for car allowance and Company
contributions to 401(k) Defined Contribution Plan in the
amount of $18,022.
(24) Consists of $9,200 for car allowance and Company
contributions to 401(k) Defined Contribution Plan in the
amount of $9,432.
-10-
<PAGE>
OPTION/SAR GRANTS TABLE
The Company granted no stock appreciation rights during
fiscal 1997 to the Named Officers or to other employees. The
following table provides information on option grants during
fiscal year 1997 to the Named Officers:
INDIVIDUAL GRANTS
-------------------------
NUMBER OF PERCENT OF EXERCISE
SECURITIES TOTAL OPTIONS OR
UNDERLYING GRANTED TO BASE
OPTIONS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED YEAR ($/SH) DATE
------------------ ---------- ------------- -------- ----------
J. Shelby Bryan -- -- -- --
James D. Grenfell 40,000 2.9 10.375(1) 10/22/06
7,500 0.5 10.375 04/16/07
Sheldon S. Ohringer 7,500 0.5 10.375(1) 10/22/06
10,000 0.7 10.375 04/16/07
Marc E. Maassen 7,000 0.5 10.375(1) 10/22/06
3,500 0.3 10.375 04/16/07
Henry R. Carabelli 20,000 1.5 10.375(1) 03/07/06
15,000 1.1 10.375(1) 10/22/06
15,000 1.1 10.375 04/16/07
William J. Maxwell 25,000(2) 1.8 10.375(1) 10/22/06
75,000(2) 1.8 10.375 04/16/07
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
PRICE APPRECIATION
FOR OPTION TERM
----------------------------
NAME 5% 10%
---- -- ---
J. Shelby Bryan - -
James D. Grenfell 245,273 613,054
48,936 124,013
Sheldon S. Ohringer 45,989 114,948
65,248 165,351
Marc E. Maassen 42,923 107,284
22,837 57,873
Henry R. Carabelli 112,684 276,690
91,978 229,895
97,871 248,026
William J. Maxwell 153,296 383,158
163,120 413,377
--------------------
(1) In order to continue to provide non-cash incentives and
retain key employees, all employee stock options outstanding
on April 16, 1997 with exercise prices at or in excess of
$15.875 were repriced by the Stock Option Committee of the
Company's Board of Directors to $10.375, the closing price
of Common Stock on April 16, 1997.
(2) As a result of Mr. Maxwell's resignation on December 3,
1997, 43,750 of the options granted during fiscal 1997 have
been canceled.
-11-
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST YEAR AND YEAR END OPTION
VALUES
The following table provides information on options
exercised during fiscal year 1997 by the Named Officers and the
value of such officers' unexercised options at December 31, 1997.
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS AT FISCAL YEAR END
(#)
--------------------------
SHARES
ACQUIRED
ON VALUE
EXERCISE REALIZED
NAME (#) ($) EXERCISABLE UNEXERCISABLE
---------------- -------- -------- ----------- -------------
J. Shelby Bryan -- -- 1,775,000 225,000
James D. Grenfell -- -- 35,000 62,500
Sheldon S.
Ohringer -- -- 36,875 35,625
Marc E. Maassen -- -- 52,750 35,750
Henry R.
Carabelli -- -- 8,750 41,250
William J.
Maxwell -- -- 294,750 --
VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR END
($)(1)
--------------------------------
NAME EXERCISABLE UNEXERCISABLE
------------------- ----------- -------------
J. Shelby Bryan 33,815,625 3,881,250
James D. Grenfell 600,000 1,064,063
Sheldon S. Ohringer 586,641 608,672
Marc E. Maassen 834,515 555,152
Henry R. Carabelli 147,656 696,094
William J. Maxwell 5,258,248 --
--------------------
(1) Based on the closing price of Common Stock of $27.25 on
December 31, 1997. Options granted prior to fiscal 1994
contained exercise prices stated in Canadian dollars; value
listed is based on the exchange rate of 1.4296 in effect on
December 31, 1997.
REPORT ON REPRICING OF OPTIONS/SARS
The Stock Option Committee of the Board of Directors of the
Company (the "Committee") is responsible for administering the
Company's Stock Option Plans, as well as granting any stock
options thereunder. The Committee is composed of four
independent, non-employee directors.
In 1996, the Company established the 1996 Stock Option Plan
(the "Plan"). Prior to that time, the Plan was known as the
IntelCom Group Inc. Restated and Amended 1995 Stock Option Plan
(the "IntelCom Plan"). Effective as of August 2, 1996, the
Company assumed sponsorship of, and immediately thereafter
amended and restated, the IntelCom Plan. The Plan constitutes a
continuation of the IntelCom Plan, as assumed by the Company.
The purpose of the Plan is to promote success and enhance the
value of the Company by linking the personal interest of
participants to those of the Company stockholders by providing
participants with an incentive for outstanding performance. The
Plan is further intended to assist the Company in its ability to
motivate, and retain the services of, participants upon whose
judgment, interest and special effort the successful conduct of
its operations is largely dependent. Stock options are awarded
by the Committee according to the terms of the Plan. Up to an
aggregate number of 2,500,000 shares may be granted under the
Plan, reduced by the number of Common Shares of IntelCom
represented by options granted to individuals under the IntelCom
Plan prior to August 2, 1996. When awarding stock options, the
Committee takes into consideration the individual's past
performance and contribution to the Company, as well as future
potential.
In April 1997, the Committee considered repricing certain
existing stock options that, as a result of recent stock declines
in the Company's industry, had an exercise price in excess of the
then fair market value of the Company's Common Stock.
Specifically, approximately 154,000 stock options granted on
March 7, 1996 as part of employee bonus compensation had an
exercise price of $15.875, approximately 219,000 options granted
in connection with recent new hires had exercise prices ranging
from $16.25 to $26.25, and approximately 225,000 options granted
as part of employee bonus compensation on October 22, 1996 had an
exercise price of $19.125 per share. At those prices, the
Committee believed that the options were not able to effectively
serve as incentives for the employees and that, in the current
competitive market place, the Company needed to have a strong
incentive compensation program in place in order to retain, keep
and motivate its employees.
-12-
<PAGE>
Consequently, the Committee approved the repricing of all
outstanding employee stock options previously granted under the
stock option plans of the Company (and its predecessor, IntelCom
Group Inc.) which options were exercisable at prices at or in
excess of $15.875 per share (the "Eligible Options"). The
repricing was accomplished through an offer to all holders of
Eligible Options to exchange the Eligible Options for new stock
options (the "Repriced Options"), as of April 16, 1997, under the
same terms and conditions (including vesting) contained in the
stock option plan as originally granted the Eligible Option. The
Repriced Options are exercisable at a price of $10.375 per share,
which was the closing price of a share of Common Stock, $.01 par
value, of the Company on the Nasdaq National Market on April 16,
1997.
William J. Laggett
Harry R. Herbst
Leontis Teryazos
Walter Threadgill
(Members of the Stock Option Committee)
-13-
<PAGE>
The following provides information on the repricing on April
16, 1997 of stock options held by the Named Officers:
NUMBER OF
SECURITIES
UNDERLYING MARKET PRICE OF
OPTIONS STOCK AT TIME OF
REPRICED OR REPRICING OR
NAME AMENDED (#) AMENDMENT ($)
-----------------------------------------------------------------
J. Shelby Bryan -- --
President and
Chief Executive Officer
James D. Grenfell 40,000 10.375
Executive Vice President and
Chief Financial Officer
Sheldon S. Ohringer 7,500 10.375
Executive Vice President --
Telecom and President of ICG
Telecom Group, Inc.
Marc E. Maassen 7,000 10.375
Executive Vice President --
Strategic Planning
Henry R. Carabelli 15,000 10.375
Executive Vice President and 20,000 10.375
Chief of Operations of ICG
Telecom Group, Inc.
William J. Maxwell 25,000 10.375
Former President of ICG
Enterprises Division
LENGTH OF
EXERCISE ORIGINAL
PRICE OPTION TERM
AT TIME OF REMAINING AT
REPRICING OR NEW DATE OF
AMENDMENT EXERCISE REPRICING OR
NAME ($) PRICE ($) AMENDMENT
------------------------------------------------------------------
J. Shelby Bryan -- -- --
President and
Chief Executive Officer
James D. Grenfell 19.125 10.375(1) 113 months
Executive Vice President
and Chief Financial Officer
Sheldon S. Ohringer 19.125 10.375(1) 113 months
Executive Vice President --
Telecom and President of
ICG Telecom Group, Inc.
Marc E. Maassen 19.125 10.375(1) 113 months
Executive Vice President --
Strategic Planning
Henry R. Carabelli 19.125 10.375(1) 113 months
Executive Vice President 15.875 10.375(1) 107 months
and Chief of Operations of
ICG Telecom Group, Inc.
William J. Maxwell 19.125 10.375(1) 113 months
Former President of ICG
Enterprises Division
(1) Represents the closing price of the Common Stock on
April 16, 1997.
-14-
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENTS
The Company and its subsidiaries have employment agreements
with Messrs. J. Shelby Bryan, Douglas I. Falk, David W. Garrison,
James D. Grenfell and H. Don Teague.
The Company's amended employment agreement with Mr. Bryan
provides for a term of two years, which commenced June 1, 1997.
As compensation, the Company will pay Mr. Bryan a salary equal to
the sum of one percent of the monthly increase in Company revenue
and three percent of the monthly increase in EBITDA. If Mr.
Bryan's salary exceeds $1,500,000 in any fiscal year, the Company
may elect to pay such excess in unregistered ICG Common Stock.
Mr. Bryan is entitled to benefits as are generally provided to
executive officers of ICG, including options under stock option
plans, a leased automobile, private club membership fees and
reimbursement of reasonable out-of-pocket expenses incurred on
behalf of the Company. The employment agreement may be terminated
by the Company with or without cause or after a disability
continuing for a six-month consecutive period, or by Mr. Bryan
for cause, including breach of the agreement or reduction in
status or responsibilities, 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 18 months. After termination of the employment
agreement, Mr. Bryan is subject to a confidentiality covenant and
a one-year non-competition commitment.
The Company's employment agreement with Mr. Falk, dated
August 14, 1996, has an initial one-year term commencing
August 26, 1996 and continues from month-to-month thereafter
until either party provides 30 days notice of termination. The
agreement provides for an annual base salary and an incentive
bonus determined by the Board of Directors. Mr. Falk also
receives stock options under the stock option plans. If the
Company terminates the employment agreement without cause or if
the Company or Mr. Falk terminates the employment agreement upon
the occurrence of a major transaction involving the Company, then
Mr. Falk will receive his salary and insurance benefits for a
period of 12 months following the date of termination. Mr. Falk
is subject to a confidentiality covenant and to a one-year
non-competition commitment following the termination of his
employment.
The Company's indirect wholly owned subsidiary, NETCOM On-
Line Communication Services, Inc., has an employment agreement
with Mr. Garrison which commenced June 1, 1997 and provides for
an annual base salary and an incentive bonus determined by the
Board of Directors. Mr. Garrison is entitled to such other
benefits including stock options under the Company's stock option
plans, car allowance and reimbursement or direct payment of
reasonable out-of-pocket expenses incurred on behalf of the
Company. The Company may terminate the employment agreement at
any time and for any reason upon written notice. Mr. Garrison
may terminate the employment agreement for any reason by giving
the Company 30 days written notice. If termination without cause
occurs more than six months after a change of control, Mr.
Garrison will receive his salary, insurance benefits and his
annual incentive bonus earned on a quarterly basis for a period
of 12 months. If termination without cause occurs within six
months after a change in control, Mr. Garrison will receive two
times his salary, 200% of the greater of his prior year's
incentive bonus or his annual incentive bonus earned on a
quarterly basis and two years of life insurance. Mr. Garrison is
subject to a confidentiality covenant.
The Company's employment agreement with Mr. Grenfell
originally provided for an initial two-year term which commenced
November 1, 1995. Upon completion of the first 12 months of the
initial term, the agreement automatically renewed and will
continue to automatically renew from month-to-month such that 12
months remain in the term. The agreement may be terminated upon
30 days written notice from either party or by the Company if Mr.
Grenfell is unable to perform his duties for 140 days in any
180-day period due to illness or incapacity. Mr. Grenfell is
entitled to such other benefits as are generally provided to
executive officers of the Company, including options under the
Company's stock option plans, use of a company car and
reimbursement or direct payment of reasonable out-of-pocket
expenses incurred on behalf of the Company. The agreement
provides for an annual base salary and an incentive bonus
determined by the Board of Directors. If the employment agreement
is terminated without cause by the Company or by either party
upon the occurrence of a change of control involving the Company,
Mr. Grenfell will receive a termination fee equal to his current
monthly salary times the number of months remaining in the term.
Mr. Grenfell is also subject to a ten-year confidentiality
covenant and a one-year non-competition commitment.
-15-
<PAGE>
The Company's employment agreement with Mr. Teague provides
for an initial two-year term which commenced May 19, 1997. Upon
completion of the first 12 months of the initial term, the
agreement automatically renews from month-to-month such that 12
months remain in the term. The agreement provides for an annual
base salary and an incentive bonus determined by the Board of
Directors. Mr. Teague is also entitled to such other benefits as
are generally provided to executive officers of the Company,
including options under the Company's stock option plans, a car
allowance and reimbursement of reasonable out-of-pocket expenses
incurred on behalf of the Company. The agreement may be
terminated by the Company upon 30 days written notice if Mr.
Teague is unable to perform his duties for 140 days in any
180-day period due to illness or incapacity. The agreement may
also be terminated by the Company or Mr. Teague upon 30 days
written notice in certain other circumstances. If the employment
agreement is terminated as a result of illness or incapacity or
without cause by the Company or by either party upon the
occurrence of a change of control involving the Company, Mr.
Teague will receive a termination fee equal to his current
monthly salary times the number of months remaining in the term.
Mr. Teague is also subject to a ten-year confidentiality covenant
and a one-year non-competition commitment.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors of the
Company (the "Compensation Committee") evaluates compensation
levels of senior management and evaluates the various factors
affecting compensation of the Company's highest paid officers.
The Compensation Committee believes that compensation to the
Company's executive officers should be designed to encourage and
reward management's efforts to further strengthen the Company's
business and to create added value for stockholders. Such a
compensation program helps to achieve the Company's business and
financial objectives and also provides incentives needed to
attract and retain well-qualified executives. The Company
operates in a competitive marketplace and needs to attract and
retain highly qualified senior management and executive personnel
in order for the Company to achieve its goals of continuing to
develop new services and expanding into new businesses and
markets. The Compensation Committee attributes a substantial
portion of the Company's overall performance, as well as the
individual contributions of the executive officers, to the
executive officers' compensation.
The Company has employment agreements with several of its
executive officers. See "Executive Employment Agreements" for
descriptions of those agreements. All senior management, except
for J. Shelby Bryan, President and Chief Executive Officer, are
compensated with a base salary and an incentive bonus. The base
salaries are intended to compensate these executives for their
ongoing leadership skills and management responsibility. The
incentive bonuses are dependent upon individual performance. For
purposes of determining the bonuses, the Compensation Committee
evaluates the accomplishment of goals set at the start of each
fiscal year and compares the Company's performance in each year
to the prior year. Based on the progress of the Company during
fiscal 1997, Chairman Laggett recommended, and the Compensation
Committee approved, bonuses for the named executive officers of
the Company. See "Summary Compensation Table" for the bonuses
paid to executive officers.
The compensation of the Company's President and Chief
Executive Officer, J. Shelby Bryan, is set forth in his
employment contract. His base salary is computed as: the sum of
(x) one percent (1%) of the increase in Revenues of the Company
for such month over Revenues of the Company for the immediately
prior month and (y) three percent (3%) of the increase in
Earnings Before Income Taxes, Depreciation and Amortization
("EBITDA") of the Company for such month over EBITDA of the
Company for the immediately prior month. In addition, Mr. Bryan
receives other benefits. See "Summary Compensation Table" for
the type and amount of these payments. The Compensation
Committee believes that the compensation paid to Mr. Bryan is a
suitable compensation package based on Mr. Bryan's experience in
the communications industry and because his compensation is
directly tied to the performance of the Company.
In addition, the Stock Option Committee awarded stock
options to certain employees of the Company, including executive
officers. These grants were related to the executive officers'
performance in fiscal 1996 and as incentives for continued
efforts and success and were based on individual performance and
responsibility. The Compensation Committee believes that stock
options serve as important long-term incentives for executive
officers by encouraging their continued employment and commitment
to the Company's performance. The Compensation and Stock Option
Committees do not consider the number of options currently held
by all executive officers in determining individual grants
-16-
<PAGE>
because such consideration could create an incentive to exercise
options and sell the underlying stock. See "Summary Compensation
Table" for the stock options granted to the executive officers.
The Compensation Committee has reviewed the compensation of
the Company's executive officers and has concluded that their
compensation was reasonable in view of the Company's performance.
The Compensation Committee observed that revenue increased $82.7
million, approximately 43%, in fiscal 1997 as compared with the
12 months ended December 31, 1996. The Company's networks have
grown from approximately 2,385 operational fiber route miles at
December 1996 to approximately 3,043 operational miles at the end
of fiscal 1997. The Company also raised net proceeds of $320.0
million from the issuance of preferred securities and notes
during fiscal 1997. These accomplishments exceeded the Company's
objectives for fiscal 1997. The Compensation Committee believes
that the Company appropriately awarded its executive officers for
their short and long-term efforts.
The Compensation Committee continually evaluates the
compensation of the Company's executive officers, including
assessing compensation reports for comparable companies and for
the telecommunications industry. The Compensation Committee
believes that maintaining suitable executive compensation
programs is necessary to support the future development of the
Company and growth in stockholder value.
William J. Laggett
Harry R. Herbst
Leontis Teryazos
Walter Threadgill
(Members of the Compensation Committee)
-17-
<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 Nasdaq Composite
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 from September 30, 1992 through
December 31, 1997. The total stockholder return assumes $100
invested at the beginning of the period in the Company's Common
Stock, the NASDAQ Composite Index and the Company's designated
Peer Group, as described below.
September 30,
----------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
NASDAQ Composite Index(1) 100 131 131 179 210
Peer Group(2) . . . . . . 100 223 144 184 152
ICG . . . . . . . . . . . 100 434 314 291 479
December 31, December 31,
1996 1997
---- ----
NASDAQ Composite Index(1) 221 269
Peer Group(2) . . . . . . 197 277
ICG . . . . . . . . . . . 403 622
--------------------
(1) IntelCom Group Inc. ("IntelCom") Common Shares traded on the
American Stock Exchange ("AMEX") Emerging Company
Marketplace until January 4, 1993, when IntelCom Common
Shares began trading on the AMEX. IntelCom data reflects a
one-for-five reverse stock split effective January 13, 1993.
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. On March 25, 1997, ICG Common Stock ceased trading on
the AMEX and began trading on the Nasdaq National Market
System. The Nasdaq Composite Index was used for the entire
period shown.
(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. from September
30, 1992; MFS Communications Company, Inc. from the date of
the initial public offering of its common stock on May 20,
1993 until the date of its purchase by WorldCom, Inc. on
December 31, 1996; 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.
-18-
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The following table lists the current and former directors,
officers and beneficial owners of more than 10% of the
outstanding Common Stock (each a "Reporting Person") that failed
to file on a timely basis reports required by Section 16(a) of
the Exchange Act during the most recent fiscal year, the number
of late reports, the number of transactions that were not
reported on a timely basis and any known failure to file a
required Form by each Reporting Person:
Transactions
Untimely Known Failures
Reporting Person Late Reports Reported to file Forms
---------------- ------------ ------------ --------------
Walter Threadgill 1 (Form 3) 1 None
Mark S. Helwege(1) 1 (Form 5) 3 None
--------------------
(1) Former Executive Vice President -- Network and President of
ICG Fiber Optic Technologies, Inc.
Except as set forth above, the Company believes that during
the fiscal year ended December 31, 1997, 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.
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 were controlled, prior
to November 30, 1997, by Teleport Transmission Holdings Inc.
("TTH"), a corporation owned one-third each by Director William
Laggett and two former Directors. TTH's subsidiaries gave 15-
year promissory notes to the Company to acquire the FCC licenses.
After receipt of approval from the FCC, the Company exercised its
option on November 30, 1997 to have the common carrier licenses
transferred back to the Company. Upon completion of the transfer
of the licenses, the promissory notes were canceled. In fiscal
1997, the Company paid or accrued $0.6 million to TTH's
subsidiaries for common carrier services, and the Company
received from TTH's subsidiaries approximately $2.4 million as
payment in full on the promissory notes, management services,
equipment leases and technical support. In addition,
approximately $1.1 million of the note balances were canceled due
to the sale of the licenses in conjunction with the sale of four
of the Company's teleports.
ICG Holdings (Canada), Inc. and International Communications
Consulting, Inc. ("ICC") have entered into a three-year
consulting agreement whereby ICC will provide various consulting
services to the Company through December 1999 in exchange for
approximately $4.2 million in consulting fees to be paid during
the term of the agreement. During fiscal 1997, the Company paid
approximately $1.1 million related to this consulting agreement.
William W. Becker, a former Director and stockholder of the
Company, is President and Chief Executive Officer of ICC.
As part of a resolution and settlement of certain
transactions in 1995 between the Company and the Becker Group of
Companies (the "Becker Group"), a company founded by William W.
Becker, the Company was assigned a note receivable in the amount
of $200,000, which had previously been advanced to John D. Field,
a former executive officer of the Company, by the Becker Group.
The note receivable is evidenced by a promissory note from Mr.
Field to the Company payable on demand, which bears interest at a
rate of 7% per annum.
In order to facilitate the relocation of William J. Maxwell,
a former executive officer of the Company, the Company advanced
$200,000 to Mr. Maxwell in April 1994 pursuant to a promissory
note payable on demand bearing interest at a rate of 7% per
annum. In March 1998, the April 1994 promissory note was
replaced with a new promissory note for $125,000 which is due in
full on September 30, 1998.
-19-
<PAGE>
PROPOSAL II
APPROVAL OF THE COMPANY'S 1998 STOCK OPTION PLAN
------------------------------------------------
GENERAL. On February 23, 1998, the Board of Directors of the
Company adopted, subject to shareholder approval, the ICG
Communications, Inc. 1998 Stock Option Plan (the "Option Plan").
The Option Plan was adopted primarily because existing stock
option plans no longer have Common Stock available thereunder for
issuance in respect of future grants of options. As of the
Record Date, no employees or directors of the Company have
received awards under the Option Plan.
A summary of the principal features of the Option Plan is
provided below, but this Summary is qualified in its entirety by
reference to the full text of the Option Plan which was filed
electronically with this Proxy Statement with the Securities and
Exchange Commission. Such text is not included in the printed
version of this Proxy Statement. Copies of the Option Plan may
be obtained from the Company and will also be available for
inspection at the Meeting.
PURPOSE AND EFFECTIVE DATE. The purpose of the Option Plan is to
promote the success and enhance the value of the Company by
linking participants' personal interests to those of the
Company's stockholders by providing participants with an
incentive for outstanding performance, and to motivate and retain
the services of participants upon whose judgment, interest and
special effort the successful conduct of its operations is
largely dependent. The Option Plan provides for the granting of
stock options ("Options"), as determined by the Stock Option
Committee of the Board of Directors. The Option Plan will be
effective, subject to stockholder approval at the Meeting, as of
January 1, 1998 (the "Effective Date"). In the event that
stockholder approval is not received, the Option Plan will be
terminated.
ADMINISTRATION OF THE PLAN. The Option Plan will be administered
by the Stock Option Committee of the Board of Directors of the
Company, which currently consists of William J. Laggett, Harry R.
Herbst, Leontis Teryazos and Walter Threadgill (the "Committee").
The Committee will be comprised solely of at least two Non-
Employee Directors as defined in Rule 16b-3(b)(3) under the
Exchange Act. It also is expected that the composition of the
Committee will satisfy the requirements of U.S. Treasury
Regulations Section 1.162-27(e)(3), or any successor provision,
with respect to performance-based grants made to certain key
executive officers. Compliance with this requirement is one of
the factors necessary to enable the Company to avoid the income
tax deduction limitation under Section 162(m) (the "Section
162(m) Limitation") of the Internal Revenue Code of 1986, as
amended (the "Code"), on annual compensation in excess of
$1,000,000.
SHARES SUBJECT TO THE OPTION PLAN. The Option Plan authorizes
the grant of awards relating to an aggregate of 3,400,000 shares
of Common Stock. If any corporate transaction occurs which
causes a change in the capitalization of the Company, the number
and kind of Common Stock delivered, and the number and kind
and/or price of the Common Stock subject to outstanding awards
granted under the Option Plan, shall be adjusted appropriately
and equitably to prevent dilution or enlargement of participants'
rights. Shares underlying awards of Options will be counted
against the 3,400,000 shares limitation and may be reused to the
extent that an Option expires, is terminated unexercised or is
forfeited or shares of Common Stock are returned to the Company's
treasury as a result of any form of "cashless" exercise of
Options or tax withholding of shares permitted by the Committee
under the Option Plan. On April 30, 1998, the last reported sale
price of the Common Stock on the Nasdaq National Market was
$35.00 per share.
ELIGIBILITY AND PARTICIPATION. Employees eligible to participate
in the Option Plan include officers and employees of the Company,
and its parents and subsidiaries, including employees who are
members of the Board. Directors who are not employees ("Director
Participants") will be able to participate in the Option Plan as
described below in the section captioned "Awards to Director
Participants." As of the Effective Date, it is anticipated that
the approximate number of individuals who will be eligible to
participate under the Option Plan will be at least 2,500.
AMENDMENT AND TERMINATION OF THE OPTION PLAN. In no event may
any award under the Option Plan be granted on or after the tenth
anniversary of the Option Plan's Effective Date. The Board of
Directors may amend, suspend or terminate the Option Plan at any
-20-
<PAGE>
time; provided that no amendment may be made to increase the
total number of shares of Common Stock under the Option Plan or
reduce the minimum exercise price in the case of an ISO, unless
approved by stockholders, but only if such approval is required
by applicable provisions of the Code. No amendment, termination
or suspension may alter or impair any outstanding award without
the consent of the participant. In addition, no amendment shall
be made which shall increase the total number of shares of Common
Stock which may be issued and sold pursuant to options or reduce
the minimum exercise price in the case of an incentive stock
option ("ISO") without the approval of the stockholders, if
required by the Option Plan.
AWARDS UNDER THE OPTION PLAN.
Stock Options for Employees. The Committee may grant to
---------------------------
employees ISOs, non-qualified stock options ("non-ISOs"), or a
combination thereof under the Option Plan. The Option exercise
price for each grant of Options intended to satisfy the
"performance-based" exception to the deduction limitation under
Section 162(m) of the Code or any ISO granted under the Option
Plan shall be at least equal to 100% of the fair market value of
the Common Stock on the date the Option is granted. Options
shall expire at such times as the Committee determines at the
time of grant; provided, however, that no Option shall be
exercisable later than the tenth anniversary of its grant.
Options granted under the Option Plan shall be exercisable
at such times and subject to such restrictions and conditions as
the Committee shall approve. The Option exercise price is
payable in cash or other property acceptable to the Committee, in
Common Stock having a fair market value equal to the exercise
price, by share withholding, by any form of "cashless" exercise
or a combination of the foregoing.
Options may be transferred only under the laws of descent
and distribution and, during his or her lifetime, shall be
exercisable only by the participant or his or her legal
representative. Each stock option agreement shall specify the
participant's (or his or her beneficiary's) rights in the event
of retirement, death or other termination of employment.
The fair market values (determined at the date of grant of
the Options) of shares of Common Stock subject to ISOs, which are
exercisable for the first time by any one employee in any
calendar year, shall not exceed $100,000.
Awards to Director Participants. The Option Plan provides
-------------------------------
that as of January 1, 1998 and as of January 1 of each succeeding
calendar year through and including January 1, 2007, each person
who is serving as a Director on such date shall automatically be
granted Options to purchase 20,000 shares of Common Stock (the
"Formula Options"); provided, however, that each Director who
receives formula grant options under the Company's 1996 Stock
Option Plan, as amended (the "1996 Plan"), will not be eligible
to receive grants of Formula Options under this provision
covering the same periods. All Formula Options granted in 1998
prior to the date of this Meeting to Director Participants have
been granted under the 1996 Plan. Each Formula Option will have
an exercise price equivalent to the fair market value of the
Common Stock on the date such Option is granted. Each Formula
Option granted will vest and become exercisable as to 5,000
shares of Common Stock on the last day of the fiscal quarter
during which the date of grant occurs and on the last day of each
succeeding fiscal quarter during the year, but only if the
Director has served in such capacity for more than 50% of the
business days contained in each such quarter.
In addition to the Formula Options, the Committee has the
discretionary authority to grant Options to one or more Directors
from time to time, upon such terms, conditions and exercise
prices as the Committee determines.
MERGER OR CONSOLIDATION OF THE COMPANY. Upon the merger or
consolidation of the Company (if the agreement of merger or
consolidation does not provide for the continuance of the Options
or the substitution of new Options for Options granted under the
Option Plan or for the assumption of the Options), the
dissolution or sale of substantially all the assets of the
Company or change in control of the Company, the holder of any
Option outstanding shall have the right immediately prior to such
event to exercise the Option in whole or in part.
All such Options which vest on an accelerated basis as a
result of a transaction of this type and are not so exercised
will be forfeited as of the effective time of such event, except
in the case of a change in control.
-21-
<PAGE>
GRANT INFORMATION. Except in the case of Formula Options granted
to Director Participants, it is not possible at this time to
determine awards that will be made to employees and Directors
pursuant to the Option Plan in the future; however, the Company
currently expects to grant Options to a wide range of employees.
FEDERAL INCOME TAX CONSEQUENCES OF AWARDS UNDER THE OPTION PLAN.
The Company has been advised by its counsel that under currently
applicable provisions of the Code, the following federal income
tax consequences may be expected by a participant (including a
Director Participant) and by the Company in respect of the grant
and exercise of awards under the Option Plan.
FEDERAL INCOME TAX CONSEQUENCES.
Consequences to the Optionholder - Other than Director
Participants
Grant. There are no federal income tax consequences to the
-----
optionholder solely by reason of the grant of ISOs and non-ISOs
under the Option Plan.
Exercise. The exercise of an ISO is not a taxable event for
--------
regular federal income tax purposes if certain requirements are
satisfied, including the restriction providing that the
optionholder generally must exercise the Option no later than
three months following the termination of his employment.
However, such exercise may give rise to an alternative minimum
tax liability (see "Alternative Minimum Tax" below).
Upon the exercise of a non-ISO, the optionholder generally
will recognize ordinary income in an amount equal to the excess
of the fair market value of the shares of Common Stock at the
time of exercise over the amount paid as the exercise price. The
ordinary income recognized in connection with the exercise by an
optionholder of a non-ISO will be subject to both wage and
employment tax withholding.
The optionholder's tax basis in the shares acquired pursuant
to the exercise of an Option will equal the amount paid upon
exercise plus, in the case of a non-ISO, the amount of ordinary
income recognized by the optionholder upon exercise.
Qualifying Disposition. If an optionholder disposes of
----------------------
shares of the Company's Common Stock acquired upon the exercise
of an ISO in a taxable transaction, and such disposition occurs
more than two years from the date on which the option is granted
and more than one more year after the date on which the shares
are transferred to the optionholder pursuant to the exercise of
the ISO, the optionholder will recognize long-term capital gain
or loss equal to the difference between the amount realized upon
such disposition and the optionholder's adjusted basis in such
shares (generally the Option exercise price).
Disqualifying Disposition. If the optionholder disposes of
-------------------------
the Company's Common Stock acquired upon the exercise of an ISO
(other than in certain tax-free transactions) within two years
from the date on which the ISO is granted or within one year
after the transfer of the shares to the optionholder pursuant to
the exercise of the ISO, then at the time of disposition the
optionholder generally will recognize ordinary income equal to
the lesser of (i) the excess of such shares' fair market value on
the date of exercise over the exercise price paid by the
optionholder or (ii) the optionholder's actual gain (i.e., the
----
excess, if any, of the amount realized on the disposition over
the exercise price paid by the optionholder). If the total
amount realized on a taxable disposition (including return of
capital and capital gain) exceeds the fair market value on the
date of exercise, then the optionholder will recognize a capital
gain in the amount of such excess. If the optionholder incurs a
loss on the disposition (i.e., if the total amount realized is
----
less than the exercise price paid by the optionholder) then the
loss will be a capital loss.
Other Dispositions. If an optionholder disposes of shares
------------------
of Common Stock acquired upon the exercise of a non-ISO in a
taxable transaction, the optionholder will recognize capital gain
or loss in an amount equal to the difference between his basis
(as discussed above) in the shares sold and the total amount
realized upon the disposition. Any such capital gain or loss
will be long-term depending on whether the shares of Common Stock
were held for more than one year from the date such shares were
transferred to the optionholder.
-22-
<PAGE>
Alternative Minimum Tax. Alternative minimum tax ("AMT") is
-----------------------
imposed in addition to, but only to the extent it exceeds, the
optionholder's regular tax for the taxable year. Generally, AMT
is computed at the rate of 26% on the excess of a taxpayer's
alternative minimum taxable income ("AMTI") over the exemption
amount, but only if such excess amount does not exceed $175,000
($87,500 in the case of married individuals filing separate
returns). The AMT tax rate is 28% of such excess amount over the
$175,000 ($87,500) amount. For these purposes, the exemption
amount is $45,000 for joint returns or returns of surviving
spouses ($33,750 for single taxpayers and $22,500 for married
individuals filing separate returns), reduced by 25% of the
excess of AMTI over $150,000 for joint returns or returns of
surviving spouses ($112,500 for single taxpayers and $75,000 for
married individuals filing separate returns). A taxpayer's AMTI
is essentially the taxpayer's taxable income adjusted pursuant to
the AMT provisions and increased by items of tax preference.
The exercise of ISOs (but not non-ISOs) will generally
result in an upward adjustment to the optionholder's AMTI in the
year of exercise by an amount equal to the excess, if any, of the
fair market value of the Common Shares on the date of exercise
over the exercise price. The basis of the Common Stock acquired,
for AMT purposes, will equal the exercise price increased by the
prior upward adjustment of the taxpayer's AMTI due to the
exercise of the option. Upon the disposition of the Common
Stock, the increased basis will result in a smaller capital gains
tax for AMTI than for ordinary income tax purposes.
Consequences to the Company - Other than Awards to Director
Participants
There are no federal income tax consequences to the Company
by reason of the grant of ISOs or non-ISOs or the exercise of
ISOs (other than disqualifying dispositions).
At the time the optionholder recognizes ordinary income from
the exercise of a non-ISO, the Company will be entitled to a
federal income tax deduction in the amount of the ordinary income
so recognized (as described above), provided that the Company
timely satisfies its reporting and disclosure obligations
described below. To the extent the optionholder recognizes
ordinary income by reason of a disqualifying disposition of the
stock acquired upon exercise of ISOs, the Company will be
entitled to a corresponding deduction in the year in which the
disposition occurs.
The Company will be required to report to the U.S. Internal
Revenue Service any ordinary income recognized by an optionholder
by reason of the exercise of a non-ISO or the disqualifying
disposition of the shares of Common Stock acquired pursuant to an
ISO.
Consequences to Optionholder -- Director Participants
Grant. There are no federal income tax consequences to the
-----
optionholder solely by reason of the grant of non-ISOs to a
Director Participant under the Option Plan.
Exercise. Upon the exercise of a non-ISO, the optionholder
--------
will generally recognize ordinary income in an amount equal to
the excess of the fair market value of the Common Shares at the
time of exercise over the amount paid as the exercise price.
The optionholder's tax basis in the shares acquired pursuant
to the exercise of a non-ISO will be the amount paid upon
exercise plus the amount of ordinary income recognized by the
optionholder upon exercise.
Disposition. If an optionholder disposes of shares of
-----------
Common Stock acquired upon exercise of a non-ISO in a taxable
transaction, the optionholder will recognize capital gain or loss
in an amount equal to the difference between his basis (as
discussed above) in the shares sold and the amount realized upon
disposition. Any such capital gain or loss will be long-term or
short-term depending on whether the Common Shares were held for
more than one year from the date such shares were transferred to
the optionholder.
-23-
<PAGE>
Consequences to the Company -- Grants to Director
Participants
There are no federal income tax consequences to the Company
by reason of the grant of a non-ISO to a Director Participant
under the Option Plan.
At the time the optionholder recognizes ordinary income from
the exercise of a non-ISO, the Company will be entitled to a
federal income tax deduction in the amount of the ordinary income
so recognized (as described above) so long as the Company timely
reports to the U.S. Internal Revenue Service the ordinary income
recognized by the Director Participant by reason of the exercise
of the non-ISO.
OTHER TAX CONSEQUENCES. The foregoing discussion is not a
complete description of the U.S. federal income tax aspects of
awards made under the Option Plan. In addition, administrative
and judicial interpretations of the application of the U.S.
federal income tax laws are subject to change. Furthermore, the
foregoing discussion does not address U.S. state or local tax
consequences.
The approval of the adoption by the Board of Directors of
the Option Plan 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.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL II.
PROPOSAL III
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, 1998 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.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL III.
-24-
<PAGE>
ANNUAL REPORT
All stockholders of record as of May 1, 1999 are being sent
concurrently with this Proxy Statement a copy of the Company's
1997 Summary Annual Report. The 1997 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 for the fiscal years ended September 30,
1995 and 1996, for the three months ended December 31, 1995 and
1996, and for the fiscal year ended December 31, 1997, 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.
STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be presented at the
Company's 1999 Annual Meeting of Stockholders must be received by
the Company at the Company's principal executive offices not
later than January 5, 1999. 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 the
Proxy is mailed in the enclosed envelope in the United States.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Don Teague
H. DON TEAGUE
Secretary
May 5, 1998
-25-
<PAGE>
APPENDIX
TABLE OF CONTENTS
-----------------
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . A-2
Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . A-4
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . A-22
Consolidated Balance Sheets, December 31, 1996 and 1997 . . . . . A-23
Consolidated Statements of Operations, Fiscal Years Ended
September 30, 1995 and 1996, the Three Months Ended
December 31, 1995 (unaudited) and 1996, and Fiscal
Year Ended December 31, 1997 . . . . . . . . . . . . . . . . . A-25
Consolidated Statements of Stockholders' Equity (Deficit),
Fiscal Years Ended September 30, 1995 and 1996,
the Three Months Ended December 31, 1996 and Fiscal Year
Ended December 31, 1997 . . . . . . . . . . . . . . . . . . . . . A-26
Consolidated Statements of Cash Flows, Fiscal Years Ended
September 30, 1995 and 1996, the Three Months Ended
December 31, 1995 (unaudited) and 1996, and Fiscal Year Ended
December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . A-28
Notes to Consolidated Financial Statements, December 31,
1996 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . A-30
Market for the Company's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . A-61
A-1
<PAGE>
SELECTED FINANCIAL DATA
-----------------------
The selected financial data for each fiscal year in the four-year period
ended September 30, 1996, the three months ended December 31, 1996 and the
fiscal year ended December 31, 1997 has been derived from the audited
Consolidated Financial Statements of the Company. The information set forth
below should be read in conjunction with the Consolidated Financial Statements
of the Company and the notes thereto included elsewhere in this Proxy Statement.
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>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1993 1994 1995
------------ ------------ ------------
STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenue:
Telecom services (1) $ 4,803 14,854 32,330
Network services 21,006 36,019 58,778
Satellite services(2) 3,520 8,121 20,502
Other 147 118 -
------------ ------------ ------------
Total revenue 29,476 59,112 111,610
------------ ------------ ------------
Operating costs 18,961 38,165 78,846
Selling, general and
administrative expenses 10,702 28,015 62,954
Depreciation and amortization 3,473 8,198 16,624
Net loss (gain) on disposal of
long-lived assets - - 241
Provision for impairment of
long-lived assets - - 7,000
------------ ------------ ------------
Total operating costs and
expenses 33,136 74,378 165,665
Operating loss (3,660) (15,266) (54,055)
Interest expense (2,523) (8,481) (24,368)
Other income, net 325 925 3,639
------------ ------------ ------------
Loss before income taxes,
minority interest, share of
losses and cumulative effect
of change in accounting (5,858) (22,822) (74,784)
Income tax benefit 1,552 - -
------------ ------------ ------------
Loss before minority interest,
share of losses and
cumulative effect of
change in accounting (4,306) (22,822) (74,784)
Minority interests, including
preferred dividends on
preferred securities (303) 435 (1,123)
Share of losses of joint
venture and investment - (1,481) (741)
------------ ------------ ------------
Loss before cumulative effect
of change in accounting (4,609) (23,868) (76,648)
Cumulative effect of change in
accounting (1) - - -
------------ ------------ ------------
Net loss $ (4,609) (23,868) (76,648)
============ ============ ============
Loss per share - basic and
diluted $ (0.39) (1.56) (3.25)
============ ============ ============
Weighted average number of
shares of Common Stock
outstanding - basic and
diluted (3) 11,671 15,342 23,604
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEARS THREE MONTHS FISCAL
ENDED ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
---------------------------------------------
1996 1996 1997
------------ ------------ ------------
STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenue:
Telecom services (1) $ 87,681 34,787 177,690
Network services 60,116 15,981 65,678
Satellite services(2) 21,297 6,188 29,986
Other - - -
------------ ------------ ------------
Total revenue 169,094 56,956 273,354
------------ ------------ ------------
Operating costs 135,253 49,929 246,418
Selling, general and
administrative expenses 76,725 24,253 150,767
Depreciation and amortization 30,368 9,825 57,081
Net loss (gain) on disposal of
long-lived assets 5,128 (772) 671
Provision for impairment of
long-lived assets 9,994 - 11,950
------------ ------------ ------------
Total operating costs and
expenses 257,468 83,235 466,887
Operating loss (88,374) (26,279) (193,533)
Interest expense (85,714) (24,454) (117,545)
Other income, net 15,423 5,898 21,247
------------ ------------ ------------
Loss before income taxes,
minority interest, share of
losses and cumulative effect
of change in accounting (158,665) (44,835) (289,831)
Income tax benefit 5,131 - -
------------ ------------ ------------
Loss before minority interest,
share of losses and
cumulative effect of
change in accounting (153,534) (44,835) (289,831)
Minority interests, including
preferred dividends on
preferred securities (25,306) (4,988) (37,812)
Share of losses of joint
venture and investment (1,814) - -
------------ ------------ ------------
Loss before cumulative effect
of change in accounting (180,654) (49,823) (327,643)
Cumulative effect of change in
accounting (1) (3,453) - -
------------ ------------ ------------
Net loss $ (184,107) (49,823) (327,643)
============ ============ ============
Loss per share - basic and
diluted $ (6.83)
============ ============ ============
Weighted average number of
shares of Common Stock
outstanding - basic and
diluted (3) 26,955 31,840 32,399
============ ============ ============
</TABLE>
(Continued)
A-2
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1993 1994 1995
------------ ------------ ------------
OTHER DATA: (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
EBITDA (4) $ (187) (7,068) (30,190)
Net cash used by operating
activities (2,839) (7,532) (42,798)
Net cash used by investing
activities (13,401) (51,452) (71,583)
Net cash provided (used) by
financing activities 30,382 49,428 377,772
Capital expenditures (5) 20,685 54,921 88,736
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEARS THREE MONTHS FISCAL
ENDED ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
--------------------------------------------
1996 1996 1997
------------ ------------ -------------
OTHER DATA: (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
EBITDA (4) $ (42,884) (17,226) (123,831)
Net cash used by operating
activities (43,357) (8,636) (126,954)
Net cash used by investing
activities (135,204) (82,342) (429,867)
Net cash provided (used) by
financing activities 360,227 (170) 315,721
Capital expenditures (5) 177,307 70,297 269,593
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------------------------------
1993 1994 1995
----------- ----------- ------------
BALANCE SHEET DATA: (IN THOUSANDS)
<S> <C> <C> <C>
Cash, cash equivalents and
short-term investments
available for sale 15,581 6,025 269,416
Working capital (deficit) 7,990 (8,563) 249,089
Property and equipment, net 52,203 118,875 202,004
Total assets 95,196 201,991 583,553
Current portion of long-term
debt and capital lease
obligations 7,657 23,118 27,310
Long-term debt and capital
lease obligations, less
current portion 37,116 104,461 405,535
Redeemable preferred securities
of subsidiaries - - 14,986
Common stock and additional
paid-in capital 56,402 97,806 217,245
Accumulated deficit (21,650) (58,024) (134,710)
Stockholders' equity (deficit) 34,753 39,782 82,535
AT
SEPTEMBER 30, AT DECEMBER 31,
------------- ---------------------------
1996 1996 1997
----------- ----------- ------------
BALANCE SHEET DATA: (IN THOUSANDS)
<S> <C> <C> <C>
Cash, cash equivalents and
short-term investments
available for sale 457,914 392,535 217,015
Working capital (deficit) 446,164 361,601 210,876
Property and equipment, net 336,137 403,676 632,167
Total assets 939,351 944,133 1,107,664
Current portion of long-term
debt and capital lease
obligations 8,282 25,500 7,421
Long-term debt and capital
lease obligations, less
current portion 739,827 761,504 957,507
Redeemable preferred securities
of subsidiaries 153,318 159,120 420,171
Common stock and additional
paid-in capital 299,229 302,560 326,965
Accumulated deficit (318,817) (368,640) (696,283)
Stockholders' equity (deficit) (19,588) (66,080) (369,318)
</TABLE>
(1) During fiscal 1996, the Company changed its method of accounting for
long-term telecom services contracts to recognize revenue as services are
provided. Other than the cumulative effect of adopting this new method of
accounting, the effect of this change in accounting for the periods
presented was not significant. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Accounting Change."
(2) Revenue from Satellite Services is generated through the Company's
satellite (voice and data) operations and, after January 1995, also
includes revenue from maritime communications operations. The Company
completed the sale of four of its teleports in March 1996, and has reported
results of operations from these assets through December 31, 1995.
(3) Weighted average number of shares outstanding for fiscal years 1993, 1994
and 1995 represents Holdings-Canada common shares outstanding. Weighted
average number of shares outstanding for fiscal 1996, the three months
ended December 31, 1996 and fiscal 1997 represents Holdings-Canada common
shares outstanding for the period October 1, 1995 through August 2, 1996,
and represents ICG Common Stock and Holdings-Canada Class A common shares
(not owned by ICG) outstanding for the periods subsequent to August 5,
1996.
(4) EBITDA consists of revenue less operating costs and selling, general and
administrative expenses. EBITDA is provided because it is a measure
commonly used in the telecommunications industry. EBITDA is presented to
enhance an understanding of the Company's operating results and is not
intended to represent cash flows or results of operations in accordance
with generally accepted accounting principles ("GAAP") for the periods
indicated. EBITDA is not a measurement under GAAP and is not necessarily
comparable with similarly titled measures of other companies. Net cash
flows from operating, investing and financing activities as determined
using GAAP are also presented in Other Data.
(5) Capital expenditures includes assets acquired under capital leases and
through the issuance of debt or warrants, and excludes payments for
construction of the Company's new headquarters which the Company sold in
January 1998 and leased back under a long-term operating lease.
A-3
<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 strategy of offering an integrated telecommunications package of
local, long distance, data and value-added services, continued development of
the Company's network infrastructure and actions of competitors and regulatory
authorities that could cause actual results to differ materially from the
forward-looking statements. The results for the 12 months ended December 31,
1996 and the three months ended December 31, 1995 have been derived from the
Company's Consolidated Financial Statements included elsewhere herein and the
Company's unaudited Consolidated Financial Statements included in the Company's
Forms 10-Q filed with the SEC. The Company changed its fiscal year end to
December 31 from September 30, effective January 1, 1997. All dollar amounts are
in U.S. dollars.
COMPANY OVERVIEW
The Company is one of the nation's leading competitive ICPs, based on
estimates of the industry's 1997 revenue. ICPs seek to provide an alternative to
ILECs, long distance carriers, ISPs and other communications service providers
for a full range of communications services in the increasingly deregulated
telecommunications industry. Through its CLEC operations, the Company operates
networks in four regional clusters covering major metropolitan statistical areas
in California, Colorado, Ohio and the Southeast. The Company also provides a
wide range of network systems integration services, maritime and international
satellite transmission services and subsequent to January 21, 1998, a variety of
Internet connectivity and other value-added Internet services. Network Services
consist of information technology services and selected networking products,
focusing on network design, installation, maintenance and support. Satellite
Services consist of satellite voice and data services to major cruise lines,
commercial shipping vessels, yachts, the U.S. Navy and offshore oil platforms.
The Company intends to dispose of its Satellite Services operations to better
focus its efforts on its core Telecom Services unit, although it has not entered
into a formal arrangement for such disposition. As a leading participant in the
rapidly growing competitive local telecommunications industry, the Company has
experienced significant growth, with total revenue increasing from approximately
$111.6 million for fiscal 1995 to approximately $273.4 million for fiscal 1997.
The Company's rapid growth is the result of the initial installation,
acquisition and subsequent expansion of its fiber optic networks and the
expansion of its communication service offerings.
Prior to fiscal 1996, the majority of the Company's revenue had been
derived from Network Services. However, the Company's Network Services revenue
(as well as Satellite Service revenue) will continue to represent a diminishing
percentage of the Company's consolidated revenue as the Company continues to
emphasize its core Telecom Services, including revenue generated by its newly
acquired subsidiary, NETCOM. In March 1996, the Company completed the sale of
four of its teleports which were used in the Company's Satellite Services
operations.
The Telecommunications Act and pro-competitive state regulatory initiatives
have substantially changed the telecommunications regulatory environment in the
United States. Due to these regulatory changes, the Company is now permitted to
offer all interstate and intrastate telephone services, including competitive
local dial tone. The Company is marketing and selling local dial tone services
in major metropolitan areas in the following regions: California, which began
service in late January 1997, followed by Ohio in February 1997, Colorado in
March 1997 and the Southeast in May 1997. During fiscal 1997, the Company sold
178,470 local access lines, of which 141,035 were in service as of December 31,
1997. In addition, the Company's operating networks have grown from 627 fiber
route miles at the end of fiscal 1995 to 3,043 fiber route miles as of December
31, 1997. The Company has 19 operating high capacity digital voice switches and
15 data communications switches, and plans to install additional switches as
demand warrants. As a complement to its local exchange services, the Company has
begun marketing bundled service offerings which include long distance, enhanced
telecommunications services and data services and plans to intensify the
offerings of such services in the near term.
A-4
<PAGE>
The Company will continue to expand its network through construction,
leased facilities, strategic alliances and mergers and acquisitions. For
example, in January 1998, the Company completed its merger with NETCOM, a
provider of Internet connectivity and Web site hosting services and other
value-added services, located in San Jose, California. For calendar years 1995,
1996 and 1997, NETCOM reported revenue of $52.4 million, $120.5 million and
$160.7 million, respectively, and EBITDA losses of $(6.3) million, $(20.3)
million and $(1.7) million, respectively. The Company will account for the
business combination under the pooling of interests method of accounting and
accordingly, the Company's financial statements will be restated to reflect the
operations of NETCOM and the Company on a combined basis for all historical
periods. Also, in two transactions occurring October 1997 and March 1998, the
Company purchased 100% of the capital stock of CBG, an Ohio based local exchange
and centrex reseller which had, at December 31, 1997, 48,256 local access lines
in service, principally pursuant to various resale and other agreements with
Ameritech, the ILEC in the markets it serves. Further, for the calendar years
1995, 1996 and 1997, CBG's revenue was approximately $15.4 million, $21.4
million and $33.8 million, respectively, and EBITDA losses were approximately
$(1.3) million, $(1.0) million and $(3.2) million, respectively. The operations
of CBG have been included in the Company's operations for the period subsequent
to October 17, 1997, the acquisition closing date. In May 1997, the Company
entered into an agreement with a subsidiary of Southern permitting the Company
to construct a 100-mile fiber optic network in the Atlanta metropolitan area. In
addition, the Company expanded its geographic focus to include Texas (and may
also expand to Arkansas, Louisiana and Oklahoma) through its strategic alliance
with CSW that will develop and market telecommunications services, including
local service, in these markets. In June 1997, the Company entered into an IRU
agreement with Qwest for approximately 1,800 miles of fiber optic network and
additional broadband capacity in California, Colorado, Ohio and the Southeast.
This new capacity will be used for the transmission of local, long distance and
communications services in and between the Company's markets.
Telecom Services revenue has increased from $32.3 million for fiscal 1995
to $177.7 million for fiscal 1997. The Company has experienced declining prices
and increasing price competition for access services which, to date, have been
more than offset by increasing network usage. The Company expects to continue to
experience declining prices and increasing price competition for the foreseeable
future.
In conjunction with the increase in its service offerings, the Company has
and will continue to need to spend significant amounts on sales, marketing,
customer service, engineering and support personnel prior to the generation of
corresponding revenue. This has and will continue to have an adverse effect on
operating margins until such time as sufficient volumes of customers'
telecommunications traffic are attained. As the Company's customer base grows,
the Company anticipates that operating margins will improve as incremental
revenue will exceed incremental operating expenses. The preceding
forward-looking statement is dependent upon the successful implementation of the
Company local dial tone, data and long distance services strategy, continued
development of the Company's network infrastructure, increased traffic on the
Company's facilities, any or all of which may not occur, and upon actions of
competitors and regulatory authorities.
Currently the Company has experienced and may continue to experience
negative operating margins from its wholesale switched services while its
networks are in the development and construction phases and while the Company
relies on ILEC networks to carry a significant portion of its customers'
switched traffic. The Company expects overall operating margins from switched
services to improve as local dial tone, local toll, long distance and data
communications services become a relatively larger portion of its business mix
and the Company de-emphasizes its wholesale switched services. In addition, the
Company believes that the unbundling of ILEC services and the implementation of
local telephone number portability, which are mandated by the Telecommunications
Act, will reduce the Company's costs of providing switched services and
facilitate the marketing of local and other services. The Company has recently
raised prices on its wholesale switched services product in order to improve
margins and free up switch port capacity for its higher margin dial tone
product.
The Company believes that the provisions of the Telecommunications Act,
including the opening of the local telephone services market to competition,
will facilitate the Company's plan to provide a full array of local, long
distance and data communications services. In order to fully implement its
strategy, the Company must make significant capital expenditures to provide
A-5
<PAGE>
additional switching capacity, network infrastructure and electronic components.
The Company must also make significant investments and expenditures to develop,
train and manage its marketing and sales personnel.
The continued development, construction and expansion of the Company's
business requires significant capital, a large portion of which is expended
before related revenue is generated. The Company has experienced, and expects to
continue to experience, negative cash flows over the near term and significant
losses while it expands its operations to provide a wide range of
telecommunications services and establishes a sufficient revenue-generating
customer base. There can be no assurance that the Company will be able to
establish or retain such a customer base.
A-6
<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.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30,
--------------------------------------
1995 1996
------------------ -------------------
$ % $ %
--------- -------- ---------- --------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C>
Revenue:
Telecom services (1) 32,330 29 87,681 52
Network services 58,778 53 60,116 36
Satellite services 20,502 18 21,297 12
--------- -------- ---------- --------
Total revenue 111,610 100 169,094 100
Operating costs:
Telecom services 21,825 78,705
Network services 45,928 46,256
Satellite services 11,093 10,292
--------- -------- ---------- --------
Total operating costs 78,846 71 135,253 80
Selling, general and administrative 62,954 56 76,725 45
Depreciation and amortization 16,624 15 30,368 18
Net loss (gain) on disposal of
long-lived assets 241 * 5,128 3
Provision for impairment of
long-lived assets 7,000 6 9,994 6
--------- -------- ---------- --------
Operating loss (54,055) (48) (88,374) (52)
OTHER DATA:
EBITDA(2) (30,190) (27) (42,884) (25)
Net cash used by operating activities (42,798) (43,357)
Net cash used by investing activities (71,583) (135,204)
Net cash (used) provided by
financing activities 377,772 360,227
Capital expenditures 88,736 177,307
THREE MONTHS
ENDED DECEMBER 31,
--------------------------------------
1995 1996
------------------ -------------------
$ % $ %
--------- -------- ---------- ---------
STATEMENT OF OPERATIONS DATA: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue:
Telecom services (1) 13,513 38 34,787 61
Network services 15,718 45 15,981 28
Satellite services 6,168 17 6,188 11
---------- --------- ----------- --------
Total revenue 35,399 100 56,956 100
Operating costs:
Telecom services 11,882 34,463
Network services 11,998 12,287
Satellite services 3,230 3,179
---------- --------- ----------- ---------
Total operating costs 27,110 76 49,929 88
Selling, general and administrative 18,628 53 24,253 42
Depreciation and amortization 4,919 14 9,825 17
Net loss (gain) on disposal of
long-lived assets 1,030 3 (772) (1)
Provision for impairment of
long-lived assets - - - -
--------- -------- ---------- --------
Operating loss (16,288) (46) (26,279) (46)
OTHER DATA:
EBITDA(2) (10,339) (29) (17,226) (30)
Net cash used by operating activities (4,598) (8,636)
Net cash used by investing activities (25,242) (82,342)
Net cash (used) provided by
financing activities (8,413) (170)
Capital expenditures 26,882 70,297
*Less than 0.5%
</TABLE>
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED FISCAL YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------- ------------------
1996 1997
------------------- ------------------
$ % $ %
--------- --------- ---------- --------
STATEMENT OF OPERATIONS DATA: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue:
Telecom services (1) 108,955 57 177,690 65
Network services 60,379 32 65,678 24
Satellite services 21,317 11 29,986 11
--------- -------- ---------- --------
Total revenue 190,651 100 273,354 100
Operating costs:
Telecom services 101,286 175,829
Network services 46,545 53,911
Satellite services 10,241 16,678
--------- -------- ---------- --------
Total operating costs 158,072 83 246,418 90
Selling, general and administrative 82,350 43 150,767 55
Depreciation and amortization 35,274 19 57,081 21
Net loss (gain) on disposal of
long-lived assets 3,326 2 671 *
Provision for impairment of
long-lived assets 9,994 5 11,950 5
--------- -------- ---------- --------
Operating loss (98,365) (52) (193,533) (71)
OTHER DATA:
EBITDA(2) (49,771) (26) (123,831) (45)
Net cash used by operating
activities (47,395) (126,954)
Net cash used by investing
activities (192,304) (429,867)
Net cash (used) provided by
financing activities 368,470 315,721
Capital expenditures 220,722 269,593
</TABLE>
*Less than 0.5%
(1) During fiscal 1996, the Company changed its method of accounting for
long-term telecom services contracts to recognize revenue as services are
provided. See "-Accounting Changes." Other than the cumulative effect of
adopting this new method of accounting, the effect of this change in
accounting for the periods presented was not significant.
(2) See note 4 under "Selected Financial Data" for the definition of EBITDA.
A-7
<PAGE>
FISCAL 1997 COMPARED TO 12 MONTHS ENDED DECEMBER 31, 1996
Revenue. Revenue for fiscal 1997 increased $82.7 million or 43% from the 12
months ended December 31, 1996. Telecom Services revenue increased 63% to $177.7
million due to an increase in network usage for both switched and special access
services, offset in part by a decline in average unit pricing. Switched services
revenue increased from $48.1 million (44% of Telecom Services revenue) for the
12 months ended December 31, 1996 to $93.9 million (53% of Telecom Services
revenue) for fiscal 1997. Switched access (terminating long distance) revenue
represented approximately 77% of the Company's switched services revenue
component for fiscal 1997, compared to 100% for the 12 months ended December 31,
1996. Special access revenue increased from $39.4 million (36% of Telecom
Services revenue) for the 12 months ended December 31, 1996 to $55.4 million
(31% of Telecom Services revenue) for fiscal 1997. Also included in Telecom
Services revenue for fiscal 1997 is $28.3 million generated by Zycom, compared
to $21.5 million for the same 12-month period in 1996. The increase in Zycom
revenue for fiscal 1997 as compared to the same period in 1996 relates to
changes in the classification of certain operating costs as a result of the
Company entering into long-term contracts with its major customers. These costs
were netted against revenue through April 1996 due to the uncertainty of renewal
of short-term customer contracts. At December 31, 1997, the Company had 141,035
access lines in service compared to zero at December 31, 1996. Special access
network usage reflected in voice grade equivalents ("VGEs") increased 49% from
748,528 VGEs at December 31, 1996, to 1,111,697 VGEs at December 31, 1997. At
December 31, 1997, the Company had 2,321 buildings connected to its networks
compared to 2,069 buildings connected at December 31, 1996. Additionally,
switched minutes of use increased 43% from approximately 2.0 billion minutes
during the 12 months ended December 31, 1996 to approximately 2.9 billion
minutes during fiscal 1997. Revenue from long distance and data services did not
generate a material portion of total revenue during either period. Network
Services revenue increased 9% to $65.7 million for fiscal 1997 as compared to
$60.4 million for the 12 months ended December 31, 1996. The increase in Network
Services revenue is due to a single equipment sale during fiscal 1997 for $3.2
million as well as general increases in volume. Satellite Services revenue
increased $8.7 million, or 41%, to $30.0 million for fiscal 1997, compared to
the 12 months ended December 31, 1996. This increase is primarily due to the
operations of MCN, which comprised $6.3 million of total Satellite Services
revenue for fiscal 1997 compared to $1.8 million during the same 12-month period
in 1996. The remaining increase can be attributed to the general growth of MTN
and its increased sales of C-Band equipment to offshore oil and gas customers.
Operating costs. Total operating costs for fiscal 1997 increased $88.3
million, or 56%, from the 12 months ended December 31, 1996. Telecom Services
operating costs increased from $101.3 million, or 93% of Telecom Services
revenue, for the 12 months ended December 31, 1996 to $175.8 million, or 99% of
Telecom Services revenue, for fiscal 1997. Telecom Services operating costs
consist of payments to ILECs for the use of network facilities to support
special and switched access services, network operating costs, right of way fees
and other costs. The increase in operating costs in absolute dollars is
attributable to the increase in switched access services and the addition of
engineering and operations personnel dedicated to the development of local
exchange services. The increase in operating costs as a percentage of total
revenue is due primarily to the increase in switched access services revenue,
and the investment in the development of local exchange services without the
benefit of substantial corresponding revenue in the same period. The Company
expects that the Telecom Services ratio of operating costs to revenue will
further improve as the Company provides a greater volume of higher margin
services, principally local exchange services, carries more traffic on its own
facilities rather than ILEC facilities and obtains the right to use unbundled
ILEC facilities on satisfactory terms, any or all of which may not occur.
Network Services operating costs increased 16% to $53.9 million and increased as
a percentage of Network Services revenue from 77% for the 12 months ended
December 31, 1996 to 82% for fiscal 1997. The increase is due to a substantially
lower margin earned on equipment sales (which constituted a larger portion of
1997 revenue) relative to other services and certain indirect project costs
included in operating costs during fiscal 1997 which were treated as selling,
general and administrative expenses during the comparable 12-month period in
1996. Network Services operating costs include the cost of equipment sold,
direct hourly labor and other indirect project costs. Satellite Services
operating costs increased to $16.7 million for fiscal 1997, from $10.2 million
for the 12 months ended December 31, 1996. Satellite Services operating costs as
a percentage of Satellite Services revenue also increased from 48% for the 12
months ended December 31, 1996 to 56% for fiscal 1997. This increase is due to
A-8
<PAGE>
an increase in MCN's sales as well the increased volume of equipment sales, both
of which provide lower margins than other maritime services. Satellite Services
operating costs consist primarily of transponder lease costs and the cost of
equipment sold.
Selling, general and administrative expenses. Selling, general and
administrative ("SG&A") expenses for fiscal 1997 increased $68.4 million, or
83%, compared to the 12 months ended December 31, 1996. This increase was
principally due to the continued rapid expansion of the Company's Telecom
Services networks and related significant additions to the Company's management
information systems, customer service, marketing and sales staffs dedicated to
the expansion of the Company's networks and implementation of the Company's
expanded services strategy, primarily the development of local and long distance
telephone and data communications services. SG&A expenses as a percentage of
total revenue increased from 43% for the 12 months ended December 31, 1996 to
55% for fiscal 1997. There is typically a period of higher administrative and
marketing expense prior to the generation of appreciable revenue from newly
developed networks or services. The Company expects SG&A expenses for Telecom
Services to increase slightly over the near term as a result of hiring new staff
to facilitate the marketing and development of local dial tone, local toll, long
distance and data transmission services.
Depreciation and amortization. Depreciation and amortization increased
$21.8 million, or 62%, for fiscal 1997, compared to the 12 months ended December
31, 1996, due to increased investment in depreciable assets resulting from the
continued expansion of the Company's networks and services. The Company reports
high levels of depreciation expense relative to revenue during the early years
of operation of a new network because the full cost of a network is depreciated
using the straight-line method despite the low rate of capacity utilization in
the early stages of network operation.
Net loss (gain) on disposal of long-lived assets. Net loss (gain) on
disposal of long-lived assets decreased from a net loss of $3.3 million for the
12 months ended December 31, 1996 to a net gain of $0.7 million for fiscal 1997.
Net loss on disposal of long-lived assets for the 12 months ended December 31,
1996 includes the loss recorded on the sale of four of the Company's teleports
used in its Satellite Services operations ($1.1 million), the loss recorded on
the disposal of other operating assets ($2.7 million) and a write-off of an
investment ($0.3 million), offset by a gain on the sale on sale of the Company's
50% interest in the Phoenix network joint venture ($0.8 million). For fiscal
1997, net loss on disposal of long-lived assets primarily relates to losses
recorded on the disposal of the Company's investment in its Melbourne network.
Provision for impairment of long-lived assets. For fiscal 1997, provision
for impairment of long-lived assets includes the write-down of the Company's
investment in StarCom International Optics Corporation, Inc. ($5.2 million), MCN
($2.9 million), Zycom ($2.7 million) and Nova-Net ($0.9 million) as well as a
write-down of other operating assets ($0.3 million). Provision for impairment of
long-lived assets for the 12 months ended December 31, 1996 includes valuation
allowances for the amounts receivable for advances made to the Phoenix network
joint venture included in long-term note receivable ($5.8 million), the
investments in the Melbourne network ($2.7 million) and the Satellite Services
Mexico subsidiary ($0.1 million) and the note receivable from NovoComm, Inc.
($1.3 million). Provision for impairment of long-lived assets was recorded based
on management's estimate of the net realizable value of the Company's assets at
December 31, 1996 and 1997.
Interest expense. Interest expense increased $22.6 million, from $95.0
million for the 12 months ended December 31, 1996, to $117.5 million for fiscal
1997, which includes $105.5 million of non-cash interest. This increase was
primarily attributable to an increase in long-term debt, primarily the 11 5/8%
Notes issued in March 1997. In addition, the Company's interest expense
increased, and will continue to increase, because the principal amount of its
indebtedness increases until the Company's senior indebtedness begins to pay
interest in cash.
Interest income. Interest income increased $0.4 million, from $21.5 million
for the 12 months ended December 31, 1996 to $21.9 million for fiscal 1997. The
increase is attributable to the increase in cash and invested cash balances from
the proceeds from the issuances of the 11 5/8% Notes and 14% Preferred Stock in
March 1997 and the 6 3/4% Preferred Securities in September and October 1997.
A-9
<PAGE>
Other, net. Other, net decreased from $3.9 million net expense for the 12
months ended December 31, 1996 to $0.7 million net expense for fiscal 1997.
Other expense recorded for the 12 months ended December 31, 1996 consists
primarily of the write-off of deferred financing costs associated with the
conversion or repayment of debt and litigation settlement costs. For fiscal
1997, other, net consists primarily of litigation settlement costs and the loss
on disposal of non operating assets.
Minority interest in share of losses, net of accretion and preferred
dividends on preferred securities of subsidiaries. Minority interest in share of
losses, net of accretion and preferred dividends on preferred securities of
subsidiaries increased $10.7 million, from $27.1 million for the 12 months ended
December 31, 1996 to $37.8 million for fiscal 1997. The increase is due
primarily to the issuances of the 14% Preferred Stock in March 1997 and the 6
3/4% Preferred Securities in September and October 1997. Offsetting this
increase is $12.3 million recorded during the 12 months ended December 31, 1996
for the excess of the redemption price over the carrying amount of the 12%
redeemable preferred stock of Holdings ("12% Redeemable Preferred Stock")
redeemed in April 1996. Minority interest in share of losses, net of accretion
and preferred dividends on preferred securities of subsidiaries recorded during
fiscal 1997 consists of the accretion of issue costs ($0.9 million) and the
accrual of the preferred security dividends ($38.9 million) associated with the
6 3/4% Preferred Securities, the 14% Preferred Stock and the 14 1/4%
Exchangeable Preferred Stock Mandatorily Redeemable 2007 (the "14 1/4% Preferred
Stock"), offset by minority interest in losses of subsidiaries of $2.0 million.
Share of losses of joint venture and investment. Effective October 1, 1996,
the Company sold its 50% interest in the Phoenix network joint venture. As a
result, no share of losses in joint venture was recorded during fiscal 1997, as
compared to the $1.6 million loss recorded during the comparable 12-month period
in 1996.
Net loss. Net loss increased $128.4 million, or 64%, due to the increases
in operating costs, SG&A expense, depreciation and amortization, interest
expense and minority interest in share of losses, net of accretion and preferred
dividends on preferred securities of subsidiaries noted above.
THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 1995
Revenue. Revenue for the three months ended December 31, 1996 increased
$21.6 million, or 61%, from the three months ended December 31, 1995. The
increase in total revenue reflects continued growth in Telecom Services, Network
Services and Satellite Services, offset slightly by the loss in revenue
resulting from the sale of four of the Company's teleports during the second
quarter of fiscal 1996. Telecom Services revenue increased 157% to $34.8 million
due to an increase in network usage for both switched and special access
services, offset in part by a decline in average unit pricing. Switched services
revenue increased from $5.1 million (38% of Telecom Services revenue) for the
three months ended December 31, 1995, to $16.4 million (47% of Telecom Services
revenue) for the three months ended December 31, 1996. Switched access revenue
represented substantially all of the Company's switched services revenue
component for the three months ended December 31, 1996. Special access revenue
increased from $7.5 million (56% of Telecom Services revenue) for the three
months ended December 31, 1995 to $10.9 million (31% of Telecom Services
revenue) for the three months ended December 31, 1996. Also, included in Telecom
Services revenue for the three months ended December 31, 1996 is $7.5 million
generated by Zycom, compared to $0.9 million for the three months ended December
31, 1995. Approximately $6.5 million of the increase in Zycom revenue for the
three months ended December 31, 1996 as compared to the same period in 1995
relates to changes in the classification of certain operating costs as a result
of the Company entering into long-term contracts with its major customers.
Network usage as reflected in VGEs increased 53% from 488,403 VGEs on December
31, 1995 to 748,528 at December 31, 1996. On December 31, 1996, the Company had
2,069 buildings connected to its networks compared to 1,539 buildings connected
on December 31, 1995. Consistent with expectations, Network Services revenue
growth was moderate, increasing from $15.7 million to $16.0 million for the
three months ended December 31, 1995 and 1996, respectively, while the Company
repositioned its systems and operations to improve operating results. Satellite
Services revenue remained relatively stable between the three-month periods
ended December 31, 1995 and 1996 as a result of the offsetting effects of
increased maritime minutes of use from cruise ships and no revenue in the three
A-10
<PAGE>
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. The increase in operating costs in absolute dollars is attributable to the
increase in switched access services and the addition of engineering and
operations personnel dedicated to the development of local exchange services.
The increase in operating costs as a percentage of revenue is due primarily to
the increase in switched access services revenue. Network Services operating
costs increased 2% to $12.3 million for the three months ended December 31, 1996
and increased as a percentage of Network Services revenue from 76% to 77% for
the three month periods ended December 31, 1995 and 1996, respectively.
Satellite Services operating costs decreased 2% to $3.2 million for the three
months ended December 31, 1996. Satellite Services operating costs as a
percentage of revenue declined to 51% of Satellite Services revenue during the
three months ended December 31, 1996, from 52% during the three months ended
December 31, 1995. The decrease in percentage of revenue as well as absolute
dollars is attributable to the decline in revenue resulting from the sale of
four of the Company's teleports in March 1996, offset by an increase in higher
margin maritime services revenue at MTN. Revenue from teleport operations
historically have yielded lower gross margins than maritime services revenue.
Selling, general and administrative expense. SG&A expenses for the three
months ended December 31, 1996 increased $5.6 million, or 30%, compared to the
three months ended December 31, 1995. This increase was principally due to the
continued rapid expansion of the Company's Telecom Services networks and related
significant additions to the Company's management information systems, customer
service, marketing and sales staffs dedicated to the expansion of the Company's
networks and implementation of the Company's expanded services strategy,
primarily the development of the Company's CLEC operations. SG&A expenses as a
percentage of total revenue was 43% for the three months ended December 31,
1996, compared to 53% for the same period in 1995. SG&A expenses for Network
Services decreased both in absolute dollars and as a percentage of Network
Services revenue due to approximately $0.7 million in non-recurring charges,
primarily legal accruals, recorded during the three months ended December 31,
1995. Satellite Services SG&A expenses decreased in absolute dollars and as a
percentage of Satellite Services revenue due to cost control efforts by the
Company's management. Other corporate expenses increased from $4.0 million, or
11% of total revenue, for the three months ended December 31, 1995 to $5.7
million, or 10% of total revenue, for the three months ended December 31, 1996.
This increase is primarily attributable to the addition of employees,
principally human resources and regulatory personnel, for the purpose of
managing the Company's growth and its expansion into new markets as allowed
under the Telecommunications Act.
Depreciation and amortization expense. Depreciation and amortization
expense increased $4.9 million, or 100%, for the three months ended December 31,
1996, as compared to the same period in 1995. Depreciation of fixed assets
increased by approximately $2.3 million as a result of the shortening of
estimated depreciable lives during fiscal 1996, as discussed in "-Accounting
Changes," and an increase in depreciable fixed assets due to the continued
expansion of the Company's networks. The increase in depreciation expense was
offset slightly due to the sale of four of the Company's teleports in March
1996.
Net loss (gain) on disposal of long-lived assets. Net loss (gain) on
disposal of long-lived assets decreased from a net loss of $1.0 million for the
three months ended December 31, 1995 to a net gain of $0.8 million for the three
months ended December 31, 1996. Net loss on disposal of long-lived assets for
the three months ended December 31, 1995 includes the write-off of certain
operating assets. For the three months ended December 31, 1996, net gain on
disposal of long-lived assets consists of the gain on sale of the Company's 50%
interest in the Phoenix network joint venture.
Interest expense. Interest expense increased by $9.3 million, from $15.2
million for the three months ended December 31, 1995 to $24.5 million for the
three months ended December 31, 1996, which included $22.7 million of non-cash
A-11
<PAGE>
interest. This increase was attributable to an increase in long-term debt,
primarily the 12 1/2% Senior Discount Notes (the "12 1/2% Notes") issued in
April 1996 and an increase in capitalized lease obligations to finance Telecom
Services equipment used in the expansion of the Company's networks.
Interest income. Interest income increased $2.2 million from the three
months ended December 31, 1995 to $6.0 million for the three months ended
December 31, 1996. The increase is attributable to the interest earned on the
proceeds from the issuance of the 12 1/2% Notes and the 14 1/4% Preferred Stock
in April 1996.
Share of losses of joint venture and investment. As a result of the sale of
the Company's 50% interest in the Phoenix network joint venture, no share of
losses in joint venture was recorded during the three months ended December 31,
1996, as compared to the $0.2 million recorded during the same period in 1995.
Other, net. Other, net for the three months ended December 31, 1996 was
$0.1 million net expense as compared to a minor net gain for the three months
ended December 31, 1995. Other expense recorded during the three-month period
ended December 31, 1996 consists of miscellaneous other expenses.
Minority interest in share of losses, net of accretion and preferred
dividends on preferred securities of subsidiaries. Minority interest in share of
losses, net of accretion and preferred dividends on preferred securities of
subsidiaries increased $1.8 million, from $3.2 million for the three months
ended December 31, 1995 to $5.0 million for the three months ended December 31,
1996. The increase is due primarily to the issuance of the 14 1/4% Preferred
Stock in April 1996. Minority interest in share of losses, net of accretion and
preferred dividends on preferred securities of subsidiaries recorded during the
current three-month period ended December 31, 1996 consists of the accretion of
issue costs ($0.1 million) and the accrual of the preferred stock dividend ($5.7
million) associated with the 14 1/4% Preferred Stock, offset by minority
interest in losses of subsidiaries of $0.8 million.
Cumulative effect of change in accounting for revenue from long-term
telecom services contracts. The cumulative effect of change in accounting for
revenue from long-term telecom services contracts recorded during the three
months ended December 31, 1995 is due to the change in accounting principle as
described in "-Accounting Changes." As the change in accounting was applied
retroactively as of October 1, 1995, no similar amounts were recorded during the
three months ended December 31, 1996.
Net loss. Net loss increased $15.2 million, or 44%, due to the increase in
operating costs, SG&A expenses, depreciation and amortization and interest
expense noted above.
FISCAL 1996 COMPARED TO FISCAL 1995
The following information reflects the results of operations for fiscal
1996 compared to the pro forma results of operations for fiscal 1995, assuming
the change in accounting for long-term telecom services contracts described in
"-Accounting Change" had been applied retroactively.
Revenue. Revenue for fiscal 1996 increased $58.2 million, or 52%, from
fiscal 1995. The increase in total revenue reflects continued growth in Telecom
Services, Network Services and Satellite Services, offset slightly by the loss
in revenue resulting from the sale of four of the Company's teleports. Telecom
Services revenue increased 177% to $87.7 million due to an increase in network
usage for both switched and special access services, offset in part by a decline
in average unit prices. Switched services revenue, consisting solely of switched
access services, increased from $5.8 million (18% of Telecom Services revenue)
for fiscal 1995, to $36.7 million (42% of Telecom Services revenue) for fiscal
1996. Special access revenue increased from $25.1 million (78% of Telecom
Services revenue) for fiscal 1995 to $36.1 million (41% of Telecom Services
revenue) for fiscal 1996. Also included in Telecom Services revenue for fiscal
1996 is $14.9 million generated by Zycom, compared to $1.4 million in fiscal
1995. Approximately $10.6 million of the increase in Zycom revenue relates to
changes in the classification of certain operating costs as a result of the
A-12
<PAGE>
Company entering into long-term contracts with its major customers. Network
usage as reflected in VGEs increased 47% from 430,535 VGEs on September 30,
1995, to 630,697 VGEs on September 30, 1996. On September 30, 1996, the Company
had 2,067 buildings connected to its networks compared to 1,375 buildings
connected on September 30, 1995. Consistent with expectations, Network Services
revenue growth was moderate, increasing from $58.8 million to $60.1 million,
while the Company repositioned its systems and operations to improve operating
results. Satellite Services revenue increased 4% to $21.3 million for fiscal
1996 primarily due to increased maritime minutes of use from cruise ships offset
in part by the decrease resulting from the sale of four of the Company's
teleports. Satellite Services revenue for fiscal 1995 and 1996, on a pro forma
basis to reflect the sale of teleports, was $11.4 million and $18.9 million,
respectively. Satellite Services revenue decreased $0.4 million from the third
quarter of fiscal 1996 to the fourth quarter of fiscal 1996. The decrease in
revenue was primarily due to three Navy vessels being in "dry dock."
Operating costs. Total operating costs for fiscal 1996 increased $56.4
million, or 72%, from fiscal 1995. Telecom Services operating costs increased
from $21.8 million, or 69% of Telecom Services revenue for fiscal 1995, to $78.7
million, or 90% of Telecom Services revenue for fiscal 1996. The increase in
operating costs in absolute dollars is attributable to the increase in switched
access services and the expansion in off-net special access service offerings.
The increase in operating costs as a percentage of total revenue is due
primarily to the increase in switched access services revenue. Network Services
operating costs increased 1% to $46.3 million and decreased as a percentage of
Network Services revenue from 78% for fiscal 1995 to 77% for fiscal 1996.
Satellite Services operating costs decreased to $10.3 million for fiscal 1996,
from $11.1 million for fiscal 1995. Satellite Services operating costs as a
percentage of revenue also declined to 48% for fiscal 1996, compared to 54% for
fiscal 1995. The decrease both in absolute dollars and as a percentage of
revenue is attributable to the decline in revenue resulting from the sale of
four of the Company's teleports, partially offset by an increase in higher
margin maritime services revenue at MTN.
Selling, general and administrative expense. SG&A expenses for fiscal 1996
increased $13.8 million, or 22%, compared to fiscal 1995. This increase was
principally due to the continued rapid expansion of the Company's Telecom
Services networks and related significant additions to the Company's management
information systems, marketing and sales staff dedicated to the expansion of the
Company's networks and implementation of the Company's switched services
strategy and development of the Company's CLEC operations. A portion of the
increase was also attributable to approximately $1.8 million of legal,
accounting, and SEC filing fees incurred in the incorporation of a new U.S.
publicly traded holding company, ICG Communications, Inc., and approximately
$1.3 million of consulting fees related to various process improvement
initiatives. SG&A expenses as a percentage of total revenue was 45% for fiscal
1996, compared to 57% for fiscal 1995. SG&A expenses for Network Services
increased due to increased engineering, marketing and sales staff to support
growth in network system installations. Satellite Services SG&A expenses
increased primarily due to the growth of MTN and MCN.
Depreciation and amortization. Depreciation and amortization increased
$13.7 million, or 83%, for fiscal 1996 compared to fiscal 1995. Depreciation of
fixed assets increased by approximately $7.0 million as a result of the
shortening of estimated depreciable lives discussed in "-Accounting Changes,"
and an increase in depreciable fixed assets due to the continued expansion of
the Company's networks. The increase in depreciation expense was offset slightly
due to the sale of four of the Company's teleports.
Net loss (gain) on disposal of long-lived assets. Net loss (gain) on
disposal of long-lived assets increased to $5.1 million during fiscal 1996 from
$0.2 million during fiscal 1995. Net loss on disposal of long-lived assets for
fiscal 1996 includes the loss recorded on the sale of four of the Company's
teleports used in its Satellite Services operations ($1.1 million), the loss
recorded on the disposal of other operating assets ($3.7 million) and a
write-off of an investment ($0.3 million).
Provision for impairment of long-lived assets. Provision for impairment of
long-lived assets increased $3.0 million from fiscal 1995 to $10.0 million for
fiscal 1996. The amount recorded during fiscal 1996 includes valuation
allowances for the amounts receivable for advances made to the Phoenix network
joint venture included in long-term notes receivable ($5.8 million), the
investment in the Melbourne network ($2.7 million), the note receivable from
A-13
<PAGE>
NovoComm, Inc. ($1.3 million) and the Satellite Services Mexico subsidiary ($0.2
million). The fiscal 1995 amount includes an allowance for an investment ($2.0
million) and a write-down in the goodwill associated with the acquisition of
Nova-Net ($5.0 million). Provision for impairment of long-lived assets was
recorded based on management's estimate of the net realizable value of the
Company's assets at September 30, 1995 and 1996.
Interest expense. Interest expense increased by $61.3 million, from $24.4
million for fiscal 1995 to $85.7 million for fiscal 1996, which included $66.5
million of non-cash interest. This increase was attributable to an increase in
long-term debt, primarily the 13 1/2% Senior Discount Notes due 2005 (the "13
1/2% Notes") issued in August 1995 and the 12 1/2% Notes issued in April 1996,
and an increase in capitalized lease obligations to finance the purchase of
Telecom Services and Satellite Services equipment. Also included in interest
expense is a charge of approximately $11.5 million for the payments made to
holders of the 13 1/2% Notes with respect to consents to amendments to the
indenture governing the 13 1/2% Notes in order to permit the offering of the 13
1/2% Notes in April 1996.
Interest income. Interest income increased $15.1 million from fiscal 1995.
The increase is attributable to the increase in cash from the proceeds of the
issuance of the 13 1/2% Notes in August 1995 and the 12 1/2% Notes and 14 1/4%
Preferred Stock in April 1996.
Share of losses of joint venture and investment. Share of losses in the
Phoenix network joint venture, in which the Company held a 50% equity interest,
increased $1.1 million, or 145%, from fiscal 1995 to $1.8 million for fiscal
1996 due to increased losses resulting from the continued expansion and
implementation of switched access services.
Other, net. Other, net increased from $0.5 million net expense for fiscal
1995 to $3.9 million net expense for fiscal 1996. Other expense recorded in
fiscal 1996 consists primarily of settlement costs of certain litigation ($1.2
million) and the write-off of deferred financing costs upon conversion or
settlement of debt ($2.7 million).
Minority interest in share of losses, net of accretion and preferred
dividends on preferred securities of subsidiaries. Minority interest in share of
losses, net of accretion and preferred dividends on preferred securities of
subsidiaries increased $24.2 million, from $1.1 million for fiscal 1995 to
approximately $25.3 million for fiscal 1996. The increase is due to the
accretion of the unit warrants issued in connection with the 13% Notes ($14.4
million) and issue costs ($1.1 million) associated with the issuance of the 12%
Redeemable Preferred Stock, of Holdings (the "12% Preferred Stock") accretion of
issue costs associated with the 14 1/4% Preferred Stock ($0.3 million), accrual
of the preferred stock dividend on the 12% Preferred Stock ($2.1 million) and
the 14 1/4% Preferred Stock ($9.1 million) and the excess redemption price over
the stated value of the convertible Series B Preferred Stock of Holdings-Canada
($1.0 million), partially offset by the minority interest in losses of
subsidiaries.
Income tax benefit. Income tax benefit for fiscal 1996 was $5.1 million.
The income tax benefit is due to an adjustment to the deferred tax liability as
a result of the change in estimated depreciable lives.
Cumulative effect of change in accounting for revenue from long-term
telecom services contracts. The increase in cumulative effect of change in
accounting for revenue from long-term telecom services contracts is due to the
change in accounting as described in "-Accounting Changes."
Net loss. Net loss increased $107.5 million, or 140%, due to the increases
in operating costs, SG&A expenses, depreciation and amortization, interest
expense and minority interest in share of losses, net of accretion and preferred
dividends on preferred securities of subsidiaries noted above.
A-14
<PAGE>
QUARTERLY RESULTS
The following table presents selected unaudited operating results for
three-month quarterly periods, beginning with the three months ended December
31, 1995 and through the three months ended December 31, 1997. The Company
believes that all necessary adjustments have been included in the amounts stated
below to present fairly the quarterly results when read in conjunction with the
Company's Consolidated Financial Statements and related notes included elsewhere
in this Annual Report. Results of operations for any particular quarter are not
necessarily indicative of results of operations for a full year or predictive of
future periods. ICG's development and expansion activities, including
acquisitions, during the periods shown below materially affect the comparability
of this data from one period to another.
<TABLE>
<CAPTION>
THREE
THREE MONTHS ENDED MONTHS
-------------------------------------------------- ENDED
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1996 1996 1996 1996
------------ ------------ ------------ ----------- --------
STATEMENT OF (DOLLARS IN THOUSANDS)
OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenue:
Telecom services $ 13,513 17,635 24,371 32,162 34,787
Network services 15,718 13,973 14,679 15,746 15,981
Satellites
services 6,168 4,336 5,596 5,197 6,188
------------ ------------ ------------ ----------- --------
Total revenue 35,399 35,944 44,646 53,105 56,956
Operating loss (15,258) (15,823) (20,262) (37,031) (26,279)
Net loss before
cumulative effect
of change in
accounting (31,189) (26,939) (64,721) (57,805) (49,823)
Cumulative effect
of change in
accounting (1) (3,453) - - - -
------------ ------------ ------------ ----------- --------
Net loss $ (34,642) (26,939) (64,721) (57,805) (49,823)
============ ============ ============ =========== ========
OTHER DATA:
EBITDA (2) (10,339) (8,381) (11,207) (12,957) (17,226)
Net cash used by
operating
activities (4,598) (16,400) (15,059) (7,300) (8,636)
Net cash used by
investing
activities (25,242) (51,322) (10,729) (47,911) (82,342)
Net cash (used)
provided by
financing
activities (8,413) (23,956) 400,467 (7,871) (170)
Capital
expenditures (3) 26,882 76,433 29,882 44,110 70,297
STATISTICAL DATA(4):
Full time employees 998 1,061 1,173 1,323 1,424
Telecom services:
Access lines in
service (5) - - - - -
Buildings connected:
On-net 304 327 384 478 522
Hybrid (6) 1,235 1,401 1,493 1,589 1,547
------------ ------------ ------------ ----------- --------
Total buildings
connected 1,539 1,728 1,877 2,067 2,069
Customer circuits
in service
(VGEs) (7) 488,403 510,755 551,881 630,697 748,528
Operational
switches:
Voice 13 13 13 14 14
Data - - - - -
------------ ------------ ------------ ----------- --------
Total
operational
switches 13 13 13 14 14
Switched minutes
of use (in
millions) 235 362 475 563 607
Fiber route
miles (8)
Operational 637 780 886 2,143 2,385
Under
construction - - - - -
Fiber strand
miles (9)
Operational 28,779 36,310 45,098 70,067 75,490
Under
construction - - - - -
Wireless
miles (10) 545 582 483 491 506
Satellite services:
VSATs 633 658 659 835 860
C-Band
installations(11) 33 36 48 48 54
L-Band
installations(12) - 3 53 109 204
- ------------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
MAR. 31, JUNE 30, SEPT.30, DEC. 31,
1997 1997 1997 1997
------------ ------------ ------------ ------------
STATEMENT OF (DOLLARS IN THOUSANDS)
OPERATIONS DATA:
<S> <C> <C> <C> <C>
Revenue:
Telecom services $ 38,280 41,243 43,664 54,503
Network services 17,987 15,640 16,432 15,619
Satellites
services 6,783 7,883 7,640 7,680
----------- ---------- ----------- -------------
Total revenue 63,050 64,766 67,736 77,802
Operating loss (40,915) (46,592) (46,543) (59,483)
Net loss before
cumulative effect
of change in
accounting (66,781) (77,570) (80,047) (103,245)
Cumulative effect
of change in
accounting (1) - - - -
----------- ---------- ----------- -------------
Net loss $ (66,781) (77,570) (80,047) (103,245)
=========== ========== =========== =============
OTHER DATA:
EBITDA (2) (29,901) (33,791) (31,699) (28,440)
Net cash used by
operating
activities (14,770) (23,235) (33,219) (55,730)
Net cash used by
investing
activities (60,219) (50,733) (193,587) (125,328)
Net cash (used)
provided by
financing
activities 174,343 (3,100) 111,943 32,535
Capital
expenditures (3) 58,578 64,412 64,489 82,114
STATISTICAL DATA(4):
Full time employees 1,606 1,854 2,083 2,219
Telecom services:
Access lines in
service (5) 5,371 20,108 50,551 141,035
Buildings connected:
On-net 545 560 590 596
Hybrid (6) 1,550 1,704 1,726 1,725
--------- ---------- ----------- ---------
Total buildings
connected 2,095 2,264 2,316 2,321
Customer circuits
in service
(VGEs) (7) 816,238 917,656 1,006,916 1,111,697
Operational
switches:
Voice 16 17 18 19
Data 10 15 15 15
------------ ------------ ------------ ------
Total
operational
switches 26 32 33 34
Switched minutes
of use (in
millions) 682 742 788 660
Fiber route
miles (8)
Operational 2,483 2,898 3,021 3,043
Under
construction - - - 1,064
Fiber strand
miles (9)
Operational 83,334 101,788 109,510 111,435
Under
construction - - - 16,366
Wireless
miles (10) 511 511 511 511
Satellite services:
VSATs 875 895 934 957
C-Band
installations(11) 57 57 54 57
L-Band
installations(12) 355 671 768 1,239
- ------------
</TABLE>
A-15
<PAGE>
(1) During fiscal 1996, the Company changed its method of accounting for
long-term telecom services contracts to recognize revenue as services are
provided. See "-Accounting Change." Other than the cumulative effect of
adopting this new method of accounting, the effect of this change in
accounting for the periods presented was not significant.
(2) EBITDA consists of revenue less operating costs and selling, general and
administrative expenses. EBITDA is provided because it is a measure
commonly used in the telecommunications industry. EBITDA is presented to
enhance an understanding of the Company's operating results and is not
intended to represent cash flows or results of operations in accordance
with GAAP for the periods indicated. EBITDA is not a measurement under GAAP
and is not necessarily comparable with similarly titled measures of other
companies. Net cash flows from operating, investing and financing
activities as determined using GAAP are also presented in Other Data.
(3) Capital expenditures includes assets acquired under capital leases and
excludes payments for construction of the Company's new headquarters which
the Company sold in January 1998 and leased back under a long-term
operating lease.
(4) Amounts presented are for three-month periods ended, or as of the end of,
the period presented.
(5) Access lines in service at December 31, 1997 includes 66,346 lines which
are provisioned through the Company's switch and 74,689 lines which are
provisioned through resale and other agreements with various local exchange
carriers. Resale lines typically generate lower margins and are used
primarily to obtain customers. Although the Company plans to migrate lines
from resale to higher margin on-switch lines, there are no assurances that
it will be successful in executing this strategy.
(6) Hybrid buildings connected represent buildings connected to the Company's
network via another carrier's facilities. Hybrid buildings declined from
September 30, 1996 to December 31, 1996 due to the sale of the Company's
50% interest in the Phoenix joint venture.
(7) Customer circuits in service are measured in voice grade equivalents
("VGEs").
(8) Fiber route miles refers to the number of miles of fiber optic cable,
including leased fiber. As of December 31, 1997, the Company had 3,043
fiber route miles, of which 171 fiber route miles were leased under
operating leases. Fiber route miles under construction represents fiber
under construction which is expected to be operational within six months.
(9) Fiber strand miles refers to the number of fiber route miles, including
leased fiber, along a telecommunications path multiplied by the number of
fiber strands along that path. As of December 31, 1997, the Company had
111,435 fiber strand miles, of which 3,278 fiber strand miles were leased
under operating leases. Fiber strand miles under construction represents
fiber under construction which is expected to be operational within six
months.
(10) Wireless miles represents the total distance of the digital microwave paths
between Company transmitters which are used in the Company's networks.
(11) C-Band installations service cruise ships, U.S. Navy vessels and offshore
oil platform installations.
(12) L-Band installations service smaller maritime installations, and both
mobile and fixed land-based units.
- ---------------
The Company's consolidated revenue has increased every quarter since the
first fiscal quarter of 1992, primarily due to the installation and acquisition
of new networks, the expansion of existing networks and increased services
provided over existing networks. From the third quarter of fiscal 1993 until the
sale of four teleports in the second quarter of fiscal 1996, Satellite Services
also contributed to the quarterly revenue growth.
EBITDA, operating and net losses have generally increased immediately
preceding and during periods of relatively rapid network acquisition and
expansion activity. The increased quarterly losses from the first quarter of
A-16
<PAGE>
fiscal 1995 through the quarter ended December 31, 1997 resulted from a
combination of increases in negative margin switched access services revenue and
increases in personnel and other SG&A expenses to support the acquisition and
expansion of Telecom Services networks, the implementation of the Company's
switched access services strategy and development of local exchange services.
Since the quarter ended June 30, 1996, EBITDA losses have improved for each
consecutive quarter. As the Company provides a greater volume of higher margin
services, principally local exchange services, carries more traffic on its own
facilities rather than ILEC facilities and obtains the right to use unbundled
ILEC facilities, while experiencing decelerating increases in personnel and
other SG&A expenses supporting its Telecom Services networks, any or all of
which may not occur, the Company anticipates that EBITDA losses will continue to
improve in the near term.
Individual operating units may experience variability in quarter to quarter
revenue due to (i) the type and mix of services available to customers, (ii) the
timing and size of contract orders, (iii) the timing of price changes and
associated impact on volume, and (iv) customer usage patterns.
NET OPERATING LOSS CARRYFORWARDS
As of December 31, 1997, the Company had net operating loss carryforwards
("NOLs") of approximately $353.0 million, which expire at various times in
varying amounts through 2012. However, due to the provisions of Section 382,
Section 1502 and certain other provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), the utilization of a portion of the NOLs will be
limited. In addition, the Company is also subject to certain state income tax
laws which may also limit the utilization of NOLs for state income tax purposes.
Section 382 of the Code provides annual restrictions on the use of NOLs, as
well as other tax attributes, following significant changes in ownership of a
corporation's stock, as defined in the Code. Investors are cautioned that future
events beyond the control of the Company could reduce or eliminate the Company's
ability to utilize the tax benefits of its NOLs. Future ownership changes under
Section 382 will require a new Section 382 computation which could further
restrict the use of the NOLs. In addition, the Section 382 limitation could be
reduced to zero if the Company fails to satisfy the continuity of business
enterprise requirement for the two-year period following an ownership change.
LIQUIDITY AND CAPITAL RESOURCES
The Company's growth has been funded through a combination of equity, debt
and lease financing. As of December 31, 1997, the Company had current assets of
$310.2 million, including $217.0 million of cash, cash equivalents and
short-term investments available for sale, which exceeded current liabilities of
$99.3 million, providing working capital of $210.9 million. The Company invests
excess funds in short-term, interest-bearing investment-grade securities until
such funds are used to fund the capital investments and operating needs of the
Company's business. The Company's short term investment objectives are safety,
liquidity and yield, in that order.
CASH USED BY OPERATING ACTIVITIES
The Company's operating activities used $42.8 million and $43.4 million in
fiscal 1995 and 1996, respectively, $4.6 million and $8.6 million for the three
months ended December 31, 1995 and 1996, respectively, and $127.0 million for
fiscal 1997. Cash used by operations is primarily due to net losses, which are
partially offset by non-cash expenses, such as depreciation and amortization
expense, deferred interest expense, preferred dividends on subsidiary preferred
securities and changes in working capital items.
The Company expects to continue to generate negative cash flows from
operating activities while it emphasizes the development, construction and
expansion of its Telecom Services business. Consequently, it does not anticipate
A-17
<PAGE>
that cash provided by operations will be sufficient to fund operating
activities, future expansion of existing networks or the construction and
acquisition of new networks in the near term. As the Company provides a greater
volume of higher margin services, principally local exchange services, carries
more traffic on its own facilities rather than ILEC facilities and obtains the
right to use unbundled ILEC facilities, while experiencing decelerating
increases in personnel and other SG&A expenses supporting its Telecom Services
networks, any or all of which may not occur, the Company anticipates that cash
used by operating activities will continue to improve in the near term.
CASH USED BY INVESTING ACTIVITIES
Cash used by investing activities was $71.6 million and $135.2 million (net
of $21.6 million received in connection with the sale of certain satellite
equipment, including four teleports) in fiscal 1995 and 1996, respectively,
$25.2 million (net of $21.1 million received in connection with the
aforementioned equipment sale) and $82.3 million for the three months ended
December 31, 1995 and 1996, respectively, and $429.9 million for fiscal 1997.
Cash used by investing activities includes cash expended for the acquisition of
property, equipment and other assets of $50.1 million and $122.3 million for
fiscal 1995 and 1996, respectively, and $26.8 million and $50.8 million for the
three months ended December 31, 1995 and 1996, respectively, and $269.6 million
for fiscal 1997. Additionally, cash used by investing activities includes
payments for construction of the Company's new headquarters of $1.5 million,
$7.9 million and $29.4 million for fiscal 1996, the three months ended December
31, 1996 and fiscal 1997, respectively. The Company will continue to use cash in
investing activities in 1998 and subsequent periods for the construction of new
networks, the expansion of existing networks and potentially for acquisitions.
The Company acquired assets under capital leases and through the issuance of
debt or warrants of $38.7 million and $55.0 million in fiscal 1995 and 1996,
respectively, $0.1 million and $19.5 million for the three months ended December
31, 1995 and 1996, respectively, and zero for fiscal 1997.
CASH PROVIDED (USED) BY FINANCING ACTIVITIES
Financing activities provided $377.8 million and $360.2 million in fiscal
1995 and 1996, respectively, used $8.4 million and $0.2 million in the three
months ended December 31, 1995 and 1996, respectively, and provided $315.7
million in fiscal 1997. Cash provided by financing activities primarily includes
cash received in connection with the private placement of units consisting of
the 13 1/2% Senior Discount Notes due 2005 (the "13 1/2% Notes") and warrants in
August 1995, the 12 1/2% Notes and the 14 1/4% Preferred Stock in April 1996,
the 11 5/8% Notes and the 14% Preferred Stock in March 1997 and the 6 3/4%
Preferred Securities in September and October 1997. Historically, the funds to
finance the Company's business acquisitions, capital expenditures, working
capital requirements and operating losses have been obtained through public and
private offerings of ICG and Holdings-Canada common shares, convertible
subordinated notes, convertible preferred shares of Holdings-Canada, capital
lease financings and various working capital sources, including credit
facilities, in addition to the private placement of the securities previously
mentioned.
On March 11, 1997, Holdings completed a private placement of 11 5/8% Notes
and 100,000 shares of 14% Preferred Stock for net proceeds of approximately
$192.4 million. The Company believes the net proceeds of the private placement
will improve its operating and financial flexibility over the near term because
(a) the 11 5/8% Notes do not require the payment of cash interest until 2002 and
(b) Holdings has the option to pay dividends on the 14% Preferred Stock in
additional shares of 14% Preferred Stock prior to 2002 and the Preferred Stock
is not mandatorily redeemable until 2008.
The 11 5/8% Notes are unsecured senior obligations of Holdings (guaranteed
by ICG) that mature on March 15, 2007. Interest will accrue at 11 5/8% per
annum, beginning March 15, 2002, and is payable each March 15 and September 15,
commencing September 15, 2002. Dividends on the 14% Preferred Stock are
cumulative at a rate of 14% per annum and are payable quarterly in arrears each
March 15, June 15, September 15 and December 15, commencing June 15, 1997. The
14% Preferred Stock has a liquidation preference of $1,000 per share, plus
A-18
<PAGE>
accrued and unpaid dividends, and is mandatorily redeemable in 2008. The 14%
Preferred Stock is exchangeable, at the option of Holdings, into 14% senior
subordinated exchange debentures of Holdings due 2008, at any time after the
exchange is permitted under certain indenture restrictions.
On September 24 and October 3, 1997, ICG Funding completed a private
placement (guaranteed by ICG) of 2,645,000 6 3/4% Preferred Securities for net
proceeds, after underwriting costs, of approximately $127.6 million. Dividends
on the 6 3/4% Preferred Securities are payable quarterly in arrears each
February 15, May 15, August 15 and November 15, and commenced November 15, 1997.
The dividend is payable in cash through November 15, 2000, and in cash or shares
of ICG common stock, at the option of ICG Funding, thereafter. The 6 3/4%
Preferred Securities have a liquidation preference of $50 per security, plus
accrued and unpaid dividends, and are mandatorily redeemable in 2009. The 6 3/4%
Preferred Securities are exchangeable at any time prior to November 15, 2009
into shares of ICG Common Stock at a rate of 2.0812 shares of Common Stock per
preferred security or $24.025 per share.
As of December 31, 1997, an aggregate of approximately $60.2 million of
capitalized lease obligations was due prior to December 31, 2001 and an
aggregate accreted value of approximately $887.5 million was outstanding under
the 13 1/2% Notes, the 12 1/2% Notes and the 11 5/8% Notes. The 13 1/2% Notes
require payments of interest to be made in cash commencing March 15, 2001 and
mature on September 15, 2005. The 12 1/2% Notes require payments of interest to
be made in cash commencing November 1, 2001 and mature on May 1, 2006. The 11
5/8% Notes require payments of interest to be made in cash commencing March 15,
2002 and mature on March 15, 2007. The 6 3/4% Preferred Securities require
payments of dividends to be made in cash and are being paid currently through
November 15, 2000. In addition, the 14% Preferred Stock and the 14 1/4%
Preferred Stock require payment of dividends to be made in cash commencing June
15, 2002 and August 1, 2001, respectively. As of December 31, 1997, the Company
had $7.9 million of other indebtedness outstanding. The Company may also have
additional payment obligations prior to such time, the amount of which cannot
presently be determined. The Company's cash on hand and amounts expected to be
available through vendor financing arrangements will provide sufficient funds
necessary for the Company to expand its Telecom Services business as currently
planned and to fund its operating deficits through the first quarter of 1999.
With respect to indebtedness outstanding on December 31, 1997, the Company has
cash interest payment obligations of approximately $113.3 million in 2001,
$158.0 million in 2002 and $168.1 million in 2003. With respect to preferred
securities currently outstanding, the Company has cash dividend obligations of
approximately $8.9 million in each of 1998, 1999 and 2000, $21.5 million in
2001, $57.0 million in 2002 and $70.9 million in 2003. Accordingly, the Company
may have to refinance a substantial amount of indebtedness and obtain
substantial additional funds prior to March 2001. The Company's ability to do so
will depend on, among other things, its financial condition at the time,
restrictions in the instruments governing its indebtedness, and other factors,
including market conditions, beyond the control of the Company. There can be no
assurance that the Company will be able to refinance such indebtedness,
including such capitalized leases, or obtain such additional funds, and if the
Company is unable to effect such refinancings or obtain additional funds, the
Company's ability to make principal and interest payments on its indebtedness or
make payments of cash dividends on, or the mandatory redemption of, its
preferred securities, would be adversely affected.
On February 12, 1998, ICG Services completed a private placement of 10%
Senior Discount Notes due 2008 for net proceeds, after underwriting costs, of
approximately $291.6 million. Interest will accrue at 10% per annum, beginning
February 15, 2003, and is payable each February 15 and August 15, commencing
August 15, 2003. The Notes will be redeemable at the option of ICG Services, in
whole or in part, on or after February 15, 2003.
CAPITAL EXPENDITURES
The Company expects to continue to generate negative cash flows from
operating activities over the near term while it emphasizes development,
construction and expansion of its business and until the Company establishes a
sufficient revenue-generating customer base. The Company's capital expenditures
(including assets acquired under capital leases and excluding payments for
construction of the Company's new headquarters) were $88.7 million and $177.3
million for fiscal 1995 and 1996, respectively, $26.9 million and $70.3 million
A-19
<PAGE>
for the three months ended December 31, 1995 and 1996, respectively, and $269.6
million for fiscal 1997. The Company anticipates that the expansion of existing
networks, construction of new networks and further development of the Company's
products and services will require capital expenditures of approximately $450.0
million during 1998, including capital expenditure requirements of NETCOM. To
facilitate the expansion of its services and networks the Company has entered
into equipment purchase agreements with various vendors under which the Company
must purchase a substantial amount of equipment and other assets, including a
full range of switching systems, fiber optic cable, network electronics,
software and services. Actual capital expenditures will depend on numerous
factors, including certain factors beyond the Company's control. These factors
include the nature of future expansion and acquisition opportunities, economic
conditions, competition, regulatory developments and the availability of equity,
debt and lease financing.
OTHER CASH COMMITMENTS AND CAPITAL REQUIREMENTS
The Company's operations have required and will continue to require
significant capital expenditures for development, construction, expansion and
acquisitions of telecommunications assets. Significant amounts of capital are
required to be invested before revenue is generated, which results in initial
negative cash flows. In addition to the Company's planned capitial expenditures,
it has other cash commitments as described in the footnotes to the Company's
audited Consolidated Financial Statements for the fiscal year ended December 31,
1997 included elsewhere herein.
In view of the anticipated negative cash flows from operating activities,
the continuing development of the Company's products and services, the expansion
of existing networks and the construction, leasing and licensing of new
networks, the Company will require additional amounts of cash in the future from
outside sources. Management believes that the Company's cash on hand and amounts
expected to be available through vendor financing arrangements will provide
sufficient funds necessary for the Company to expand its Telecom Services
business as currently planned and to fund its operating deficits through the
first quarter of 1999. Additional sources of cash may include public and private
equity and debt financings, sales of non-strategic assets, capitalized leases
and other financing arrangements. The Company may require additional amounts of
equity capital in the near term. In the past, the Company has been able to
secure sufficient amounts of financing to meet its capital expenditure needs.
There can be no assurance that additional financing will be available to the
Company or, if available, that it can be obtained on terms acceptable to the
Company.
The failure to obtain sufficient amounts of financing could result in the
delay or abandonment of some or all of the Company's development and expansion
plans, which could have a material adverse effect on the Company's business. In
addition, the inability to fund operating deficits with the proceeds of
financings until the Company establishes a sufficient revenue generating
customer base could have a material adverse effect on the Company's liquidity.
YEAR 2000 COMPLIANCE
While the Company believes that its software applications are year 2000
complaint, there can be no assurance until the year 2000 occurs that all systems
will then function adequately. Further, if the software applications of local
exchange carriers, long distance carriers or others on whose services the
Company depends are not year 2000 complaint, it could have a material adverse
effect on the Company's financial condition and results of operations.
ACCOUNTING CHANGE
During fiscal 1996, the Company changed its method of accounting for
long-term telecom services contracts. Under the new method, the Company
recognizes revenue as services are provided and continues to charge direct
selling expenses to operations as incurred. The Company had previously
recognized revenue in an amount equal to the noncancelable portion of the
contract, which is a minimum of one year on a three-year or longer contract, at
the inception of the contract and upon activation of service to the customer, to
the extent of direct installation and selling expense incurred in obtaining
customers during the period in which such revenue was recognized. Revenue
A-20
<PAGE>
recognized in excess of normal monthly billings during the year was limited to
an amount which did not exceed such installation and selling expense. The
remaining revenue from the contract had been recognized ratably over the
remaining noncancelable portion of the contract. The Company believes the new
method is preferable because it provides a better matching of revenue and
related operating expenses and is more consistent with accounting practices
within the telecommunications industry.
As required by generally accepted accounting principles, the Company has
reflected the effects of the change in accounting as if such change had been
adopted as of October 1, 1995. The Company's results for fiscal 1996 include a
charge of $3.5 million ($0.13 per share) relating to the cumulative effect of
this change in accounting as of October 1, 1995. The effect of this change in
accounting was not significant for fiscal 1996. If the new revenue recognition
method had been applied retroactively, Telecom Services revenue would have
decreased by $0.5 million and $0.7 million for fiscal 1994 and 1995,
respectively. See the Company's Consolidated Financial Statements and the
related notes thereto contained elsewhere in this Annual Report.
NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" ("SFAS 128") which revises the calculation and
presentation of Accounting Principles Board Opinion 15 and related
interpretations. The Company adopted SFAS 128 for the fiscal year ending
December 31, 1997, including the requirement for retroactive application. The
adoption of SFAS 128 had no effect on the Company's reported loss per share.
A-21
<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 December 31, 1996 and 1997 and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the fiscal years ended September 30, 1995 and 1996, the
three-month period ended December 31, 1996, and the fiscal year ended December
31, 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ICG Communications,
Inc. and subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for the fiscal years ended September 30, 1995
and 1996, the three-month period ended December 31, 1996, and the fiscal year
ended December 31, 1997, in conformity with generally accepted accounting
principles.
As explained in note 2 to the consolidated financial statements, during the
fiscal year ended September 30, 1996, the Company changed its method of
accounting for long-term telecom services contracts.
KPMG PEAT MARWICK LLP
Denver, Colorado
February 19, 1998
A-22
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
---------------------
ASSETS 1996 1997
- -------
---------- --------
(in thousands)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 359,934 118,834
Short-term investments available for sale (note 4) 32,601 98,181
Receivables:
Trade, net of allowance of $2,515 and $5,376 at
December 31, 1996 and 1997, respectively 41,131 59,042
Revenue earned, but unbilled 6,053 8,599
Due from affiliate (note 5) - 9,384
Other (note 8) 1,440 1,696
---------- ----------
48,624 78,721
---------- ----------
Inventory 2,845 3,901
Prepaid expenses and deposits 5,019 10,543
Notes receivable, net 200 -
---------- ----------
Total current assets 449,223 310,180
---------- ----------
Property and equipment (notes 6, 9 and 10) 460,221 738,488
Less accumulated depreciation (56,545) (106,321)
---------- ----------
Net property and equipment 403,676 632,167
---------- ----------
Investments (note 3) 5,170 -
Long-term notes receivable from affiliate and others,
net (note 5) 623 10,375
Restricted cash (notes 11 and 14) 13,333 38,749
Other assets, net of accumulated amortization:
Goodwill (note 3) 31,881 77,562
Deferred financing costs (note 10) 21,963 23,196
Transmission and other licenses 8,526 6,031
Other (note 7) 9,738 9,404
---------- ----------
72,108 116,193
---------- ----------
$ 944,133 1,107,664
========== ==========
(Continued)
</TABLE>
A-23
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
-------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT 1996 1997
- --------------------------------------
---------- -----------
(in thousands)
Current liabilities:
<S> <C> <C>
Accounts payable $ 24,813 29,143
Accrued liabilities 31,890 57,691
Deferred revenue 5,419 5,049
Current portion of capital lease
obligations (notes 9 and 14) 24,683 5,637
Current portion of long-term debt
(note 10) 817 1,784
---------- ---------
Total current liabilities 87,622 99,304
---------- ---------
Capital lease obligations, less
current portion (note 9) 71,146 66,939
Long-term debt, net of discount,
less current portion (note 10) 690,358 890,568
---------- ---------
Total liabilities 849,126 1,056,811
---------- ---------
Minority interests 1,967 -
Redeemable preferred stock of
subsidiary ($164.8 million
and $301.2 million liquidation
value at December 31, 1996 and
1997, respectively) (notes 10
and 11) 159,120 292,442
Company-obligated mandatorily
redeemable preferred securities
of subsidiary limited liability
company which holds solely Company
preferred stock ($133.4 million
liquidation value at December 31,
1997) (note 11) - 127,729
Stockholders' deficit:
Common stock (notes 1 and 12) 8,088 647
Additional paid-in capital 294,472 326,318
Accumulated deficit (368,640) (696,283)
---------- ---------
Total stockholders' deficit (66,080) (369,318)
---------- ---------
Commitments and contingencies
(notes 8, 9, 10, 11 and 14) $ 944,133 1,107,664
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
A-24
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED SEPTEMBER 30, 1995 AND 1996,
THE THREE MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED) AND 1996,
AND FISCAL YEAR ENDED DECEMBER 31, 1997
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal years ended
September 30,
-----------------------------
1995 1996
-------------- --------------
(unaudited)
(in thousands, except per share data)
Revenue:
<S> <C> <C>
Telecom services (note 2) $ 32,330 87,681
Network services (note 17) 58,778 60,116
Satellite services (note 13) 20,502 21,297
-------------- --------------
Total revenue 111,610 169,094
-------------- --------------
Operating costs and expenses:
Operating costs 78,846 135,253
Selling, general and administrative
expenses 62,954 76,725
Depreciation and amortization (note 2) 16,624 30,368
Net loss (gain) on disposal of
long-lived assets (note 3) 241 5,128
Provision for impairment of
long-lived assets (note 3) 7,000 9,994
-------------- --------------
Total operating costs and expenses 165,665 257,468
-------------- --------------
Operating loss (54,055) (88,374)
Other income (expense):
Interest expense (note 10) (24,368) (85,714)
Interest income 4,162 19,300
Other, net (note 10) (523) (3,877)
-------------- --------------
(20,729) (70,291)
-------------- --------------
Loss before income taxes, minority
interest, share of losses and
cumulative effect of change in
accounting (74,784) (158,665)
Income tax benefit (note 15) - 5,131
-------------- --------------
Loss before minority interest, share of
losses and cumulative effect of
change in accounting (74,784) (153,534)
Minority interest in share of losses, net
of accretion and preferred dividends
on preferred securities of subsidiaries
(note 11) (1,123) (25,306)
Share of losses of joint venture and
investment (note 3) (741) (1,814)
-------------- --------------
Loss before cumulative effect of change
in accounting (76,648) (180,654)
Cumulative effect of change in accounting - (3,453)
-------------- --------------
Net loss $ (76,648) (184,107)
============== ==============
Loss per share - basic and diluted:
Loss before cumulative effect of
change in accounting $ (3.25) (6.70)
Cumulative effect of change in
accounting - (0.13)
------------- ---------------
Loss per share - basic and
diluted $ (3.25) (6.83)
============= ==============
Weighted average number of shares
outstanding - basic and diluted 23,604 26,955
============== ==============
</TABLE>
<TABLE>
<CAPTION>
Fiscal year
Three months ended ended
December 31, December 31,
------------------------ -----------
1995 1996 1997
---------- ---------- ----------
(unaudited)
(in thousands, except per share data)
Revenue:
<S> <C> <C> <C>
Telecom services (note 2) $ 13,513 34,787 177,690
Network services (note 17) 15,718 15,981 65,678
Satellite services (note 13) 6,168 6,188 29,986
--------- --------- ---------
Total revenue 35,399 56,956 273,354
--------- --------- ---------
Operating costs and expenses:
Operating costs 27,110 49,929 246,418
Selling, general and administrative
expenses 18,628 24,253 150,767
Depreciation and amortization (note 2) 4,919 9,825 57,081
Net loss (gain) on disposal of
long-lived assets (note 3) 1,030 (772) 671
Provision for impairment of
long-lived assets (note 3) - - 11,950
--------- --------- ---------
Total operating costs and expenses 51,687 83,235 466,887
--------- --------- ---------
Operating loss (16,288) (26,279) (193,533)
Other income (expense):
Interest expense (note 10) (15,215) (24,454) (117,545)
Interest income 3,750 5,962 21,907
Other, net (note 10) 7 (64) (660)
--------- --------- ---------
(11,458) (18,556) (96,298)
--------- --------- ---------
Loss before income taxes, minority
interest, share of losses and
cumulative effect of change in
accounting (27,746) (44,835) (289,831)
Income tax benefit (note 15) - - -
--------- --------- ---------
Loss before minority interest, share of
losses and cumulative effect of
change in accounting (27,746) (44,835) (289,831)
Minority interest in share of losses, net
of accretion and preferred dividends
on preferred securities of subsidiaries
(note 11) (3,215) (4,988) (37,812)
Share of losses of joint venture and
investment (note 3) (228) - -
--------- --------- ---------
Loss before cumulative effect of change
in accounting (31,189) (49,823) (327,643)
Cumulative effect of change in accounting (3,453) - -
--------- --------- ---------
Net loss $ (34,642) (49,823) (327,643)
========= ========= =========
Loss per share - basic and diluted:
Loss before cumulative effect of
change in accounting $ (1.24) (1.56) (10.11)
Cumulative effect of change in
accounting (0.14) - -
--------- --------- ---------
Loss per share - basic and
diluted (1.38) (1.56) (10.11)
========= ========= =========
Weighted average number of shares
outstanding - basic and diluted 25,139 31,840 32,399
========= ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
A-25
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FISCAL YEARS ENDED SEPTEMBER 30, 1995 AND 1996, THE
THREE MONTHS ENDED DECEMBER 31, 1996, AND FISCAL YEAR ENDED DECEMBER 31, 1997
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common stock
Shares Amount
----------- ----------
(in thousands)
<S> <C> <C>
BALANCES AT OCTOBER 1, 1994 17,047 $ 95,606
Shares issued for cash (note 12):
Public offering and private placements 6,312 84,498
Public offering and private placement costs - (6,162)
Exercise of options and warrants 338 1,471
Shares issued as repayment of debt and related
accrued interest (note 10) 683 9,482
Shares issued in connection with business
combinations (note 3) 130 1,737
Conversion of ICG Holdings (Canada), Inc.
preferred shares 302 2,000
Shares issued as contribution to 401(k) plan
(note 16) 38 490
Warrants issued in connection with offerings
(notes 10, 11 and 12) - -
Change in foreign currency translation adjustment - -
Compensation expense related to issuance of
common stock options - -
Shares issued in exchange for investments and
other assets 123 1,398
Shares issued as payment of trade payables 18 233
Net loss - -
---------- ----------
BALANCES AT SEPTEMBER 30, 1995 24,991 190,753
Shares issued for cash in connection with the
exercise of options and warrants 1,522 1,742
Shares issued as repayment of debt and related
accrued interest (note 10) 130 687
Shares issued in connection with business
combinations (note 3) 64 749
Conversion of ICG Holdings (Canada), Inc.
preferred shares 496 3,780
Shares issued as contribution to 401(k) plan
(note 16) 87 856
Shares issued upon conversion of subordinated
notes (note 10) 4,413 76,336
Repurchase of warrants - -
Compensation expense related to issuance of
common stock options - -
Exchange of ICG Holdings (Canada), Inc. common
shares for ICG common stock - (248,682)
Net loss - -
--------- ----------
BALANCES AT SEPTEMBER 30, 1996 31,703 $ 26,221
(Continued)
</TABLE>
<TABLE>
<CAPTION>
Total
Additional stock-
paid-in Accumulated holders'
capital deficit equity
(deficit)
---------- ----------- ---------
(in thousands)
<S> <C> <C> <C>
BALANCES AT OCTOBER 1, 1994 2,200 (58,024) 39,782
Shares issued for cash (note 12):
Public offering and private placements - - 84,498
Public offering and private placement costs - - (6,162)
Exercise of options and warrants - - 1,471
Shares issued as repayment of debt and related
accrued interest (note 10) - - 9,482
Shares issued in connection with business
combinations (note 3) - - 1,737
Conversion of ICG Holdings (Canada), Inc.
preferred shares - - 2,000
Shares issued as contribution to 401(k) plan
(note 16) - - 490
Warrants issued in connection with offerings
(notes 10, 11 and 12) 24,134 - 24,134
Change in foreign currency translation adjustment - (38) (38)
Compensation expense related to issuance of
common stock options 158 - 158
Shares issued in exchange for investments and
other assets - - 1,398
Shares issued as payment of trade payables - - 233
Net loss - (76,648) (76,648)
------- -------- -------
BALANCES AT SEPTEMBER 30, 1995 26,492 (134,710) 82,535
Shares issued for cash in connection with the
exercise of options and warrants 152 - 1,894
Shares issued as repayment of debt and related
accrued interest (note 10) - - 687
Shares issued in connection with business
combinations (note 3) - - 749
Conversion of ICG Holdings (Canada), Inc.
preferred shares - - 3,780
Shares issued as contribution to 401(k) plan
(note 16) 300 - 1,156
Shares issued upon conversion of subordinated
notes (note 10) - - 76,336
Repurchase of warrants (2,671) - (2,671)
Compensation expense related to issuance of
common stock options 53 - 53
Exchange of ICG Holdings (Canada), Inc. common
shares for ICG common stock 248,682 - -
Net loss - (184,107) (184,107)
------- -------- --------
BALANCES AT SEPTEMBER 30, 1996 273,008 (318,817) (19,588)
(Continued)
</TABLE>
A-26
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT), CONTINUED
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common stock
Shares Amount
---------- ----------
(in thousands)
<S> <C> <C>
Shares issued for cash in connection with the
exercise of options and warrants 132 $ 1,800
Shares issued in connection with business
combination (note 3) 18 -
Shares issued as contribution to 401(k) plan
(note 16) 19 -
Shares issued upon conversion of subordinated
notes (note 10) 23 417
Exchange of ICG Holdings (Canada), Inc. common
shares for ICG common stock - (20,350)
Net loss - -
-------- ---------
BALANCES AT DECEMBER 31, 1996 31,895 8,088
Shares issued for cash in connection with the
exercise of options and warrants 938 5
Shares issued in connection with business
combination (note 3) 687 7
Shares issued for cash in connection with
employee stock purchase plan 109 1
Shares issued as contribution to 401(k)
plan (note 16) 179 2
Exchange of ICG Holdings (Canada), Inc. common
shares for ICG common stock - (7,456)
Net loss - -
-------- ----------
BALANCES AT DECEMBER 31, 1997 33,808 $ 647
======== ==========
</TABLE>
<TABLE>
<CAPTION>
Total
Additional stock
paid-in Accumulated holders'
capital deficit equity
(deficit)
---------- ----------- ---------
(in thousands)
<S> <C> <C> <C>
Shares issued for cash in connection with the
exercise of options and warrants 284 - 2,084
Shares issued in connection with business
combination (note 3) 350 - 350
Shares issued as contribution to 401(k) plan
(note 16) 480 - 480
Shares issued upon conversion of subordinated
notes (note 10) - - 417
Exchange of ICG Holdings (Canada), Inc. common
shares for ICG common stock 20,350 - -
Net loss - (49,823) (49,823)
------- -------- --------
BALANCES AT DECEMBER 31, 1996 294,472 (368,640) (66,080)
Shares issued for cash in connection with the
exercise of options and warrants 4,111 - 4,116
Shares issued in connection with business
combination (note 3) 15,953 - 15,960
Shares issued for cash in connection with
employee stock purchase plan 1,318 - 1,319
Shares issued as contribution to 401(k)
plan (note 16) 3,008 - 3,010
Exchange of ICG Holdings (Canada), Inc. common
shares for ICG common stock 7,456 - -
Net loss - (327,643) (327,643)
------- -------- --------
BALANCES AT DECEMBER 31, 1997 326,318 (696,283) (369,318)
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
A-27
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED SEPTEMBER 30, 1995 AND 1996,
THE THREE MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED) AND 1996,
AND FISCAL YEAR ENDED DECEMBER 31, 1997
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal years ended
September 30,
--------------------------
1995 1996
------------- ------------
(unaudited)
(in thousands)
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (76,648) (184,107)
Adjustments to reconcile net loss to net cash
used by operating activities:
Cumulative effect of change in accounting - 3,453
Share of losses of joint venture and investment 741 1,814
Minority interest in share of losses, net of
accretion and non-cash preferred dividends
on preferred securities of subsidiaries 656 24,279
Depreciation and amortization 16,624 30,368
Compensation expense related to issuance of
common stock options 158 53
Interest expense deferred and included in
long-term debt 14,068 63,951
Amortization of deferred financing costs
included in interest expense 989 2,573
Write-off of non operating assets - 2,650
Contribution to 401(k) plan through issuance
of common shares 490 1,156
Deferred income tax benefit - (5,329
Provision for impairment of long-lived assets 7,000 9,994
Net loss (gain) on disposal of long-lived
assets 241 5,128
Change in operating assets and liabilities,
excluding the effects of business acquisitions,
dispositions and non-cash transactions:
Receivables (6,092) (13,293)
Inventory (447) (1,200)
Prepaid expenses and deposits (2,482) (2,975)
Accounts payable and accrued liabilities 514 16,674
Deferred revenue 1,390 1,454
----------- ---------
Net cash used by operating activities $ (42,798) (43,357)
----------- ---------
Cash flows from investing activities:
(Increase) decrease in notes receivable from
affiliate and others $ 348 4
Advances to affiliates (2,184) (109)
Investment in and advances to joint venture (5,452) (4,308)
Payments for business acquisitions, net of cash
acquired (8,168) (8,441)
Acquisition of property, equipment and other
assets (50,066) (122,277)
Payments for construction of new headquarters - (1,501)
Proceeds from disposition of property, equipment
and other assets - 21,593
Purchase of short-term investments - (6,832)
Increase in restricted cash - (13,333)
Other investments (6,061) -
---------- ----------
Net cash used by investing activities $ (71,583) (135,204)
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
Three months Fiscal year
ended ended
December 31, December
------------------ 31,
1995 1996 1997
-------- ------- --------
(unaudited)
(in thousands)
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss (34,642) (49,823) (327,643)
Adjustments to reconcile net loss to net cash
used by operating activities:
Cumulative effect of change in accounting 3,453 - -
Share of losses of joint venture and investment 228 - -
Minority interest in share of losses, net of
accretion and non-cash preferred dividends
on preferred securities of subsidiaries 2,188 4,988 35,457
Depreciation and amortization 4,919 9,825 57,081
Compensation expense related to issuance of
common stock options 14 - -
Interest expense deferred and included in
long-term debt 12,004 22,087 102,947
Amortization of deferred financing costs
included in interest expense 527 612 2,514
Write-off of non operating assets - - 200
Contribution to 401(k) plan through issuance
of common shares 405 480 3,010
Deferred income tax benefit - - -
Provision for impairment of long-lived assets - - 11,950
Net loss (gain) on disposal of long-lived
assets 1,030 (772) 671
Change in operating assets and liabilities,
excluding the effects of business
acquisitions, dispositions and non-cash
transactions:
Receivables (3,742) (7,790) (24,452)
Inventory (272) 361 (2,822)
Prepaid expenses and deposits (459) (910) (5,405)
Accounts payable and accrued liabilities 8,970 9,731 19,908
Deferred revenue 779 2,575 (370)
-------- ------- --------
Net cash used by operating activities $ (4,598) (8,636) (126,954)
-------- ------- --------
Cash flows from investing activities:
(Increase) decrease in notes receivable from
affiliate and others $ (1,263) 133 (9,552)
Advances to affiliates (15) - -
Investment in and advances to joint venture - - -
Payments for business acquisitions, net of cash
acquired - - (45,861)
Acquisition of property, equipment and other
assets (26,798) (50,818) (269,593)
Payments for construction of new headquarters - (7,945) (29,432)
Proceeds from disposition of property, equipment
and other assets 21,146 2,057 15,567
Purchase of short-term investments (4,979) (25,769) (65,580)
Increase in restricted cash (13,333) - (25,416)
Other investments - - -
-------- ------- --------
Net cash used by investing activities $ (25,242) (82,342) (429,867)
-------- ------- --------
(Continued)
</TABLE>
A-28
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal years ended
September 30,
-----------------------
1995 1996
------------ ----------
(unaudited)
(in thousands)
<S> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of common stock:
Common stock offering $ 84,498 -
Business combination (note 3) - -
Exercise of stock options and warrants 1,471 1,894
Employee stock purchase plan - -
Proceeds from issuance of redeemable preferred
securities of subsidiaries, net of issuance
costs 28,800 144,000
Proceeds from issuance of convertible preferred
stock of subsidiary 16,000 -
Offering costs related to common and preferred
stock offerings (5,565) -
Redemption of preferred shares (3,800) (5,570)
Repurchase of redeemable preferred stock of
subsidiary and payment of accrued dividend - (32,629)
Repurchase of redeemable warrants - (2,671)
Proceeds from issuance of short-term debt - 17,500
Principal payments on short-term debt - (21,192
Proceeds from issuance of long-term debt 305,613 300,034
Deferred debt issuance costs (13,641) (11,915)
Principal payments on long-term debt (29,333) (16,920)
Principal payments on capital lease obligations (6,271) (12,304)
---------- ---------
Net cash provided (used) by financing
activities 377,772 360,227
---------- ---------
Net (decrease) increase in cash and cash
equivalents 263,391 181,666
Cash and cash equivalents, beginning of period 6,025 269,416
---------- ---------
Cash and cash equivalents, end of period $269,416 451,082
========== =========
Supplemental disclosure of cash flows information:
Cash paid for interest $ 9,311 19,190
========== ==========
Supplemental schedule of non-cash investing and
financing activities:
Common shares issued in connection with
business combinations, repayment of debt or
conversion of liabilities to equity $ 11,452 77,772
========== ==========
Common shares issued in exchange for notes
receivable, investments and other assets $ 1,398 -
========== ==========
Assets acquired under capital leases and
through the issuance of debt or warrants
(note 14) $ 38,670 55,030
========== ==========
Reclassification of investment in joint
venture to long-term notes receivable $ 6,882 -
========== ==========
Conversion of notes receivable related to
business combinations $ 6,330 -
========== ==========
Capitalized interest on assets under
construction $ - 4,916
========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Fiscal
year
Three months ended ended
December 31, December
------------------ 31,
1995 1996 1997
-------- -------- ------
(unaudited)
(in thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of common stock:
Common stock offering $ - - -
Business combination (note 3) - - 15,960
Exercise of stock options and warrants 101 2,084 4,116
Employee stock purchase plan - - 1,319
Proceeds from issuance of redeemable preferred
securities of subsidiaries, net of issuance
costs - - 223,628
Proceeds from issuance of convertible preferred
stock of subsidiary - - -
Offering costs related to common and preferred
stock offerings - - -
Redemption of preferred shares (5,570) - -
Repurchase of redeemable preferred stock of
subsidiary and payment of accrued dividend - - -
Repurchase of redeemable warrants - - -
Proceeds from issuance of short-term debt 17,500 - -
Principal payments on short-term debt (3,692) - -
Proceeds from issuance of long-term debt - - 99,908
Deferred debt issuance costs - - (3,554)
Principal payments on long-term debt (13,761) (279) (1,598)
Principal payments on capital lease obligations (2,991) (1,975) (24,058)
------- ------- --------
Net cash provided (used) by financing
activities (8,413) (170) 315,721
------- ------- --------
Net (decrease) increase in cash and cash
equivalents (38,253) (91,148) (241,100)
Cash and cash equivalents, beginning of period 269,416 451,082 359,934
------- ------- --------
Cash and cash equivalents, end of period $ 231,163 359,934 118,834
======= ======= ========
Supplemental disclosure of cash flows information:
Cash paid for interest $ 2,684 1,755 12,084
======= ======= ========
Supplemental schedule of non-cash investing and
financing activities:
Common shares issued in connection with
business combinations, repayment of debt or
conversion of liabilities to equity $ - 350 -
======= ======= ========
Common shares issued in exchange for notes
receivable, investments and other assets $ - - -
======= ======= ========
Assets acquired under capital leases and
through the issuance of debt or warrants
(note 14) $ 84 19,479 -
======= ======= ========
Reclassification of investment in joint
venture to long-term notes receivable $ - - -
======= ======= ========
Conversion of notes receivable related to
business combinations $ - - -
======= ======= ========
Capitalized interest on assets under
construction $ - 1,966 3,179
======= ======= ========
</TABLE>
A-29
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
- --------------------------------------------------------------------------------
(1) ORGANIZATION AND NATURE OF BUSINESS
ICG Communications, Inc., a Delaware corporation ("ICG"), was incorporated
on April 11, 1996, for the purpose of becoming the new publicly-traded U.S.
parent company of ICG Holdings (Canada), Inc., a Canadian federal
corporation ("Holdings-Canada"), ICG Holdings, Inc., a Colorado corporation
("Holdings"), and its subsidiaries. Pursuant to a Plan of Arrangement (the
"Arrangement"), which was approved by Holdings-Canada shareholders on July
30, 1996, and by the Ontario Court of Justice on August 2, 1996, each
shareholder of Holdings-Canada exchanged their common shares on a
one-for-one basis for either (i) shares of $.01 par value common stock of
ICG (the "Common Stock"), or (ii) Class A common shares of Holdings-Canada
(which are exchangeable at any time on a one-for-one basis into shares of
ICG Common Stock). On August 2, 1996, 28,795,132, or approximately 98%, of
the total issued and outstanding common shares of Holdings-Canada were
exchanged for an equal number of shares of Common Stock of ICG. In
accordance with generally accepted accounting principles, the Arrangement
was accounted for in a manner similar to a pooling of interests since ICG
and Holdings-Canada had common shareholders, and the number of shares
outstanding and the weighted average number of shares outstanding reflect
the equivalent shares outstanding for the combined companies. On September
17, 1997, ICG formed a new special purpose entity, ICG Funding, LLC, a
Delaware limited liability company and wholly owned subsidiary of ICG ("ICG
Funding"). ICG and its subsidiaries are collectively referred to as the
"Company."
The Company's principal business activity is telecommunications services,
including Telecom Services, Network Services and Satellite Services, and as
of January 21, 1998, the Company also began providing Internet Services,
through its recently acquired subsidiary, NETCOM On-Line Communication
Services, Inc. ("NETCOM"). Telecom Services consists of the Company's
competitive local exchange carrier operations which provide services to
business end users, long distance carriers and resellers. Network Services
supplies information technology services and selected networking products,
focusing on network design, installation, maintenance and support for a
variety of end users, including Fortune 1000 firms and other large
businesses and telecommunications companies. Satellite Services provides
satellite voice and data services to major cruise ship lines, the
commercial shipping industry, yachts, the U.S. Navy and offshore oil
platforms. The Company intends to dispose of its Satellite Services
operations to better focus on its core Telecom Services unit, although it
has not entered into a formal arrangement for such dispostion. Beginning in
1998, the Company's Internet Services includes Internet access, World Wide
Web (the "Web") site hosting services and other value-added connectivity
services, which are primarily targeted to small and medium-sized business
customers in the United States, Canada and the United Kingdom.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the
United States, and include the accounts of the Company and its
majority and wholly owned subsidiaries. Financial information prior to
the completion of the Arrangement on August 2, 1996 represents the
financial position and results of operations of Holdings-Canada and
Holdings, which are considered to be predecessor entities to ICG.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
A-30
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- ------------------------------------------------------------------------------
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(b) CHANGE IN FISCAL YEAR END
The Company changed its fiscal year end to December 31 from September
30, effective January 1, 1997. References to fiscal 1995, 1996 and
1997 relate to the years ended September 30, 1995 and 1996 and
December 31, 1997, respectively.
Unaudited consolidated statements of operations and cash flows for the
three months ended December 31, 1995 have been included in the
accompanying consolidated financial statements for comparative
purposes.
(c) CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS AVAILABLE FOR SALE
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. The Company
invests primarily in high grade short-term investments which consist
of money market instruments, commercial paper, certificates of
deposit, government obligations and corporate bonds, all of which are
considered to be available for sale and generally have maturities of
one year or less. The Company's short-term investment objectives are
safety, liquidity and yield, in that order. The Company carries all
cash equivalents and short-term investments at cost, which
approximates fair value.
(d) INVENTORY
Inventory, consisting of satellite systems equipment and equipment to
be utilized in the installation of communications systems, services
and networks for customers, is recorded at the lower of cost or
market, using the first-in, first-out method of accounting for cost.
(e) INVESTMENTS
Investments in joint ventures are accounted for using the equity
method, under which the Company's share of earnings or losses of the
joint ventures are reflected in operations and dividends are credited
against the investment when received. Losses recognized in excess of
the Company's investment due to additional investment or financing
requirements, or guarantees, are recorded as a liability in the
consolidated financial statements. Other investments representing an
interest of 20% or more, but less than 50%, are accounted for using
the equity method of accounting. Investments of less than a 20% equity
interest are accounted for using the cost method, unless the Company
exercises significant influence and/or control over the operations of
the investee company, in which case the equity method is used.
(f) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Costs of construction are
capitalized, including interest costs related to construction.
Equipment held under capital leases is stated at the lower of the fair
value of the asset or the net present value of the minimum lease
payments at the inception of the lease. For equipment held under
capital leases, depreciation is provided using the straight-line
method over the estimated useful lives of the assets owned, or the
related lease term, whichever is shorter.
A-31
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -----------------------------------------------------------------------------
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Estimated useful lives of major categories of property and equipment
are as follows:
Office furniture and equipment 3 to 7 years
Buildings and improvements 31.5 years
Machinery and equipment 3 to 8 years
Switch equipment 10 years
Fiber optic transmission system 20 years
The Company capitalizes the direct costs associated with the
installation of dial tone customers' service, including labor and an
allocation of overhead costs, and amortizes these costs over two
years, the estimated average customer contract term.
(g) OTHER ASSETS
Amounts related to the acquisition of transmission and other licenses
are recorded at cost and amortized over 20 years using the
straight-line method. Goodwill results from the application of the
purchase method of accounting for business combinations and is
amortized over a maximum of 20 years using the straight-line method.
Rights of way, minutes of use, and non-compete agreements are recorded
at cost, and amortized using the straight-line method over the terms
of the agreements, ranging from 2 to 12 years.
Amortization of deferred financing costs is provided over the life of
the related financing agreement, the maximum term of which is 10
years.
(h) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting periods. Actual results
could differ from those estimates.
(i) REVENUE RECOGNITION
The Company recognizes Telecom Services and Satellite Services revenue
as services are provided and charges direct selling expenses to
operations as incurred. Revenue from Network Services contracts for
the design and installation of communication systems and networks,
which are generally short-term in duration, is recognized using the
percentage of completion method of accounting. Maintenance revenue is
recognized as services are provided. Uncollectible trade receivables
are accounted for using the allowance method.
Revenue which has been earned under the percentage of completion
method, but has not been billed to the customer is included in
receivables-revenue earned, but unbilled in the consolidated financial
A-32
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- ------------------------------------------------------------------------------
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
statements. Deferred revenue includes monthly advance billings to
customers for certain services provided by the Company's Telecom
Services and Satellite Services, as well as Network Services revenue
which has been billed to the customer in compliance with contract
terms, but not yet earned under the percentage of completion method.
Prior to January 1, 1996, the Company recognized Telecom Services
revenue in an amount equal to the non-cancelable portion of the
contract, which is a minimum of one year on a three-year or longer
contract, at the inception of the contract and upon activation of
service to the customer to the extent of direct installation and
selling expenses incurred in obtaining customers during the period in
which such revenue was recognized. Revenue recognized in excess
of normal monthly billings during the year was limited to an amount
which did not exceed such installation and selling expense. The
remaining revenue from the contract was recognized ratably over
the remaining non-cancelable portion of the contract. The
Company believes the new method is preferable because it provides
a better matching of revenue and related operating expenses and
is more consistent with accounting practices within the
telecommunications industry. As required by generally accepted
accounting principles, the Company has reflected the effects of
the change in accounting as if such change had been adopted as
of October 1, 1995, and has included in the results of operations
for fiscal 1996 a charge of approximately $3.5 million relating
to the cumulative effect of this change in accounting. Other than
the cumulative effect of adopting this new method of accounting,
the effect of this change in accounting for the periods presented
was not significant.
(j) INCOME TAXES
The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes ("SFAS 109"). Under the asset and liability method of
SFAS 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under SFAS 109, the effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(k) LOSS PER SHARE
Loss per share is calculated by dividing the net loss by the weighted
average number of shares outstanding. Weighted average number of
shares outstanding for fiscal year 1995 and the three months ended
December 31, 1995 represents outstanding Holdings-Canada common
shares. Weighted average number of shares outstanding for fiscal 1996,
the three months ended December 31, 1996 and fiscal 1997 represents
Holdings-Canada common shares outstanding for the period
October 1, 1995 through August 2, 1996, and combined ICG Common Stock
and Holdings-Canada Class A common shares outstanding for the
periods subsequent to August 5, 1996.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share ("SFAS 128") which revises the
calculation and presentation provisions of Accounting Principles Board
A-33
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- ------------------------------------------------------------------------------
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Opinion No. 15 and related interpretations. Under SFAS 128, basic loss
per share is computed on the basis of weighted average common shares
outstanding. Diluted loss per share considers potential common stock
instruments in the calculation. The Company adopted SFAS 128 for its
fiscal year ending December 31, 1997, including the requirement for
retroactive application. The adoption of SFAS 128 had no effect on the
Company's previously reported loss per share. Potential common stock
instruments, which include options, warrants and convertible
subordinated notes and preferred securities, are not included in the
loss per share calculation as their effect is anti-dilutive.
(l) STOCK-BASED COMPENSATION
The Company accounts for its stock-based employee and non-employee
director compensation plans using the intrinsic value based method
prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related Interpretations ("APB 25").
The Company has provided pro forma disclosures of net loss and loss
per share as if the fair value based method of accounting for these
plans, as prescribed by Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), had
been applied. Pro forma disclosures include the effects of employee
and non-employee director stock options granted during fiscal 1996,
the three months ended December 31, 1996 and fiscal 1997.
(m) IMPAIRMENT OF LONG-LIVED ASSETS
The Company provides for the impairment of long-lived assets pursuant
to Statement of Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of ("SFAS 121") which requires that long-lived assets and
certain identifiable intangibles held and used by an entity be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable.
An impairment loss is recognized when estimated undiscounted
future cash flows expected to be generated by the asset is less than
its carrying value. Measurement of the impairment loss is based on
the fair value of the asset, which is generally determined using
valuation techniques such as the discounted present value of
expected future cash flows.
(n) RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with
the current period's presentation.
(3) BUSINESS COMBINATIONS AND INVESTMENTS
(a) ACQUISITION DURING FISCAL 1997
On October 17, 1997, the Company purchased approximately 91% of the
outstanding capital stock of Communications Buying Group, Inc.
("CBG"), an Ohio based local exchange and centrex reseller. The
Company paid total consideration of approximately $46.5 million, plus
the assumption of certain liabilities. Separately, on October 17,
A-34
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- ------------------------------------------------------------------------------
(3) BUSINESS COMBINATIONS AND INVESTMENTS (continued)
1997, the Company sold 687,221 shares of Common Stock for
approximately $16.0 million to certain shareholders of CBG. Subsequent
to December 31,1997, the Company purchased the remaining approximately
9% interest in CBG for approximately $2.9 million in cash.
The Company has accounted for the acquisition under the purchase
method of accounting, and accordingly, the operations of CBG have been
included in the Company's operations since the acquisition date. The
excess of the purchase price over the fair value of the net
identifiable assets acquired of $48.8 million has been recorded as
goodwill and is being amortized on a straight-line basis over six
years. Revenue, net loss and loss per share on a pro forma combined
basis are not significantly different from the Company's historical
results for the periods presented herein.
(b) ACQUISITIONS AND INVESTMENTS DURING FISCAL 1996
In January 1996, the Company purchased the remaining 49% minority
interest of Fiber Optic Technologies, Inc. ("FOTI"), making FOTI a
wholly owned subsidiary. Consideration for the purchase was
approximately $2.0 million in cash and 66,236 common shares of
Holdings-Canada valued at approximately $0.8 million, for total
consideration of approximately $2.8 million.
In February 1996, the Company entered into an agreement with Linkatel
California, L.P. ("Linkatel") and its other partners, Linkatel
Communications, Inc. and The Copley Press, Inc., under which the
Company acquired a 60% interest in Linkatel for an aggregate purchase
price of $10.0 million in cash and became the general partner of
Linkatel. In April 1996, the partnership was renamed ICG Telecom of
San Diego, L.P.
In March 1996, the Company acquired a 90% equity interest in MarineSat
Communications Network, Inc. ("MCN"), (formally Maritime Cellular
Tele-network, Inc.), a Florida-based provider of cellular and
satellite communications for commercial ships, private vessels,
offshore oil platforms and land-based mobile units, for approximately
$0.7 million in cash and approximately $0.1 million of assumed debt,
for total consideration of approximately $0.8 million. In April 1997,
the Company received the remaining 10% interest in MCN as partial
consideration for the sale of its investment in Mexico. In the fourth
quarter of fiscal 1997, the Company recorded a provision for
impairment of $2.9 million of its investment in MCN.
In August 1996, the Company acquired certain Signaling System 7
("SS7") assets of Pace Network Services, Inc. ("Pace"), a division of
Pace Alternative Communications, Inc. SS7 is used by local exchange
companies, long-distance carriers, wireless carriers and others to
signal between network elements, creating faster call set-up resulting
in a more efficient use of network resources. The Company paid cash
consideration of $1.6 million as of September 30, 1996 and an
additional $1.0 million in January 1997, based on the operating
results of the underlying business since the date of acquisition.
The acquisitions described above have been accounted for using the
purchase method of accounting and, accordingly, the net assets and
results of operations are included in the consolidated financial
statements from the respective dates of acquisition. Revenue, net loss
and loss per share on a pro forma basis are not significantly
different from the Company's historical results for the periods
A-35
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -----------------------------------------------------------------------------
(3) BUSINESS COMBINATIONS AND INVESTMENTS (continued)
presented herein. The aggregate purchase price of the 1996
acquisitions, in which the Company obtained a controlling interest,
was allocated based on fair values of the underlying assets acquired
as follows (in thousands):
Current assets $ 6,563
Property and equipment 7,542
Other assets, including goodwill 10,647
Current liabilities (775)
Long-term liabilities (6,314)
Minority interest (1,422)
-------------------
$ 16,241
===================
(c) ACQUISITIONS AND INVESTMENTS DURING FISCAL 1995
In January 1995, the Company and an unaffiliated entity formed
Maritime Telecommunications Network, Inc. ("MTN") to provide wireless
communications through satellites to the maritime cruise industry,
U.S. Navy vessels and offshore oil platforms. The Company acquired (i)
approximately 64% of MTN, (ii) approximately $4.4 million in notes
receivable from MTN and (iii) consulting and non-compete agreements
valued at an aggregate of approximately $0.3 million in exchange for
(i) approximately $9.0 million in cash, (ii) the surrender and
cancellation of a note to the Company from the other entity for $0.6
million plus interest, (iii) 408,347 Holdings-Canada common shares
valued at approximately $5.1 million (of which 256,303 common shares
were issued in the fourth quarter of fiscal 1994), and (iv) the
Company's commitment to provide additional convertible working capital
advances to MTN as required by MTN. The other shareholder of MTN
contributed the assets of a predecessor business to MTN.
MTN also assumed approximately $2.1 million of obligations of such
predecessor business. The Company paid a $0.5 million finder's fee
obligation of the predecessor to a third party. As part of the terms
of the original purchase agreement, the Company agreed to purchase,
at fair market value, all of the shares of MTN that were owned by
the minority shareholders, upon demand of the minority shareholders,
if a transaction was not effected which converted the minority
shares into publicly traded securities or cash by January 3, 1998.
As of the current date, no such demand has been made by the
minority shareholders.
During fiscal 1995, the Company purchased a 58% interest in Zycom
Corporation ("Zycom"), an Alberta, Canada corporation whose shares are
traded on the Alberta Stock Exchange. Consideration for the purchase
was approximately $0.8 million in cash, the conversion of $2.0 million
in notes receivable, and the assumption of approximately $0.7 million
in debt for total consideration of approximately $3.5 million. In
March 1996, the Company acquired an additional approximate 12% equity
interest in Zycom by converting a $3.2 million receivable due from
Zycom into common stock. In the fourth quarter of fiscal 1997, the
Company recorded a provision for impairment of $2.7 million of its
investment in Zycom.
The acquisitions described above were accounted for using the purchase
method of accounting, and accordingly, the net assets and the results
of operations are included in the consolidated financial statements
from the respective dates of acquisition. Revenue, net loss and loss
per share on a pro forma basis are not significantly different from
the Company's historical results for the periods presented herein.
A-36
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- ------------------------------------------------------------------------------
(3) BUSINESS COMBINATIONS AND INVESTMENTS (continued)
The aggregate purchase price of the 1995 acquisitions, in which the
Company obtained a controlling interest, was allocated based on fair
values of the underlying assets acquired as follows (in thousands):
Current assets $ 1,835
Property and equipment 9,086
Other assets, including goodwill 16,986
Current liabilities (2,764)
Long-term liabilities (6,779)
Minority interest (4,850)
----------------------
$ 13,514
======================
During fiscal 1995, the Company invested approximately $5.2 million
($3.9 million in cash, $1.1 million in common shares of
Holdings-Canada, and the conversion of approximately $0.2 million in
notes receivable) in StarCom International Optics Corporation
("StarCom"), for which the Company received a 25% equity interest in
each of Starcom's wholly owned operating subsidiaries. In December
1997, a senior secured creditor of StarCom notified the Company that
it intended to foreclose on its collateral in StarCom, and in January
1998, StarCom commenced bankruptcy proceedings. Based on management's
estimate of the net realizable value of its investment, the Company
recorded a provision for impairment of its investment of $5.2 million
in fiscal 1997.
(d) INVESTMENTS IN JOINT VENTURE AND AFFILIATE
In September 1992, the Company entered into a joint venture agreement
with Greenstar Technologies Inc. (now GST Telecommunications, Inc.
("GST")) to design, construct and operate a competitive access network
in Phoenix. The Company and GST each had a 50% equity interest in the
joint venture. All financing provided to the joint venture by the
Company, as well as the recognition of the Company's share of the
joint venture's losses, were recorded according to the equity method
of accounting. During fiscal 1996, the Company recorded a valuation
allowance of approximately $5.8 million for the amounts receivable
arising from advances made to the Phoenix network joint venture, based
on management's estimate of the net realizable value of the
receivable.
In October 1996, the Company sold its interest in the joint venture to
GST. The Company received approximately $2.1 million in cash,
representing $1.3 million of consideration for its 50% interest and
$0.8 million for equipment and amounts advanced to the joint venture.
In addition, the Company received equipment with a net book value of
$2.4 million and assumed liabilities of $0.3 million. A gain on sale
of the joint venture of approximately $0.8 million was recorded in the
consolidated financial statements during the three months ended
December 31, 1996.
(e) MERGER SUBSEQUENT TO DECEMBER 31, 1997
On January 21, 1998, the Company completed a merger with NETCOM.
Located in San Jose, California, NETCOM is a provider of Internet
connectivity and Web site hosting services and other value-added
Internet services. At the effective time of the merger, each
outstanding share of NETCOM common stock became automatically
A-37
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- ------------------------------------------------------------------------------
(3) BUSINESS COMBINATIONS AND INVESTMENTS (continued)
convertible into shares of Common Stock at an exchange ratio of 0.8628
shares of Common Stock per NETCOM common share. As a result of the
transaction, the Company expects to issue an estimated 10.2 million
shares of Common Stock for the NETCOM common shares outstanding on
January 21, 1998. Cash will be paid in lieu of fractional shares. The
Company will account for the business combination under the
pooling-of-interests method of accounting and accordingly, the
Company's financial statements will be restated to reflect the
operations of NETCOM and the Company on a combined basis for all
historical periods.
The following unaudited pro forma information presents the combined
results of operations of the Company and NETCOM as if the business
combination had been consummated on October 1, 1994. The Company does
not anticipate any significant adjustments to conform the accounting
policies of NETCOM with those of the Company.
<TABLE>
<CAPTION>
Three months Fiscal year
Fiscal years ended ended ended
September 30, December 31, December 31,
---------------------------
1995 1996 1996 1997
------------- ------------- -------------- -----------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C>
Revenue $164,032 289,634 93,335 434,014
Net loss (90,712) (228,372) (61,313) (360,735)
Loss per share -
basic and diluted (2.94) (6.19) (1.46) (8.49)
</TABLE>
(4) SHORT-TERM INVESTMENTS AVAILABLE FOR SALE
Short-term investments available for sale are comprised of the following:
December 31,
----------------------------------
1996 1997
---------------- -------------
(in thousands)
Money market investments $ 10,000 -
Commercial paper 5,500 4,000
U.S. Treasury securities 17,101 94,181
--------------- --------------
$ 32,601 98,181
================ =============
At December 31, 1996 and 1997, the estimated fair value of the Company's
money market instruments, commercial paper and U.S. Treasury securities
approximated cost, and the amount of gross unrealized gains was not
significant. All money market instruments, commercial paper and U.S.
Treasury securities mature within one year.
A-38
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- ------------------------------------------------------------------------------
(5) NOTES RECEIVABLE AND DUE FROM AFFILIATE
In January 1997, the Company announced a strategic alliance with Central
and South West Corporation ("CSW") which is developing and marketing
telecommunications services in certain cities in Texas. The venture entity,
a limited partnership named CSW/ICG ChoiceCom, L.P. ("ChoiceCom"), is based
in Austin, Texas. CSW holds 100% of the interest in ChoiceCom, and CSW and
the Company each have two representatives on the Management Committee of
the general partner of ChoiceCom. The Company has committed to loan
ChoiceCom $15.0 million under two promissory notes, which are payable on
demand and earn interest at LIBOR plus 2% per annum (7.97% at December 31,
1997). Advances under these promissory notes were $10.0 million at December
31, 1997.
Additionally, the Company has agreed to perform certain administrative
services for ChoiceCom and make certain payments to vendors on behalf of
ChoiceCom, for which such services and payments are to be conducted on an
arm's length basis and reimbursed by ChoiceCom. At December 31, 1997,
amounts outstanding under this arrangement and included in due from
affiliate were approximately $9.4 million, and were collected in full
during the subsequent fiscal quarter.
(6) PROPERTY AND EQUIPMENT
Property and equipment, including assets held under capital leases, is
comprised of the following:
December 31,
-------------------------------
1996 1997
------------- ---------------
(in thousands)
Land $ 306 709
Buildings and improvements 2,300 2,238
Furniture, fixtures and office equipment 35,904 46,711
Machinery and equipment 10,764 31,630
Fiber optic equipment 143,133 156,255
Satellite equipment 19,408 29,760
Switch equipment 58,199 85,546
Fiber optic transmission system 117,281 192,756
Build out/site preparation 13,284 13,898
Construction in progress (see note 14) 59,642 178,985
------------- ---------------
460,221 738,488
Less accumulated depreciation (56,545) (106,321)
------------- ---------------
$ 403,676 632,167
============= ===============
Property and equipment includes approximately $179.0 million of equipment
which has not been placed in service at December 31, 1997, and accordingly,
is not being depreciated. The majority of this amount is related to new
network construction (see note 14).
A-39
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- ------------------------------------------------------------------------------
(6) PROPERTY AND EQUIPMENT (continued)
Certain of the assets described above have been pledged as security for
long-term debt and are held under capital leases at December 31, 1997. The
following is a summary of property and equipment held under capital leases:
December 31,
--------------------------------
1996 1997
------------- ----------------
(in thousands)
Machinery and equipment $ 1,842 3,926
Fiber optic equipment 7,514 6,314
Switch equipment 22,280 21,380
Fiber optic transmission system 55,746 58,806
Construction in progress 20,187 17,895
------------- ----------------
107,569 108,321
Less accumulated depreciation (4,424) (8,409)
------------- ----------------
$ 103,145 99,912
============= ================
(7) OTHER ASSETS
Other assets are comprised of the following:
December 31,
--------------------------------
1996 1997
------------- ----------------
(in thousands)
Deposits $ 3,579 2,429
Pace customer base 2,581 2,805
Rights of way 1,739 425
Minutes of use agreement 1,421 -
Non-compete agreements 902 1,386
Right of entry - 5,019
Other 1,063 839
------------- ----------------
11,285 12,903
Less accumulated amortization (1,547) (3,499)
------------- ----------------
Other $ 9,738 9,404
============= ================
(8) RELATED PARTY TRANSACTIONS
During fiscal 1996, Holdings-Canada and International Communications
Consulting, Inc. ("ICC") entered into a consulting agreement whereby ICC
will provide various consulting services to the Company through December
1999 for approximately $4.2 million to be paid during the term of the
agreement. During fiscal 1996, the three months ended December 31, 1996 and
fiscal 1997, the Company paid approximately $1.3 million, $0.3 million and
$1.1 million, respectively, related to this consulting agreement. William
W. Becker, a stockholder and former director of the Company, is President
and Chief Executive Officer of ICC.
A-40
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- ------------------------------------------------------------------------------
(8) RELATED PARTY TRANSACTIONS (continued)
At December 31, 1996 and 1997, receivables from officers and employees of
approximately $1.0 million and $0.9 million, respectively, are primarily
comprised of promissory notes from officers for relocation expenses, which
are generally payable on demand and bear interest at 7% per annum, and are
included in receivables-other in the accompanying consolidated financial
statements.
(9) CAPITAL LEASE OBLIGATIONS
The Company has payment obligations under various capital lease agreements
for equipment. The future required payments under the Company's capital
lease obligations subsequent to December 31, 1997 are as follows (in
thousands):
Due December 31:
1998 $ 15,651
1999 13,782
2000 14,431
2001 16,350
2002 11,009
Thereafter 93,584
---------------------
Total minimum lease payments 164,807
Less amounts representing interest (92,231)
---------------------
Present value of net minimum lease payments 72,576
Less current portion (5,637)
---------------------
$ 66,939
=====================
(10) LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1997
----------- -----------
(in thousands)
<S> <C> <C>
11 5/8% Senior discount notes,
net of discount (a) $ - 109,436
12 1/2% Senior discount notes,
net of discount (b) 325,530 367,494
13 1/2% Senior discount notes,
net of discount (c) 355,955 407,409
Note payable with interest at
the 90-day commercial
paper rate plus 4 3/4% (10.3%
at December 31, 1997),
due 2001, secured by certain
telecommunications equipment 5,815 4,932
Note payable with interest at 11%,
due monthly through
fiscal 1999, secured by equipment 2,625 1,860
Mortgage payable with interest at 8 1/2%,
due monthly through 2009,
secured by building 1,177 1,131
Other 73 90
---------- -----------
691,175 892,352
Less current portion (817) (1,784)
---------- -----------
$ 690,358 890,568
========== ===========
</TABLE>
A-41
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- ------------------------------------------------------------------------------
(10) LOMG TERM-DEBT (continued)
(a) 11 5/8% NOTES
On March 11, 1997, Holdings completed a private placement (the "1997
Private Offering") of 11 5/8% Senior Discount Notes due 2007 (the "11
5/8% Notes") and 14% Exchangeable Preferred Stock Mandatorily
Redeemable 2008 (the "14% Preferred Stock") for gross proceeds of
$99.9 million and $100.0 million, respectively. Net proceeds from the
1997 Private Offering, after costs of approximately $7.5 million, were
approximately $192.4 million.
The 11 5/8% Notes are unsecured senior obligations of Holdings
(guaranteed by ICG) that mature on March 15, 2007, at a maturity value
of $176.0 million. Interest will accrue at 11 5/8% per annum,
beginning March 15, 2002, and is payable each March 15 and September
15, commencing September 15, 2002. The indenture for the 11 5/8% Notes
contains certain covenants which provide for limitations on
indebtedness, dividends, asset sales and certain other transactions
and effectively prohibits the payment of cash dividends.
The 11 5/8% Notes were originally recorded at approximately $99.9
million. The discount on the 11 5/8% Notes and the debt issuance costs
are being accreted over ten years until maturity at March 15, 2007.
The accretion of the discount and debt issuance costs is included in
interest expense in the accompanying consolidated financial
statements.
(b) 12 1/2% NOTES
On April 30, 1996, Holdings completed a private placement (the "1996
Private Offering") of 12 1/2% Senior Discount Notes due 2006 (the "12
1/2% Notes") and of 14 1/4% Exchangeable Preferred Stock Manditorily
Redeemable 2007 (the "14 1/4% Preferred Stock") for gross proceeds of
$300.0 million and $150.0 million, respectively. Net proceeds from the
1996 Private Offering, after issuance costs of approximately $17.0
million, were approximately $433.0 million.
The 12 1/2% Notes are unsecured senior obligations of Holdings
(guaranteed by ICG and Holdings-Canada) that mature on May 1, 2006,
with a maturity value of $550.3 million. Interest will accrue at 12
1/2% per annum, beginning May 1, 2001, and is payable each May 1 and
November 1, commencing November 1, 2001. The indenture for the 12 1/2%
Notes contains certain covenants which provide for limitations on
indebtedness, dividends, asset sales and certain other transactions
and effectively prohibits the payment of cash dividends.
The 12 1/2% Notes were originally recorded at approximately $300.0
million. The discount on the 12 1/2% Notes and the debt issuance costs
are being accreted over ten years until maturity at May 1, 2006. The
accretion of the discount and debt issuance costs is included in
interest expense in the accompanying consolidated financial
statements.
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
A-42
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- ------------------------------------------------------------------------------
(10) LONG-TERM DEBT (continued)
preferred dividends on preferred securities of subsidiaries of
approximately $12.3 million for the excess of the redemption price of
the Redeemable Preferred Stock over the carrying amount at April 30,
1996, and recognized a charge to interest expense of approximately
$11.5 million for the payments made to noteholders with respect to
consents to amendments to the indenture governing the 13 1/2% Notes to
permit the 1996 Private Offering.
(c) 13 1/2% NOTES
On August 8, 1995, Holdings completed a private placement (the "1995
Private Offering") through the issuance of 58,430 units (the "Units"),
each Unit consisting of ten $1,000, 13 1/2% Senior Discount Notes due
2005 (the "13 1/2% Notes") and warrants to purchase 33 common shares
of Holdings-Canada (the "Unit Warrants"). Net proceeds from the 1995
Private Offering, after issuance costs of approximately $14.0 million,
were approximately $286.0 million.
The 13 1/2% Notes are unsecured senior obligations of Holdings
(guaranteed by ICG and Holdings-Canada) that mature on September 15,
2005, with a maturity value of $584.3 million. Interest will accrue at
the rate of 13 1/2% per annum, beginning September 15, 2000, and is
payable in cash each March 15 and September 15, commencing March 15,
2001. The indenture for the 13 1/2% Notes contains certain covenants
which provide for limitations on the indebtedness, dividends, asset
sales and certain other transactions and effectively prohibits the
payment of cash dividends.
The 13 1/2% Notes were originally recorded at approximately $294.0
million, which represents the $300.0 million in proceeds less the
approximate $6.0 million value assigned to the Unit Warrants, which is
included in additional paid-in capital. The discount on the 13 1/2%
Notes and the debt issuance costs are being accreted over five years
until September 15, 2000, the date at which the 13 1/2% Notes can
first be redeemed. The value assigned to the Unit Warrants,
representing additional debt discount, is also being accreted over
the five-year period. The accretion of the total discount is
included in interest expense in the accompanying consolidated
financial statements. Holdings may redeem the 13 1/2% Notes on or
after September 15, 2000, in whole or in part, at the redemption
prices set forth in the agreement, plus unpaid interest, if any,
at the date of redemption.
The Unit Warrants entitle the holder to purchase one common share of
Holdings-Canada, which is exchangeable into one share of Common Stock,
at the exercise price of $12.51 per share and are exercisable at any
time between August 8, 1996 and August 8, 2005.
In connection with the issuance of the 13 1/2% Notes, the Company
obtained $6.0 million of interim financing from the placement agent
and certain private investors in exchange for the issuance of an
aggregate of 520,000 Series A Warrants (see note 12 (c)). The $6.0
million was repaid with a portion of the proceeds from the 1995
Private Offering. As a result of the repayment of the interim
financing, the value assigned to the Series A Warrants totaling
approximately $3.0 million, representing debt discount, was charged to
interest expense during the year ended September 30, 1995.
A-43
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -----------------------------------------------------------------------------
(10) LONG-TERM DEBT (continued)
Scheduled principal maturities of long-term debt as of December 31,
1997 are as follows (in thousands):
Due December 31:
1998 $ 1,784
1999 1,686
2000 1,290
2001 938
2002 938
Thereafter (a) 1,311,976
-----------------
1,318,612
Less unaccreted discount on
the 11 5/8% Notes, the 12 1/2%
Notes and the 13 1/2% Notes (426,260)
-----------------
$ 892,352
==================
(a) Includes $176.0 million, $550.3 million and $584.3 million of 11
5/8% Notes, 12 1/2% Notes, and 13 1/2% Notes, respectively, due
at maturity.
(e) PRIVATE PLACEMENT OF SENIOR DISCOUNT NOTES COMPLETED SUBSEQUENT TO
DECEMBER 31, 1997
On February 12, 1998, ICG Services, Inc., a Delaware corporation and
new wholly owned subsidiary of ICG ("ICG Services"), completed a
private placement of 10% Senior Discount Notes due 2008 (the "10%
Notes") for gross proceeds of approximately $300.6 million. Net
proceeds from the offering, after underwriting costs of approximately
$9.0 million, were approximately $291.6 million.
The 10% Notes are unsecured senior obligations of ICG Services that
mature on February 15, 2008, at a maturity value of $490.0 million.
Interest will accrue at 10% per annum, beginning February 15, 2003,
and is payable each February 15 and August 15, commencing August 15,
2003. The indenture for the 10% Notes contains certain covenants which
provide limitations on indebtedness, dividends, asset sales and
certain other transactions.
(11) REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES
Redeemable preferred stock of subsidiary is summarized as follows:
December 31,
--------------------------------
1996 1997
-------------- -----------------
(in thousands)
14% Exchangeable preferred stock,
mandatorily redeemable in 2008 (a) $ - 108,022
14 1/4% Exchangeable preferred stock,
mandatorily redeemable in 2007 (b) 159,120 184,420
-------------- ----------------
$ 159,120 292,442
============== =================
A-44
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -----------------------------------------------------------------------------
(11) REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES (continued)
(a) 14% PREFERRED STOCK
In connection with the 1997 Private Offering, Holdings sold 100,000
shares of exchangeable preferred stock that bear a cumulative dividend
at the rate of 14% per annum. The dividend is payable quarterly in
arrears each March 15, June 15, September 15, and December 15, and
commenced June 15, 1997. Through March 15, 2002, the dividend is
payable at the option of Holdings in cash or additional shares of 14%
Preferred Stock. Holdings may exchange the 14% Preferred Stock into
14% Senior Subordinated Exchange Debentures at any time after the
exchange is permitted by certain indenture restrictions. The 14%
Preferred Stock is subject to mandatory redemption on March 15, 2008.
(b) 14 1/4% PREFERRED STOCK
In connection with the 1996 Private Offering, Holdings sold 150,000
shares of exchangeable preferred stock that bear a cumulative dividend
at the rate of 14 1/4% per annum. The dividend is payable quarterly in
arrears each February 1, May 1, August 1 and November 1, and commenced
August 1, 1996. Through May 1, 2001, the dividend is payable, at the
option of Holdings, in cash or additional shares of 14 1/4% Preferred
Stock. Holdings may exchange the 14 1/4% Preferred Stock into 14 1/4%
Senior Subordinated Exchange Debentures at any time after the exchange
is permitted by certain indenture restrictions. The 14 1/4% Preferred
Stock is subject to mandatory redemption on May 1, 2007.
(c) 6 3/4% PREFERRED SECURITIES
During fiscal 1997, a new subsidiary of the Company, ICG Funding,
completed a private placement of 6 3/4% Exchangeable Limited Liability
Company Preferred Securities Mandatorily Redeemable 2009 (the "6 3/4%
Preferred Securities") for gross proceeds of $132.25 million. Net
proceeds from the private placement, after offering costs, were
approximately $127.6 million. Restricted cash at December 31, 1997 of
$38.7 million includes the proceeds from the offering which are
designated for the payment of cash dividends on the 6 3/4% Preferred
Securities through November 15, 2000.
The 6 3/4% Preferred Securities consist of 2,645,000 exchangeable
preferred securities of ICG Funding that bear a cumulative dividend at
the rate of 6 3/4% per annum. The dividend is paid quarterly in
arrears each February 15, May 15, August 15 and November 15, and
commenced November 15, 1997. The dividend is payable in cash through
November 15, 2000 and thereafter, in cash or shares of ICG Common
Stock, at the option of ICG Funding. The 6 3/4% Preferred Securities
are exchangeable, at the option of the holder, at any time prior to
November 15, 2009 into shares of Common Stock at a rate of 2.0812
shares of Common Stock per preferred security, or $24.025 per share,
subject to adjustment. ICG Funding may, at its option, redeem the 6
3/4% Preferred Securities at any time on or after November 18, 2000.
Prior to that time, ICG Funding may redeem the 6 3/4% Preferred
Securities if the current market value of Common Stock equals or
exceeds the exchange price, for at least 20 days of any 30-day trading
period, by 170% prior to November 16, 1998; 160% from November 16,
1998 through November 15, 1999; and 150% from November 16, 1999
through November 15, 2000. The 6 3/4% Preferred Securities are subject
to mandatory redemption on November 15, 2009.
A-45
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- ------------------------------------------------------------------------------
(11) REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES (continued)
On February 15, 1998, ICG Funding used the remaining proceeds from the
private placement of the 6 3/4% Preferred Securities to purchase
$112.4 million of ICG Communications, Inc. Preferred Stock ("ICG
Preferred Stock") which pays dividends each February 15, May 15,
August 15 and November 15 in additional shares of ICG Preferred Stock
through November 15, 2000. Subsequent to November 15, 2000, dividends
are payable in cash or shares of Common Stock, at the option of ICG.
The ICG Preferred Stock is exchangeable, at the option of ICG Funding,
at any time prior to November 15, 2009 into shares of Common Stock
at an exchange rate based on the exchange rate of the 6 3/4%
Preferred Securities. The ICG Preferred Stock is subject to mandatory
redemption on November 15, 2009.
The accreted value of the 6 3/4% Preferred Securities is included in
Company-obligated mandatorily redeemable preferred securities of
subsidiary limited liability company which holds solely Company
preferred stock in the accompanying consolidated balance sheet at
December 31, 1997.
Included in minority interest in share of losses, net of accretion
and preferred dividends on preferred securities of
subsidiaries is approximately $1.3 million, $27.0 million,
$5.8 million and $39.8 million for fiscal 1995 and 1996, the three
months ended December 31, 1996 and fiscal 1997, respectively,
associated with the accretion of issuance costs, discount and
preferred security dividend accruals for the 6 3/4% Preferred
Securities, the 14% Preferred Stock, the 14 1/4% Preferred Stock
and the Redeemable Preferred Stock (issued in connection with
the 1995 Private Offering and redeemed in April 1996). These costs
are partially offset by the minority interest share in losses of
subsidiaries of approximately $0.6 million, $2.7 million, $0.8
million and $2.0 million for fiscal 1995 and 1996, the three
months ended December 31, 1996 and fiscal 1997, respectively.
(12) STOCKHOLDERS' DEFICIT
(a) COMMON STOCK
Common stock outstanding at December 31, 1997 represents the issued
and outstanding Common Stock of ICG and Class A common shares of
Holdings-Canada (not owned by ICG) which are exchangeable at any time,
on a one-for-one basis, for ICG Common Stock. The following table sets
forth the number of shares outstanding for ICG and Holdings-Canada on
a separate company basis as of December 31, 1997:
A-46
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- ------------------------------------------------------------------------------
(12) STOCKHOLDERS' DEFICIT (continued)
Shares Shares not owned
owned by ICG by ICG
-------------------- -------------------
ICG Common Stock, $.01 par value,
100,000,000 shares authorized;
31,087,825 and 33,784,500 shares
issued and outstanding at December
31, 1996 and 1997, respectively - 33,784,500
Holdings-Canada Class A common shares,
no par value, 100,000,000 shares
authorized; 31,795,270 and
31,822,756 shares issued and
outstanding at December 31, 1996
and 1997, respectively:
Class A common shares,
exchangeable on a one-for-one
basis for ICG Common Stock
at any time - 23,700
Class A common shares owned
by ICG 31,799,056 -
-------------------
Total shares outstanding 33,808,200
===================
(b) STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN
In fiscal years 1991, 1992 and 1993, the Company's Board of Directors
approved incentive stock option plans and replenishments to those
plans which provide for the granting of options to directors,
officers, employees and consultants of the Company to purchase
285,000, 724,400 and 1,692,700 shares, respectively, of the Company's
Common Stock, with exercise prices between 80% and 100% of the fair
value of the shares at the date of grant. A total of 1,849,600 options
have been granted under these plans with exercise prices ranging from
approximately $2.92 to $14.03. Compensation expense has been recorded
for options granted at an exercise price below the fair market value
of the Company's Common Stock at the date of grant, pursuant to the
provisions of APB 25. The options granted under these plans are
subject to various vesting requirements and expire in five and ten
years from the date of grant.
In fiscal years 1994, 1995 and 1996, the three months ended December
31, 1996 and fiscal 1997, the Company's Board of Directors approved
incentive and non-qualified stock option plans and replenishments to
plans which provide for the granting of options to certain directors,
officers and employees to purchase 2,536,000 shares of the Company's
Common Stock under the 1994 plan and an aggregate of 2,700,000
shares of the Company's Common Stock under the 1995 and 1996 plans.
A total of 5,709,426 options have been granted under these
plans at original exercise prices ranging from $7.94 to $27.06,
none of which were less than 100% of the fair market value of the
shares underlying options on the date of grant, and accordingly, no
compensation expense was recorded for these options under APB 25.
The options granted under these plans are subject to various
vesting requirements and expire in five and ten years from the date
of grant.
A-47
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- ------------------------------------------------------------------------------
(12) STOCKHOLDERS' DEFICIT (continued)
In order to continue to provide non-cash incentives and retain key
employees, all employee stock options outstanding on April 16, 1997
with exercise prices at or in excess of $15.875 were canceled by the
Stock Option Committee of the Company's Board of Directors and
regranted with an exercise price of $10.375, the closing price of the
Company's Common Stock on the Nasdaq National Market on April 16,
1997. A total of 597,600 options, with original exercise prices
ranging from $15.875 to $26.25, were canceled and regranted. There was
no effect on the Company's consolidated financial statements as a
result of the cancellation and regranting of options.
In October 1996, the Company established an Employee Stock Purchase
Plan whereby employees can elect to designate 1% to 30% of their
annual salary, to be used to purchase shares of the Company's Common
Stock, up to a limit of $25,000 in Common Stock each year, at a 15%
discount to fair market value. Stock purchases will occur four times a
year on February 1, May 1, August 1 and November 1, with the price per
share equaling the lower of 85% of the market price at the beginning
or end of the offering period. The Company is authorized to issue a
total of 1,000,000 shares of Common Stock to participants in the plan.
During fiscal 1997, the Company sold 109,213 shares of the Company's
Common Stock to employees under this plan.
The Company recorded compensation expense in connection with its
stock-based employee and non-employee director compensation plans of
$0.2 million and $0.1 million for fiscal 1995 and 1996, respectively,
pursuant to the intrinsic value based method of APB 25. Had
compensation expense for the Company's plans been determined based on
the fair market value of the options at the grant dates for awards
under those plans consistent with the provisions of SFAS 123,
the Company's pro forma net loss and loss per share would have
been as presented below. Pro forma disclosures include the effects
of employee and non-employee director stock options granted during
fiscal 1995 and 1996, the three months ended December 31, 1996 and
fiscal 1997.
<TABLE>
<CAPTION>
Fiscal years ended Three months Fiscal year
September 30, ended ended
------------------------ December 31, December 31,
1995 1996 1996 1997
---------- ---------- --------- ---------
(in thousands, except per share amounts)
Net loss:
- --------
<S> <C> <C> <C> <C>
As reported $ (76,648) (184,107) (49,823) (327,643)
Pro forma (82,544) (186,831) (50,819) (331,715)
Loss per share - basic
- ----------------------
and diluted:
- -----------
As reported $ (3.25) (6.83) (1.56) (10.11)
Pro forma (3.50) (6.93) (1.60) (10.24)
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted average assumptions: an expected option life of three years
A-48
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- ------------------------------------------------------------------------------
(12) STOCKHOLDERS' DEFICIT (continued)
for directors, officers and other executives, and two years for other
employees, for all periods; expected volatility of 50% for all
periods; and risk-free interest rates ranging from 5.03% to 7.42% for
fiscal 1995 and 1996 and the three months ended December 31, 1996, and
risk-free interest rates ranging from 5.61% to 6.74% for fiscal 1997.
Risk-free interest rates, as were currently available on the grant
date, were assigned to each granted option based on the zero-coupon
rate of U.S. Treasury bills to be held for the same period as the
assumed option life. Since the Company does not anticipate issuing any
dividends on its Common Stock, the dividend yield was assumed to be
zero. The weighted average fair market value of options granted during
fiscal 1995 and 1996, the three months ended December 31, 1996 and
fiscal 1997 was approximately $4.11, $5.28, $9.42 and $5.75 per
option, respectively.
As options outstanding at December 31, 1997 will continue to vest in
subsequent periods, additional options are expected to be awarded
under existing and new plans and options granted prior to 1995 have
not been considered, the above pro forma results are not necessarily
indicative of the impact on net loss and loss per share in future
periods.
The following table summarizes the status of the Company's stock-based
compensation plans:
<TABLE>
<CAPTION>
Shares Weighted
underlying average Options
options exercise price exercisable
------------- -------------- -----------
(in thousands) (in thousands)
<S> <C> <C> <C>
Outstanding at October 1, 1994 1,319 $ 6.81 769
Granted 2,520 9.73
Exercised (264) 3.32
Canceled (201) 13.25
--------
Outstanding at September 30, 1995 3,374 9.08 940
Granted 1,322 11.78
Exercised (248) 7.55
Canceled (243) 11.12
--------
Outstanding at September 30, 1996 4,205 9.77 2,264
Granted 335 18.59
Exercised (31) 8.95
Canceled (56) 12.65
--------
Outstanding at December 31, 1996 4,453 10.34 2,969
Granted 1,546 13.55
Exercised (632) 7.54
Canceled (860) 16.08
--------
Outstanding at December 31, 1997 4,507 10.62 3,037
========
</TABLE>
A-49
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- ------------------------------------------------------------------------------
(12) STOCKHOLDERS' DEFICIT (continued)
The following table summarizes information about options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------- ---------------------
Weighted
average Weighted Weighted
Range of remaining average average
exercise Number contractual exercise Number exercise
prices outstanding life price exercisable price
--------------- ----------- ------------ -------- ----------- --------
(in thousands) (in years) (in thousands)
<S> <C> <C> <C> <C> <C>
$4.00 - 6.25 98 4.95 $ 4.23 98 $ 4.23
7.94 1,550 7.41 7.94 1,550 7.94
8.50 - 10.38 1,689 8.35 10.02 607 9.71
10.50 - 26.88 1,135 7.89 15.26 782 13.70
27.06 35 9.77 27.06 - -
------- -------
4,507 3,037
======== =======
</TABLE>
(c) WARRANTS
During fiscal 1995 and 1996, the three months ended December 31, 1996
and fiscal 1997, the Company's warrant activity was as follows:
(i) During fiscal 1993, the Company issued to a debt holder warrants
to purchase 17,067, 3,255 and 11,039 common shares at exercise
prices of $6.56, $7.38 and $7.88, respectively. During fiscal
1994, 17,067 warrants were exercised for proceeds of
approximately $0.1 million. In addition, during fiscal 1994, the
Company issued to the same debt holder additional warrants to
purchase 1,989, 15,260 and 3,665 common shares of Holdings-Canada
at $21.51, $20.01 and $11.80 per share, exercisable on or before
November 10, 1998, March 24, 1999, and July 8, 1999,
respectively. An additional 7,725 warrants were issued on July
10, 1995 at an exercise price of $14.50, which expire on July 9,
2000. Also issued on July 10, 1995 were 60,000 additional
warrants to an affiliate of the debt holder at an exercise price
of $14.50, which expire on July 9, 2000. During the three months
ended December 31, 1996, 1,231 of the $7.38 warrants, 4,456 of
the $7.88 warrants and 2,215 of the $11.80 warrants were
canceled. During fiscal 1997, 2,024 of the $7.38 warrants,
6,583 of the $7.88 warrants, 1,450 of the $11.80 warrants and
17,429 of the $14.50 warrants were exercised in exchange
for Holdings-Canada Class A common shares. In addition, 50,296
of the $14.50 warrants were canceled. At December 31,
1997, a total of 17,249 of these warrants remained outstanding.
(ii) During fiscal 1994, the Company issued to two financial advisors
warrants to purchase 75,000 and 200,000 common shares of
Holdings-Canada. These warrants have an exercise price of $7.94
and $18.00 and are exercisable for two- and five-year periods,
respectively. During fiscal 1995 and 1996, 74,335 and 665 of the
75,000 warrants were exercised for total proceeds of
A-50
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -----------------------------------------------------------------------------
(12) STOCKHOLDERS' DEFICIT (continued)
approximately $0.6 million. During the three months ended
December 31, 1996, 100,000 of the 200,000 warrants were exercised
for proceeds of approximately $1.8 million. At December 31, 1997,
100,000 warrants remained outstanding.
(iii) Pursuant to a private placement of the Redeemable Preferred
Stock and the interim financing arrangement during fiscal 1995,
the Company issued 1,895,000 Series A Warrants and 1,375,000
Series B Warrants to purchase an equal number of common shares of
Holdings-Canada with exercise prices of $7.94 and $8.73,
respectively, which expire on July 14, 2000. During fiscal 1996,
the Company repurchased 458,333 each of the Series A and Series B
Warrants for $3.21 and $2.52, respectively (see note 10 (c)). In
addition, 1,853,334 warrants were exercised in June 1996 through
a cashless exercise in which 1,271,651 Holdings-Canada common
shares were issued. During fiscal 1997, the remaining 500,000
warrants of the Series A and Series B warrants were exercised in
exchange for 346,014 common shares of Holdings-Canada, which were
in turn converted into an equal number of shares of ICG Common
Stock.
(iv) In connection with the 1995 Private Offering, the Company issued
1,928,190 warrants to purchase an equal number of common shares
of Holdings-Canada. The warrants were exercisable beginning
August 8, 1996 at $12.51 per share and expire on August 6, 2005.
During fiscal 1997, 71,775 warrants were exercised for total
proceeds of approximately $0.9 million and were in turn converted
into an equal number of shares of ICG Common Stock. At December
31, 1997, 1,856,415 of these warrants remained outstanding.
The following table summarizes warrant activity for fiscal 1995 and 1996,
the three months ended December 31, 1996 and fiscal 1997:
Outstanding Price
warrants range
----------------- -----------------------
(in thousands)
Outstanding, October 1, 1994 310 $ 7.38 - 21.51
Granted 5,266 7.94 - 14.50
Exercised (74) 7.94
-----------------
Outstanding, September 30, 1995 5,502 7.38 - 21.51
Exercised (1,854) 7.94 - 8.73
Repurchased (917) 2.52 - 3.21
------------------
Outstanding, September 30, 1996 2,731 7.38 - 21.51
Exercised (100) 18.00
Canceled (8) 7.38 - 11.80
------------------
Outstanding, December 31, 1996 2,623 7.38 - 21.51
Exercised (599) 7.38 - 14.50
Canceled (50) 14.50
------------------
Outstanding, December 31, 1997 1,974 12.51 - 21.51
==================
A-51
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- ------------------------------------------------------------------------------
(12) STOCKHOLDERS' DEFICIT (continued)
The warrants outstanding on December 31, 1997 expire on the following
dates:
Outstanding Exercise
Expiration date warrants price
----------------- ------------------ ----------------
(in thousands)
November 10, 1998 2 $ 21.51
December 17, 1998 100 18.00
March 24, 1999 15 20.01
August 6, 2005 1,857 12.51
------------------
1,974
==================
(13) SALE OF TELEPORTS
In December 1995, the Company received approximately $21.1 million as
partial payment for the sale of four of its teleports and certain related
assets, and entered into a management agreement with the purchaser whereby
the purchaser assumed control of the teleport operations. Upon approval of
the transaction by the Federal Communications Commission ("FCC"), the
Company completed the sale in March 1996 and received an additional $0.4
million due to certain closing adjustments, for total proceeds of $21.5
million. The Company recognized a loss of approximately $1.1 million on the
sale. Revenue associated with these operations was approximately $9.1
million and $2.5 million for fiscal 1995 and 1996, respectively. The
Company has reported results of operations from these assets through
December 31, 1995.
(14) COMMITMENTS AND CONTINGENCIES
(a) NETWORK CONSTRUCTION
In March 1996, the Company and Southern California Edison Company
("SCE") jointly entered into a 25-year agreement under which the
Company will lease 1,258 miles of fiber optic cable in Southern
California, and can install up to 500 additional miles of fiber optic
cable. This network, which will be maintained and operated primarily
by the Company, stretches from Los Angeles to southern Orange County.
Under the terms of this agreement, SCE will be entitled to receive an
annual fee for ten years, certain fixed quarterly payments, a
quarterly payment equal to a percentage of certain network
revenue, and certain other installation and fiber connection
fees. The aggregate fixed payments remaining under the agreement
totaled approximately $144.7 million at December 31, 1997. The
agreement has been accounted for as a capital lease in the
accompanying consolidated balance sheets.
In May 1997, the Company entered into a long-term agreement with The
Southern Company ("Southern") that will permit the Company to
construct a 100-mile fiber optic network in the Atlanta metropolitan
area. The Company paid $5.5 million upon execution of the agreement
and is responsible for reimbursement to Southern for costs of network
design, construction, installation, maintenance and repair.
Additionally, the Company is also required to pay Southern a quarterly
fee based on specified percentages of the Company's revenue derived
from services provided over this network. Network construction on the
A-52
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -----------------------------------------------------------------------------
(14) COMMITMENTS AND CONTINGENCIES (continued)
initial 43-mile build is expected to be completed by May of 1998. The
Company estimates costs to complete the initial build to be
approximately $5.2 million. Other than the initial $5.5 million
payment, no costs have been incurred as of December 31, 1997.
In January 1997, the Company announced the formation of ChoiceCom, a
strategic alliance between the Company and CSW, which is expected to
develop and market telecommunications services in certain cities in
Texas. CSW holds 100% of the partnership interest in ChoiceCom and the
Company has an option to purchase a 50% interest at any time prior to
July 1, 2003. Subsequent to July 1, 1999, if the Company has not
exercised its option, CSW will have the right to sell, at price
pursuant to the terms of the limited partnership agreement, either 51%
or 100% of the partnership interest in ChoiceCom to the Company.
Additionally, the Company has committed to loan $15.0 million to
ChoiceCom under two promissory notes, of which $10.0 million was
advanced as of December 31, 1997 and the remaining $5.0 million was
advanced during the first quarter of fiscal 1998.
In June 1997, the Company entered into an indefeasible right of use
("IRU") agreement with Qwest Communications Corporation ("Qwest") for
approximately 1,800 miles of fiber optic network and additional
broadband capacity in California, Colorado, Ohio and the Southeast.
Network construction is ongoing and is expected to be complete by
December 1998. The Company is responsible for payment on the
construction as segments of the network are completed and has incurred
approximately $8.0 million as of December 31, 1997, with total costs
anticipated to be approximately $35.0 million. Additionally, the
Company has committed to purchase $6.0 million in network capacity
from Qwest prior to the end of 1998.
(b) COMPANY HEADQUARTERS
During the three months ended December 31, 1996, the Company acquired
property for its new headquarters and commenced construction of an
office building that will accommodate most of the Company's Colorado
operations. The total cost of the project is expected to be
approximately $44.2 million, of which $29.4 million had been incurred
as of December 31, 1997 and is included in construction in progress.
In January 1998, the Company sold the substantially completed building
to a third party and entered into an agreement to lease back all of
the office space under a 15-year operating lease which includes two
ten-year renewal terms.
(c) OTHER COMMITMENTS
As part of the terms of the original purchase agreement, the Company
was obligated to purchase, at fair market value, all of the shares of
Maritime Telecommunications Network, Inc. ("MTN"), a 64% owned
subsidiary of the Company, that were owned by the minority
shareholders, upon demand of the minority shareholders, if a
transaction was not effected which converted the minority shares into
publicly traded securities or cash by January 3, 1998. As of the
current date, no such demand has been made by the minority
shareholders.
The Company has entered into various equipment purchase agreements
with certain of its vendors. Under these agreements, if the Company
does not meet a minimum purchase level in any given year, the vendor
may discontinue for that year certain discounts, allowances and
A-53
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -----------------------------------------------------------------------------
(14) COMMITMENTS AND CONTINGENCIES (continued)
incentives otherwise provided to the Company. In addition, the
agreements may be terminated by either the Company or the vendor upon
prior written notice.
Additionally, the Company has entered into certain commitments to
purchase capital assets with an aggregate purchase price of
approximately $19.5 million at December 31, 1997.
(d) LEASES
The Company leases office space and equipment under non-cancelable
operating leases. Lease expense was approximately $2.8 million, $5.1
million, $1.3 million and $11.8 million for fiscal 1995 and 1996, the
three months ended December 31, 1996 and fiscal 1997, respectively.
Estimated future minimum lease payments for the years subsequent to
December 31, 1997 are (in thousands):
Due December 31:
1998 $12,765
1999 9,563
2000 8,536
2001 8,003
2002 6,292
Thereafter 53,631
-----------------
$ 98,790
=================
(e) RECIPROCAL COMPENSATION
The Company has recorded revenue of approximately $4.9 million for
fiscal 1997 for reciprocal compensation relating to the transport and
termination of local traffic to Internet service providers from
customers of incumbent local exchange carriers pursuant to various
interconnection agreements. These local exchange carriers have not
paid most of the bills they have received from the Company and have
disputed substantially all of these charges based on the belief that
such calls are not local traffic as defined by the various agreements
and under state and federal laws and public policies. The resolution
of these disputes will be based on rulings by state public utility
commissions and/or by the FCC. To date, there have been favorable
rulings from 15 states and no unfavorable final rulings by any state
public utilities commission or the FCC that would indicate that calls
placed by end users to Internet service providers would not qualify as
local traffic subject to the payment of reciprocal compensation. While
the Company believes that all revenue recorded through December 31,
1997 is collectible and that future reciprocal compensation revenue
will be realized, there can be no assurance that such future
regulatory rulings will be favorable to the Company.
(f) LITIGATION
On April 4, 1997, certain shareholders of the Company's majority owned
subsidiary, Zycom Corporation ("Zycom"), an Alberta, Canada
corporation, filed a shareholder derivative suit and class action
complaint for unspecified damages, purportedly on behalf of all of the
minority shareholders of Zycom, in the District Court of Harris
A-54
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -----------------------------------------------------------------------------
(14) COMMITMENTS AND CONTINGENCIES (continued)
County, Texas (Cause No. 97-17777) against the Company, Zycom and
certain of their subsidiaries. This complaint alleges that the Company
and certain of its subsidiaries breached certain duties owed to the
plaintiffs. The Company is vigorously defending the claims. While it
is not possible to predict the outcome of this litigation, management
believes these proceedings will not have a material adverse effect on
the Company's financial condition, results of operations or cash
flows.
The Company is a party to certain other litigation which has arisen in
the ordinary course of business. In the opinion of management, the
ultimate resolution of these matters will not have a material adverse
effect on the Company's financial condition, results of operations or
cash flows.
(15) INCOME TAXES
The components of income tax benefit for fiscal 1996 are as follows (in
thousands):
Current income tax expense $ (198)
Deferred income tax benefit 5,329
---------------------
Total $ 5,131
=====================
Current income tax expense for fiscal 1996 represents state income tax
relating to operations of companies in states requiring separate entity tax
returns. Accordingly, these entities' taxable income cannot be offset by
the Company's net operating loss carryforwards. No income tax expense or
benefit was recorded in fiscal 1995, the three months ended December 31,
1996 or fiscal 1997.
During fiscal 1996, the deferred tax liability was adjusted for the effects
of certain changes in estimated lives of property and equipment as
discussed in note 2 (j). As a result, the Company recognized an income tax
benefit of $5.3 million.
Income tax benefit differs from the amounts computed by applying the U.S.
federal income tax rate to loss before income taxes primarily because the
Company has not recognized the income tax benefit of certain of its net
operating loss carryforwards and other deferred tax assets due to the
uncertainty of realization.
A-55
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- ------------------------------------------------------------------------------
(15) INCOME TAXES (continued)
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1997
----------- ---------
(in thousands)
<S> <C> <C>
Deferred income tax liabilities:
Property and equipment, due to excess
purchase price of tangible assets and
differences in depreciation for book and
tax purposes $ 14,106 6,254
--------- ---------
Deferred income tax assets:
Net operating loss carryforwards (68,740) (141,185)
Accrued interest on high yield debt obligations
deductible when paid (32,873) (72,330)
Accrued expenses not currently deductible for
tax purposes (2,031) (7,968)
Less valuation allowance 89,538 215,229
--------- ---------
Net deferred income tax asset (14,106) (6,254)
--------- ---------
Net deferred income tax liability $ - -
========= =========
</TABLE>
As of December 31, 1997, the Company has net operating losses ("NOLs") of
approximately $353.0 million for U.S. tax purposes which expire in varying
amounts through 2012. However, due to the provisions of Section 382,
Section 1502 and certain other provisions of the Internal Revenue Code (the
"Code"), the utilization of these NOLs will be limited. The Company is also
subject to certain state income tax laws, which will also limit the
utilization of NOLs.
A valuation allowance has been provided for the deferred tax asset relating
to the Company's NOLs, as management cannot determine when the Company will
generate future taxable income.
(16) EMPLOYEE BENEFIT PLANS
The Company has established salary reduction savings plans under Section
401(k) of the Code which the Company administers for participating
employees. All full-time employees are covered under the plan after meeting
minimum service and age requirements. The Company makes a matching
contribution of its Common Stock (up to a maximum of 6% of an employee's
eligible earnings) which totaled approximately $0.5 million, $1.2
million, $0.5 million and $3.0 million during fiscal 1995 and 1996, the
three months ended December 31, 1996 and fiscal 1997, respectively.
A-56
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -----------------------------------------------------------------------------
(17) SIGNIFICANT CUSTOMER
During fiscal 1995, the Company had revenue from a single customer which
comprised 11% of total revenue and accounts receivable which comprised 8%
of the total accounts receivable balance at September 30, 1995. There were
no customers which accounted for greater than 10% of revenue or accounts
receivable as of, or for the respective periods ended September 30, 1996,
December 31, 1996 or 1997.
(18) SUMMARIZED FINANCIAL INFORMATION OF ICG HOLDINGS, INC.
As discussed in note 10, the 11 5/8% Notes issued by Holdings during 1997
are guaranteed by ICG. The 12 1/2% Notes and 13 1/2% Notes issued by
Holdings during fiscal 1996 and 1995, respectively, are also guaranteed by
ICG and Holdings-Canada. The separate complete financial statements of
Holdings have not been included herein because such disclosure is not
considered to be significant to the holders of the 11 5/8% Notes, the 12
1/2% Notes and the 13 1/2% Notes. However, summarized combined financial
information for Holdings and subsidiaries and affiliates is as follows:
Summarized Consolidated Balance Sheet Information
December 31,
---------------------------------------
1996 1997
------------------ ------------------
(in thousands)
Current assets $ 449,059 215,817
Property and equipment, net 403,676 632,167
Other non-current assets, net 88,439 122,768
Current liabilities 87,423 98,351
Long-term debt, less current portion 690,293 890,503
Due to parent 11,485 30,970
Other long-term liabilities 73,113 66,939
Preferred stock 159,120 292,442
Stockholders' deficit (80,260) (408,453)
<TABLE>
<CAPTION>
A-57
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- ------------------------------------------------------------------------------
(18) SUMMARIZED FINANCIAL INFORMATION OF ICG HOLDINGS, INC. (continued)
Summarized Consolidated and Combined Statement of Operations Information (a)
Fiscal year
Fiscal years ended Three months ended ended
September 30, December 31, December 31,
------------------- ----------------1
1995 1996 1995 1996 1997
-------- --------- ------- -------- ---------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Total revenue $ 111,610 169,094 35,399 56,956 273,354
Total operating costs
and expenses 157,384 238,908 50,296 83,934 465,517
Operating loss (45,774) (69,814) (14,897) (26,978) (192,163)
Net loss (68,760) (172,687) (34,281) (49,750) (328,193)
</TABLE>
(a) Holdings-Canada's 51% interest in FOTI was contributed to Holdings
effective in February 1995 (the remaining 49% was purchased in January
1996) and, accordingly, FOTI's operations have been included in the
consolidated amounts subsequent to that date.
(19) FINANCIAL INFORMATION OF ICG HOLDINGS (CANADA), INC.
Condensed financial information for Holdings-Canada only is as follows:
Condensed Balance Sheet Information
December 31,
--------------------------------------------
1996 1997
--------------------- --------------------
(in thousands)
Current assets $ 165 162
Advances to subsidiaries 11,485 30,790
Non-current assets, net 2,793 3,800
Current liabilities 199 107
Long-term debt, less current portion 65 65
Due to parent 1,566 22,342
Preferred stock 127,729 -
Share of losses of subsidiary 80,260 408,453
Shareholders' deficit (67,647) (396,035)
A-58
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -----------------------------------------------------------------------------
(19) FINANCIAL INFORMATION OF ICG HOLDINGS (CANADA), INC. (continued)
<TABLE>
<CAPTION>
Condensed Statement of Operations Information
Fiscal year
Fiscal years ended Three months ended ended
September 30, December 31, December 31,
-------------------- ------------------
1995 1996 1995 1996 1997
---------- -------- -------- -------- --------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Total revenue $ - - - - -
Total operating costs
and expenses 1,309 3,438 361 73 195
Operating loss (1,309) (3,438) (361) (73) (195)
Losses from subsidiaries (68,760) (172,687) (34,281) (49,750) (328,193)
Net loss attributable to
common shareholders (76,648) (184,107) (34,642) (49,823) (328,388)
</TABLE>
(20) SUMMARIZED FINANCIAL INFORMATION OF ICG FUNDING, LLC
As discussed in note 11, the 6 3/4% Preferred Securities issued by ICG
Funding during fiscal 1997 are guaranteed by ICG. The separate complete
financial statements of ICG Funding have not been included herein because
such disclosure is not considered to be significant to the holders of the 6
3/4% Preferred Securities. For fiscal 1997, the statement of operations of
ICG Funding included only the preferred dividends paid and accrued on the 6
3/4% Preferred Securities and interest income earned on the proceeds from
the offering of such securities. The summarized balance sheet information
for ICG Funding is as follows:
Summarized Balance Sheet Information
December 31,
1997
-------------------------
(in thousands)
Cash, cash equivalents and short-term
investments available for sale $ 94,182
Other current assets 19
Restricted cash 38,749
Dividends payable 1,116
Due to parent 4,642
Preferred securities 127,729
Member deficit (537)
A-59
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -----------------------------------------------------------------------------
(21) CONDENSED FINANCIAL INFORMATION OF ICG COMMUNICATIONS, INC. (PARENT
COMPANY)
The primary asset of ICG is its investment in Holdings-Canada. Certain
corporate expenses of the parent company are included in ICG's statement of
operations and were approximately $1.2 million for fiscal 1997. At December
31, 1997, ICG had no operations other than those of ICG Funding,
Holdings-Canada and its subsidiaries.
A-60
<PAGE>
MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
----------------------------------------------------------------------
ICG Common Stock, $.01 par value per share, has been quoted on the Nasdaq
National Market ("Nasdaq") since March 25, 1997 under the symbol "ICGX" and was
previously listed on the American Stock Exchange ("AMEX"), from August 5, 1996
to March 24, 1997 under the symbol "ICG." Prior to August 5, 1996,
Holdings-Canada's common shares had been listed on the AMEX under the symbol
"ITR" from January 14, 1993 through February 28, 1996, and under the symbol
"ICG" thereafter through August 2, 1996. Holdings-Canada Class A Common Shares
ceased trading on the AMEX at the close of trading on August 2, 1996.
Holdings-Canada Class A Common Shares, which were listed on the Vancouver Stock
Exchange ("VSE") under the symbol "IHC.A," ceased trading on the VSE at the
close of trading on March 12, 1997.
The following table sets forth, for the fiscal periods indicated, the high
and low sales prices of the Holdings-Canada Class A Common Shares as reported on
the AMEX through August 2, 1996, and the VSE through March 12, 1997, and the
high and low sales prices of the ICG Common Stock as reported on the AMEX from
August 5, 1996 through March 24, 1997 and on the Nasdaq from March 25, 1997
through the date indicated below. The table also sets forth the average of the
monetary exchange rates on the last day of each such relevant fiscal period.
<TABLE>
<CAPTION>
American Stock
Exchange/
Nasdaq National Vancouver Exchange
Market (1) Stock Exchange (1) Rate
----------------- -------------------
High Low High Low (C$/$)
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED
SEPTEMBER 30, 1996
First Quarter $ 12.75 $ 8.63 C$ - C$ - 1.36
Second Quarter 17.88 10.25 - - 1.36
Third Quarter 27.38 17.13 17.50 17.50 1.36
Fourth Quarter 25.88 18.50 - - 1.36
THREE MONTHS ENDED
DECEMBER 31, 1996 (2) $ 22.25 $ 14.00 C$ 28.35 C$ 28.35 1.37
FISCAL YEAR ENDED
DECEMBER 31, 1997 (2)
First Quarter $ 18.13 $ 10.38 C$ - C$ - 1.38
Second Quarter 21.13 8.63 N/A N/A N/A
Third Quarter 24.63 17.75 N/A N/A N/A
Fourth Quarter 28.63 19.75 N/A N/A N/A
FISCAL YEAR ENDED
DECEMBER 31, 1998
First Quarter $ 44.25 $ 24.38 C$ N/A C$ N/A N/A
Second Quarter 38.88 28.05 N/A N/A N/A
(through April 30, 1998)
</TABLE>
- ----------------
(1) Effective at the close of trading on August 2, 1996, Holdings-Canada's
Class A Common Shares ceased trading on the AMEX and the ICG Common Stock
commenced trading on the AMEX on August 5, 1996. Effective March 25, 1997,
the ICG Common Stock ceased trading on the AMEX and commenced trading on
the Nasdaq. ICG Common Stock has never traded on the VSE. The Class A
Common Shares traded on the VSE through March 12, 1997 and all information
reported on the above table from August 5, 1996 to March 12, 1997 with
respect to the VSE relates only to the Class A Common Shares.
(2) The Company changed its fiscal year end to December 31 from September 30,
effective January 1, 1997.
A-61
<PAGE>
On April 30, 1998, the last reported sale price of the Common Stock on
the Nasdaq National Market was $35.00 per share. On May 1, 1998, there were
44,676,251 shares of Common Stock outstanding and 293 holders of record.
The Company has never declared or paid dividends on the Common Stock and
does not intend to pay cash dividends on the Common Stock in the foreseeable
future. The Company intends to retain future earnings, if any, to finance the
development and expansion of its business. In addition, the payment of any
dividends on the Common Stock is effectively prohibited by the restrictions
contained in the Company's indentures and in the Second Amended and Restated
Articles of Incorporation of Holdings, which prohibits Holdings from making any
material payment to the Company. Certain of the Company's debt facilities
contain covenants which also may restrict the Company's ability to pay cash
dividends.
In September and October 1997, the Company's new wholly owned subsidiary,
ICG Funding, LLC, a Delaware limited liability company, completed a private
placement of $132.25 million of 6 3/4% Preferred Securities. The 6 3/4%
Preferred Securities are mandatorily redeemable November 15, 2009 at the
liquidation preference of $50.00 per security, plus accrued and unpaid
dividends. Dividends on the 6 3/4% Preferred Securities are cumulative at the
rate of 6 3/4% per annum and are payable in cash through November 15, 2000 and,
thereafter, in cash or shares of Common Stock at the option of ICG Funding. The
6 3/4% Preferred Securities are exchangeable, at the option of the holder, into
Common Stock at an exchange price of $24.025 per share, subject to adjustment.
ICG Funding may, at its option, redeem the 6 3/4% Preferred Securities at any
time on or after November 18, 2000. Prior to that time, ICG Funding may redeem
the 6 3/4% Preferred Securities if the current market value of Common Stock
equals or exceeds the exchange price, for at least 20 days of any consecutive
30-day trading period, by 170% prior to November 16, 1998; by 160% from November
16, 1998 through November 15, 1999; and by 150% from November 16, 1999 through
November 15, 2000. The 6 3/4% Preferred Securities and the Common Stock issuable
upon exchange of such securities have been registered under the Securities Act.
The 6 3/4% Preferred Securities are guaranteed by ICG on a full and
unconditional basis.
In October 1997, the Company sold 687,221 shares of Common Stock (the "CBG
Shares") to certain shareholders of CBG in connection with the acquisition of
CBG for a purchase price of approximately $16.0 million. The sale of the CBG
Shares was exempt from registration under Rule 4 (2) under the Securities Act
because the offers and sales were made to a limited number of investors in a
private transaction. Resale of the CBG Shares was subsequently registered on a
Form S-3 registration statement which was declared effective on October 31,
1997.
A-62
<PAGE>
ATTACHEMENT A
=================================================================
ICG COMMUNICATIONS, INC.
1998 STOCK OPTION PLAN
_______________
EFFECTIVE AS OF JANUARY 1, 1998
=================================================================
<PAGE>
ICG COMMUNICATIONS, INC.
1998 STOCK OPTION PLAN
INTRODUCTION
ICG Communications, Inc., a Delaware corporation
(hereinafter referred to as the "Corporation"), hereby
establishes an incentive compensation plan to be known as the
"ICG Communications, Inc. 1998 Stock Option Plan" (hereinafter
referred to as the "Plan"), as set forth in this document. The
Plan permits the grant of Non-Qualified Stock Options and
Incentive Stock Options.
The purpose of the Plan is to promote the success and
enhance the value of the Corporation by linking the personal
interests of Participants to those of the Corporation's
stockholders by providing Participants with an incentive for
outstanding performance. The Plan is further intended to assist
the Corporation in its ability to motivate, and retain the
services of, Participants upon whose judgment, interest and
special effort the successful conduct of its operations is
largely dependent.
<PAGE>
DEFINITIONS
For purposes of this Plan, the following terms shall be
defined as follows unless the context clearly indicates
otherwise:
A. "Code" shall mean the Internal Revenue Code of 1986,
----
as amended, and the rules and regulations thereunder.
B. "Committee" shall mean the Stock Option Committee of
---------
the Board of Directors of the Corporation.
C. "Common Stock" shall mean the common stock, $.01 par
------------
value, of the Corporation.
D. "Corporation" shall mean ICG Communications, Inc.,
-----------
a Delaware corporation.
E. "Director Participant" shall mean a director of the
--------------------
Corporation or of any Parent or Subsidiary on the date of a grant
of Options under Section V(B) hereof who is not a common law
employee of the Corporation, any Parent or any Subsidiary.
F. "Disability" shall have the same meaning as the term
----------
"permanent and total disability" under Section 22(e)(3) of the
Code.
G. "Exchange Act" shall mean the Securities Exchange
------------
Act of 1934, as amended, and the rules and regulations
thereunder.
H. "Executive" shall mean an employee of the
---------
Corporation or of any Parent or Subsidiary whose compensation is
subject to the deduction limitations set forth under Code Section
162(m).
I. "Fair Market Value" of the Corporation's Common
-----------------
Stock on a Trading Day shall mean the last reported sale price
for Common Stock or, in case no such reported sale takes place on
such Trading Day, the average of the closing bid and asked prices
for the Common Stock for such Trading Day, in either case on the
principal securities exchange on which the Common Stock is listed
or admitted to trading, or if the Common Stock is not listed or
admitted to trading on any securities exchange, but is traded in
the over-the-counter market, the closing sale price of the Common
Stock or, if no sale is publicly reported, the average of the
closing bid and asked quotations for the Common Stock, as
reported by the National Association of Securities Dealers
Automated Quotation System ("NASDAQ") or any comparable system
or, if the Common Stock is not listed on NASDAQ or a comparable
system, the closing sale price of the Common Stock or, if no sale
is publicly reported, the average of the closing bid and asked
-2-
<PAGE>
prices, as furnished by two members of the National Association
of Securities Dealers, Inc. who make a market in the Common Stock
selected from time to time by the Corporation for that purpose.
In addition, for purposes of this definition, a "Trading Day"
shall mean, if the Common Stock is listed on any securities
exchange, a business day during which such exchange was open for
trading and at least one trade of Common Stock was effected on
such exchange on such business day, or, if the Common Stock is
not listed on any national securities exchange but is traded in
the over-the-counter market, a business day during which the
over-the-counter market was open for trading and at least one
"eligible dealer" quoted both a bid and asked price for the
Common Stock. An "eligible dealer" for any day shall include
any broker-dealer who quoted both a bid and asked price for such
day, but shall not include any broker-dealer who quoted only a
bid or only an asked price for such day. In the event the
Corporation's Common Stock is not publicly traded, the Fair
Market Value of such Common Stock shall be determined by the
Committee in good faith.
J. "Good Cause" shall mean (i) a Participant's willful
----------
or gross misconduct or willful or gross negligence in the
performance of his duties for the Corporation or for any Parent
or Subsidiary after prior written notice of such misconduct or
negligence and the continuance thereof for a period of 30 days
after receipt by such Participant of such notice, (ii) a
Participant's intentional or habitual neglect of his duties for
the Corporation or for any Parent or Subsidiary after prior
written notice of such neglect, or (iii) a Participant's theft or
misappropriation of funds of the Corporation or of any Parent or
Subsidiary or commission of a felony.
K. "Incentive Stock Option" shall mean a stock option
----------------------
satisfying the requirements for tax-favored treatment under
Section 422 of the Code.
L. "Non-Qualified Option" shall mean a stock option
--------------------
which does not satisfy the requirements for, or which is not
intended to qualify for, tax-favored treatment under Section 422
of the Code.
M. "Option" or "Plan Award" shall mean an Incentive
------ ----------
Stock Option or a Non-Qualified Stock Option granted pursuant to
the provisions of Section V hereof.
N. "Optionee" shall mean a Participant who is granted
--------
an Option under the terms of this Plan.
O. "Outside Directors" shall mean members of the Board
-----------------
of Directors of the Corporation who are classified as "outside
directors" under Section 162(m) of the Code.
P. "Parent" shall mean a parent corporation of the
------
Corporation within the meaning of Section 424(e) of the Code.
-3-
<PAGE>
Q. "Participant" shall mean any employee of the
-----------
Corporation or any Parent or Subsidiary, or a Director
Participant, participating under the Plan.
R. "Plan Quarter" shall mean the three calendar month
------------
periods beginning January 1st, April 1st, July 1st and October
1st.
S. "Retirement" shall mean the termination of
----------
employment by a Participant in the Plan from the Corporation or
from any Parent or Subsidiary, who at the time of such
termination is at least fifty-five (55) years of age and who has
completed at least ten (10) years of service (at least 1,000
hours in any fiscal year) with the Corporation or any Parent or
Subsidiary, or any combination thereof.
T. "Securities Act" shall mean the Securities Act of
--------------
1933, as amended, and the rules and regulations thereunder.
U. "Subsidiary" shall mean a subsidiary corporation of
----------
the Corporation within the meaning of Section 424(f) of the Code.
-4-
<PAGE>
SECTION I.
ADMINISTRATION
The Plan shall be administered by the Committee, which
shall be composed solely of at least two Non-Employee Directors,
as defined in Rule 16b-3(b)(3) promulgated under the Exchange
Act, and who also qualify as Outside Directors. Subject to the
provisions of the Plan, the Committee may establish from time to
time such regulations, provisions, proceedings and conditions of
awards which, in its opinion, may be advisable in the
administration of the Plan. A majority of the Committee shall
constitute a quorum, and, subject to the provisions of Section IV
of the Plan, the acts of a majority of the members present at any
meeting at which a quorum is present, or acts approved in writing
by a majority of the Committee, shall be the acts of the
Committee.
SECTION II.
SHARES AVAILABLE
Subject to the adjustments provided in Section VI of
the Plan, the aggregate number of shares of the Common Stock
which may be granted for all purposes under the Plan shall be
3,400,000 shares. Shares of Common Stock underlying awards of
Options shall be counted against the limitation set forth in the
immediately preceding sentence and may be reused to the extent
that (i) an Option expires, is terminated unexercised, or is
forfeited or (ii) shares of Common Stock are returned to the
Corporation's treasury as a result of any form of "cashless"
exercise of Options or tax withholding of shares permitted by the
Committee under Section IV hereof. Incentive and Non-Qualified
Stock Options awarded under the Plan may be fulfilled in
accordance with the terms of the Plan with either authorized and
unissued shares of the Common Stock, issued shares of such Common
Stock held in the Corporation's treasury or shares of Common
Stock acquired on the open market.
SECTION III.
ELIGIBILITY
Officers and employees (including officers or employees
who are also directors) of the Corporation, or of any Parent or
Subsidiary, who are regularly employed on a salaried basis as
common law employees shall be eligible to participate in the
Plan. Directors of the Corporation, or of any Parent or
Subsidiary, who are not common law employees of the Corporation
or of any Parent or Subsidiary shall also be eligible to
participate in the Plan, but only to the extent provided under
Section V(B) hereof and, where appropriate under this Plan, shall
be referred to as "employees" and their service as directors as
"employment".
-5-
<PAGE>
SECTION IV.
AUTHORITY OF COMMITTEE
The Plan shall be administered by, or under the
direction of, the Committee, which shall administer the Plan so
as to comply at all times with Section 16 of the Exchange Act and
the rules and regulations promulgated thereunder, to the extent
such compliance is required, and shall otherwise have plenary
authority to interpret the Plan and to make all determinations
specified in or permitted by the Plan or deemed necessary or
desirable for its administration or for the conduct of the
Committee's business. Subject to the provisions of Section X
hereof, all interpretations and determinations of the Committee
may be made on an individual or group basis and shall be final,
conclusive and binding on all interested parties. Subject to the
express provisions of the Plan, the Committee shall have
authority, in its discretion, to determine the persons to whom
Plan Awards shall be granted, the times when such Plan Awards
shall be granted, the number of Plan Awards, the exercise price
of each Plan Award, the period(s) during which such Plan Award
shall be exercisable (whether in whole or in part), the
restrictions to be applicable to Plan Awards and the other terms
and provisions thereof (which need not be identical). In
addition, the authority of the Committee shall include, without
limitation, the following:
A. Financing. The arrangement of temporary financing
---------
for an Optionee by registered broker-dealers, under the rules and
regulations of the Federal Reserve Board, for the purpose of
assisting the Optionee in the exercise of an Option, such
authority to include the payment by the Corporation of the
commissions of the broker-dealer;
B. Procedures for Exercise of Option. The
---------------------------------
establishment of procedures for an Optionee (i) to exercise an
Option by payment of cash or any other property acceptable to the
Committee, (ii) to have withheld from the total number of shares
of Common Stock to be acquired upon the exercise of an Option
that number of shares having a Fair Market Value, which, together
with such cash as shall be paid in respect of fractional shares,
shall equal the option exercise price of the total number of
shares of Common Stock to be acquired, (iii) to exercise all or a
portion of an Option by delivering that number of shares of
Common Stock already owned by him having a Fair Market Value
which shall equal the Option exercise price for the portion
exercised and, in cases where an Option is not exercised in its
entirety, to permit the Optionee to deliver the shares of Common
Stock thus acquired by him in payment of shares of Common Stock
to be received pursuant to the exercise of additional portions of
such Option, the effect of which shall be that an Optionee can in
sequence utilize such newly acquired shares of Common Stock in
payment of the exercise price of the entire Option, together with
such cash as shall be paid in respect of fractional shares and
(iv) to engage in any form of "cashless" exercise.
C. Withholding. The establishment of a procedure
-----------
whereby a number of shares of Common Stock or other securities
may be withheld from the total number of shares of Common Stock
or other securities to be issued upon exercise of an Option, or
-6-
<PAGE>
for the tender of cash or shares of Common Stock owned by any
Participant to meet any obligation of withholding for taxes
incurred by the Optionee upon such exercise.
D. Types of Plan Awards. The Committee may grant
--------------------
awards in the form of Incentive Stock Options and Non-Qualified
Stock Options.
SECTION V.
STOCK OPTIONS
A. For Employees.
-------------
The Committee shall have the authority, in its
discretion, to grant Incentive Stock Options or to grant
Non-Qualified Stock Options or to grant both types of Options.
No Option shall be granted for a term of more than ten (10)
years. Notwithstanding anything contained herein to the
contrary, an Incentive Stock Option may be granted only to common
law employees of the Corporation or of any Parent or Subsidiary
now existing or hereafter formed or acquired, and not to any
director or officer who is not also such a common law employee.
In order to satisfy the "performance-based" exception to the
deduction limitation under Code Section 162(m), the maximum
number of shares of Common Stock subject to Options which may be
granted to any single Executive during any one calendar year is
300,000. The terms and conditions of the Options shall be
determined from time to time by the Committee; provided, however,
-------- -------
that the Options granted under the Plan shall be subject to the
following:
(i) Exercise Price. The Committee shall establish the
--------------
exercise price at the time any Option is granted at such amount
as the Committee shall determine; provided, however, that the
-------- -------
exercise price for each share of Common Stock purchasable under
any Option which is intended to satisfy the performance-based
exception to the deduction limitation under Section 162(m) of
the Code or any Incentive Stock Option granted hereunder shall
be such amount as the Committee shall, in its best judgment,
determine to be not less than one hundred percent (100%) of the
Fair Market Value per share of Common Stock at the date the
Option is granted; and provided, further, that in the case of
an Incentive Stock Option granted to a person who, at the time
such Incentive Stock Option is granted, owns shares of stock
of the Corporation or of any Parent or Subsidiary which possess
more than ten percent (10%) of the total combined voting power of
all classes of shares of stock of the Corporation or of any Parent
or Subsidiary, the exercise price for each share of Common Stock
shall be such amount as the Committee, in its best judgment,
shall determine to be not less than one hundred ten percent
(110%) of the Fair Market Value per share of Common Stock at the
date the Option is granted. The exercise price will be subject
to adjustment in accordance with the provisions of Section VI of
the Plan.
(ii) Payment of Exercise Price. The price per share of
-------------------------
Common Stock with respect to each Option shall be payable at the
time the Option is exercised. Such price shall be payable in
cash or pursuant to any of the methods set forth in Sections
IV(A) or (B) hereof. Shares of Common Stock delivered to the
Corporation in payment of the exercise price shall be valued at
-7-
<PAGE>
the Fair Market Value of the Common Stock on the date preceding
the date of the exercise of the Option.
(iii) Employment Requirement. Notwithstanding
----------------------
anything else contained herein, each Option by its terms shall
require the Optionee to remain in the continuous full-time employ
of the Corporation, or of any Parent or Subsidiary, for at least
six (6) months from the date of grant of the Option before the
right to exercise any part of the Option (by him or any other
person) will accrue.
(iv) Exercisability of Options. Each Option shall be
-------------------------
exercisable in whole or in installments, and at such time(s), and
subject to the fulfillment of any conditions on exercisability as
may be determined by the Committee at the time of the grant of
such Options. The right to purchase shares of Common Stock shall
be cumulative so that when the right to purchase any shares of
Common Stock has accrued such shares of Common Stock or any part
thereof may be purchased at any time thereafter until the
expiration or termination of the Option. Unless otherwise
determined by the Committee in its sole discretion, each Option
granted hereunder shall be exercisable, on a cumulative basis, as
to twenty-five percent (25%) of the shares of Common Stock set
forth thereunder on each of the first, second, third and fourth
anniversaries of the date such Option is granted.
(v) Expiration of Options. No Option by its terms shall
---------------------
be exercisable after the expiration of ten (10) years from the
date of grant of the Option; provided, however, in the case of an
-------- -------
Incentive Stock Option granted to a person who, at the time such
Option is granted, owns shares of stock of the Corporation or of
any Parent or Subsidiary possessing more than ten percent (10%)
of the total combined voting power of all classes of shares of
stock of the Corporation or of any Parent or Subsidiary, such
Option shall not be exercisable after the expiration of five (5)
years from the date such Option is granted.
(vi) Exercise Upon Death of Optionee. Subject to the
-------------------------------
provisions of Sections V(A)(iii) and V(A)(ix) hereof, in the
event of the death of the Optionee prior to his termination of
employment with the Corporation or with any Parent or Subsidiary,
or within 3 (three) months following his Retirement, his estate
(or other beneficiary, if so designated in writing by the
Participant) shall have the right, within one (1) year after the
date of death (but in no case after the expiration date of the
Option(s)), to exercise his Option(s) with respect to all or any
part of the shares of Common Stock as to which the deceased
Optionee had not exercised his Option at the time of his death,
but only to the extent the Option or Options were exercisable as
of the earlier of the date of his Retirement or the date of his
death.
(vii) Exercise Upon Disability of Optionee. Subject
------------------------------------
to the provisions of Sections V(A)(iii) and V(A)(ix) hereof, if
the employment by the Corporation or by any Parent or Subsidiary
of an Optionee is terminated because of Disability, he shall have
the right, within one (1) year after the date of such termination
(but in no case after the expiration of the Option(s)), to
exercise his Option(s) with respect to all or any part of the
-8-
<PAGE>
shares of Common Stock as to which he had not exercised his
Option at the time of such termination, but only to the extent
such Option or Options were exercisable as of the date of his
termination of employment due to Disability.
(viii) Exercise Upon Optionee's Termination of
---------------------------------------
Employment. Except as provided in the following sentence, if the
----------
employment of an Optionee by the Corporation or by any Parent or
Subsidiary is terminated for any reason other than those
specified in Sections V(A)(vi) and V(A)(vii) above, he shall have
the right, within three (3) months after the date of such
termination (but in no case after the expiration date of the
Option(s)), to exercise his Option(s) only with respect to that
number of shares of Common Stock that he was entitled to purchase
pursuant to Options that were exercisable immediately prior to
such termination. Notwithstanding the provisions of the
immediately preceding sentence, if an Optionee's employment is
terminated by the Corporation or by any Parent or Subsidiary for
Good Cause, the Optionee shall, at the time of such termination
of employment, forfeit his rights to exercise all of such
Option(s).
(ix) Maximum Amount of Incentive Stock Options. Each
-----------------------------------------
Plan Award under which Incentive Stock Options are granted shall
provide that to the extent the aggregate of the (A) Fair Market
Value of the shares of Common Stock (determined as of the time of
the grant of the Option) subject to such Incentive Stock Option
and (B) the Fair Market Values (determined as of the date(s) of
grant of the options) of all other shares of Common Stock subject
to incentive stock options granted to an Optionee by the
Corporation or any Parent or Subsidiary, which are exercisable
for the first time by any person during any calendar year,
exceed(s) one hundred thousand dollars ($100,000), such excess
shares of Common Stock shall not be deemed to be purchased
pursuant to Incentive Stock Options. The terms of the
immediately preceding sentence shall be applied by taking options
into account in the order in which they are granted.
B. For Director Participants.
-------------------------
(i) General Provisions - Formula Grant Options. Subject
------------------
to the terms and conditions of this Section V(B), as of January
1, 1998, and as of January 1 of each succeeding calendar year
through and including January 1, 2007, each individual who is
serving as a Director on such date shall automatically be granted
Options to purchase twenty thousand (20,000) shares of Common
Stock, subject to availability under the Plan. Notwithstanding
the foregoing, each individual who is serving as a Director and
receives formula grant options under Section V(B)(i) of the
Corporation's 1996 Stock Option Plan, as amended, shall not be
eligible to receive grants of Options under Section V(B)(i) of
this Plan covering the same periods. In the event that an
individual becomes a Director during any Plan Quarter, but did
not serve as a Director on January 1, such individual shall
automatically be granted, as of the date of election of such
individual as a Director, Options to purchase that pro rata
number of shares of Common Stock for such calendar year as a
Director would otherwise be entitled to receive under this
Section V(B)(i) (at the rate of 5,000 shares per Plan Quarter,
-9-
<PAGE>
subject to the last sentence of this Section V(B)(i)). Subject
to the provisions of Section VI hereunder, the option price of
the shares of Common Stock covered by each Option shall be the
Fair Market Value of such shares on the date of the grant. Each
Option granted under this Section V(B)(i) by its terms shall
expire ten (10) years from the date of its grant. Furthermore,
an Option granted pursuant to this Section V(B)(i) shall become
exercisable as to 5,000 shares of Common Stock covered thereby on
the last day of the Plan Quarter during which the date of grant
occurs and as to 5,000 shares on the last day of each of the next
succeeding Plan Quarters during such year, respectively, but only
if, with regard to the shares of Common Stock with respect to
which the Option becomes exercisable at the end of any Plan
Quarter, the Director has served in such capacity on an
uninterrupted basis for more than fifty percent (50%) of the
business days contained in such Plan Quarter.
(ii) General Provisions - Discretionary Option Grants.
------------------------------------------------
The Committee shall have the authority, in its discretion, to
grant to one or more Directors from time to time Non-Qualified
Stock Options. No Option shall be granted for a term of more
than ten (10) years. The Committee shall establish the exercise
price at the time any Option is granted at such amount as the
Committee shall determine. The exercise price will be subject to
adjustment in accordance with the provisions of Section VI of the
Plan. Except as otherwise expressly provided in this Section V,
the terms and conditions of the Options shall be determined by
the Committee.
(iii) Payment of Exercise Price. The price per share
-------------------------
of Common Stock with respect to each Option shall be payable at
the time the Option is exercised. Such price shall be payable in
cash or pursuant to any of the methods set forth in Sections
IV(A) or (B) hereof. Shares of Common Stock delivered to the
Corporation in payment of the exercise price shall be valued at
the Fair Market Value of the Common Stock on the date preceding
the date of the exercise of the Option.
(iv) Exercisability of Options. Each Option shall be
-------------------------
exercisable in whole or in installments, and at such time(s), and
subject to the fulfillment of any conditions on exercisability as
may be determined by the Committee at the time of the grant of
such Options. The right to purchase shares of Common Stock shall
be cumulative so that when the right to purchase any shares of
Common Stock has accrued such shares of Common Stock or any part
thereof may be purchased at any time thereafter until the
expiration or termination of the Option.
(v) Director's Termination. If a Director's service as
----------------------
a director of the Corporation is terminated by reason of (1) his
Disability, (2) the failure of the Corporation to retain, or
nominate for re-election, such Director (who is otherwise
eligible) other than for Good Cause, (3) his ineligibility for
re-election pursuant to the Corporation's By-laws, or (4) his
voluntary termination of such directorship, such termination
shall be considered a "Qualifying Termination" and each Option
granted to such Director, to the extent exercisable (and not
exercised) on the date of such Qualifying Termination, shall
remain so exercisable by him until the end of the exercise period
under such Option. If a Director's service as a director of the
-10-
<PAGE>
Corporation or of any Parent or Subsidiary is terminated for Good
Cause, such termination shall be considered a "Non-Qualifying
Termination." In the event of a Non-Qualifying Termination, all
outstanding unexercised stock options granted pursuant to this
Section V(B) shall be forfeited or canceled, as the case may be.
(vi) Director's Death. If a Director dies while holding
----------------
an outstanding Option, such Option, to the extent exercisable
(and not exercised) on the date of his death, shall remain so
exercisable by his estate (or other beneficiaries, as designated
in writing by such Director) until the end of the exercise period
under the Option.
SECTION VI.
ADJUSTMENT OF SHARES; MERGER OR
CONSOLIDATION, ETC. OF THE CORPORATION
A. Recapitalization, Etc. In the event there is any
---------------------
change in the Common Stock of the Corporation by reason of any
reorganization, recapitalization, stock split, stock dividend or
otherwise, there shall be substituted for or added to each share
of Common Stock theretofore appropriated or thereafter subject,
or which may become subject, to any Option, the number and kind
of shares of stock or other securities into which each
outstanding share of Common Stock shall be so changed or for
which each such share shall be exchanged, or to which each such
share be entitled, as the case may be, and the per share price
thereof also shall be appropriately adjusted. Notwithstanding
the foregoing, (i) each such adjustment with respect to an
Incentive Stock Option shall comply with the rules of Section
424(a) of the Code and (ii) in no event shall any adjustment be
made which would render any Incentive Stock Option granted
hereunder to be other than an incentive stock option for purposes
of Section 422 of the Code.
B. Merger, Consolidation or Change in Control of
---------------------------------------------
Corporation. Upon (i) the merger or consolidation of the
-----------
Corporation with or into another corporation (pursuant to which
the stockholders of the Corporation immediately prior to such
merger or consolidation will not, as of the date of such merger
or consolidation, own a beneficial interest in shares of voting
securities of the corporation surviving such merger or
consolidation having at least a majority of the combined voting
power of such corporation's then outstanding securities), if the
agreement of merger or consolidation does not provide for (1) the
continuance of the Options granted hereunder or (2) the
substitution of new options for Options granted hereunder, or for
the assumption of such Options by the surviving corporation,
(ii) the dissolution, liquidation or sale of substantially all
the assets of the Corporation or (iii) the Change in Control of
the Corporation, the holder of any such Option theretofore
granted and still outstanding (and not otherwise expired) shall
have the right immediately prior to the effective date of such
merger, consolidation, dissolution, liquidation, sale of assets
or Change in Control of the Corporation to exercise such
Option(s) in whole or in part without regard to any installment
provision that may have been made part of the terms and
conditions of such Option(s). The Corporation, to the extent
-11-
<PAGE>
practicable, shall give advance notice to affected Optionees of
any such merger, consolidation, dissolution, liquidation, sale of
assets or Change in Control of the Corporation. All such Options
which vest on an accelerated basis in accordance with this
Section VI(B) and are not so exercised shall be forfeited as of
the effective time of any merger, consolidation, dissolution,
liquidation or sale of assets (but not in the case of a Change in
Control of the Corporation).
C. Definition of Change in Control of the Corporation.
--------------------------------------------------
As used herein, a "Change in Control of the Corporation" shall be
deemed to have occurred if any person (including any individual,
firm, partnership or other entity) together with all Affiliates
and Associates (as defined under Rule 12b-2 of the General Rules
and Regulations promulgated under the Exchange Act) of such
person, but excluding (i) a trustee or other fiduciary holding
securities under an employee benefit plan of the Corporation or
any subsidiary of the Corporation, (ii) a corporation owned,
directly or indirectly, by the stockholders of the Corporation in
substantially the same proportions as their ownership of the
Corporation, (iii) the Corporation or any subsidiary of the
Corporation or (iv) only as provided in the immediately following
sentence, a Participant together with all Affiliates and
Associates of a Participant, is or becomes the Beneficial Owner
(as defined in Rule 13d-3 promulgated under the Exchange Act),
directly or indirectly, of securities of the Corporation
representing 40% of more of the combined voting power of the
Corporation's then outstanding securities, such person being
hereinafter referred to as an Acquiring Person. The provisions of
clause (iv) of the immediately preceding sentence shall apply
only with respect to the Option(s) held by the Participant who,
together with his Affiliates or Associates, if any, is or becomes
the direct or indirect Beneficial Owner of the percentage of
securities set forth in such clause.
SECTION VII.
MISCELLANEOUS PROVISIONS
A. Administrative Procedures. The Committee may
-------------------------
establish any procedures determined by it to be appropriate in
discharging its responsibilities under the Plan. Subject to the
provisions of Section X hereof, all actions and decisions of the
Committee shall be final.
B. Assignment or Transfer. No grant or award of any
----------------------
Incentive Stock Option or any other "derivative security" (as
defined by Rule 16a-l(c) promulgated under the Exchange Act) made
under the Plan or any rights or interests therein shall be
assignable or transferable by a Participant except by will or the
laws of descent and distribution or pursuant to a domestic
relations order. During the lifetime of a Participant, Options
granted hereunder shall be exercisable only by the Participant.
C. Investment Representation. Upon the exercise of an
-------------------------
Option, the Committee may require, as a condition of receiving
such securities, that the Participant furnish to the Corporation
such written representations and information as the Committee
deems appropriate to permit the Corporation, in light of the
-12-
<PAGE>
existence or nonexistence of an effective registration statement
under the Securities Act to deliver such securities in compliance
with the provisions of the Securities Act.
D. Withholding Taxes. The Corporation shall have the
-----------------
right to deduct from all cash payments hereunder any federal,
state, local or foreign taxes required by law to be withheld with
respect to such payments. In the case of the issuance or
distribution of Common Stock or other securities hereunder, the
Corporation, as a condition of such issuance or distribution, may
require the payment (through withholding from the Participant's
salary, reduction of the number of shares of Common Stock or
other securities to be issued, or otherwise) of any such taxes.
The Participant may satisfy the withholding obligations by paying
to the Corporation a cash amount equal to the amount required to
be withheld or by tendering to the Corporation a number of shares
of Common Stock having a value equivalent to such cash amount, or
by use of any available procedure as described under Section
IV(C) hereof.
E. Costs and Expenses. The costs and expenses of
------------------
administering the Plan shall be borne by the Corporation and
shall not be charged against any award nor to any employee
receiving a Plan Award.
F. Funding of Plan. The Plan shall be unfunded. The
---------------
Corporation shall not be required to segregate any of its assets
to assure the payment of any Plan Award under the Plan. Neither
the Participants nor any other persons shall have any interest in
any fund or in any specific asset or assets of the Corporation or
any other entity by reason of any Plan Award, except to the
extent expressly provided hereunder. The interests of each
Participant and former Participant hereunder are unsecured and
shall be subject to the general creditors of the Corporation.
G. Other Incentive Plans. The adoption of the Plan
---------------------
does not preclude the adoption by appropriate means of any other
incentive plan for employees.
H. Plurals and Gender. Where appearing in the Plan,
------------------
masculine gender shall include the feminine and neuter genders,
and the singular shall include the plural, and vice versa, unless
the context clearly indicates a different meaning.
I. Headings. The headings and sub-headings in this
--------
Plan are inserted for the convenience of reference only and are
to be ignored in any construction of the provisions hereof.
J. Severability. In case any provision of this Plan
------------
shall be held illegal or void, such illegality or invalidity
shall not affect the remaining provisions of this Plan, but shall
be fully severable, and the Plan shall be construed and enforced
as if said illegal or invalid provisions had never been inserted
herein.
K. Payments Due Missing Persons. The Corporation shall
----------------------------
make a reasonable effort to locate all persons entitled to
benefits under the Plan; however, notwithstanding any provisions
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<PAGE>
of this Plan to the contrary, if, after a period of one (1) year
from the date such benefits shall be due, any such persons
entitled to benefits have not been located, their rights under
the Plan shall stand suspended. Before this provision becomes
operative, the Corporation shall send a certified letter to all
such persons at their last known addresses advising them that
their rights under the Plan shall be suspended. Subject to all
applicable state laws, any such suspended amounts shall be held
by the Corporation for a period of one (1) additional year and
thereafter such amounts shall be forfeited and thereafter remain
the property of the Corporation.
L. Liability and Indemnification. (i) Neither the
-----------------------------
Corporation nor any Parent or Subsidiary shall be responsible in
any way for any action or omission of the Committee, or any other
fiduciaries in the performance of their duties and obligations as
set forth in this Plan. Furthermore, neither the Corporation nor
any Parent or Subsidiary shall be responsible for any act or
omission of any of their agents, or with respect to reliance upon
advice of their counsel provided that the Corporation and/or the
appropriate Parent or Subsidiary relied in good faith upon the
action of such agent or the advice of such counsel.
(ii) Except for their own gross negligence or willful
misconduct regarding the performance of the duties specifically
assigned to them under, or their willful breach of the terms of,
this Plan, the Corporation, each Parent and Subsidiary and the
Committee shall be held harmless by the Participants, former
Participants, beneficiaries and their representatives against
liability or losses occurring by reason of any act or omission.
Neither the Corporation, any Parent or Subsidiary, the Committee,
nor any agents, employees, officers, directors or shareholders of
any of them, nor any other person shall have any liability or
responsibility with respect to this Plan, except as expressly
provided herein.
M. Incapacity. If the Committee shall receive evidence
----------
satisfactory to it that a person entitled to receive payment of
any Plan Award is, at the time when such benefit becomes
payable, a minor, or is physically or mentally incompetent to
receive such Plan Award and to give a valid release thereof, and
that another person or an institution is then maintaining or has
custody of such person and that no guardian, committee or other
representative of the estate of such person shall have been duly
appointed, the Committee may make payment of such Plan Award
otherwise payable to such person to such other person or
institution, including a custodian under a Uniform Gifts to
Minors Act, or corresponding legislation (who shall be an adult,
a guardian of the minor or a trust company), and the release by
such other person or institution shall be a valid and complete
discharge for the payment of such Plan Award.
N. Cooperation of Parties. All parties to this Plan
----------------------
and any person claiming any interest hereunder agree to perform
any and all acts and execute any and all documents and papers
which are necessary or desirable for carrying out this Plan or
any of its provisions.
O. Governing Law. All questions pertaining to the
-------------
validity, construction and administration of the Plan shall be
determined in accordance with the laws of the State of Delaware.
-14-
<PAGE>
P. Nonguarantee of Employment. Nothing contained in
--------------------------
this Plan shall be construed as a contract of employment between
the Corporation (or any Parent or Subsidiary), and any employee
or Participant, as a right of any employee or Participant to be
continued in the employment of the Corporation (or any Parent or
Subsidiary), or as a limitation on the right of the Corporation
or any Parent or Subsidiary to discharge any of its employees,
with or without cause.
Q. Notices. Each notice relating to this Plan shall be
-------
in writing and delivered in person or by certified mail to the
proper address. All notices to the Corporation or the Committee
shall be addressed to it at ICG Communications, Inc., 161 Inverness
Drive West, Englewood, Colorado 80112 Attn: Secretary. All notices
to Participants, former Participants, beneficiaries or other
persons acting for or on behalf of such persons shall be addressed
to such person at the last address for such person maintained in
the Committee's records.
R. Written Agreements. Each Plan Award shall be
------------------
evidenced by a signed written agreement between the Corporation
and the Participant containing the terms and conditions of the
award.
SECTION VIII.
AMENDMENT OR TERMINATION OF PLAN
The Board of Directors of the Corporation shall have
the right to amend, suspend or terminate the Plan and the Options
granted hereunder at any time and for any purpose (including,
without limitation, an amendment necessary for an Option to
maintain its qualification as an "incentive stock option" within
the meaning of Section 422 of the Code, if applicable, or to
comply with Rule 16b-3 (or any successor rule) promulgated under
the Exchange Act); provided, however, that no amendment shall be
made which shall increase the total number of shares of the
Common Stock of the Corporation which may be issued and sold
pursuant to Options or reduce the minimum exercise price in the
case of an Incentive Stock Option, unless such amendment is made
by or with the approval of the stockholders (such approval being
granted within 12 months of the effective date of such
amendment), but only if such approval is required by any
applicable provisions of the Code. Such stockholder approval
shall be effected by the affirmative vote of a majority of the
votes cast by the holders of the outstanding shares of Common
Stock present, by person or proxy, and voting on such amendment.
Except as otherwise provided herein, no amendment, suspension or
termination of the Plan shall alter or impair any Plan Awards
previously granted under the Plan, without the consent of the
holder thereof.
-15-
<PAGE>
SECTION IX.
TERM OF PLAN
The Plan shall remain in effect until December 31,
2007, which is the day prior to the tenth anniversary of the
effective date of the Plan, unless sooner terminated by the Board
of Directors of the Corporation. No Plan Awards may be granted
under the Plan subsequent to the termination of the Plan.
SECTION X.
CLAIMS PROCEDURES
A. Denial. If any Participant, former Participant or
------
beneficiary is denied any vested benefit to which he is, or
reasonably believes he is, entitled under this Plan, either in
total or in an amount less than the full vested benefit to which
he would normally be entitled, the Committee shall advise such
person in writing the specific reasons for the denial. The
Committee shall also furnish such person at the time with a
written notice containing (i) a specific reference to pertinent
Plan provisions, (ii) a description of any additional material or
information necessary for such person to perfect his claim, if
possible, and an explanation of why such material or information
is needed and (iii) an explanation of the Plan's claim review
procedure.
B. Written Request for Review. Within 60 days of
--------------------------
receipt of the information stated in subsection (a) above, such
person shall, if he desires further review, file a written
request for reconsideration with the Committee.
C. Review of Document. So long as such person's
------------------
request for review is pending (including the 60 day period in
subsection (b) above), such person or his duly authorized
representative may review pertinent Plan documents and may submit
issues and comments in writing to the Committee.
D. Committee's Final and Binding Decision. A final and
--------------------------------------
binding decision shall be made by the Committee within 60 days of
the filing by such person of this request for reconsideration;
provided, however, that if the Committee, in its discretion, feels
-------- -------
that a hearing with such person or his representative is
necessary or desirable, this period shall be extended for an
additional 60 days.
E. Transmittal of Decision. The Committee's decision
-----------------------
shall be conveyed to such person in writing and shall (i) include
specific reasons for the decision, (ii) be written in a manner
calculated to be understood by such person and (iii) set forth
the specific references to the pertinent Plan provisions on which
the decision is based.
F. Limitation on Claims. Notwithstanding any
--------------------
provisions of this Plan to the contrary, no Participant (nor the
estate or other beneficiary of a Participant) shall be entitled
-16-
<PAGE>
to assert a claim against the Corporation (or against any Parent
or Subsidiary) more than three years after the date the
Participant (or his estate or other beneficiary) initially is
entitled to receive benefits hereunder.
-17-
<PAGE>
ICG COMMUNICATIONS, INC. 1998 ANNUAL MEETING
JUNE 3, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of ICG COMMUNICATIONS, INC., a
Delaware corporation (the "Company"), acknowledges receipt of the
Notice of Annual Meeting of Stockholders and Proxy Statement,
dated May 5, 1998, 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
Company's principal executive offices at 161 Inverness Drive
West, Englewood, Colorado 80112, on June 3, 1998, at 9:30 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:
1. Election of Directors:
FOR all nominees listed WITHHOLD AUTHORITY
below (except as to vote for all
indicated) [ ] all nominees listed
below [ ]
NOMINEES: Leontis Teryazos, Walter Threadgill
(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.)
2. Approval of the adoption by the Board of Directors of
the Company's 1998 Stock Option Plan.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
<PAGE>
3. 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,
1998.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. Transaction of such other business as may properly come
before the Meeting and 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, FOR the
approval of the adoption by the Board of Directors of the
Company's 1998 Stock Option Plan, FOR the ratification of the
appointment of the independent auditors and FOR 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.
Date . . . . . . . . . . . . 1998
. . . . . . . . . . . . . . (L.S.)
. . . . . . . . . . . . . . (L.S.)
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.
