FORM 10-Q. - QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
X Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1998
or
Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
(Commission File Number 1-11965)
ICG COMMUNICATIONS, INC.
(Commission File Number 333-40495)
ICG FUNDING, LLC
(Commission File Number 1-11052)
ICG HOLDINGS (CANADA), INC.
(Commission File Number 33-96540)
ICG HOLDINGS, INC.
(Exact names of registrants as specified in their charters)
- ----------------------------------------- -------------------------------------
Delaware 84-1342022
Delaware 84-1434980
Canada Not applicable
Colorado 84-1158866
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
- ----------------------------------------- -------------------------------------
161 Inverness Drive West Not applicable
Englewood, Colorado 80112
161 Inverness Drive West Not applicable
Englewood, Colorado 80112
1710-1177 West Hastings Street c/o ICG Communications, Inc.
Vancouver, BC V6E 2L3 161 Inverness Drive West
P.O. Box 6742
Englewood, Colorado 80155-6742
161 Inverness Drive West Not applicable
Englewood, Colorado 80112
(Address of principal executive offices) (Address of U.S. agent for service)
- ----------------------------------------- -------------------------------------
Registrants' telephone numbers, including area codes: (888) 424-1144 or
(303) 414-5000
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
Yes X No
The number of registrants' outstanding common securities as of August 13,
1998 were 45,729,222, 1, 31,831,558 and 1,918, respectively. ICG Communications,
Inc. owns all of the issued and outstanding common securities of ICG Funding,
LLC. ICG Holdings (Canada), Inc. owns all of the issued and outstanding common
shares of ICG Holdings, Inc.
<PAGE>
TABLE OF CONTENTS
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . 2
Consolidated Balance Sheets as of December 31, 1997 and
June 30, 1998 (unaudited) . . . . . . . . . . . . . . . 2
Consolidated Statements of Operations (unaudited) for the
Three Months and Six Months Ended June 30, 1997 and 1998 4
Consolidated Statement of Stockholders' Deficit
(unaudited) for the Six Months Ended June 30, 1998 . . . 5
Consolidated Statements of Cash Flows (unaudited) for the
Six Months Ended June 30, 1997 and 1998 . . . . . . . . . 6
Notes to Consolidated Financial Statements (unaudited). . . 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . 18
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . 30
ITEM 2. CHANGES IN SECURITIES . . . . . . . . . . . . . . . . . . . 30
ITEM 3. DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . . 30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS . . 30
ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . 30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . 30
Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . 30
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 31
<PAGE>
2
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and June 30, 1998 (unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------------ ----------------
(in thousands)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 182,202 615,494
Short-term investments 112,281 16,000
Receivables:
Trade, net of allowance of $7,004 and $10,263 at
December 31, 1997 and June 30, 1998, respectively
(note 7) 61,439 84,490
Revenue earned, but unbilled 8,599 13,424
Due from affiliate 9,384 7,022
Other 1,696 1,598
------------------ ----------------
81,118 106,534
Inventory 4,242 3,426
Prepaid expenses and deposits 14,097 12,774
------------------ ----------------
Total current assets 393,940 754,228
------------------ ----------------
Property and equipment 860,495 998,615
Less accumulated depreciation (155,383) (203,914)
------------------ ----------------
Net property and equipment 705,112 794,701
------------------ ----------------
Long-term notes receivable from affiliate and others, net 10,375 15,285
Restricted cash 24,649 20,836
Other assets, net of accumulated amortization:
Goodwill 77,562 74,398
Deferred financing costs 23,196 38,481
Deferred advertising costs 3,115 8,032
Transmission and other licenses 6,031 5,878
Deposits and other 10,531 20,793
------------------ ----------------
120,435 147,582
================== ================
$ 1,254,511 1,732,632
================== ================
(Continued)
</TABLE>
<PAGE>
3
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (unaudited), Continued
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------------ -------------------
(in thousands)
<S> <C> <C>
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 38,457 71,825
Accrued liabilities 71,678 60,139
Deferred revenue 10,219 13,933
Current portion of capital lease obligations (note 7) 8,128 7,821
Current portion of long-term debt (note 2) 1,784 935
------------------ -------------------
Total current liabilities 130,266 154,653
------------------ -------------------
Capital lease obligations, less current portion (note 7) 70,489 64,941
Long-term debt, net of discount, less current portion (note 2) 890,568 1,512,805
------------------ -------------------
Total liabilities 1,091,323 1,732,399
------------------ -------------------
Redeemable preferred stock of subsidiary ($301.2 million and
$323.0 million liquidation value at December 31, 1997 and
June 30, 1998, respectively) (note 2) 292,442 314,590
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 and June 30, 1998) 127,729 127,847
Stockholders' deficit:
Common stock (note 3) 749 747
Additional paid-in capital 533,541 550,989
Accumulated deficit (791,417) (994,008)
Accumulated other comprehensive income 144 68
------------------ -------------------
Total stockholders' deficit (256,983) (442,204)
------------------ -------------------
Commitments and contingencies (notes 4, 5, 6 and 7)
$ 1,254,511 1,732,632
================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
4
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (unaudited)
Three Months and Six Months Ended June 30, 1997 and 1998
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
-------------------------------- -------------------------------
1997 1998 1997 1998
-------------- -------------- -------------- --------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenue:
Telecom services $ 41,243 69,455 79,523 134,197
Internet services 41,020 40,370 80,025 80,904
Network services 15,640 14,759 33,627 26,190
Satellite services 7,883 11,683 14,666 20,632
-------------- -------------- -------------- ------------
Total revenue 105,786 136,267 207,841 261,923
Operating costs and expenses:
Operating costs 83,650 93,351 166,602 186,870
Selling, general and administrative expenses 58,636 61,444 112,252 122,502
Depreciation and amortization 18,955 30,663 35,681 51,630
Net (gain) loss on disposal of long-lived assets (256) 137 (897) 642
Provision for impairment of long-lived assets - - - 1,860
Merger and restructuring costs 1,712 2,185 1,712 9,931
-------------- -------------- -------------- ------------
Total operating costs and expenses 162,697 187,780 315,350 373,435
Operating loss (56,911) (51,513) (107,509) (111,512)
Other income (expense):
Interest expense (28,451) (41,991) (53,633) (76,875)
Interest income 7,778 9,499 13,876 16,148
Other expense, net (note 4) (43) (3,224) (593) (3,540)
-------------- -------------- -------------- ------------
(20,716) (35,716) (40,350) (64,267)
-------------- -------------- -------------- ------------
Loss before income taxes and minority interest (77,627) (87,229) (147,859) (175,779)
Income tax expense (6) (12) (13) (25)
-------------- -------------- -------------- ------------
Loss before minority interest (77,633) (87,241) (147,872) (175,804)
Minority interest in share of losses, net of
accretion and preferred dividends on preferred
securities of subsidiaries (9,116) (13,595) (14,869) (26,787)
-------------- -------------- -------------- ------------
Net loss $ (86,749) (100,836) (162,741) (202,591)
============== ============== ============== ============
Other comprehensive income (loss):
Foreign currency translation adjustment 144 (181) (234) (76)
Unrealized loss on investment securities (84) - (305) -
-------------- -------------- -------------- ------------
Other comprehensive income (loss) 60 (181) (539) (76)
-------------- -------------- -------------- ------------
Comprehensive loss $ (86,689) (101,017) (163,280) (202,667)
============== ============== ============== ============
Net loss per share - basic and diluted (note 3) $ (2.06) (2.25) (3.87) (4.54)
============== ============== ============== ============
Weighted average number of shares outstanding - basic
and diluted 42,122 44,865 42,067 44,588
============== ============== ============== ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
5
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Deficit (unaudited)
Six Months Ended June 30, 1998
<TABLE>
<CAPTION>
Accumulated
Common stock Additional other Total
---------------------- paid-in Accumulated comprehensive stockholders'
Shares Amount capital deficit income deficit
---------- ------------ ------------- ---------------- ------------------ ----------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1998 43,974 $ 749 533,541 (791,417) 144 (256,983)
Shares issued for cash by ICG
Funding, LLC net of selling costs 127 1 3,384 - - 3,385
Shares issued for cash in connection
with the exercise of options and
warrants 981 9 11,659 - - 11,668
Shares issued for cash in connection
with the employee stock purchase plan 21 - 884 - - 884
Shares issued as contribution to 401(k)
plan 53 1 1,508 - - 1,509
Exchange of ICG Holdings (Canada),Inc.
common shares for ICG common stock - (13) 13 - - -
Cumulative foreign currency
translation adjustment - - - - (76) (76)
Net loss - - - (202,591) - (202,591)
========== ============ ============= ================ ================== ================
Balances at June 30, 1998 45,156 747 550,989 (994,008) 68 (442,204)
========== ============ ============= ================ ================== ================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
6
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
Six Months Ended June 30, 1997 and 1998
<TABLE>
<CAPTION>
Six months ended June 30,
---------------------------------------
1997 1998
------------------- -----------------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (162,741) (202,591)
Adjustments to reconcile net loss to net cash used by operating activities:
Minority interest in share of losses, net of accretion and preferred
dividends on preferred securities of subsidiaries 14,869 26,787
Depreciation and amortization 35,681 51,630
Interest expense deferred and included in long-term debt, net of amounts
capitalized on assets under construction 48,532 67,695
Amortization of deferred advertising costs included in selling,
general and administrative expenses 5,799 3,634
Amortization of deferred financing costs included in interest expense 1,370 1,820
Write-off of non-operating assets 992 -
Contribution to 401(k) plan through issuance of common shares 533 1,509
Net (gain) loss on disposal of long-lived assets (897) 642
Provision for impairment of long-lived assets - 1,860
Change in operating assets and liabilities:
Receivables (1,753) (25,416)
Inventory (875) 816
Prepaid expenses and deposits (3,204) 1,323
Deferred advertising costs (3,160) (8,551)
Accounts payable and accrued liabilities 24,199 20,790
Deferred revenue 1,430 3,714
------------------- -----------------
Net cash used by operating activities (39,225) (54,338)
------------------- -----------------
Cash flows from investing activities:
Decrease (increase) in long-term notes receivable from affiliates and others 343 (4,910)
Acquisition of property, equipment and other assets, net (128,330) (165,806)
Payments for construction of new headquarters (10,156) (4,944)
Proceeds from disposition of property, equipment and other assets 1,706 145
Proceeds from sale of new headquarters, net of selling and other costs - 29,094
Sale of short-term investments 20,601 96,281
Decrease in restricted cash 633 3,813
Purchase of minority interest in subsidiary - (355)
------------------- -----------------
Net cash used by investing activities (115,203) (46,682)
------------------- -----------------
Cash flows from financing activities:
Proceeds from issuance of common stock:
Sales by ICG Funding, LLC - 3,385
Exercise of options and warrants 669 11,668
Employee stock purchase plan 1,457 884
Proceeds from issuance of subsidiary preferred stock, net of issuance costs 96,000 -
Proceeds from issuance of long-term debt 101,486 550,574
Deferred long-term debt issuance costs (3,554) (17,205)
Principal payments on capital lease obligations (22,091) (8,170)
Principal payments on short-term debt - (1)
Principal payments on long-term debt (879) (2,350)
Payments of preferred dividends - (4,463)
------------------- -----------------
Net cash provided by financing activities 173,088 534,322
------------------- -----------------
Net increase in cash and cash equivalents 18,660 433,302
Effect of exchange rates on cash (168) (10)
Cash and cash equivalents, beginning of period 433,342 182,202
=================== =================
Cash and cash equivalents, end of period $ 451,834 615,494
=================== =================
(Continued)
</TABLE>
<PAGE>
7
ICG COMMUNICATIONS, INC. AND SUBISIDIARIES
Consolidated Statements of Cash Flows (unaudited), Continued
<TABLE>
<CAPTION>
Six months ended June 30,
----------------------------------------
1997 1998
------------------- -----------------
(in thousands)
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest $ 3,751 7,360
=================== =================
Cash paid for income taxes $ 13 25
================== =================
Supplemental schedule of non-cash financing and investing activities - assets
acquired under capital leases $ 5,533 2,315
=================== =================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
8
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and June 30, 1998 (unaudited)
(1) Organization and Basis of Presentation
(a) 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. On
September 17, 1997, ICG formed a new special purpose entity, ICG
Funding, LLC, a Delaware limited liability company and wholly owned
subsidiary of ICG ("ICG Funding").
On January 21, 1998, the Company completed a merger with NETCOM
On-Line Communication Services, Inc. ("NETCOM"). At the effective time
of the merger, each outstanding share of NETCOM common stock, $.01 par
value, became automatically convertible into shares of ICG common
stock, $.01 par value ("ICG Common Stock"), at an exchange ratio of
0.8628 shares of ICG Common Stock per NETCOM common share. The
business combination has been accounted for as a pooling of interests,
and accordingly, the accompanying consolidated financial statements
have been restated to include the operations of NETCOM for all
historical periods presented. NETCOM was incorporated in the state of
California in August 1992 and reincorporated in the state of Delaware
in October 1994. On January 23, 1998, the Company formed ICG Services,
Inc., a Delaware corporation and wholly owned subsidiary of ICG ("ICG
Services"). ICG Services is the parent company of NETCOM and ICG
Equipment, Inc., a Colorado corporation formed on January 23, 1998 to
purchase or lease telecommunications equipment, software and capacity
and related services, and in turn, lease such assets to Holdings'
subsidiaries. ICG and its subsidiaries, including ICG Services and its
subsidiaries, are collectively referred to as the "Company."
The Company's principal business activity is telecommunications
services, including Telecom Services, Internet Services, Network
Services and Satellite Services. Telecom Services consists primarily
of the Company's competitive local exchange carrier operations which
provide services to business end users and long distance carriers and
resellers. Internet Services consists of the operations of NETCOM
which includes Internet access, World Wide Web ("the Web") site
hosting services and other value-added connectivity services, which
are primarily targeted to small and medium-sized business customers in
the United States, Canada and the United Kingdom. Network Services
supplies information technology services and selected networking
products, focusing on network design, installation, maintenance and
support for a variety of end users, including Fortune 1000 firms and
other large businesses and telecommunications companies. For the
periods presented, Satellite Services provides satellite voice and
data services to major cruise ship lines, the commercial shipping
industry, yachts, the U.S. Navy and offshore oil platforms. To better
focus its efforts on its core Telecom Services unit, the Company has
entered into definitive agreements to sell the capital stock of two
subsidiaries within its Satellite Services operations (see note 4).
(b) Reference to Annual and Transition Reports
The accompanying consolidated financial statements give retroactive
effect to the merger of ICG and NETCOM on January 21, 1998, which has
been accounted for as a pooling of interests, and includes the
accounts of NETCOM and its subsidiaries as of the end of and for the
periods presented.
These financial statements should be read in conjunction with ICG's
Annual Report on Form 10-K for the fiscal year December 31, 1997 and
NETCOM's Annual Report on Form 10-KSB/A for the fiscal year
<PAGE>
9
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and June 30, 1998 (unaudited)
(1) Organization and Basis of Presentation (continued)
ended December 31, 1996, as certain information and note disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the United States
Securities and Exchange Commission. The interim financial statements
reflect all adjustments which are, in the opinion of management,
necessary for a fair presentation of financial position, results of
operations and cash flows as of and for the interim periods presented.
Such adjustments are of a normal recurring nature. Operating results
for the six months ended June 30, 1998 are not necessarily indicative
of the results that may be expected for the fiscal year ending
December 31, 1998.
(c) Deferred Advertising Costs
The Company expenses the costs of advertising as incurred, except
direct response advertising expenses which are deferred and amortized
over the period in which the future benefits are expected to be
received, generally 12 to 24 months. Deferred advertising costs relate
directly to customer solicitations and principally include the
printing, production and shipping of Internet starter packages and the
costs of obtaining qualified customer prospects by various targeted
direct marketing programs. No indirect costs are included in deferred
advertising costs. Beginning in the second quarter of 1998, the
amortization of deferred advertising costs is included in selling,
general and administrative expenses in the accompanying consolidated
statements of operations. The amortization of these costs was
previously included in depreciation and amortization. This
reclassification was made to conform with current industry practice.
All prior period amounts have been reclassified to conform with the
current presentation.
(d) Reclassifications
Certain 1997 amounts have been reclassified to conform with the 1998
presentation.
<PAGE>
10
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Long-term Debt and Redeemable Preferred Securities of Subsidiaries
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997 June 30, 1998
--------------------- -----------------
(in thousands)
<S> <C> <C>
9 7/8% Senior discount notes, net of discount (a) $ - 254,338
10% Senior discount notes, net of discount - 312,050
11 5/8% Senior discount notes, net of discount 109,436 115,797
12 1/2% Senior discount notes, net of discount 367,494 390,460
13 1/2% Senior discount notes, net of discount 407,409 435,432
Note payable with interest at the 90-day commercial paper
rate plus 4 3/4% (10.2% at June 30, 1998), due 2001,
secured by certain telecommunications equipment 4,932 4,490
Note payable with interest at 11%, paid in full on June 12,
1998 1,860 -
Mortgage payable with interest at 8 1/2%, due
monthly through 2009, secured by building 1,131 1,107
Other 90 66
--------------------- -----------------
892,352 1,513,740
Less current portion (1,784) (935)
===================== =================
$ 890,568 1,512,805
===================== =================
</TABLE>
Redeemable preferred stock of subsidiary is summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997 June 30, 1998
--------------------- ------------------
(in thousands)
<S> <C> <C>
14% Exchangeable preferred stock, mandatorily
redeemable in 2008 $ 108,022 116,159
14 1/4% Exchangeable preferred stock, mandatorily
redeemable in 2007 184,420 198,431
===================== ==================
$ 292,442 314,590
===================== ==================
</TABLE>
(a) 9 7/8% Notes
On April 27, 1998, ICG Services completed a private placement of 9
7/8% Senior Discount Notes due 2008 (the "9 7/8% Notes") for gross
proceeds of approximately $250.0 million. Net proceeds from the
offering, after underwriting and other offering costs of approximately
$7.6 million, were approximately $242.4 million.
The 9 7/8% Notes are unsecured senior obligations of ICG Services that
mature on May 1, 2008, at a maturity value of $405.3 million. Interest
will accrue at 9 7/8% per annum, beginning May 1, 2003, and is payable
each May 1 and November 1, commencing November 1, 2003. The indenture
for the 9 7/8% Notes contains certain covenants which provide
limitations on indebtedness, dividends, asset sales and certain other
transactions.
<PAGE>
11
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Long-term Debt and Redeemable Preferred Securities of Subsidiaries
(continued)
The 9 7/8% Notes were originally recorded at approximately $250.0
million. The discount on the 9 7/8% Notes will be accreted through May
1, 2003, the date on which the 9 7/8% Notes may first be redeemed. The
accretion of the discount and debt issuance costs is included in
interest expense in the accompanying consolidated financial
statements.
(3) Stockholders' Deficit
(a) Common Stock
Common stock outstanding at June 30, 1998 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 June 30, 1998:
<TABLE>
<CAPTION>
Shares
Shares owned by owned by third
ICG parties
----------------- ----------------
<S> <C> <C>
ICG Common Stock, $.01 par value, 100,000,000
shares authorized; 45,134,020 shares issued and outstanding
at June 30, 1998 - 45,134,020
Holdings-Canada Class A common shares, no par value,
100,000,000 shares authorized; 31,831,558 shares issued
and outstanding at June 30, 1998:
Class A common shares, exchangeable on a one-for-one
basis for ICG Common Stock at any time - 22,040
Class A common shares owned by ICG 31,809,518 -
----------------
Total shares outstanding 45,156,060
================
</TABLE>
(b) Stock Options
The ICG Communications, Inc. 1998 Stock Option Plan (the "1998 Plan")
was adopted by the Stock Option Committee of the Company's Board of
Directors on February 23, 1998 and approved by the Company's
shareholders on June 3, 1998. The 1998 Plan authorizes the grant of
incentive and non-qualified stock options to employees and
non-employee directors to purchase 3,400,000 shares of ICG Common
Stock. Also on June 3, 1998, the Stock Option Committee approved the
grant of an aggregate of 1,950,210 stock options under the 1998 Plan
to all of the Company's employees at an exercise price of $30.00, the
closing price of ICG Common Stock on June 3, 1998. The purpose of the
1998 Plan is to retain employees and to provide participants with an
incentive for outstanding performance and thereby promote the success
and enhance the value of the Company.
(c) Net Loss Per Share
Basic and diluted net loss per share is calculated by dividing the net
loss by the weighted average number of shares outstanding. Weighted
average number of shares outstanding represents combined ICG Common
Stock and Holdings-Canada Class A common shares outstanding. Common
stock equivalents, which include options, warrants and convertible
subordinated notes and preferred stock, are not included in the net
loss per share calculation as their effect is anti-dilutive.
<PAGE>
12
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4) Sale of Satellite Services Operating Subsidiaries
On April 1, 1998, the Company entered into definitive agreements to sell
the capital stock of Maritime Telecommunications Network, Inc. ("MTN") and
MarineSat Communications Network, Inc. (formerly Maritime Communications
Network, Inc.) ("MCN"), the two main operating subsidiaries within the
Company's Satellite Services operations. In accordance with these
agreements, each party had the option to terminate the agreements if
regulatory approvals were not received and the transactions were not closed
by June 30, 1998. On July 1, 1998, the Company terminated both agreements
and, on July 17, 1998, entered into separate definitive agreements to sell
the capital stock of MCN and Nova-Net Communications, Inc. ("Nova-Net"),
another subsidiary within the Company's Satellite Services operations. The
sale of MCN was completed on August 12, 1998. The sale of Nova-Net is
expected to be completed later this year and remains subject to certain
conditions, including regulatory approvals. The combined revenue of MCN and
Nova-Net does not represent a significant portion of the Company's
historical consolidated revenue. MTN remains a subsidiary of the Company.
Prior to April 1998, the Company owned a 64.5% interest in MTN. In April
1998, the Company purchased the minority interest in MTN for approximately
$0.4 million and settled certain disputes with the former minority
shareholders for approximately $2.7 million, which amount is included in
other expense, net in the accompanying consolidated statement of
operations.
(5) Assignment of Call Traffic by Zycom
The Company owns a 70% interest in Zycom Corporation ("Zycom") which,
through its wholly owned subsidiary, Zycom Network Services, Inc. ("ZNSI"),
operates an 800/888/900 number services bureau and a switch platform in the
United States and supplies information providers and commercial accounts
with audiotext and customer support services. In June 1998, Zycom was
notified by its largest customer of the customer's intent to transfer its
call traffic to another service bureau. In order to minimize the obligation
that this loss in call traffic would generate under Zycom's volume discount
agreements with its call transport provider, ZNSI entered into a
conditional agreement on July 1, 1998 with an unaffiliated entity, ICN
Limited ("ICN"), whereby ZNSI intends to assign the traffic of its largest
audiotext customer and its other 900-number customers to ICN. As part of
this agreement, ICN will assume and Zycom will be released of all minimum
call traffic volume obligations to AT&T, Zycom's call transport provider.
Zycom and ICN are awaiting the necessary approvals from AT&T to complete
the transaction. The call traffic to be assigned to ICN represents
approximately 86% and 87% of Zycom's revenue for the fiscal year ended
December 31, 1997 and the six months ended June 30, 1998, respectively, and
6% and 4% of the Company's revenue for the fiscal year ended December 31,
1997 and the six months ended June 30, 1998, respectively.
(6) Business Combinations
As discussed in note 1, 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 convertible into shares
of ICG 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 issued
an estimated 10.2 million shares of ICG Common Stock for the NETCOM common
shares outstanding on January 21, 1998 and may be expected to issue as many
as 1.7 million shares of ICG Common Stock related to common stock options
of NETCOM outstanding on the merger closing date. Cash is paid in lieu of
fractional shares. The Company has accounted for the business combination
under the pooling-of-interests method of accounting and accordingly, the
Company's financial statements have been restated to reflect the operations
of NETCOM and the Company on a combined basis for all historical periods.
<PAGE>
13
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) Business Combinations (continued)
The following unaudited pro forma information presents the combined results
of operations of ICG and NETCOM as if the 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>
Fiscal years ended Fiscal year Six months ended
September 30, Three months ended ended June 30,
---------------------------- December 31, December 31, -----------------------------
1995 1996 1996 1997 1997 1998
------------- ----------- -------------------- ----------------- ------------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
ICG $ 111,610 169,094 56,956 273,354 127,816 181,019
NETCOM 52,422 120,540 36,379 160,660 80,025 80,904
============= =========== ==================== ================= ============= ============
Combined $ 164,032 289,634 93,335 434,014 207,841 261,923
============= =========== ==================== ================= ============= ============
Net loss:
ICG (76,648) (184,107) (49,823) (327,643) (144,351) (174,093)
NETCOM (14,064) (44,265) (11,490) (33,092) (18,390) (28,498)
============= =========== ==================== ================= ============= ============
Combined $ (90,712) (228,372) (61,313) (360,735) (162,741) (202,591)
============= =========== ==================== ================= ============= ============
Loss per share
basic and diluted:
ICG $ (3.25) (6.83) (1.56) (10.11) (4.51)
============= =========== ==================== ================= =============
NETCOM $ (1.95) (4.46) (1.15) (3.27) (1.83)
============= =========== ==================== ================= =============
Combined $ (2.94) (6.19) (1.46) (8.49) (3.87) (4.54)
============= =========== ==================== ================= ============= ============
</TABLE>
On July 27, 1998, the Company acquired DataChoice Network Services L.L.C.
("DataChoice") for total consideration of $5.9 million, consisting of
145,997 shares of ICG Common Stock and approximately $1.1 million in cash.
DataChoice, a Colorado limited liability company, provides point-to-point
data transmission resale services through its long-term agreements with
multiple regional carriers and nationwide providers.
Additionally, the Company completed a series of transactions on July 30,
1998 to acquire NikoNET, Inc., CompuFAX Acquisition Corp. and Enhanced
Messaging Services, Inc. (collectively, "NikoNET"). The Company paid
approximately $13.8 million in cash, including amounts paid to satisfy
NikoNET's former line-of-credit, and exchanged 356,318 shares of ICG Common
Stock with a fair market value of approximately $12.4 million, for all the
capital stock of NikoNET. Located in Atlanta, Georgia, NikoNET provides
broadcast facsimile services and value-added messaging services to
financial institutions, corporate investor and public relations departments
and other customers. The Company believes that the acquisition of NikoNET
will enable the Company to expand the service offerings currently available
to its Telecom Services customers.
The acquisitions described will be accounted for using the purchase method
of accounting and, accordingly, the net assets and results of operations
will be included in the consolidated financial statements from the
respective dates of acquisition. Revenue, net loss and loss per share on a
pro forma basis, assuming the transactions were completed at the beginning
of the periods presented, are not significantly different from the
Company's historical results.
<PAGE>
14
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) Commitments and Contingencies
(a) Network Construction
In March 1996, the Company and Southern California Edison Company
(ASCE@) entered into a 25-year agreement under which the Company will
license 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 is 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 $136.5 million at
June 30, 1998. The agreement has been accounted for as a capital lease
in the accompanying consolidated balance sheets.
In May 1997, the Company entered into a long-term agreement with the
Southern Company ("Southern") that will permit the Company to
construct a 100-mile fiber optic network in the Atlanta metropolitan
area. The Company paid $5.5 million upon execution of the agreement
and is responsible for reimbursement to Southern for costs of network
design, construction, installation, maintenance and repair.
Additionally, the Company is also required to pay Southern a quarterly
fee based on specified percentages of the Company's revenue derived
from services provided over this network. Network construction on the
initial 43-mile build is expected to be completed in September of
1998. The Company estimates costs to complete the initial build to be
approximately $3.5 million. The Company has incurred approximately
$7.0 million as of June 30, 1998, including the initial $5.5 million
payment.
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 in
December 1998. The Company is responsible for payment on the
construction as segments of the network are completed and has incurred
approximately $9.6 million as of June 30, 1998, with remaining costs
anticipated to be approximately $25.4 million. Additionally, the
Company has committed to purchase $6.0 million in network capacity
from Qwest prior to the end of 1999.
(b) Other Commitments
The Company has entered into various equipment purchase agreements
with certain of its vendors. Under these agreements, if the Company
does not meet a minimum purchase level in any given year, the vendor
may discontinue certain discounts, allowances and incentives otherwise
provided to the Company. In addition, the agreements may be terminated
by either the Company or the vendor upon prior written notice.
Additionally, the Company has entered into certain commitments to
purchase capital assets with an aggregate purchase price of
approximately $89.4 million at June 30, 1998.
<PAGE>
15
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) Commitments and Contingencies (continued)
(c) Transport and Termination Charges
The Company has recorded revenue of approximately $4.9 million and
$15.1 million for fiscal 1997 and the six months ended June 30, 1998,
respectively, for reciprocal compensation relating to the transport
and termination of local traffic to Internet service providers from
customers of incumbent local exchange carriers pursuant to various
interconnection agreements. These local exchange carriers have not
paid most of the bills they have received from the Company and have
disputed substantially all of these charges based on the belief that
such calls are not local traffic as defined by the various agreements
and under state and federal laws and public policies. The resolution
of these disputes will be based on rulings by state public utility
commissions and/or by the Federal Communications Commission ("FCC").
To date, there have been favorable final rulings from 20 states,
favorable preliminary decisions from two additional states and no
unfavorable final rulings by any state public utility commission or
the FCC that would indicate that calls placed by end users to Internet
service providers would not qualify as local traffic subject to the
payment of reciprocal compensation. In addition to the two preliminary
rulings, cases are pending before five other states. Additionally,
three federal district court decisions have upheld favorable public
utility commission rulings. The Company has also recorded revenue of
approximately $5.5 million for the six months ended June 30, 1998
related to other transport and termination charges to the incumbent
local exchange carriers, pursuant to the Company's interconnection
agreements with these carriers. Included in the Company's trade
receivables at December 31, 1997 and June 30, 1998 is $4.4 million and
$23.5 million, respectively, for all receivables related to transport
and termination charges. While the Company believes that all revenue
recorded through June 30, 1998 is collectible and that future revenue
from transport and termination charges will be realized, there can be
no assurance that such future regulatory rulings will be favorable to
the Company.
(d) Litigation
On April 4, 1997, certain shareholders of the Company's majority owned
subsidiary, Zycom Corporation ("Zycom"), an Alberta, Canada
corporation, filed a shareholder derivative suit and class action
complaint for unspecified damages, purportedly on behalf of all of the
minority shareholders of Zycom, in the District Court of Harris
County, Texas (Cause No. 97-17777) against the Company, Zycom and
certain of their subsidiaries. This complaint alleges that the Company
and certain of its subsidiaries breached certain duties owed to the
plaintiffs. The Company is vigorously defending the claims. While it
is not possible to predict the outcome of this litigation, management
believes these proceedings will not have a material adverse effect on
the Company's financial condition, results of operations or cash
flows.
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.
(8) Summarized Financial Information of ICG Holdings, Inc.
The 11 5/8% Senior Discount Notes due 2007 (the "11 5/8% Notes") issued by
Holdings during 1997 are guaranteed by ICG. The 12 1/2% Senior Discount
Notes due 2006 (the "12 1/2% Notes") and the 13 1/2% Senior Discount Notes
due 2005 (the "13 1/2% Notes") issued by Holdings during 1996 and 1995,
respectively, are guaranteed by ICG and Holdings-Canada.
The separate complete financial statements of Holdings have not been
included herein because such disclosure is not considered to be material to
the holders of the 11 5/8% Notes, the 12 1/2% Notes and the 13 1/2% Notes.
<PAGE>
16
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) Summarized Financial Information of ICG Holdings, Inc. (continued)
However, summarized combined financial information for Holdings and its
subsidiaries is as follows:
Condensed Balance Sheet Information
<TABLE>
<CAPTION>
December 31, 1997 June 30, 1998
------------------------ ---------------------
(in thousands)
<S> <C> <C>
Current assets $ 215,817 223,313
Property and equipment, net 632,167 670,221
Other non-current assets, net 122,768 136,116
Current liabilities 98,351 91,604
Long-term debt, less current portion 890,503 946,353
Due to parent 30,970 184,507
Other long-term liabilities 66,939 61,287
Preferred stock 292,442 314,590
Stockholder's deficit (408,453) (568,691)
</TABLE>
Summarized Consolidated and Combined Statement of Operations Information
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
----------------------------------- ---------------------------------
1997 1998 1997 1998
----------------- -------------- --------------- ---------------
(in thousands)
<S> <C> <C> <C> <C>
Total revenue 64,766 96,700 127,816 182,176
Total operating costs and expenses 111,553 136,107 215,234 261,159
Operating loss (46,787) (39,407) (87,418) (78,983)
Net loss (77,490) (80,735) (144,119) (160,238)
</TABLE>
(9) Condensed Financial Information of ICG Holdings (Canada), Inc.
Condensed financial information for Holdings-Canada only is as follows:
Condensed Balance Sheet Information
<TABLE>
<CAPTION>
December 31, 1997 June 30, 1998
------------------------ ---------------------
(in thousands)
<S> <C> <C>
Current assets $ 162 162
Advances to subsidiaries 30,790 184,507
Non-current assets, net 3,800 2,526
Current liabilities 107 107
Long-term debt, less current portion 65 65
Due to parent 22,162 174,686
Share of losses of subsidiary 408,453 568,691
Shareholders' deficit (396,035) (556,354)
</TABLE>
<PAGE>
17
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) Condensed Financial Information of ICG Holdings (Canada), Inc. (continued)
Condensed Statement of Operations Information
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
---------------------------------- -----------------------------------------
1997 1998 1997 1998
--------------- ----------------- ------------------ -------------------
(in thousands)
<S> <C> <C> <C> <C>
Total revenue $ - - - -
Total operating costs and expenses 47 48 100 81
Operating loss (47) (48) (100) (81)
Losses of subsidiaries (77,490) (80,735) (144,119) (160,238)
Net loss attributable to common
shareholders (77,537) (80,783) (144,219) (160,319)
</TABLE>
(10) Summarized Financial Information of ICG Funding, LLC
The 6 3/4% Exchangeable Limited Liability Company Preferred Securities
Mandatorily Redeemable 2009 (the "6 3/4% Preferred Securities") issued by
ICG Funding during fiscal 1997 are guaranteed by ICG. The separate complete
financial statements of ICG Funding have not been included herein because
such disclosure is not considered to be material to the holders of the 6
3/4% Preferred Securities. For the six months ended June 30, 1998, 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
<TABLE>
<CAPTION>
December 31, 1997 June 30, 1998
----------------------- ----------------------
(in thousands)
<S> <C> <C>
Cash, cash equivalents and short-term
investments available for sale $ 108,282 -
Restricted cash 24,649 20,836
Investment in ICG Preferred Stock - 112,412
Dividends payable 1,218 1,218
Due to parent - 4
Preferred securities 132,250 132,250
Additional paid-in capital - 3,385
Member deficit (537) (3,609)
</TABLE>
(11) Condensed Financial Information of ICG Communications, Inc. (Parent
company)
The primary assets of ICG are its investments in ICG Services and
Holdings-Canada. Certain corporate expenses of the parent company are
included in ICG's statement of operations and were approximately $0.1
million for both the three months and six months ended June 30, 1997 and
$0.5 million and $1.0 million for the three months and six months ended
June 30, 1998, respectively. ICG has no operations other than those of ICG
Services, ICG Funding and Holdings-Canada and their subsidiaries.
<PAGE>
18
ITEM 2. MANAGEMENT=S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion includes certain forward-looking statements which
are affected by important factors including, but not limited to, 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, Internet, 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 of operations for all periods
presented represent the combined results of ICG and NETCOM. The terms "fiscal"
and "fiscal year" refer to the Company's fiscal year ending December 31. All
dollar amounts are in U.S. dollars.
Company Overview
The Company is one of the nation's leading competitive integrated
communications providers ("ICPs") based on estimates of the industry's 1997
revenue. ICPs seek to provide an alternative to incumbent local exchange
carriers ("ILECs"), long distance carriers, Internet service providers ("ISPs")
and other communications service providers for a full range of communications
services in the increasingly deregulated telecommunications industry. Through
its competitive local exchange carrier ("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.
To better focus its efforts on its core Telecom Services unit, the Company has
entered into definitive agreements to sell the capital stock of two subsidiaries
within its Satellite Services operations. The Company will include the results
of operations of these subsidiaries within its consolidated results of
operations through the respective closing dates. As a leading participant in the
rapidly growing competitive local telecommunications industry, the Company has
experienced significant growth, with total revenue increasing from approximately
$164.0 million for fiscal 1995 to approximately $488.1 million for the 12-month
period ended June 30, 1998. 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.
The Federal Telecommunications Act of 1996 (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 services in late January
1997, followed by Ohio in February 1997, Colorado in March 1997 and the
Southeast in May 1997. During fiscal 1997 and the six months ended June 30,
1998, the Company sold 178,470 and 88,482 local access lines, respectively, of
which 237,458 were in service at June 30, 1998. In addition, the Company's
operating networks have grown from 627 fiber route miles at the end of fiscal
1995 to 3,812 fiber route miles as of June 30, 1998. The Company has 20
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.
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 (before nonrecurring charges) of
$(9.1) million, $(32.5) million and $(10.6) million, respectively. The Company
has accounted for the business combination under the pooling-of-interests method
of accounting and accordingly, the Company's financial statements have been
restated to reflect the operations of NETCOM and the Company on a combined basis
for all historical periods.
<PAGE>
19
Telecom Services revenue has increased from $32.3 million for fiscal 1995
to $232.4 million for the 12-month period ended June 30, 1998. 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. EBITDA, operating and net losses have generally increased
immediately preceding and during periods of relatively rapid network expansion
and development of new services. Since the quarter ended June 30, 1996, EBITDA
losses (before nonrecurring charges) 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 selling, general and
administrative expenses supporting its operations, any or all of which may not
occur, the Company anticipates that EBITDA losses will continue to improve in
the near term.
Results of Operations
The following table provides a breakdown of revenue and operating costs for
Telecom Services, Internet Services, Network Services and Satellite Services,
and certain other financial data for the Company for the periods indicated. The
table also shows revenue, operating costs and expenses, operating loss, EBITDA
and EBITDA (before nonrecurring charges) as a percentage of the Company's total
revenue.
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
---------------------------------------------------- -------------------------------------------
1997 1998 1997 1998
-------------------------- ------------------------- -------------------- ----------------------
$ % $ % $ % $ %
-------------- ---------- --------------- --------- ------------- ------- ---------- ----------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
Telecom services 41,243 39 69,455 51 79,523 38 134,197 51
Internet services 41,020 39 40,370 30 80,025 39 80,904 31
Network services 15,640 15 14,759 11 33,627 16 26,190 10
Satellite services 7,883 7 11,683 8 14,666 7 20,632 8
-------------- ----------- --------------- ----------------------- --------------------- --------
Total revenue 105,786 100 136,267 100 207,841 100 261,923 100
Operating costs:
Telecom services 42,444 48,840 83,894 100,848
Internet services 23,957 26,052 47,337 51,706
Network services 12,883 12,590 27,418 23,455
Satellite services 4,366 5,869 7,953 10,861
-------------- ----------- --------------- ----------------------- --------------------- --------
Total operating costs 83,650 79 93,351 69 166,602 80 186,870 71
Selling, general and
administrative 58,636 55 61,444 45 112,252 54 122,502 47
Depreciation and amortization 18,955 18 30,663 22 35,681 17 51,630 20
Net (gain) loss on disposal
of long-lived assets (256) - 137 - (897) - 642 -
Provision for impairment of
long-lived assets - - - - - - 1,860 1
Merger and restructuring costs 1,712 2 2,185 2 1,712 1 9,931 4
-------------- ----------- --------------- ----------------------- --------------------- --------
Operating loss (56,911) (54) (51,513) (38) (107,509) (52) (111,512) (43)
Other Data:
Net cash used by operating
activities (21,940) (39,862) (39,225) (54,338)
Net cash used by investing
activities (53,684) (77,913) (115,203) (46,682)
Net cash (used) provided by
financing activities (3,205) 239,081 173,088 534,322
EBITDA (1) (37,956) (36) (20,850) (15) (71,828) (35) (59,882) (23)
EBITDA (before nonrecurring
charges) (1) (36,500) (35) (18,528) (14) (71,013) (34) (47,449) (18)
Capital expenditures (2) 70,004 95,862 133,863 168,121
</TABLE>
<PAGE>
20
<TABLE>
<CAPTION>
June 30, September 30, December 31, March 31, June 30,
1997 1997 1997 1998 1998
------------- --------------- -------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statistical Data (3):
Full time employees 2,623 2,861 3,032 3,050 3,089
Telecom services:
Access lines in service (4) 20,108 50,551 141,035 186,156 237,458
Buildings connected (5) :
On-net 560 590 596 637 665
Hybrid (6) 1,704 1,726 1,725 3,294 3,733
------------- --------------- -------------- ------------- -------------
Total buildings connected 2,264 2,316 2,321 3,931 4,398
Customer circuits in service
(VGEs) (7) 917,656 1,006,916 1,111,697 1,171,801 1,250,479
Operational switches:
Voice 17 18 19 20 20
Data 15 15 15 15 15
------------- --------------- -------------- ------------- -------------
Total operational switches 32 33 34 35 35
Switched minutes of use (in
millions) 742 788 660 639 516
Fiber route miles (8):
Operational 2,898 3,021 3,043 3,194 3,812
Under construction - - - - 430
Fiber strand miles (9):
Operational 101,788 109,510 111,435 118,074 124,642
Under construction - - - - 11,102
Wireless miles (10) 511 511 511 511 511
Internet services:
Direct access and Web site
hosting services subscribers 9,070 10,630 12,275 14,976 18,638
Average monthly revenue per
subscriber $ 23.95 24.24 25.01 25.12 25.87
Satellite services:
VSATs 895 934 957 921 928
C-band installations (11) 57 54 57 59 66
L-band installations (12) 671 768 1,239 1,450 1,636
</TABLE>
(1) EBITDA consists of earnings (loss) before interest, income taxes,
depreciation and amortization, other expense, net and minority interest in
share of losses, or simply, operating loss plus depreciation and
amortization. EBITDA (before nonrecurring charges) represents EBITDA before
certain nonrecurring charges such as the net (gain) loss on disposal of
long-lived assets, provision for impairment of long-lived assets and merger
and restructuring costs. During the three months ended June 30, 1998, the
Company reclassified the amortization of deferred advertising costs from
depreciation and amortization to selling, general and administrative
expenses. Additionally, the Company reclassified certain costs originally
recorded as merger and restructuring costs during the three months ended
March 31, 1998 to selling, general and administrative expenses.
Accordingly, the Company has restated EBITDA (before nonrecurring charges)
to reflect these reclassifications in the Company's statement of operations
for all historical periods presented. EBITDA and EBITDA (before
nonrecurring charges) are provided because they are measures commonly used
in the Internet and telecommunications industries. EBITDA and EBITDA
(before nonrecurring charges) are presented to enhance the understanding of
the Company's operating results and are not intended to represent cash
flows or results of operations in accordance with generally accepted
accounting principles ("GAAP") for the periods indicated. EBITDA and EBITDA
(before nonrecurring charges) are not measurements under GAAP and are 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.
(2) Capital expenditures include 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.
(3) Amounts presented are for three-month periods ended, or as of the end of
the period presented.
<PAGE>
21
(4) Access lines in service at June 30, 1998 includes 146,789 lines which are
provisioned through the Company's switch and 90,669 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 is no assurance that it
will be successful in executing this strategy.
(5) Prior to the first quarter of 1998, the Company reported only special
access buildings connected. Beginning March 31, 1998, buildings connected
includes both dial tone and special access buildings connected. The
combined special access and dial tone buildings connected at December 31,
1997 was 3,153.
(6) Hybrid buildings connected represent buildings connected to the Company's
network via another carrier's facilities.
(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 June 30, 1998, the Company had 3,812 fiber
route miles, of which 53 fiber route miles were leased under operating
leases. Fiber route miles under construction represents fiber under
construction and fiber which is expected to be operational within six
months.
(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 June 30, 1998, the Company had 124,642
fiber strand miles, of which 2,028 fiber strand miles were leased under
operating leases. Fiber strand miles under construction represents fiber
under construction and fiber which is expected to be operational within six
months.
(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.
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
Revenue. Revenue for the three months ended June 30, 1998 increased $30.5
million, or 29%, from the three months ended June 30, 1997. Telecom Services
revenue increased 68% to $69.5 million due to an increase in revenue from
switched local services, long distance and special access services, offset in
part by a decline in average unit pricing and in wholesale switched services
revenue. Switched local services revenue increased from $1.2 million (3% of
Telecom Services revenue) for the three months ended June 30, 1997 to $29.5
million (42% of Telecom Services revenue) for the three months ended June 30,
1998. Revenue from long distance generated $5.8 million for the three months
ended June 30, 1998, compared to no reported revenue for the three months ended
June 30, 1997. Switched access (terminating long distance) revenue was
approximately $11.4 million for the three months ended June 30, 1998, compared
to $19.7 million for the three months ended June 30, 1997. The Company
anticipates that switched access revenue will continue to decline as it
de-emphasizes its wholesale switched 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.
Special access revenue increased from $13.5 million for the three months ended
June 30, 1997 to $17.6 million for the three months ended June 30, 1998. Revenue
from data services did not generate a material portion of total revenue during
either period. Also included in Telecom Services revenue for the three months
ended June 30, 1998 is $5.2 million generated by Zycom, compared to $6.8 million
for the three months ended June 30, 1997. The decrease in Zycom revenue for the
three months ended June 30, 1998 as compared to the same period in 1997 relates
to a general decline in call traffic and the loss of certain customers.
Internet Services revenue decreased 2% to $40.4 million for the three
months ended June 30, 1998, compared to $41.0 million for the three months ended
June 30, 1997, primarily due to a decrease in dial-up services subscribers
between the comparative periods. Offsetting this decrease was an increase in
revenue of $0.5 million, or 7%, from $7.5 million to $8.0 million for the three
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22
months ended June 30, 1997 and 1998, respectively, generated from the Company's
higher margin direct access and Web site hosting services.
Network Services revenue decreased 6% to $14.8 million for the three months
ended June 30, 1998, compared to $15.6 million for the three months ended June
30, 1997. The decrease in Network Services revenue is primarily due to large
equipment sales to a single customer during the three months ended June 30,
1997.
Satellite Services revenue increased 48% to $11.7 million for the three
months ended June 30, 1998. This increase is primarily due to the operations of
MTN, which comprised $8.0 million of total Satellite Services revenue for the
three months ended June 30, 1998, compared to $5.3 million during the same
period in 1997. This increase was due to the addition of six cruise ships and
increased equipment sales. The remaining increase can be attributed to the
general growth of MCN and Nova-Net, which reported an increase in revenue of
$1.1 million, compared to the three months ended June 30, 1997. On July 17,
1998, the Company entered into separate definitive agreements to sell MCN and
Nova-Net. The sale of MCN was completed on August 12, 1998. The sale of Nova-Net
is expected to be completed later this year and remains subject to certain
conditions, including regulatory approvals.
Operating costs. Total operating costs for the three months ended June 30,
1998 increased $9.7 million, or 12%, from the three months ended June 30, 1997.
Telecom Services operating costs increased from $42.4 million, or 103% of
Telecom Services revenue, for the three months ended June 30, 1997, to $48.8
million, or 70% of Telecom Services revenue, for the three months ended June 30,
1998. 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 volume of switched
local and special access services and the addition of network operating costs
which include engineering and operations personnel dedicated to the development
and launch of local exchange services. The decrease in operating costs as a
percentage of total revenue is due primarily to a greater volume of higher
margin services, principally local exchange services. The Company expects 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 the
ILEC facilities, and obtains the right to use unbundled ILEC facilities on
satisfactory terms, any or all of which may not occur.
Internet Services operating costs increased 9% to $26.1 million and
increased as a percentage of Internet Services revenue from 58% for the three
months ended June 30, 1997 to 65% for the three months ended June 30, 1998. The
increase is due to increased transport costs due to initiatives related to the
conversion from an analog to a digital based network, which produced certain
duplicative costs during the period of conversion.
Network Services operating costs decreased 2% to $12.6 million and
increased as a percentage of Network Services revenue from 82% for the three
months ended June 30, 1997 to 85% for the three months ended June 30, 1998. The
decrease in operating costs in absolute dollars is due to the decrease in
equipment sales and general business volume between the comparative periods.
Operating costs increased as a percentage of revenue due to cost overruns during
the three months ended June 30, 1998. Network Services operating costs include
the cost of equipment sold, direct hourly labor and other indirect project
costs.
Satellite Services operating costs increased to $5.9 million for the three
months ended June 30, 1998, from $4.4 million for the three months ended June
30, 1997. Satellite Services operating costs as a percentage of Satellite
Services revenue decreased from 55% for the three months ended June 30, 1997 to
50% for the three months ended June 30, 1998. Operating costs decreased as a
percentage of revenue as a result of the increase in revenue from MTN and
Nova-Net which have relatively higher margins than MCN. 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 the three months ended June 30, 1998
increased $2.8 million, or 5%, compared to the three months ended June 30, 1997.
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
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23
and long distance telephone services. SG&A expenses as a percentage of total
revenue decreased from 55% for the three months ended June 30, 1997 to 45% for
the three months ended June 30, 1998, as the Company begins to benefit from the
revenue generated by newly developed services requiring substantial
administrative, selling and marketing expense prior to initial service
offerings. The Company expects SG&A expenses for Telecom Services to increase
slightly in absolute dollars 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
$11.7 million, or 62%, for the three months ended June 30, 1998, compared to the
three months ended June 30, 1997, primarily 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.
Additionally, during the three months ended June 30, 1998, the Company recorded
a cumulative adjustment to depreciation and amortization expense of
approximately $3.7 million for the aggregate depreciation and amortization
expense on capital and other assets of MTN, which was not recorded during the
period in which MTN was held for sale. On April 1, 1998, the Company entered
into a definitive agreement to sell the capital stock of MTN and, on July 1,
1998, the Company exercised its option to terminate the agreement. MTN remains a
subsidiary of the Company.
Net (gain) loss on disposal of long-lived assets. Net (gain) loss on
disposal of long-lived assets fluctuated from a net gain of $0.3 million for the
three months ended June 30, 1997 to a net loss of $0.1 million for the three
months ended June 30, 1998. Net gain on disposal of long-lived assets for the
three months ended June 30, 1997 represents a gain on the sale of NETCOM's
investment in the McKinley Group. For the three months ended June 30, 1998, net
loss on disposal of long-lived assets relates to the loss on the sale of certain
Internet equipment.
Merger and restructuring costs. Merger and restructuring costs for the
three months ended June 30, 1997 of $1.7 million relate to the restructuring of
NETCOM's subsidiary in the United Kingdom and include $0.7 million in accrued
expenses for costs to terminate excess leased office facilities, a $0.4 million
write-off of previously capitalized deferred subscriber acquisition costs and a
$0.6 million write-off of office equipment, furniture and building improvements.
For the three months ended June 30, 1998, merger and restructuring costs include
approximately $1.6 million of merger costs associated with ICG's merger with
NETCOM in January 1998, which consists of additional severance and line
termination costs, and $0.6 million in restructuring costs, primarily severance
costs, related to the decentralization of the Company's Network Services
subsidiary.
Interest expense. Interest expense increased $13.5 million, from $28.5
million for the three months ended June 30, 1997, to $42.0 million for the three
months ended June 30, 1998, which includes $39.9 million of non-cash interest.
This increase is primarily attributable to an increase in long-term debt,
primarily the 10% Senior Discount Notes due 2008 (the "10% Notes") issued in
February 1998 and the 9 7/8% Notes issued in April 1998. 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 $1.7 million, from $7.8 million
for the three months ended June 30, 1997, to $9.5 million for the three months
ended June 30, 1998. The increase is attributable to the increase in cash and
invested cash balances from the proceeds from the issuance of the 6 3/4%
Preferred Securities in September and October 1997, the 10% Notes in February
1998 and the 9 7/8% Notes in April 1998.
Other expense, net. Other expense, net increased from $0.1 million net
expense for the three months ended June 30, 1997 to $3.2 million net expense for
the three months ended June 30, 1998. Other expense, net recorded for the three
months ended June 30, 1997 consists primarily of litigation settlement costs.
For the three months ended June 30, 1998, other expense, net primarily includes
approximately $2.7 million in settlement costs paid to the former minority
shareholders of MTN.
Income tax expense. Income tax expense for the three months ended June 30,
1997 and 1998 is attributable to state and foreign income taxes incurred and
paid by NETCOM.
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24
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 $4.5 million, from $9.1 million for the three months
ended June 30, 1997 to $13.6 million for the three months ended June 30, 1998.
The increase is due primarily to the issuance of the 6 3/4% Preferred Securities
in September and October 1997. Minority interest in share of losses, net of
accretion and preferred dividends on preferred securities of subsidiaries
recorded during the three months ended June 30, 1998 consists of the accretion
of issuance costs ($0.3 million) and the accrual of the preferred securities
dividends ($13.3 million) associated with the 6 3/4% Preferred Securities, the
14% Preferred Stock Mandatorily Redeemable 2008 (the "14% Preferred Stock") and
the 14 1/4% Exchangeable Preferred Stock Mandatorily Redeemable 2007 (the 14
1/4% Preferred Stock").
Net loss. Net loss increased $14.1 million, or 16%, primarily due to the
increases as a percentage of revenue of depreciation and amortization, merger
and restructuring costs, interest expense and minority interest in share of
losses, net of accretion and preferred dividends on preferred securities of
subsidiaries as noted above.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Revenue. Revenue for the six months ended June 30, 1998 increased $54.1
million, or 26%, from the six months ended June 30, 1997. Telecom Services
revenue increased 69% to $134.2 million due to an increase in revenue from
switched local services, long distance and special access services, offset in
part by a decline in average unit pricing and in wholesale switched services
revenue. Switched local services revenue increased from $1.2 million (1% of
Telecom Services revenue) for the six months ended June 30, 1997 to $52.6
million (39% of Telecom Services revenue) for the six months ended June 30,
1998. Revenue from long distance generated $10.9 million for the six months
ended June 30, 1998, compared to no reported revenue for the six months ended
June 30, 1997. Switched access (terminating long distance) revenue was
approximately $25.6 million for the six months ended June 30, 1998, compared to
$38.3 million for the six months ended June 30, 1997. Special access revenue
increased from $25.6 million for the six months ended June 30, 1997 to $33.6
million for the six months ended June 30, 1998. Revenue from data services did
not generate a material portion of total revenue during either period. Also
included in Telecom Services revenue for the six months ended June 30, 1998 is
$11.5 million generated by Zycom, compared to $14.4 million for the same period
in 1997. Substantially all of the decrease in Zycom revenue for the six months
ended June 30, 1998 as compared to the same period in 1997 relates to a general
decline in call traffic and the loss of certain customers.
Internet Services revenue increased 1% to $80.9 million for the six months
ended June 30, 1998, compared to $80.0 million for the six months ended June 30,
1997 due to an increase in revenue of $3.4 million, or 28%, from the Company's
higher margin direct access and Web site hosting services. Offsetting this
increase is a decrease in the Company's dial-up services revenue, due to a
decrease in dial-up services subscribers between the comparative periods.
Network Services revenue decreased 22% to $26.2 million for the six months
ended June 30, 1998, compared to $33.6 million for the six months ended June 30,
1997. The decrease in Network Services revenue is primarily due to the decline
in projects from new and existing customers and large equipment sales to a
single customer during the six months ended June 30, 1997.
Satellite Services revenue increased 41% to $20.6 million for the six
months ended June 30, 1998. This increase is primarily due to the operations of
MTN, which comprised $13.5 million of total Satellite Services revenue for the
six months ended June 30, 1998, compared to $9.8 million during the same period
in 1997. The remaining increase can be attributed to the general growth of MCN
which increased $1.7 million, from $2.8 million for the six months ended June
30, 1997 to $4.5 million for the six months ended June 30, 1998.
Operating costs. Total operating costs for the six months ended June 30,
1998 increased $20.3 million, or 12% from the six months ended June 30, 1997.
Telecom Services operating costs increased from $83.9 million, or 106% of
Telecom Services revenue, for the six months ended June 30, 1997, to $100.8
million, or 75% of Telecom Services revenue, for the six months ended June 30,
1998. The increase in operating costs in absolute dollars is attributable to the
increase in volume of switched local and special access services and the
addition of engineering and operations personnel dedicated to the development of
local exchange services. The decrease in operating costs as a percentage of
total revenue is due primarily to a greater volume of higher margin services,
principally local exchange services.
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25
Internet Services operating costs increased 9% to $51.7 million and
increased as a percentage of Internet Services revenue from 59% for the six
months ended June 30, 1997 to 64% for the six months ended June 30, 1998. The
increase is due to increased transport costs due to initiatives related to the
conversion from an analog to a digital based network, which produced certain
duplicative costs during the period of conversion.
Network Services operating costs decreased 14% to $23.5 million and
increased as a percentage of revenue from 82% for the six months ended June 30,
1997 to 90% for the six months ended June 30, 1998. The decrease in operating
costs in absolute dollars is due to the decrease in equipment sales and general
business volume between the comparative periods. Operating costs increased as a
percentage of revenue due to cost overruns during the six months ended June 30,
1998.
Satellite Services operating costs increased to $10.9 million for the six
months ended June 30, 1998, from $8.0 million for the six months ended June 30,
1997. Satellite Services operating costs as a percentage of Satellite Services
revenue decreased from 54% for the six months ended June 30, 1997 to 53% for the
six months ended June 30, 1998. This decrease is due to an increase in MTN's
sales, which provide higher margins than other maritime services.
Selling, general and administrative expenses. Selling, general and
administrative ("SG&A") expenses for the six months ended June 30, 1998
increased $10.3 million, or 9%, compared to the six months ended June 30, 1997.
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 services. SG&A expenses as a percentage of total
revenue decreased from 54% for the six months ended June 30, 1997 to 47% for the
six months ended June 30, 1998.
Depreciation and amortization. Depreciation and amortization increased
$15.9 million, or 45%, for the six months ended June 30, 1998, compared to the
six months ended June 30, 1997, primarily due to increased investment in
depreciable assets resulting from the continued expansion of the Company's
networks and services. Additionally, during the six months ended June 30, 1998,
the Company recorded a cumulative adjustment to depreciation and amortization
expense of approximately $3.7 million, for the aggregate depreciation and
amortization expense on capital and other assets of MTN which was not recorded
during the period in which MTN was held for sale.
Net (gain) loss on disposal of long-lived assets. Net (gain) loss on
disposal of long-lived assets fluctuated from a net gain of $0.9 million for the
six months ended June 30, 1997 to a net loss of $0.6 million for the six months
ended June 30, 1998. Net gain on disposal of long-lived assets for the six
months ended June 30, 1997 consists primarily of a gain on the sale of Satellite
Services' Mexico subsidiary and NETCOM's investment in the McKinley Group. For
the six months ended June 30, 1998, net loss on disposal of long-lived assets
relates to the write-off of certain installation costs of disconnected special
access customers of $0.5 million and the loss on the sale of certain Internet
equipment of $0.1 million.
Provision for impairment of long-lived assets. For the six months ended
June 30, 1998, provision for impairment of long-lived assets includes a
provision for the remaining net book value of goodwill associated with Zycom's
purchase of certain operating assets.
Merger and restructuring costs. Merger and restructuring costs for the six
months ended June 30, 1997 of $1.7 million relate to the restructuring of
NETCOM's subsidiary in the United Kingdom, consisting of $0.7 million in accrued
expenses for costs to terminate excess leased office facilities, a $0.4 million
write-off of previously capitalized deferred subscriber acquisition costs and a
$0.6 million write-off of office equipment, furniture and building improvements.
For the six months ended June 30, 1998, merger and restructuring costs include
approximately $9.3 million of merger costs associated with ICG's merger with
NETCOM. These costs consist of $4.4 million of investment advisory and legal and
accounting fees, $3.7 million relating to penalties and abandonment of projects
of NETCOM resulting from the merger and $1.2 million of other costs associated
with the merger. Additionally, for the six months ended June 30, 1998, merger
and restructuring costs include $0.6 million in restructuring costs, primarily
severance costs, related to the decentralization of the Company's Network
Services subsidiary.
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26
Interest expense. Interest expense increased $23.3 million, from $53.6
million for the six months ended June 30, 1997, to $76.9 million for the six
months ended June 30, 1998, which included $69.5 million of non-cash interest.
This increase was primarily attributable to an increase in long-term debt,
primarily the 10% Notes issued in February 1998 and the 9 7/8% Notes issued in
April 1998. In addition, the Company's interest expense increased, and will
continue to increase, because the principal amount of its indebtedness increases
until Holdings' senior indebtedness begins to pay interest in cash.
Interest income. Interest income increased $2.2 million, from $13.9 million
for the six months ended June 30, 1997, to $16.1 million for the six months
ended June 30, 1998. The increase is attributable to the increase in cash and
invested cash balances from the proceeds of the issuances of the 11 5/8% Notes
and 14% Preferred Stock in March 1997, the 6 3/4% Preferred Securities in
September and October 1997, the 10% Notes in February 1998 and the 9 7/8% Notes
in April 1998.
Other expense, net. Other expense, net increased from $0.6 million net
expense in the six months ended June 30, 1997 to $3.5 million net expense in the
six months ended June 30, 1998. Other expense, net recorded for the six months
ended June 30, 1997 consists primarily of litigation settlement costs and other
miscellaneous gains and losses. For the six months ended June 30, 1998, other
expense, net primarily includes approximately $2.7 million in settlement costs
paid to the former minority shareholders of MTN.
Income tax expense. Income tax expense for the six months ended June 30,
1997 and 1998 is attributable to state and foreign income taxes incurred and
paid by NETCOM.
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 $11.9 million, from $14.9 million for the six months
ended June 30, 1997 to $26.8 million for the six months ended June 30, 1998. The
increase is due primarily to the issuance of the 14% Preferred Stock Mandatorily
Redeemable 2008 in March 1997 and the 6 3/4% Preferred Securities in September
and October 1997. Minority interest in share of losses, net of accretion and
preferred dividends on preferred securities of subsidiaries recorded during the
six months ended June 30, 1998 consists of the accretion of issuance costs ($2.7
million) and the accrual of the preferred security dividends ($24.1 million)
associated with the 6 3/4% Preferred Securities, the 14% Preferred Stock and the
14 1/4% Exchangeable Preferred Stock.
Net loss. Net loss increased $39.9 million, or 24%, due to the increases as
a percentage of revenue of depreciation and amortization, merger and
restructuring costs, interest expense and minority interest in share of losses,
net of accretion and preferred dividends on preferred securities of subsidiaries
as noted above.
Liquidity and Capital Resources
The Company's growth has been funded through a combination of equity, debt
and lease financing. As of June 30, 1998, the Company had current assets of
$754.2 million, including $631.5 million of cash, cash equivalents and
short-term investments, which exceeded current liabilities of $154.7 million,
providing working capital of $599.6 million. The Company invests excess funds in
short-term, interest-bearing investment-grade securities until such funds are
used to fund the capital investments and operating needs of the Company's
business. The Company's short-term investment objectives are safety, liquidity
and yield, in that order.
Cash Used By Operating Activities
The Company's operating activities used $39.2 million and $54.3 million for
the six months ended June 30, 1997 and 1998, respectively. 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 does not anticipate that cash provided by operations will be
sufficient to fund operating activities, the 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
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27
experiencing decelerating increases in personnel and other SG&A expenses
supporting its operations, 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
Investing activities used $115.2 million and $46.7 million for the six
months ended June 30, 1997 and 1998, respectively. Cash used by investing
activities includes cash expended for the acquisition of property, equipment and
other assets, of $128.3 million and $165.8 million for the six months ended June
30, 1997 and 1998, respectively. Additionally, cash used by investing activities
includes payments for construction of the Company's headquarters of $10.2
million and $4.9 million for the six months ended June 30, 1997 and 1998,
respectively. Offsetting the expenditures for investing activities for the six
months ended June 30, 1998 are the proceeds from the sale of the Company's new
headquarters of $29.1 million and the sale of short-term investments of $96.3
million. The Company will continue to use cash 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
of $2.3 million for the six months ended June 30, 1998.
Cash Provided By Financing Activities
Financing activities provided $173.1 million and $534.3 million for the six
months ended June 30, 1997 and 1998, respectively. Cash provided by financing
activities for these periods primarily includes cash received in connection with
the private placement of the 11 5/8% Senior Discount Notes due 2007 (the "11
5/8% Notes") and the 14% Preferred Stock in March 1997, and the 10% Notes and
the 9 7/8% Notes in February and April 1998, respectively. 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 and other securities offerings.
On February 12, 1998, ICG Services completed a private placement of 10%
Notes for net proceeds, after underwriting and other offering costs, of
approximately $291.0 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 10% Notes will be redeemable at the option of ICG Services,
in whole or in part, on or after February 15, 2003.
On April 27, 1998, ICG Services completed a private placement of 9 7/8%
Notes, for net proceeds, after underwriting and other offering costs, of
approximately $242.4 million. Interest will accrue at 9 7/8% per annum,
beginning May 1, 2003, and is payable each May 1 and November 1, commencing
November 1, 2003. The 9 7/8% Notes will be redeemable at the option of ICG
Services, in whole or in part, on or after May 1, 2003.
As of June 30, 1998, the Company had an aggregate of approximately $72.8
million of capitalized lease obligations and an aggregate accreted value of
approximately $1.5 billion was outstanding under the 13 1/2% Notes, the 12 1/2%
Notes, the 11 5/8% Notes, the 10% Notes and the 9 7/8% Notes. The 13 1/2% Notes
require payments of interest to be made in cash commencing on March 15, 2001 and
mature on September 15, 2005. The 12 1/2% Notes require payments of interest to
be made in cash commencing on November 1, 2001 and mature on May 1, 2006. The 11
5/8% Notes require payments of interest to be made in cash commencing on
September 15, 2002 and mature on March 15, 2007. The 10% Notes require payments
of interest in cash commencing August 15, 2003 and mature February 15, 2008. The
9 7/8 Notes require payments of interest in cash commencing November 1, 2003 and
mature May 1, 2008. The 6 3/4% Preferred Securities require payments of
dividends to be made in cash through November 15, 2000. In addition, the 14%
Preferred Stock and 14 1/4% Preferred Stock require payments of dividends to be
made in cash commencing June 15, 2002 and August 1, 2001, respectively. As of
June 30, 1998, the Company had $5.7 million of other indebtedness outstanding.
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 business as currently planned and to fund its operating deficits
through 1999. With respect to indebtedness outstanding on June 30, 1998, the
Company has cash interest payment obligations of approximately $113.3 million in
2001, $158.0 million in 2002 and $212.6 million in 2003. With respect to
preferred securities currently outstanding, the Company has cash dividend
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28
obligations of approximately $4.5 million remaining in 1998, $8.9 million in
each of 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 stock, would be adversely affected.
Capital Expenditures
The Company's capital expenditures (including assets acquired under
capitalized leases and excluding payments for construction of the Company's new
headquarters) were $69.9 million and $95.8 million for the three months ended
June 30, 1997 and 1998, respectively, and $133.9 million and $168.1 million for
the six months ended June 30, 1997 and 1998, respectively. The Company
anticipates that the expansion of existing networks, construction of new
networks and further development of the Company's products and services will
require capital expenditures of approximately $272.0 million during the second
half of 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
has committed to purchase a substantial amount of equipment and other assets,
including a full range of switching systems, fiber optic cable, network
electronics, software and services. If the Company fails to meet the minimum
purchase level in any given year, the vendor may discontinue certain discounts,
allowances and incentives otherwise provided to the Company. Actual capital
expenditures will depend on numerous factors, including certain factors beyond
the Company's control. These factors include the nature of future expansion and
acquisition opportunities, economic conditions, competition, 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
acquisition 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 capital expenditures,
it has other cash commitments as described in the Company's unaudited
Consolidated Financial Statements for the six months ended June 30, 1998
included elsewhere herein.
In view of 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 business as currently planned and to fund its operating deficits through
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. 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
The Company is performing a comprehensive review of its information and
support systems to determine whether such systems will properly function in the
year 2000 and thereafter. Systems under review principally include the Company's
network operations and monitoring systems, billing and financial systems and
systems supporting the Company's communications equipment premises, building
facilities and other office equipment. Although the Company relies primarily on
<PAGE>
29
systems developed with current technology and many of the systems currently in
operation were designed to be year 2000 compliant, the Company expects that it
will have to replace, upgrade or reprogram certain systems to ensure that all
interfacing technology will be year 2000 compliant when running jointly. The
Company's due diligence also includes an evaluation of vendor-provided
technology and the implementation of new policies to require vendors to confirm
that they have disclosed and will correct any year 2000 compliance issues.
The Company's evaluation process is expected to be complete during
1998. Certain minor conversions and system upgrades are already under way and
the Company plans to have all identified compliance issues resolved by mid-1999.
The costs associated with resolving year 2000 compliance issues are expensed as
incurred and, in the aggregate, are not expected to have a material impact on
the Company's financial condition or results of operations. While the Company
believes that its software applications will be year 2000 compliant, 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 compliant, it could have a material adverse effect on the Company's
financial condition and results of operations.
<PAGE>
30
PART II
ITEM 1. LEGAL PROCEEDINGS
See Note 7 (d) to the Company's unaudited Consolidated Financial Statements
for the six months ended June 30, 1998 contained elsewhere in this
Quarterly Report.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of ICG Communications, Inc. was held on
June 3, 1998 (the "Annual Meeting"). At the Annual Meeting, three matters
were considered and acted upon: (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 of
the ICG Communications, Inc. 1998 Stock Option Plan and (3) the
ratification of the appointment of KPMG Peat Marwick LLP as independent
auditors of ICG Communications, Inc. and its subsidiaries for the fiscal
year ending December 31, 1998.
Indicated below are the total votes in favor of each director nominee and
the total votes withheld:
Votes
-----------------------------------------
For Withheld
---------------- -------------------
Leontis Teryazos 40,179,233 158,839
Walter Threadgill 40,191,465 146,607
In connection with the vote on the adoption of the ICG Communications, Inc.
1998 Stock Option Plan, 26,643,251 votes were cast in favor of the approval
of such adoption and 13,647,001 votes were cast in opposition thereto.
In connection with the vote on the ratification of the appointment of the
independent auditors, 10,264,349 votes were cast in favor of the
appointment and 47,301 votes were cast in opposition thereto.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits.
(4) Instruments Defining the Rights of Security Holders, Including
Indentures
4.1 Indenture, between ICG Services, Inc. and Norwest Bank
Colorado, National Association, dated as of April 27, 1998
[Incorporated by reference to Exhibit 4.4 to ICG Services,
Inc. Registration Statement on Form S-4 No. 333-60653, as
amended].
<PAGE>
31
(10) Material Contracts.
10.1:Employment Agreement, dated as of July 1, 1998, between ICG
Communications, Inc. and Harry R. Herbst.
10.2:ICG Communications, Inc. 1998 Stock Option Plan
[Incorporated by reference to Attachment A to ICG
Communications, Inc.'s Proxy Statement for the fiscal year
ended December 31, 1997].
(27) Financial Data Schedules.
27.1:Restated Financial Data Schedule of ICG Communications, Inc.
for the Six Months Ended June 30, 1997.
27.2:Financial Data Schedule of ICG Communications, Inc. for the
Six Months Ended June 30, 1998.
(B) Reports on Form 8-K. The following reports on Form 8-K were filed by
the registrants during the three months ended June 30, 1998:
(i) Current Report on Form 8-K dated April 20, 1998, regarding the
announcement of the private placement of $200 million of Senior
Discount Notes by ICG Services, Inc.
(ii) Current Report on Form 8-K dated June 12, 1998, regarding the
consolidated financial statements of ICG Communications, Inc. for
the fiscal years ended September 30, 1995 and 1996, the three
months ended December 31, 1996, and the fiscal year ended
December 31, 1997, restated to include the operations of NETCOM
On-Line Communication Services, Inc. for all historical periods.
<PAGE>
INDEX TO EXHIBITS
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
<PAGE>
EXHIBIT 10.1
Employment Agreement, dated as of July 1, 1998, between
ICG Communications, Inc. and Harry Herbst
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made as of the 1st day of July,
1998 by and between ICG Communications, Inc. ("Employer" or the "Company") and
Harry R. Herbst ("Employee").
R E C I T A L S
WHEREAS, Employer desires to hire and employ Employee as Executive Vice
President and Chief Financial Officer of the Company, or in such other position
as Employer may from time-to-time decide, as provided herein; and
WHEREAS, Employee desires to be employed by Employer as provided herein.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties agree as follows:
1. Employment. The Company agrees to employ Employee and Employee hereby
agrees to be employed by the Company or by such of its subsidiary corporations
as determined by the Company, on a full-time basis, for the period and upon the
terms and conditions hereinafter set forth.
2. Capacity and Duties. Employee shall serve as Executive Vice President of
Employer beginning July 1, 1998 and as Executive Vice President and Chief
Financial Officer of Employer beginning August 1, 1998. During his employment,
Employee shall perform the duties and bear the responsibilities commensurate
with his position and shall serve the Employer faithfully and to the best of his
ability. Employee shall devote 100% of his working time to carrying out his
obligations hereunder.
3. Compensation and Benefits.
3.1 The Company shall pay Employee during the Term of this Agreement
an annual base salary, payable semi-monthly in arrears. The annual base
salary will be Two Hundred Twenty-Five Thousand Dollars ($225,000.00).
3.2 In addition to the base salary, Employee will be eligible for an
annual performance bonus in an exact amount to be determined by the Board
of Directors of the Company or the Compensation Committee of the Board. The
annual bonus will be determined in accordance with the bonus plan of the
Company and will be based on objectives and goals set for the Company and
the Employee (the annual bonus is expected to be approximately 50% of
annual base salary if all objectives and goals are met).
3.3 In addition to salary and bonus payments as provided above, the
Company will provide Employee, during the Term of this Agreement, with the
benefits of such insurance plans, hospitalization plans, club memberships
and similar benefits as shall be generally provided to executive officers
of the Company of this level and for which Employee may be eligible under
the terms and conditions thereof. Employee will also be entitled to all
benefits provided under any directors and officers liability insurance or
errors and omissions insurance maintained by the Company. Throughout the
Term of this Agreement, the Company will provide Employee with a car
allowance in the amount of Seven Hundred and 00/100 Dollars ($700.00) per
month.
<PAGE>
3.4 Throughout the Term of this Agreement, the Company will reimburse
Employee for all reasonable out-of-pocket expenses incurred by Employee in
connection with the business of the Company and the performance of his
duties under this Agreement, upon presentation to the Company by Employee
of an itemized accounting of such expenses with reasonable supporting data.
3.5 Employee shall retain all stock options previously granted to him
by the Company in his capacity as a non-employee director, including those
granted in 1998 but not vested. In addition, the Company will provide to
Employee stock options pursuant to and subject to the terms and conditions
of the Company's 1998 Stock Option Plan. Employee will receive a grant of
100,000 stock options upon employment with an exercise price equal to the
closing price of ICG common stock on the date of this Agreement (July 1,
1998).
4. Term. The initial term of this Agreement will be for one (1) year,
commencing on July 1, 1998 ("Term"). Upon completion of the first twelve (12)
months of the Term, this Agreement will automatically renew from month-to-month
such that there will always be twelve (12) months remaining in the Term, unless
and until either party shall give at least thirty (30) days notice to the other
of his or its desire to terminate this Agreement (in such case, the Term shall
end upon the date indicated in such notice). The applicable provisions of
Section 6, 7, 8, 9 and 10 shall remain in full force and effect as provided and
for the time periods specified in such Sections notwithstanding the termination
of this Agreement; all other obligations of either party to the other under this
Agreement shall terminate at the end of the Term.
5. Termination.
5.1 If Employee dies during the Term of this Agreement, the Company
will pay his estate the compensation payable to him under the terms of this
Agreement.
5.2 If, during the Term of this Agreement, Employee is prevented from
performing his duties by reason of illness or incapacity for one hundred
forty (140) days in any one hundred eighty (180) day period, the Company
may terminate this Agreement, upon thirty (30) days prior notice thereof to
Employee or his duly appointed legal representative. Notwithstanding
anything contained in Subsection 5.2, Employee will be entitled to all
benefits provided under any disability plans of the Company.
5.3 The Company or the Employee may terminate this Agreement upon at
least thirty (30) days prior notice upon the happening of any of the
following events:
5.3.1 The sale by the Company of substantially all of its assets
to a single purchaser or associated group of purchasers who are not
affiliates of the Company.
<PAGE>
5.3.2 The sale, exchange or other disposition in one or more
related transactions resulting in a change of ownership of fifty
percent (50%) or more of the outstanding voting stock of the Company
to or with a person, firm or corporation not then an affiliate of the
Company.
5.3.3 The merger or consolidation of the Company in a transaction
not involving an affiliate of the Company in which the shareholders of
the Company receive less than fifty (50%) of the outstanding voting
stock of the new continuing corporation.
5.3.4 A bona fide decision by the Company to terminate its
business and liquidate its assets (but only if such liquidation is not
part of a plan to carry on the Company's business through its
shareholders).
5.3.5 Any constructive dismissal of the Employee. For the
purposes hereof "constructive dismissal" means, unless consented to by
the Employee in writing, any of the following actions by the Company:
(i) any material reduction in the Employee's office, titles,
positions, duties, responsibilities, powers or reporting
relationships;
(ii) any reduction in the annual salary of the Employee;
(iii)any requirement to relocate to another state or country;
and
(iv) any material reduction in the value of the Employee's
benefits plans and programs, including, without limiting the
generality of the foregoing, bonus arrangements.
For the purpose of this Agreement, the term "affiliate" means a person, firm or
corporation that directly or indirectly, through one or more intermediaries,
controls, is controlled by, or is under common control with the Company.
5.4 The Company may terminate this Agreement immediately for gross
negligence or intentional misconduct by the Employee.
5.5 The Company may terminate this Agreement immediately upon the
conviction of Employee of any felony or upon a material breach by Employee
of any obligation or covenant created by or under this Agreement.
5.6 If this Agreement is terminated by the Company under Section 4 or
Subsection 5.1, 5.2 or 5.4 above during the Term hereof, the Company shall
pay Employee a termination fee equal to two (2) times his annual base
salary. Such termination fee will be paid in a lump sum within thirty (30)
days from the date of termination. If this Agreement is terminated by the
Company or by Employee within 90 days after the occurrence of any of the
events described in Section 5.3 above, the Company will pay Employee a
termination fee equal to two (2) times his annual base salary. Such
termination fee will be paid in a lump sum within thirty (30) days from the
date of termination. In addition, all options to purchase shares of the
Company which have been granted but not yet vested will immediately vest on
the date of termination and the Employee will be entitled to exercise such
options in accordance with the plans and agreements relating to such
options.
<PAGE>
6. Covenant Not to Compete.
6.1 During the Term of this Agreement (or, if longer, during the term
of Employee's employment with the Company or any of its affiliates) and for
a period of twelve (12) months after termination of this Agreement (or, if
later, termination of Employee's employment with the Company or any of its
affiliates), Employee shall not, directly or indirectly, own, manage,
operate, control, be employed by, or participate in the ownership,
management, operation or control of a business that is engaged in the same
business as the Company within any area or at any location constituting,
during the term of Employee's employment and/or at the time Employee's
employment is terminated, a Relevant Area. For the purposes of this Section
6, including all subsections of this Section 6, the business in which the
Company is engaged is the business commonly known as the competitive access
and network services business and all other services the Company provides
during the term of Employee's employment ("Services"). The "Relevant Area"
shall be defined for the purposes of this Agreement as any area located
within, or within fifty (50) miles of, the legal boundaries or limits of
any city within which the Company or any affiliate thereof is providing
Services, has commenced the acquisition of any authorizations, rights of
way or facilities or has commenced the construction of facilities for the
purpose of providing Services, or in which the Company has publicly
announced or privately disclosed to Employee that it plans to provide
Services.
6.2 During the Term of this Agreement (or, if longer, during the term
of Employee's employment with the Company or any of its affiliates) and for
a period of twelve (12) months after termination of this Agreement (or, if
later, termination of Employee's employment with the Company or any of its
affiliates), Employee shall not (i) directly or indirectly cause or attempt
to cause any employee of the Company or any of its affiliates to leave the
employ of the Company or any affiliate, (ii) in any way interfere with the
relationship between the Company and any employee or between an affiliate
and any employee of the affiliate, or (iii) interfere or attempt to
interfere with any transaction in which the Company or any of its
affiliates was involved during the Term of this Agreement or Employee's
employment, whichever is longer.
6.3 Employee agrees that, because of the nature and sensitivity of the
information to which he will be privy and because of the nature and scope
of the Company's business, the restrictions contained in this Section 6 are
fair and reasonable.
6.4 Notwithstanding the foregoing, at any time after the Term of this
Agreement, Employee may request the Chief Executive Officer of the Company
to waive any terms of the covenant not to compete obligations of Employee
hereunder. The Chief Executive Officer of the Company shall consider any
such request and will not unreasonably withhold his consent in connection
with any such request.
<PAGE>
7. Confidential Information.
7.1 The relationship between the Company and Employee is one of
confidence and trust. This relationship and the rights granted and duties
imposed by this Section shall continue until a date ten (10) years from the
date Employee's employment is terminated.
7.2 As used in this Agreement (i) "Confidential Information" means
information disclosed to or acquired by Employee about the Company's plans,
products, processes and services including the Services and any Relevant
Area, including information relating to research, development, inventions,
manufacturing, purchasing, accounting, engineering, marketing,
merchandising, selling, pricing and tariffed or contractual terms, customer
lists and prospect lists or other market information, with respect to any
of the Company's then current business activities; and (ii) "Inventions"
means any inventions, discoveries, concepts and ideas, whether patentable
or not, including, without limitation, processes, methods, formulas, and
techniques (as well as related improvements and knowledge) that are based
on or related to Confidential Information, that pertain in any manner to
the Company's then currently used technology, expertise or business and
that are made or conceived by Employee, either solely or jointly with
others, and while employed by the Company or within six (6) months
thereafter, whether or not made or conceived during working hours or with
the use of the Company's facilities, materials or personnel.
7.3 Employee agrees that he shall at no time during the term of his
employment or at any time thereafter disclose any Confidential Information
or component thereof to any person, firm or corporation to any extent or
for any reason or purpose or use any Confidential Information or component
thereof for any purpose other than the conduct of the Company's business.
7.4 Any Confidential Information or component thereof that is directly
or indirectly originated, developed or perfected to any degree by Employee
during the term of his employment by the Company shall be and remain the
sole property of the Company and shall be deemed trade secrets of the
Company.
7.5 Upon termination of Employee's employment pursuant to any of the
provisions herein, Employee or his legal representative shall deliver to
the Company all originals and all duplicates and/or copies of all
documents, records, notebooks, and similar repositories of or containing
Confidential Information then in his possession, whether prepared by him or
not.
7.6 Employee agrees that the covenants and agreements contained in
this Section 7 are fair and reasonable and that no waiver or modification
of this Section or any covenant or condition set forth herein shall be
valid unless set forth in writing and duly executed by the parties hereto.
Employee agrees to execute such separate and further confidentiality
agreements embodying the provisions of this Section 7 as the Company may
reasonably request.
<PAGE>
8. Injunctive Relief. Upon a material breach or threatened material breach
by Employee of any of the provisions of Sections 6 and 7 of this Agreement, the
Company shall be entitled to an injunction restraining Employee from such
breach. Nothing herein shall be construed as prohibiting the Company from
pursuing any other remedies for such breach or threatened breach, including
recovery of damages from Employee.
9. No Waiver. A waiver by the Company of a breach of any provision of this
Agreement by Employee shall not operate or be construed as a waiver of any
subsequent or other breach by Employee.
10. Severability. It is the desire and intent of the parties that the
provisions of this Agreement shall be enforced to the fullest extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, if any particular provision or portion of
this Agreement shall be adjudicated to be invalid or unenforceable, this
Agreement shall be deemed amended to delete therefrom the portion thus
adjudicated to be invalid or unenforceable, such deletion to apply only with
respect to the operation of such Section in the particular jurisdiction in which
such adjudication is made.
11. Notices. All communications, requests, consents and other notices
provided for in this Agreement shall be in writing and shall be deemed given if
mailed by first class mail, postage prepaid, certified or return receipt
requested to the last known address of the recipient.
12. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Colorado.
13. Assignment. The Company may assign its rights and obligations under
this Agreement to any affiliate of the Company and all covenants and agreements
hereunder shall inure to the benefit of and be enforceable by or against any
such assignee. Neither this Agreement nor any rights or duties hereunder may be
assigned or delegated by Employee.
14. Amendments. No provision of this Agreement shall be altered, amended,
revoked or waived except by an instrument in writing, signed by each party to
this Agreement.
15. Binding Effect. Except as otherwise provided herein, this Agreement
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective legal representatives, heirs, successors and assigns.
16. Execution in Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
17. Entire Agreement. This Agreement sets forth the entire agreement and
understanding of the parties and supersedes all prior understandings, agreements
or representations by or between the parties, whether written or oral, which
relate in any way to the subject matter hereof.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
/s/ Harry R. Herbst
--------------------------------------
HARRY R. HERBST
ICG COMMUNICATIONS, INC.
By: /s/ Don Teague
--------------------------------------
Name: Don Teague
------------------------------------
Title: Exec. V.P.
------------------------------------
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on August 13, 1998.
ICG COMMUNICATIONS, INC.
Date: August 13, 1998 By: /s/ Harry R. Herbst
----------------------------------------------
Harry R. Herbst, Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: August 13, 1998 By: /s/ Richard Bambach
----------------------------------------------
Richard Bambach, Vice President and Corporate
Controller (Principal Accounting Officer)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on August 13, 1998.
ICG FUNDING, LLC
By: ICG Communications, Inc.
Common Member and Manager
Date: August 13, 1998 By: /s/ Harry R. Herbst
----------------------------------------------
Harry R. Herbst, Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on August 13, 1998.
ICG HOLDINGS (CANADA), INC.
Date: August 13, 1998 By: /s/ Harry R. Herbst
----------------------------------------------
Harry R. Herbst, Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: August 13, 1998 By: /s/ Richard Bambach
----------------------------------------------
Richard Bambach, Vice President and Corporate
Controller (Principal Accounting Officer)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on August 13, 1997.
ICG HOLDINGS, INC.
Date: August 13, 1998 By: /s/ Harry R. Herbst
----------------------------------------------
Harry R. Herbst, Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: August 13, 1998 By: /s/ Richard Bambach
----------------------------------------------
Richard Bambach, Vice President and Corporate
Controller (Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
FOR THE SIX MONTHS ENDED JUNE 30, 1997, AS RESTATED TO REFLECT THE COMBINED
OPERATIONS OF ICG AND NETCOM AS THOUGH THE MERGER OCCURRED AT THE BEGINNING OF
THE PERIOD PRESENTED, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 451,834
<SECURITIES> 12,413
<RECEIVABLES> 57,792
<ALLOWANCES> 6,131
<INVENTORY> 4,184
<CURRENT-ASSETS> 530,934
<PP&E> 710,883
<DEPRECIATION> 113,338
<TOTAL-ASSETS> 1,222,203
<CURRENT-LIABILITIES> 123,245
<BONDS> 908,911
271,652
0<F1>
<COMMON> 657
<OTHER-SE> (82,566)
<TOTAL-LIABILITY-AND-EQUITY> 1,222,203
<SALES> 0<F1>
<TOTAL-REVENUES> 207,841
<CGS> 0<F1>
<TOTAL-COSTS> 166,602
<OTHER-EXPENSES> 148,748
<LOSS-PROVISION> 2,796
<INTEREST-EXPENSE> 53,633
<INCOME-PRETAX> (147,859)
<INCOME-TAX> 13
<INCOME-CONTINUING> (162,741)
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 0<F1>
<CHANGES> 0<F1>
<NET-INCOME> (162,741)
<EPS-PRIMARY> (3.87)
<EPS-DILUTED> 0<F1>
<FN>
<F1>THIS VALUE IS NOT APPLICABLE.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 615,494
<SECURITIES> 16,000
<RECEIVABLES> 116,797
<ALLOWANCES> 10,263
<INVENTORY> 3,426
<CURRENT-ASSETS> 754,228
<PP&E> 998,615
<DEPRECIATION> 203,914
<TOTAL-ASSETS> 1,732,632
<CURRENT-LIABILITIES> 154,653
<BONDS> 1,577,746
442,437
0<F1>
<COMMON> 747
<OTHER-SE> (442,951)
<TOTAL-LIABILITY-AND-EQUITY> 1,732,632
<SALES> 0<F1>
<TOTAL-REVENUES> 261,923
<CGS> 0<F1>
<TOTAL-COSTS> 186,870
<OTHER-EXPENSES> 186,565
<LOSS-PROVISION> 4,982
<INTEREST-EXPENSE> 76,875
<INCOME-PRETAX> (175,779)
<INCOME-TAX> 25
<INCOME-CONTINUING> (202,591)
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 0<F1>
<CHANGES> 0<F1>
<NET-INCOME> (202,591)
<EPS-PRIMARY> (4.54)
<EPS-DILUTED> 0<F1>
<FN>
<F1>THIS VALUE IS NOT APPLICABLE.
</FN>
</TABLE>
