SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [X] Definitive Proxy Statement
[_] Definitive Additional Materials [_] Soliciting Material Pursuant to
[_] Confidential, For Use of the SS.240 Rule 14a-11(c) or SS.240
Commission Only (as permitted Rule 14a-12
by Rule 14a-6(e)(2))
ICG Communications, Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[_] Fee paid previously with preliminary materials:
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
1) Amount previously paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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<PAGE>
ICG COMMUNICATIONS, INC.
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To the Stockholders of ICG Communications, Inc.:
NOTICE IS HEREBY GIVEN that the 1999 Annual Meeting of Stockholders (the
"Meeting") of ICG COMMUNICATIONS, INC., a Delaware corporation (the "Company"),
will be held on Wednesday, June 9, 1999, at 9:30 a.m., local time, at the
Company's principal executive offices at 161 Inverness Drive West, Englewood,
Colorado to consider and act upon the following:
1. The election of two directors to serve until the 2002 Annual Meeting of
Stockholders and until their successors have been duly elected and qualified;
2. The ratification of the appointment of KPMG LLP as independent auditors
of the Company and its subsidiaries for the fiscal year ending December 31,
1999; and
3. The transaction of such other business as may properly come before the
Meeting and at any adjournments thereof.
Only holders of record of the Company's common stock, par value $.01 per
share, at the close of business on April 28, 1999, which has been fixed as the
record date for the Meeting, will be entitled to notice of, and to vote at, the
Meeting and any adjournment or adjournments thereof.
Stockholders are cordially invited to attend the Meeting in person. Whether
or not you plan to attend the Meeting, please sign and date the enclosed proxy
card (the "Proxy") and mail it promptly in the enclosed envelope to ensure that
your shares are represented at the Meeting. Stockholders who attend the Meeting
may vote their shares personally, even though they have sent in their Proxies.
By Order of the Board of Directors
/s/ J. Shelby Bryan
J. Shelby Bryan
President and Chief Executive Officer
May 7, 1999
IMPORTANT
THE PROMPT RETURN OF PROXIES WILL SAVE THE COMPANY THE EXPENSE OF FURTHER
REQUESTS FOR PROXIES IN ORDER TO ENSURE A QUORUM. A MAILING ENVELOPE IS ENCLOSED
FOR YOUR CONVENIENCE AND NO POSTAGE IS REQUIRED IF IT IS MAILED WITHIN THE
UNITED STATES.
<PAGE>
ICG COMMUNICATIONS, INC.
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PROXY STATEMENT
1999 Annual Meeting of Stockholders
June 9, 1999
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GENERAL
This Proxy Statement is furnished in connection with the solicitation of
Proxies by the Board of Directors of ICG COMMUNICATIONS, INC., a Delaware
corporation ("ICG" or the "Company"), to be voted at the 1999 Annual Meeting of
Stockholders of the Company (the "Meeting") which will be held at the Company's
principal executive offices at 161 Inverness Drive West, Englewood, Colorado, on
June 9, 1999, at 9:30 a.m., local time, and at any adjournment or adjournments
thereof, for the purposes set forth in the accompanying Notice of Annual Meeting
of Stockholders and in this Proxy Statement.
The principal executive offices of the Company are located at 161 Inverness
Drive West, Englewood, Colorado 80112. The approximate date on which this Proxy
Statement and accompanying Proxy will first be sent or given to stockholders is
May 7, 1999.
VOTING SECURITIES AND VOTE REQUIRED
Stockholders of record as of the close of business on April 28, 1999 (the
"Record Date") will be entitled to notice of, and to vote at, the Meeting and at
any adjournments thereof. On the Record Date, there were 46,966,189 shares of
the Company's common stock, par value $.01 per share (the "Common Stock"),
outstanding. There was no other class of voting securities of the Company
outstanding on such date. Each holder of Common Stock is entitled to one vote
for each share held by such holder. The presence, in person or by proxy, of the
holders of one-third of the outstanding shares of Common Stock is necessary to
constitute a quorum at the Meeting. If a quorum is present, for all matters
other than the election of directors, the affirmative vote of the majority of
shares present in person or represented by proxy at the Meeting and entitled to
vote on the subject matter shall be required to approve any matter presented at
the Meeting. Directors shall be elected by a plurality of the votes of the
shares present in person or represented by proxy.
Under the rules promulgated by the Securities and Exchange Commission,
boxes and a designated blank space are provided on the Proxy card for
stockholders to mark if they wish to withhold authority to vote for one or more
of the nominees for directors. Votes withheld in connection with the election of
one or more of the nominees for director will be counted as votes cast against
such individuals and will be counted toward the presence of a quorum for the
transaction of business at the Meeting. If no direction is indicated, the Proxy
will be voted for the election of the nominees for director. The form of Proxy
does not provide for abstentions with respect to the election of directors;
however, a stockholder present at the Meeting may abstain with respect to such
election. The treatment of abstentions and broker "non-votes" with respect to
the election of directors is consistent with applicable Delaware law and the
Company's By-Laws. Abstentions and broker "non-votes" are counted as present and
entitled to vote and are, therefore, included for purposes of determining
whether a quorum of shares is present at a meeting. However, broker "non-votes"
are not deemed to be "votes cast." As a result, broker "non-votes" are not
included in the tabulation of the voting results on the election of directors or
issues requiring approval of a majority of the votes cast and, therefore, do not
have the effect of votes in opposition in such tabulations. A broker "non-vote"
occurs when a nominee holding shares for a beneficial owner does not vote on a
particular proposal because the nominee does not have discretionary voting power
with respect to that item and has not received instructions from the beneficial
owner.
<PAGE>
VOTING OF PROXIES
A Proxy, in the accompanying form, which is properly executed, duly
returned to the Company and not revoked will be voted in accordance with the
instructions contained therein. If no specification is indicated on the Proxy,
the shares represented thereby will be voted (i) FOR the election of the two
directors; (ii) FOR the ratification of the appointment of the Company's
auditors; and (iii) in accordance with the judgment of the person or persons
voting the Proxies on any other matter that may be properly brought before the
Meeting. Each such Proxy granted may be revoked at any time before it is voted
by execution and delivery of a subsequent Proxy or by attendance and voting in
person at the Meeting.
-2-
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS,
DIRECTORS, NOMINEES AND OFFICERS
The following table sets forth, as of March 31, 1999, the number of shares
of Common Stock owned by all executive officers, directors and nominees of the
Company, individually, and all directors and executive officers as a group, and
each person who owned of record, or was known to own beneficially, more than 5%
of the outstanding shares of Common Stock. The persons named in the table below
have sole voting and investment power with respect to all of the shares of
Common Stock owned by them, unless otherwise noted.
<TABLE>
Amount/Nature of
Beneficial
Name and Address of Beneficial Owner Ownership Percent(1)
- ------------------------------------ ----------------- ----------
<S> <C> <C>
Capital Guardian Trust Company.................. 4,544,710(2) 9.7%
11100 Santa Monica Boulevard
Los Angeles, CA 90025
Dresdner RCM Global Investors LLC............... 2,660,670(3) 5.7%
Four Embarcadero Center
San Francisco, CA 94111
Franklin Advisers, Inc.......................... 3,095,450(4) 6.6%
777 Mariners Island Boulevard
San Mateo, CA 94404
T. Rowe Price Associates, Inc................... 2,388,300(5) 5.1%
100 E. Pratt Street
Baltimore, MD 21202
William J. Laggett.............................. 112,797(6) *
Chairman of the Board of Directors
J. Shelby Bryan................................. 2,019,293(7) 4.2%
President, Chief Executive Officer
and Director
Douglas I. Falk................................. 9,044(8) *
Executive Vice President--Telecom
and President of ICG Telecom Group, Inc.
David W. Garrison............................... 140,395(9) *
Former Executive Vice President and
Director; Former Chairman of the Board
of Directors and ChiefExecutive Officer
of NETCOM On-Line Communication
Services, Inc. ("NETCOM")
Harry R. Herbst.................................. 77,944(10) *
Executive Vice President,
Chief Financial Officer and
Director
John Kane........................................ 8,102(11) *
Executive Vice President--
Corporate Development and
President of ICG Fiber Optic
Technologies, Inc.
Cindy Z. Schonhaut............................... 13,289(12) *
Executive Vice President--
Government and Corporate Affairs
Eric W. Spivey................................... 54,504(13) *
Former Executive Vice President;
Former President of NETCOM
H. Don Teague.................................... 35,000(6) *
Executive Vice President,
General Counsel and Secretary
John U. Moorhead II.............................. 27,500(6) *
Director
Leontis Teryazos................................ 107,500(6) *
Director
Walter Threadgill............................... 37,500(6) *
Director
-3-
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Amount/Nature of
Beneficial
Name and Address of Beneficial Owner Ownership Percent(1)
- ------------------------------------ ----------------- ----------
<S> <C> <C>
All current executive officers and
directors as a group (10 persons)......... 2,447,969(14) 5.0%
</TABLE>
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* Less than one percent of the outstanding shares of Common Stock.
(1) Based on 46,771,679 issued and outstanding shares of Common Stock on March
31, 1999, plus shares of Common Stock that may be acquired by the person or
group indicated pursuant to any options and warrants exercisable, or
pursuant to any shares vesting under the Company's 401(k) Plan, within 60
days.
(2) Capital Guardian Trust Company ("CGTC"), a bank, reported on Schedule 13G
that, as of December 31, 1998, it beneficially owns and has sole
dispositive power with respect to the shares of Common Stock reflected in
this table. CGTC reported that it has sole voting power with respect to
3,965,710 shares of Common Stock and its affiliate, Capital International,
S.A., has sole voting and dispositive power with respect to 254,700 shares
of Common Stock.
(3) Dresdner RCM Global Investors LLC ("Dresdner RCM"), an investment advisor,
reported on Schedule 13G that, as of December 31, 1998, Dresdner RCM, its
parent holding company Dresdner RCM US Holdings LLC ("DRCM Holdings"), and
Dresdner Bank AG ("Dresdner Bank"), the parent company of DRCM Holdings,
each beneficially own the shares of Common Stock reflected in this table.
Each of Dresdner RCM, DRCM Holdings and Dresdner Bank has sole voting power
with respect to 2,108,170 of the shares.
(4) Franklin Advisers, Inc. ("Franklin") reported on Schedule 13G that, as of
December 31, 1998, it beneficially owns the shares of Common Stock
reflected in this table. Franklin's parent holding company, Franklin
Resources, Inc. ("FRI"), and Charles B. Johnson and Rupert H. Johnson, Jr.,
principal shareholders of FRI, each disclaim any beneficial ownership of
shares of Common Stock reflected in this table. Franklin reported that it
has sole voting power and sole dispositive power with respect to 3,067,200
of the shares and that Franklin Management, Inc., an investment advisory
subsidiary of Franklin, has sole dispositive power with respect to 28,250
of the shares.
(5) T. Rowe Price Associates, Inc. ("T. Rowe Price"), an investment advisor,
reported on Schedule 13G that, as of December 31, 1998, it beneficially
owns and has sole dispositive power with respect to the shares of Common
Stock reflected in this table. T. Rowe Price reported that it has sole
voting power with respect to 165,500 of the shares.
(6) Represents shares of Common Stock that may be acquired pursuant to the
exercise of outstanding stock options.
(7) Includes 165,000 shares of Common Stock held by Mr. Bryan, 2,000 shares of
Common Stock held in Mr. Bryan's spouse's name for which Mr. Bryan
disclaims beneficial ownership, 14,793 shares of Common Stock held by a
401(k) Plan in Mr. Bryan's name and 1,837,500 shares of Common Stock that
may be acquired pursuant to the exercise of outstanding stock options.
(8) Includes 582 shares of Common Stock held by a 401(k) Plan, 1,587
unrestricted shares of Common Stock held by an Employee Stock Purchase Plan
and 6,875 shares of Common Stock that may be acquired pursuant to the
exercise of outstanding stock options.
(9) Includes 41,186 shares of Common Stock held directly by Mr. Garrison and
99,209 shares of Common Stock that may be acquired pursuant to the exercise
of outstanding stock options.
(10) Includes 2,010 unrestricted shares of Common Stock held by an Employee
Stock Purchase Plan and 75,934 shares of Common Stock that may be acquired
pursuant to the exercise of outstanding stock options.
(11) Includes 2,500 shares of Common Stock held directly by Mr. Kane, 602
unrestricted shares of Common Stock held by an Employee Stock Purchase Plan
and 5,000 shares of Common Stock that may be acquired pursuant to the
exercise of outstanding stock options.
(12) Includes 789 shares of Common Stock held by a 401(k) Plan and 12,500 shares
of Common Stock that may be acquired pursuant to the exercise of
outstanding stock options.
(13) Includes 862 shares of Common Stock held by Mr. Spivey directly, 14,816
shares of Common Stock held by a 401(k) Plan and 38,826 shares of Common
Stock that may be acquired pursuant to the exercise of outstanding stock
options.
(14) Includes 169,500 shares of Common Stock held directly by the executive
officers and directors as a group, 16,164 shares of Common Stock held by a
401(k) Plan, 4,199 shares of Common Stock held by an Employee Stock
Purchase Plan and 2,258,106 shares of Common Stock that may be acquired
pursuant to the exercise of outstanding stock options.
-4-
<PAGE>
PROPOSAL I
ELECTION OF DIRECTORS
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A total of two directors (Class III Directors) are to be elected at the
Meeting by the holders of the Common Stock to serve until the 2002 Annual
Meeting of Stockholders and until their successors have been elected and
qualified or until their death, resignation or removal. The two Class III
Directors are William J. Laggett and J. Shelby Bryan and their terms expire at
the Meeting. The Board of Directors recommends the election as Directors of the
nominees listed below. Should any of the nominees not remain a candidate for
election at the date of the Meeting (which contingency is not now contemplated
or foreseen by the Board of Directors), Proxies solicited thereunder will be
voted in favor of those nominees who do remain candidates and may be voted for
substitute nominees selected by the Board of Directors. Assuming a quorum is
present, a plurality of the votes of the shares present, in person or by Proxy,
at the Meeting is required to elect each of the nominees as a director in
accordance with the Company's By-Laws.
The terms of the two Class I Directors, Harry R. Herbst and John U.
Moorhead II, expire at the 2000 Annual Meeting of Stockholders. The terms of the
two Class II Directors, Leontis Teryazos and Walter Threadgill, expire at the
2001 Annual Meeting of Stockholders.
There were 13 meetings of the Board of Directors of the Company, seven
meetings of the Stock Option Committee, four meetings of the Compensation
Committee and one meeting of the Audit Committee of the Board of Directors of
the Company held during the fiscal year ended December 31, 1998. There were no
meetings of the Executive Committee in 1998. All directors attended 75% or more
of the meetings of the Board and the committees on which they served.
Since December 16, 1998, the Company compensates its non-employee directors
for attendance at meetings of the Board of Directors or a committee of the Board
of Directors as follows: $3,000 for attendance at a meeting in person plus
reimbursement of expenses, and $1,000 for participation in a telephonic meeting;
provided that when meetings of the Board and/or one or more committees are held
on the same day, the non-employee directors are entitled to be compensated only
for one such meeting. Prior to December 16, 1998, the Company compensated its
non-employee directors $250 for telephonic meetings and $2,500 for each
directors meeting or committee meeting attended, or $500 for committee meetings
attended in conjunction with a Board of Directors meeting, plus reimbursement of
expenses. In addition, the Chairman of the Board of Directors receives an annual
fee of $80,000 payable in quarterly installments. On January 1, 1998, all
non-employee directors of the Company were granted options for the 1998 fiscal
year to purchase 20,000 shares of Common Stock under the 1996 Stock Option Plan,
which vested as to 5,000 shares at the end of each fiscal quarter. On June 3,
1998, all non-employee directors of the Company, including Harry R. Herbst, who
was a non-employee director until July 1, 1998, when he was hired as an
Executive Vice President of the Company in addition to his duties as a director,
were granted options to purchase 5,000 shares of Common Stock under the
Company's 1996 Stock Option Plan. On September 18, 1998, all non-employee
directors of the Company were granted additional options to purchase 7,500
shares of Common Stock under the Company's 1996 Stock Option Plan. On December
15, 1998, all non-employee directors of the Company were granted options for the
1999 fiscal year to purchase 20,000 shares of Common Stock under the 1998 Stock
Option Plan, which vest as to 5,000 shares at the end of each fiscal quarter of
1999 commencing March 31, 1999.
-5-
<PAGE>
The following table sets forth the names of the nominees, their ages and
their current positions with the Company:
Class III Directors (to serve until the 2002
Annual Meeting of Stockholders)
Name Age Title
---- --- -----
William J. Laggett(1)(2)(3)..... 69 Chairman of the Board of Directors
J. Shelby Bryan(3).............. 53 President, Chief Executive Officer
and Director
- ----------------------
(1) Member of Compensation Committee.
(2) Member of Stock Option Committee.
(3) Member of Executive Committee.
William J. Laggett has been Chairman of the Board of Directors since June
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1995 and a Director since January 1995. Mr. Laggett was the President of Centel
Cellular Company from 1988 until his retirement in 1993. From 1970 to 1988, Mr.
Laggett held a variety of management positions with Centel Corporation,
including Group Vice President-Products Group, President-Centel Services, and
Senior Vice President-Centel Corporation. Prior to joining Centel, Mr. Laggett
worked for New York Telephone Company.
J. Shelby Bryan was appointed President, Chief Executive Officer and a
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Director in May 1995. Mr. Bryan has 19 years of experience in the
telecommunications industry, primarily in the cellular business. He co-founded
Millicom International Cellular S.A., a publicly owned corporation providing
cellular service internationally, served as its President and Chief Executive
Officer from 1985 to 1994 and served as a director through May 1998.
Other Directors and Executive Officers
Set forth below are the names, ages and positions of the other directors
and executive officers of the Company:
Name Age Position
---- --- --------
Douglas I. Falk.................... 49 Executive Vice President--
Telecom and President of ICG
Telecom Group, Inc.
Harry R. Herbst(1)................. 47 Executive Vice President,
Chief Financial Officer and
Director
John Kane.......................... 46 Executive Vice President--
Corporate Development and
President of ICG Fiber Optic
Technologies, Inc.
Cindy Z. Schonhaut................. 44 Executive Vice President--
Government and Corporate
Affairs
H. Don Teague...................... 56 Executive Vice President,
General Counsel and Secretary
John U. Moorhead II(1)(3)(4)(5).... 46 Director
Leontis Teryazos(2)(3)(4)(5)....... 56 Director
Walter Threadgill(2)(3)(4)(5)...... 53 Director
- ----------------------
(1) Term as Director expires at annual meeting of stockholders in 2000.
(2) Term as Director expires at annual meeting of stockholders in 2001.
(3) Member of Audit Committee.
(4) Member of Compensation Committee.
(5) Member of Stock Option Committee.
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<PAGE>
Douglas I. Falk has been Executive Vice President--Telecom and President of
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ICG Telecom Group, Inc. since September 1998. Prior to these positions, Mr. Falk
was Senior Vice President of Sales and Marketing for NETCOM from May 1998
through August 1998, was President of ICG Satellite Services, Inc. from August
1996 through April 1998 and Executive Vice President--Satellite from October
1996 through April 1998. Prior to joining the Company, Mr. Falk held several
positions in the cruise line industry, including President of Norwegian Cruise
Line, Senior Vice President--Marketing and Sales with Holland America
Lines/Westours and Executive Vice President of Royal Viking Line. Prior to his
work in the cruise line industry, Mr. Falk held executive positions with MTI
Vacations, Brown and Williamson Tobacco, Pepsico International, Glendenning
Associates and The Proctor and Gamble Company.
Harry R. Herbst has been a Director since October 1995. In July 1998, he
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joined the Company as Executive Vice President and, in August 1998, he also
became Chief Financial Officer. From November 1995 through June 1998, he was
Vice President of Finance and Strategic Planning of Gulf Canada Resources Ltd.
He was Vice President and Treasurer of Gulf Canada Resources Ltd. from January
to November 1995. Previously, Mr. Herbst was Vice President of Taxation for
Torch Energy Advisors Inc. from 1991 to 1994, and tax manager for Apache Corp.
from 1987 to 1990. Mr. Herbst is a certified public accountant, formerly with
Coopers & Lybrand, now known as PricewaterhouseCoopers LLP.
John Kane has been Executive Vice President--Corporate Development since
---------
December 1998 and President of ICG Fiber Optic Technologies, Inc. since March
1998. Prior to joining the Company, Mr. Kane had 25 years of experience in the
telecommunications industry. Most recently, Mr. Kane was Executive Vice
President Business Development for AMNEX, Inc., a specialty telecommunications
services company. From 1992 to 1995, Mr. Kane was Senior Vice President for WCT
Communications, Inc., which built a national fiber optic long distance network.
Mr. Kane has also served as President of Americas Carriers Telecommunications
Association (ACTA) and is a frequent speaker at industry conferences.
Cindy Z. Schonhaut has been Executive Vice President--Government and
--------------------
Corporate Affairs since November 1998. Prior to this position, Ms. Schonhaut was
Vice President of Government and External Affairs since February 1996. Prior to
joining the Company, she had more than 15 years of federal and state
telecommunications regulatory experience, consisting of more than four years
serving as Vice President--Government Affairs at MFS Communications Company and
11 years as an attorney with the Federal Communications Commission. Ms.
Schonhaut currently serves as a member of the board of directors of CompTel, the
leading trade association representing competitive telecommunications interests,
and she also serves on the board of the Association for Local Telecommunications
Services.
H. Don Teague joined the Company as Executive Vice President, General
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Counsel and Secretary in May 1997. Prior to this position, Mr. Teague was Senior
Vice President, Administration and Legal with Falcon Seaboard Holdings, L.P. and
its predecessors from April 1994 through April 1997. From 1974 to April 1994,
Mr. Teague was a partner in the law firm of Vinson & Elkins L.L.P.
John U. Moorhead II has been a Director since June 1998 and is a Managing
--------------------
Director of VM Equity Partners, a firm he co-founded in 1991. Prior to founding
VM Equity Partners, Mr. Moorhead worked for eight years as a senior executive in
investment banking, first at EF Hutton and then at Lehman Brothers where he was
Senior Vice President and Director of the New Business Group of Lehman Brothers'
investment banking division from 1987 to 1990. Mr. Moorhead serves on the Board
of Directors of SEMX Inc., a Nasdaq National Market company which provides
specialty materials and services to the microelectronic and semiconductor
industries.
-7-
<PAGE>
Leontis Teryazos has been a Director since June 1995. Mr. Teryazos has been
----------------
President of Letmic Management Inc., a financial advisory firm that specializes
in working with telecommunications and media companies, since 1993. Mr. Teryazos
also has headed Letmic Management Reg'd., a real estate development and
management company, since 1985.
Walter Threadgill has been a Director since December 1997 and is the
------------------
Managing General Partner of Atlantic Coastal Ventures, L.P. Previously, Mr.
Threadgill was the President and CEO of Multimedia Broadcast Investment
Corporation. He also held tenures as Divisional Vice President of Fiduciary
Trust Company in New York, and as Senior Vice President and Chief Operating
Officer of United National Bank in Washington, D.C. Mr. Threadgill chaired the
Presidential Small Business Advisory Committee and served the National
Association of Investment Companies as Director, Treasurer and Legislative
Committee Chairman. Mr. Threadgill is a member of the Federal Communications Bar
Association.
There are no family relationships between any current director or officer
or nominee for director and any other current director or officer or nominee for
director.
There are currently four committees of the Board of Directors of the
Company: Executive Committee, Audit Committee, Compensation Committee and Stock
Option Committee. The Executive Committee provides Board oversight for the
operations of the Company between Board meetings. The Audit Committee reviews
the services provided by the Company's independent auditors, consults with the
independent auditors on audits and proposed audits of the Company, reviews
certain filings with the Securities and Exchange Commission and reviews the
adequacy of internal controls. The Compensation Committee determines
compensation for most executives. The Stock Option Committee determines stock
option awards.
-8-
<PAGE>
COMPENSATION AND OTHER BENEFITS
Summary Compensation Table
The following table provides certain summary information concerning
compensation paid or accrued by the Company and its subsidiaries, to or on
behalf of J. Shelby Bryan, the Company's President and Chief Executive Officer,
the four other most highly compensated executive officers of the Company and one
additional officer for whom disclosure would have been required but for the fact
that the individual was not serving as an executive officer at December 31, 1998
(the "Named Officers"), for the fiscal years ended December 31, 1998, December
31, 1997 and September 30, 1996. As a result of the Company's change in year end
during 1996 from September 30 to December 31, additional amounts are shown below
for the 12 months ended December 31, 1996 and are referred to in such tables as
"1996T." The Company has not maintained any long-term incentive plans and the
Company has not granted stock appreciation rights.
Summary Compensation Table
Annual Compensation
--------------------------------------
Other Annual
Fiscal Compensation
Name and Principal Position Year Salary($) Bonus(1)($) ($)
- -------------------------------------------------------------------------------
J. Shelby Bryan 1998 1,435,191(2) -- 159,554(3)
President, Chief 1997 473,065(2) -- 86,095(4)
Executive Officer 1996T 161,178(2) -- 91,812(5)
and Director 1996 221,196(2) -- 78,919(6)
Douglas I. Falk 1998 192,231 234,885 20,182(7)
Executive Vice President- 1997 160,000 57,360 8,400(9)
Telecom and President of 1996T 56,410 45,385 20,679(11)
ICG Telecom Group, Inc. 1996 16,410 45,385 19,179(12)
Harry R. Herbst 1998 111,827 187,019 13,879(13)
Executive Vice President, 1997 -- -- --
Chief Financial Officer 1996T -- -- --
and Director 1996 -- -- --
H. Don Teague 1998 204,865 138,552 26,829(15)
Executive Vice President, 1997 121,250 64,065 51,387(16)
General Counsel and 1996T -- -- --
Secretary 1996 -- -- --
David W. Garrison 1998 349,996 -- 1,859(9)
Former Executive Vice 1997 -- -- --
President and Director; 1996T -- -- --
Former Chairman of the 1996 -- -- --
Board of Directors and
Chief Executive Officer
of NETCOM
Eric W. Spivey
Former Executive Vice 1998 236,539 105,507 19,760(19)
President; Former 1997 -- --- --
President of 1996T -- --- --
NETCOM(20) 1996 -- --- --
Long-Term
Compensation
--------------
Securities All Other
Fiscal Underlying Compensation
Name and Principal Position Year Options ($)
- --------------------------------------------------------------------------------
J. Shelby Bryan 1998 -- --
President, Chief 1997 -- --
Executive Officer 1996T -- --
and Director 1996 450,000 --
Douglas I. Falk 1998 75,000(8) --
Executive Vice President- 1997 27,500(10) --
Telecom and President of 1996T 22,500 --
ICG Telecom Group, Inc. 1996 15,000 --
Harry R. Herbst 1998 150,000 6,500(14)
Executive Vice President, 1997 -- --
Chief Financial Officer 1996T -- --
and Director 1996 -- --
H. Don Teague 1998 50,000(8) --
Executive Vice President, 1997 50,000(10) --
General Counsel and 1996T -- --
Secretary 1996 -- --
David W. Garrison 1998 100,000(17) 95,283(18)
Former Executive Vice 1997 -- --
President and Director; 1996T -- --
Former Chairman of the 1996 -- --
Board of Directors
Chief Executive Officer
of NETCOM
Eric W. Spivey
Former Executive Vice 1998 100,000(8) --
President; Former 1997 -- --
President of 1996T -- --
NETCOM(20) 1996 -- --
-9-
<PAGE>
- ----------
(1) Consists of amounts both paid in 1998 and earned in 1998 but paid in 1999.
(2) Consists of amounts earned pursuant to the compensation formula in Mr.
Bryan's employment agreement.
(3) Consists of $24,430 for car allowance, $46,964 for housing expenses and
Company contributions to 401(k) Defined Contribution Plan in the amount of
$88,160.
(4) Consists of $40,777 for car allowance, $44,422 for housing expenses and
Company contributions to 401(k) Defined Contribution Plan in the amount of
$896.
(5) Consists of $30,236 for car allowance, $49,683 for housing expenses and
Company contributions to 401(k) Defined Contribution Plan in the amount of
$11,893.
(6) Consists of $25,991 for car allowance, $43,428 for housing expenses and
Company contributions to 401(k) Defined Contribution Plan in the amount of
$9,500.
(7) Consists of $12,479 for car allowance and Company contributions to 401(k)
Defined Contribution Plan in the amount of $7,703.
(8) Includes options regranted as a result of the repricing of the Company's
options on September 18, 1998. See "--Ten Year Option/SAR Repricings."
(9) Consists of payments for car allowance.
(10) Includes options regranted as a result of the repricing of the Company's
options on April 16, 1997. See "--Ten Year Option/SAR Repricings."
(11) Consists of $2,614 for car allowance and $18,065 for relocation payments.
(12) Consists of $1,114 for car allowance and $18,065 for relocation payments.
(13) Consists of $4,200 for car allowance and Company contributions to 401(k)
Defined Contribution Plan in the amount of $9,679.
(14) Consists of payments to Mr. Herbst in his capacity as a non-employee
director for attendance at meetings of the Board of Directors and
committees of the Board of Directors. Mr. Herbst was a non-employee member
of the Board of Directors until July 1, 1998, when he was hired as an
Executive Vice President of the Company in addition to his duties as a
director.
(15) Consists of $8,400 for car allowance and Company contributions to 401(k)
Defined Contribution Plan in the amount of $18,429.
(16) Consists of $5,918 for car allowance, $42,522 in payments for relocation
expense and Company contributions to 401(k) Defined Contribution Plan in
the amount of $2,947.
(17) As a result of Mr. Garrison's resignation on June 12, 1998, all 100,000
options granted to Mr. Garrison during fiscal 1998 were canceled.
(18) Consists of $7,000 for an incentive bonus awarded for continued employment
through the date of the merger between the Company and NETCOM, $29,167 for
payments under the Company's severance agreement with Mr. Garrison, $3,924
for COBRA payments made by the Company under the Company's severance
agreement with Mr. Garrison and $55,192 for unused vacation and personal
days upon Mr. Garrison's resignation on June 12, 1998.
(19) Consists of $9,760 for car allowance and Company contributions to 401(k)
Defined Contribution Plan in the amount of $10,000.
(20) Mr. Spivey resigned from the Company effective February 28, 1999.
-10-
<PAGE>
Option/SAR Grants In Last Fiscal Year
The Company granted no stock appreciation rights during fiscal 1998 to the
Named Officers or to other employees. The following table provides information
on option grants during fiscal year 1998 to the Named Officers:
<TABLE>
<CAPTION>
Individual Grants
-------------------------- Potential Realizable Value at
Number of Percent of Assumed Annual Rates of Stock
Securities Total Options Price Appreciation
Underlying Granted to Exercise or for Option Term
Options Employees in Base Price Expiration ------------------------------
Name Granted Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
J. Shelby Bryan -- -- -- -- -- --
Douglas I. Falk 30,000 1.0 16.875(1) 6/3/08 306,776 770,986
30,000 1.0 20.063 9/22/08 378,501 959,219
15,000 0.5 20.563 12/15/08 193,975 491,570
Harry R. Herbst 20,000(2) 0.6 27.25 1/1/08 342,748 868,590
5,000(2) 0.2 30.00 6/3/08 94,334 239,061
100,000 3.2 16.875(1) 7/1/08 1,032,749 2,601,194
25,000 0.8 20.563 12/15/08 323,291 819,283
H. Don Teague 40,000 1.3 16.875(1) 4/22/08 402,966 1,009,406
10,000 0.3 20.563 12/15/08 129,316 327,713
David W. Garrison 100,000(3) 3.2 26.25 9/19/99 131,250 262,500
Eric W. Spivey(4) 50,000 1.6 16.875(1) 2/28/00 86,484 177,188
50,000 1.6 16.875(1) 2/28/00 86,484 177,188
</TABLE>
- ----------
(1) In order to continue to provide non-cash incentives and retain key
employees, all employee stock options outstanding on September 18, 1998
with exercise prices at or in excess of $22.00 were repriced by the Stock
Option Committee of the Company's Board of Directors to $16.875, the
closing price of a share of Common Stock on the Nasdaq National Market on
September 18, 1998. See "--Ten Year Option/SAR Repricings."
(2) Represents options granted to Mr. Herbst in his capacity as a non-employee
director.
(3) As a result of Mr. Garrison's resignation on June 12, 1998, all 100,000
options granted to Mr.Garrison during fiscal 1998 were canceled.
(4) Mr. Spivey resigned from the Company effective February 28, 1999.
-11-
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table provides information on options exercised during fiscal
year 1998 by the Named Officers and the value of such officers' unexercised
options at December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING
UNEXERCISED OPTIONS AT FISCAL VALUE OF UNEXERCISED IN-THE-MONEY
YEAR END OPTIONS AT FISCAL YEAR END
SHARES ACQUIRED (#) ($)(1)
ON EXERCISE VALUE REALIZED -----------------------------------------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
J. Shelby Bryan 150,000 1,584,375 1,737,500 112,500 23,178,125 1,293,750
Douglas I. Falk 6,875 163,167 5,625 90,000 62,578 362,798
Harry R. Herbst -- -- 70,934 130,000 318,532 485,938
H. Don Teague -- -- 12,500 87,500 154,688 658,437
David W. Garrison 89,521 1,312,790 161,098 15,556 1,088,656 145,137
Eric W. Spivey -- -- 38,826 100,000 226,097 462,500
</TABLE>
- --------------------
(1) Based on the closing price of a share of Common Stock on the Nasdaq
National Market of $21.50 on December 31, 1998.
REPORT ON REPRICING OF OPTIONS/SARS
The Stock Option Committee of the Board of Directors of the Company (the
"Committee") is responsible for administering the Company's Stock Option Plans,
as well as granting any stock options thereunder. The Committee is composed of
four independent, non-employee directors.
In 1998, the Company established the 1998 Stock Option Plan (the "Plan").
The purpose of the Plan is to promote the success and enhance the value of the
Company by linking the personal interests of Participants to those of the
Company's stockholders by providing Participants with an incentive for
outstanding performance. The Plan is further intended to assist the Company in
its ability to motivate, and retain the services of, Participants upon whose
judgment, interest and special effort the successful conduct of its operations
is largely dependent. Up to an aggregate number of 3,400,000 shares may be
granted under the Plan. When awarding stock options, the Committee takes into
consideration the individual's past performance and contribution to the Company,
as well as future potential.
In September 1998, the Committee considered repricing certain existing
stock options that, as a result of various market circumstances, were at option
exercise prices substantially in excess of the then current market price of the
Common Stock of the Company. Specifically, approximately 1,883,000 stock options
granted in connection with a Company-wide grant to all employees on June 3, 1998
had an exercise price of $30.00 per share and approximately 580,000 stock
options granted from October 1997 to August 1998 had exercise prices ranging
from $22.125 to $35.75 per share. Because of the exercise prices, many of the
stock options issued to the Company's employees subsequent to October 1, 1997
did not effectively serve as incentives for the employees. Further, because of
the extremely competitive marketplace for employees in the areas in which the
Company is doing business, there was a significant risk that the Company would
lose many valuable employees if it did not maintain a strong incentive
compensation program.
-12-
<PAGE>
Consequently, the Committee approved the repricing of all outstanding
employee stock options previously granted under the Company's 1996 Stock Option
Plan and 1998 Stock Option Plan subsequent to October 1, 1997 that were priced
at or in excess of $22.00 per share (collectively, the "Eligible Options"). New
stock options (the "Repriced Options") were granted as of September 18, 1998,
each of which were granted under the same stock option plan under which the
Eligible Options were originally granted. The transaction was accomplished
through the cancellation by the Stock Option Committee of the Eligible Options
and a grant of the Repriced Options. The Repriced Options are exercisable at a
price of $16.875 per share, which was the closing price of a share of Common
Stock of the Company on the Nasdaq National Market on September 18, 1998.
William J. Laggett
John U. Moorhead II
Leontis Teryazos
Walter Threadgill
(Members of the Stock Option Committee)
-13-
<PAGE>
TEN YEAR OPTION/SAR REPRICINGS
The following provides information on the repricing of stock options held
by the Named Officers within the past 10 years:
<TABLE>
<CAPTION>
Number of Length of
securities original
underlying Market price of Exercise price option term
options stock at time of at time of remaining at
repriced or repricing or repricing or New exercise date of
amended amendment amendment price repricing or
Name Date (#) ($) ($) ($) amendment
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
J. Shelby Bryan -- -- -- -- -- --
President, Chief
Executive Officer and
Director
Douglas I. Falk 9/18/98 30,000 16.875 30.00 16.875(1) 116 months
Executive Vice 4/16/97 15,000 10.375 20.25 10.375(2) 112 months
President--Telecom 4/16/97 7,500 10.375 19.125 10.375(2) 114 months
and President of ICG
Telecom Group, Inc.
Harry R. Herbst 9/18/98 100,000 16.875 35.75 16.875(1) 117 months
Executive Vice
President, Chief
Financial Officer
and Director
H. Don Teague 9/18/98 40,000 16.875 31.375 16.875(1) 115 months
Executive Vice
President, General
Counsel and Secretary
David W. Garrison -- -- -- -- -- --
Former Executive
Vice President and
Director; Former
Chairman of the Board
of Directors and Chief
Executive Officer of
NETCOM
Eric W. Spivey 9/18/98 50,000 16.875 27.75 16.875(1) 113 months
Former Executive 50,000 16.875 30.00 16.875(1) 116 months
Vice President;
Former President of
NETCOM
</TABLE>
- --------------------
(1) Represents the closing price of a share of Common Stock on the Nasdaq
National Market on September 18, 1998.
(2) Represents the closing price of a share of Common Stock on the Nasdaq
National Market on April 16, 1997.
-14-
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENTS
The Company and its subsidiaries have employment agreements with Messrs. J.
Shelby Bryan, Douglas I. Falk, Harry R. Herbst and H. Don Teague.
The Company's amended employment agreement with Mr. Bryan provides for a
term of two years, which commenced June 1, 1997. The employment agreement has
been extended and amended for an additional two-year period commencing June 1,
1999. As compensation, the Company pays Mr. Bryan a salary equal to the sum of
one percent of the monthly increase in the Company's revenue and three percent
of the monthly increase in Earnings Before Interest, Income Taxes, Depreciation
and Amortization (and certain non-recurring charges) ("EBITDA") (such payments
to be calculated on a quarterly basis commencing July 1, 1999). If Mr. Bryan's
salary exceeds $1,500,000 in any fiscal year, the Company may elect to pay such
excess in unregistered ICG Common Stock. Mr. Bryan is entitled to benefits as
are generally provided to the Company's executive officers, including options
under stock option plans, a leased automobile, private club membership fees and
reimbursement of reasonable out-of-pocket expenses incurred on behalf of the
Company. The employment agreement may be terminated by the Company with or
without cause or after a disability continuing for a six-month consecutive
period, or by Mr. Bryan for cause, including breach of the agreement or
reduction in status or responsibilities, change of control or on 90 days notice
to the Company. If the employment agreement is terminated by the Company for any
reason other than for cause, or by Mr. Bryan for cause or change of control, the
Company is obligated to pay Mr. Bryan a lump sum of $2.5 million and to continue
benefits for a period equal to the greater of the remainder of the employment
term or 18 months. If Mr. Bryan resigns from the Company other than for cause,
Mr. Bryan will receive a lump sum severance payment in an amount equal to Mr.
Bryan's aggregate salary for the immediately preceding 12-month period, unless
Mr. Bryan becomes employed by or obtains more than a 5% equity interest in a
competitive local exchange carrier. If Mr. Bryan's employment is terminated in
the case of disability or death, Mr. Bryan or his representatives or heirs will
receive a lump sum payment in an amount equal to Mr. Bryan's aggregate salary
for the immediately preceding 12-month period and any salary for the then
current year prorated to the date of termination. After termination of the
employment agreement, Mr. Bryan is subject to a confidentiality covenant and a
one-year non-solicitation commitment.
In addition, the Company has entered into a Deferred Compensation Agreement
with Mr. Bryan pursuant to which Mr. Bryan will receive ten annual installments
of $500,000 each commencing on the later of January 1, 2001 or the date of Mr.
Bryan's retirement or termination (whether by resignation by Mr. Bryan or by
discharge by the Company) from his current positions at the Company.
The Company's employment agreement with Mr. Falk, dated September 23, 1998,
has an initial one-year term commencing September 23, 1998 and continues from
month-to-month thereafter such that 12 months always remain in the term. The
agreement provides for an annual base salary and an incentive bonus determined
by the Company. Mr. Falk is also entitled to such other benefits as are
generally provided to executive officers of the Company including options under
the Company's stock option plans, a car allowance and reasonable out-of-pocket
expenses incurred on behalf of the Company. The agreement may be terminated by
the Company upon 30 days written notice if Mr. Falk is unable to perform his
duties for 140 days within a 180-day period due to illness or incapacity. The
agreement may also be terminated by the Company or Mr. Falk upon 30 days written
notice in certain circumstances. If the employment agreement is terminated by
the Company for no reason or by the Company or Mr. Falk after the occurrence of
a change in control involving the Company, Mr. Falk will receive a termination
fee equal to Mr. Falk's current monthly base salary multiplied by 12 plus an
amount equivalent to 12 months of COBRA premiums. Mr. Falk is subject to a
ten-year confidentiality covenant and a one-year non-competition commitment
following the termination of his employment.
-15-
<PAGE>
The Company's employment agreement with Mr. Herbst, dated July 1, 1998, has
an initial one-year term commencing July 1, 1998 and continues from
month-to-month thereafter such that 12 months always remain in the term. The
agreement provides for an annual base salary and an incentive bonus determined
by the Board of Directors of the Company. Mr. Herbst is also entitled to such
other benefits as are generally provided to executive officers of the Company,
including options under the Company's stock option plans, retention of all stock
options previously granted to Mr. Herbst in his capacity as a non-employee
director of the Company, a car allowance and reimbursement of reasonable
out-of-pocket expenses incurred on behalf of the Company. The agreement may be
terminated by the Company upon 30 days written notice if Mr. Herbst is unable to
perform his duties for 140 days within any 180-day period due to illness or
incapacity. The agreement may also be terminated by the Company or Mr. Herbst
upon 30 days written notice in certain circumstances. If the employment
agreement is terminated by the Company as a result of Mr. Herbst's death,
illness, incapacity, gross negligence or intentional misconduct by Mr. Herbst,
Mr. Herbst will receive a termination fee equal to two times his annual base
salary. If the employment agreement is terminated by the Company or by Mr.
Herbst within 90 days after the occurrence of a change in control involving the
Company, Mr. Herbst will receive a termination fee equal to two times his annual
base salary. In addition, all unvested options granted to purchase shares of the
Company will immediately vest on the date of termination. Mr. Herbst is also
subject to a ten-year confidentiality covenant and a one-year non-competition
commitment following the termination of his agreement.
The Company's employment agreement with Mr. Teague provides for an initial
two-year term which commenced May 19, 1997. Upon completion of the first 12
months of the initial term, the agreement automatically renews from
month-to-month such that 12 months remain in the term. The agreement provides
for an annual base salary and an incentive bonus determined by the Board of
Directors. Mr. Teague is also entitled to such other benefits as are generally
provided to executive officers of the Company, including options under the
Company's stock option plans, a car allowance and reimbursement of reasonable
out-of-pocket expenses incurred on behalf of the Company. The agreement may be
terminated by the Company upon 30 days written notice if Mr. Teague is unable to
perform his duties for 140 days in any 180-day period due to illness or
incapacity. The agreement may also be terminated by the Company or Mr. Teague
upon 30 days written notice in certain other circumstances. If the employment
agreement is terminated as a result of illness or incapacity or without cause by
the Company or by either party upon the occurrence of a change of control
involving the Company, Mr. Teague will receive a termination fee equal to his
current monthly salary times the number of months remaining in the term. Mr.
Teague is also subject to a ten-year confidentiality covenant and a one-year
non-competition commitment.
Messrs. Bryan, Falk, Herbst and Teague also have agreements that provide in
the event any payments paid or payable by the Company or benefits received or
receivable by them from the Company (collectively, the "Executive Payments") are
of the type encompassed within Section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), and are subject to tax imposed by Section 4999 of
the Code and/or any comparable tax imposed by any state or local taxing
authority, including any interest or penalties (collectively, the "Excise Tax"),
the Company will pay an additional amount in cash (the "Gross-Up Payment") so
that the net amount retained by Messrs. Bryan, Falk, Herbst and Teague, after
deduction of the Excise Tax on the Gross-Up Payment, as well as any other taxes
due solely as a result of the Gross-Up Payment, shall be equal to the full
amount of the Executive Payments. These agreements survive the termination of
employment and continue to be binding until all obligations under the agreements
have been satisfied.
-16-
<PAGE>
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors of the Company (the
"Compensation Committee") evaluates compensation levels of senior management and
evaluates the various factors affecting compensation of the Company's highest
paid officers. The Compensation Committee believes that compensation to the
Company's executive officers should be designed to encourage and reward
management's efforts to further strengthen the Company's business and to create
added value for stockholders. Such a compensation program helps to achieve the
Company's business and financial objectives and also provides incentives needed
to attract and retain well-qualified executives. The Company operates in a
competitive marketplace and needs to attract and retain highly qualified senior
management and executive personnel in order for the Company to achieve its goals
of continued growth. The Compensation Committee attributes a substantial portion
of the Company's overall performance, as well as the individual contributions of
the executive officers, to the executive officers' compensation.
The Company has employment agreements with several of its executive
officers. See "Executive Employment Agreements" for descriptions of those
agreements. All senior management, except for J. Shelby Bryan, President and
Chief Executive Officer, are compensated with a base salary and an incentive
bonus. The base salaries are intended to compensate executives for their ongoing
leadership skills and management responsibility. The incentive bonuses are
dependent upon the Company's performance. For purposes of determining incentive
bonuses, the Compensation Committee evaluates the accomplishment of goals set at
the beginning of each fiscal year and compares the Company's performance in each
year to those goals. As a result of the Company's performance during fiscal
1998, the Compensation Committee approved bonuses for the Named Officers of the
Company. See "Summary Compensation Table" for the definition of Named Officers
and the bonuses paid to them.
In addition, the Stock Option Committee awarded stock options to certain
employees of the Company, including executive officers. These grants were based
on individual performance and responsibility and were related to the executive
officers' performance in fiscal 1997 as well as an incentive for continued
efforts and success. The Compensation Committee believes that stock options
serve as important long-term incentives for executive officers by encouraging
their continued employment and commitment to the Company's performance. The
Compensation and Stock Option Committees do not consider the number of options
currently held by all executive officers in determining individual grants
because such consideration could create an incentive to exercise options and
sell the underlying stock. See "Summary Compensation Table" for the stock
options granted to the executive officers.
The compensation of the Company's President and Chief Executive Officer, J.
Shelby Bryan, is set forth in his employment contract. Mr. Bryan's base salary
is computed as: the sum of (i) one percent (1%) of the increase in revenues of
the Company for such month over revenues of the Company for the immediately
prior month and (ii) three percent (3%) of the increase in EBITDA of the Company
for such month over EBITDA of the Company for the immediately prior month (such
payments to be calculated on a quarterly basis commencing July 1, 1999). Mr.
Bryan receives other benefits as well. See "Summary Compensation Table" for the
type and amount of these payments.
As described more fully in "-Executive Employment Agreements," each of
Messrs. Bryan, Falk, Herbst and Teague is a party to an agreement with the
Company that provides in the event any Executive Payments are of the type
encompassed within Section 280G of the Code and are subject to an Excise Tax,
the Company will pay such executive a Gross-Up Payment so that the net amount
retained by Messrs. Bryan, Herbst, Teague and Falk, as the case may be, after
deduction of the Excise Tax on the Gross-Up Payment, as well as any other taxes
due solely as a result of the Gross-Up Payment, shall be equal to the full
amount of the Executive Payments. These agreements survive the termination of
employment and continue to be binding until all obligations under the agreements
have been satisfied.
-17-
<PAGE>
The Compensation Committee has reviewed the compensation of the Company's
executive officers and has concluded that their compensation was reasonable and
appropriate in view of the Company's performance. The Compensation Committee
continually evaluates the compensation of the Company's executive officers,
including an assessment of compensation reports for comparable companies and for
the telecommunications industry. The Compensation Committee believes that
maintaining suitable executive compensation programs is necessary to support the
future development of the Company and growth in stockholder value.
William J. Laggett
John U. Moorhead II
Leontis Teryazos
Walter Threadgill
(Members of the Compensation Committee)
-18-
<PAGE>
COMPARISON OF TOTAL STOCKHOLDER RETURN
The Company is required to include in this Proxy Statement a line-graph
presentation comparing cumulative five-year shareholder returns on an indexed
basis with the Nasdaq Composite Index and an index of peer companies selected by
the Company ("Peer Group"). The graph below sets forth information on
shareholder return for the period from September 30, 1993 through December 31,
1998. The total stockholder return assumes $100 invested at the beginning of the
period in the Company's Common Stock, the Nasdaq Composite Index and the
Company's designated Peer Group, as described below.
September 30,
-------------------------------
1993 1994 1995 1996
---- ---- ---- ----
NASDAQ Composit Index (1) 100 100 137 161
Peer Group (2) . . . . . 100 66 85 108
ICG . . . . . . . . . . . 100 72 67 111
December 31,
-------------------------------
1996 1997 1998
---- ---- ----
NASDAQ Composit Index (1) . . . . . 169 206 287
Peer Group (2) . . . . . . . . . . 118 251 140
ICG . . . . . . . . . . . . . . . . 93 143 113
- ----------
(1) IntelCom Group Inc. ("IntelCom") Common Shares traded on the American Stock
Exchange ("AMEX") Emerging Company Marketplace until January 4, 1993, when
IntelCom Common Shares began trading on the AMEX. IntelCom data reflects a
one-for-five reverse stock split effective January 13, 1993. As a result of
the Company's reincorporation on August 2, 1996, IntelCom Common Shares
ceased trading on the AMEX and ICG Common Stock commenced trading on the
AMEX on August 5, 1996. On March 25, 1997, ICG Common Stock ceased trading
on the AMEX and began trading on the Nasdaq National Market System. The
Nasdaq Composite Index was used for the entire period shown.
(2) The industry peer group consists of competitive local exchange carriers
with common stock registered under the Securities Exchange Act of 1934 (the
"Exchange Act") and trading on a U.S. stock exchange, and includes:
Intermedia Communications Inc. from September 30, 1993; MFS Communications
Company, Inc. from September 30, 1993 until the date of its purchase by
MCI/WorldCom, Inc. on December 31, 1996; GST Telecommunications, Inc. from
the date its common stock began trading on the AMEX on March 11, 1994;
e.spire Communications, Inc. (formerly known as American Communications
Services, Inc.), from the date its common stock began trading on the NASDAQ
Small-Cap Market on March 3, 1995; Brooks Fiber Properties, Inc. from the
date of the initial public offering of its common stock on May 3, 1996
until the date of its purchase by MCI/WorldCom on January 29, 1998; McLeod,
Inc. from the date of the initial public offering of its common stock on
June 11, 1996; and Teleport Communications Group, Inc. from the date of the
initial public offering of its common stock on June 27, 1996 until the date
of its purchase by AT&T Corp. on July 23, 1998.
-19-
<PAGE>
SECTION 16(A) BENETICIAL OWNERSHIP REPORTING COMPLIANCE
The following table lists the current and former directors, officers and
beneficial owners of more than 10% of the outstanding Common Stock (each a
"Reporting Person") that failed to file on a timely basis reports required by
Section 16(a) of the Exchange Act during the most recent fiscal year, the number
of late reports, the number of transactions that were not reported on a timely
basis and any known failure to file a required Form by each Reporting Person:
Transactions Known Failures
Reporting Person Late Reports Untimely Reported To File Forms
---------------- ------------ ----------------- -------------
Douglas I. Falk 2 (Form 4) 6 None
Cindy Z. Schonhaut 1 (Form 3) 1 None
Walter Threadgill 2 (Form 4) 2 None
Except as set forth above, the Company believes that during the fiscal year
ended December 31, 1998, its executive officers, directors and holders of more
than 10% of the Common Stock complied with all Section 16(a) filing
requirements. In making these statements, the Company has relied upon a review
of reports on Forms 3, 4 and 5 furnished to the Company during, or with respect
to, its last fiscal year.
PROPOSAL II
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
---------------------------------------------------
The Board of Directors of the Company has appointed the firm of KPMG LLP as
independent auditors of the Company to audit and report on its consolidated
financial statements for the fiscal year ended December 31, 1999 and has
determined that it would be desirable to request that the stockholders of the
Company ratify this appointment.
Representatives of KPMG LLP are expected to attend the Meeting and will be
available to respond to appropriate questions. These representatives will also
be given an opportunity to make a statement at the Meeting if they so desire.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL II.
-20-
<PAGE>
ANNUAL REPORT
All stockholders of record as of April 28, 1999 are being sent concurrently
with this Proxy Statement a copy of the Company's 1998 Summary Annual Report.
The 1998 Summary Annual Report is not incorporated by reference into this Proxy
Statement and is not to be deemed a part hereof. The Company's consolidated
financial statements for the fiscal year ended September 30, 1996, for the three
months ended December 31, 1996, and for the fiscal years ended December 31, 1997
and 1998, as well as additional information required to be provided to
stockholders pursuant to Rule 14a-3(b) under the Exchange Act, are included in
the Appendix to this Proxy Statement.
STOCKHOLDER PROPOSALS
If a stockholder intends to present a proposal at the Company's 2000 Annual
Meeting of Stockholders and seeks to have the proposal included in the Company's
Proxy Statement relating to that meeting, pursuant to Rule 14a-8 of the Exchange
Act, the proposal must be received by the Company no later than the close of
business on January 8, 2000. If a stockholder wishes to present a matter at the
2000 Annual Meeting of Stockholders that is outside of the processes of Rule
14a-8, the Company must receive notice of such a matter on or before March 23,
2000. After that date, the proposal will be considered untimely and the
Company's proxies will have discretionary voting authority with respect to such
matter. Any proposals, as well as any related questions, should be directed to
the Secretary of the Company.
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors of the
Company does not know of any other matters to be brought before the Meeting.
However, if any other matters not mentioned in the Proxy Statement are properly
brought before the Meeting or any adjournments thereof, the persons named in the
enclosed Proxy or their substitutes will have discretionary authority to vote
Proxies given in said form, or otherwise act, in respect of such matters in
accordance with their best judgment.
The Company will bear all of the costs and expenses in connection with the
solicitation of Proxies with respect to the matters described herein. In
addition to solicitation of Proxies by use of mails, directors, officers and
employees (who will receive no compensation therefor in addition to their
regular remuneration) of the Company may solicit the return of Proxies by
telephone, telegram or personal interview. The Company will request banks,
brokerage houses and other custodians, nominees and fiduciaries to forward
copies of the proxy material to their principals and to request instructions for
voting the Proxies. The Company may reimburse such banks, brokerage houses and
other custodians, nominees and fiduciaries for their expenses in connection
therewith.
It is important that Proxies be returned promptly. Stockholders are,
therefore, urged to fill in, date, sign and return the Proxy immediately. No
postage need be affixed if the Proxy is mailed in the enclosed envelope in the
United States.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ H. Don Teague
H. DON TEAGUE
Secretary
May 7, 1999
-21-
<PAGE>
APPENDIX
TABLE OF CONTENTS
-----------------
Selected Financial Data.....................................................A-2
Management's Discussion and Analysis of Financial Condition and
Results of Operations ...................A-5
Independent Auditors' Report - Report of KPMG LLP...........................A-30
Independent Auditors' Report - Report of Ernst & Young LLP, as of
December 31, 1996 and 1997 and for each of the Two Years in
the Period Ended December 31, 1997.....................................A-31
Independent Auditors' Report - Report of Ernst & Young LLP, as of
December 31, 1996 and for the Three Months Then Ended..................A-32
Consolidated Balance Sheets, December 31, 1997 and 1998 ....................A-33
Consolidated Statements of Operations, Fiscal Year Ended September
30, 1996, the Three Months Ended December 31, 1995 (unaudited)
and 1996, and Fiscal Years Ended December 31, 1997 and 1998............A-35
Consolidated Statements of Stockholders' Equity (Deficit), Fiscal
Year Ended September 30, 1996, the Three Months Ended December
31, 1996, and Fiscal Years Ended December 31, 1997 and 1998............A-37
Consolidated Statements of Cash Flows, Fiscal Year Ended September
30, 1996, the Three Months Ended December 31, 1995 (unaudited)
and 1996, and Fiscal Years Ended December 31, 1997 and 1998............A-38
Notes to Consolidated Financial Statements, December 31, 1997 and
1998...................................................................A-41
Market for the Company's Common Equity and Related Stockholder
Matters................................................................A-82
A-1
<PAGE>
SELECTED FINANCIAL DATA
-----------------------
The selected financial data for fiscal years ended September 30, 1994, 1995
and 1996, the three months ended December 31, 1996, and the fiscal years ended
December 31, 1997 and 1998 has been derived from the audited consolidated
financial statements of the Company. The information set forth below should be
read in conjunction with the Company's audited consolidated financial statements
and the notes thereto included elsewhere in this Proxy Statement. The Company's
development and expansion activities, including acquisitions, during the periods
shown below materially affect the comparability of this data from one period to
another. The Company's consolidated financial statements reflect the operations
of Zycom Corporation ("Zycom") and NETCOM as discontinued for all periods
presented. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
Three
Months Ended Fiscal Years Ended
Fiscal Years Ended September 30, Dec. 31, December 31,
----------------------------------- ----------------------
1994 1995 1996 1996 1997 1998
--------- --------- --------- --------- --------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue (1) $ 59,112 110,188 154,143 49,477 245,022 397,619
Operating costs and expenses:
Operating costs 38,165 77,944 121,983 42,485 217,927 254,689
Selling, general and administrative
expenses 28,015 61,305 75,646 23,868 148,254 183,683
Depreciation and amortization 8,198 16,350 30,030 9,691 56,501 101,545
Provision for impairment of long-lived
assets -- 7,000 9,994 -- 9,261 --
Net loss (gain) on disposal of long-lived
assets -- 241 5,128 (772) 243 4,055
Restructuring costs -- -- -- -- -- 2,339
--------- --------- --------- --------- --------- ---------
Total operating costs and expenses 74,378 162,840 242,781 75,272 432,186 546,311
Operating loss (15,266) (52,652) (88,638) (25,795) (187,164) (148,692)
Interest expense (8,481) (24,389) (85,714) (24,454) (117,520) (170,127)
Other income, net 925 3,141 15,585 5,898 21,549 23,762
--------- --------- --------- --------- --------- ---------
Loss from continuing operations before
income taxes, preferred dividends,
share of losses and cumulative effect
of change in accounting (22,822) (73,900) (158,767) (44,351) (283,135) (295,057)
Income tax benefit (expense) -- -- 5,131 -- -- (90)
--------- --------- --------- --------- --------- ---------
Loss from continuing operations before
preferred dividends, share of losses
and cumulative effect of change in
accounting (22,822) (73,900) (153,636) (44,351) (283,135) (295,147)
Accretion and preferred dividends on
preferred securities of subsidiaries,
net of minority interest in share of
losses 435 (1,636) (25,409) (4,988) (38,117) (55,183)
Share of losses of joint venture (1,481) (741) (1,814) -- -- --
--------- --------- --------- --------- --------- ---------
Loss from continuing operations before
cumulative effect of change in accounting (23,868) (76,277) (180,859) (49,339) (321,252) (350,330)
Loss from discontinued operations (100,000) (14,435) (44,060) (11,974) (39,483) (67,715)
Cumulative effect of change in accounting (1) -- -- (3,453) -- --
--------- --------- --------- --------- --------- ---------
Net loss $(123,868) (90,712) (228,372) (61,313) (360,735) (418,045)
========= ========= ========= ========= ========= =========
Loss per share from continuing
Operations - basic and diluted $ (1.17) (2.48) (4.90) (1.18) (7.56) (7.75)
========= ========= ========= ========= ========= =========
Net loss per share - basic and diluted $ (6.06) (2.94) (6.19) (1.47) (8.49) (9.25)
========= ========= ========= ========= ========= =========
Weighted average number of shares
outstanding - basic and diluted (2) 20,455 30,808 36,875 41,760 42,508 45,194
========= ========= ========= ========= ========= =========
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Fiscal Years Ended
Fiscal Years Ended September 30, Dec. 31, December 31,
----------------------------------- ----------------------
1994 1995 1996 1996 1997 1998
--------- --------- --------- --------- --------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Other Data:
Net cash used by operating activities of
continuing operations (7,532) (41,947) (39,099) (6,436) (117,191) (105,358)
Net cash used by investing activities of
continuing operations (51,452) (65,772) (134,832) (82,342) (429,512) (349,082)
Net cash (used) provided by financing
activities of continuing operations (49,428) 377,772 355,811 (1,886) 308,136 530,915
EBITDA (3) (7,068) (36,302) (58,608) (16,104) (130,663) (47,147)
EBITDA (before nonrecurring
charges) (3) (7,068) (29,061) (43,486) (16,876) (121,159) (40,753)
Capital expenditures of continuing
operations (4) 54,921 82,623 176,935 70,297 268,796 368,946
Capital expenditures of discontinued
operations (4) 11,143 49,714 54,364 8,554 18,055 25,981
</TABLE>
<TABLE>
<CAPTION>
At September 30, At December 31,
----------------------------------- -----------------------------------
1994 1995 1996 1996 1997 1998
------- ------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-term
investments available for sale $ 6,025 269,404 457,388 391,891 230,850 262,831
Net current assets (liabilities) of
discontinued operations (5) 15,551 131,571 54,226 54,481 38,331 (23,272)
Working capital 6,988 381,006 499,810 415,247 263,674 294,934
Property and equipment, net 118,875 201,038 334,646 402,251 631,454 934,134
Net non-current assets of discontinued
operations (5) 12,413 59,936 97,561 97,425 76,577 54,243
Total assets 229,955 767,072 1,081,896 1,086,734 1,217,440 1,615,425
Current portion of long-term debt and
capital lease obligations 23,118 23,487 8,282 25,500 7,421 5,132
Long-term debt and capital lease
obligations, less current portion 97,811 405,535 739,827 761,504 957,507 1,662,357
Redeemable preferred securities of
subsidiaries -- 24,336 153,318 159,120 420,171 466,352
Common stock and additional paid-in capital
129,483 420,516 504,851 508,182 534,290 578,404
Accumulated deficit (61,737) (152,487) (380,859) (430,682) (791,417) (1,209,462)
Stockholders' equity (deficit) 67,746 268,001 125,203 78,711 (256,983) (631,177)
</TABLE>
(1) During fiscal 1996, the Company changed its method of accounting for
long-term telecom services contracts to recognize revenue as services are
provided. Other than the cumulative effect of adopting this new method of
accounting, the effect of this change in accounting for the periods
presented was not significant. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Accounting Change."
(2) Weighted average number of shares outstanding for fiscal years 1994 and
1995 represents ICG Holdings (Canada) Co. ("Holdings-Canada") common shares
outstanding. Weighted average number of shares outstanding for fiscal 1996,
the three months ended December 31, 1996, and fiscal 1997 and 1998
represents Holdings-Canada common shares outstanding for the period October
1, 1995 through August 2, 1996, and represents ICG Common Stock and
Holdings-Canada Class A Common Shares (the "Class A Shares") (not owned by
ICG) outstanding for the
A-3
<PAGE>
periods subsequent to August 5, 1996. During fiscal 1998, all of the
remaining Class A Shares outstanding held by third parties were exchanged
into shares of ICG Common Stock.
(3) EBITDA consists of earnings (loss) from continuing operations before
interest, income taxes, depreciation and amortization, other expense, net
and accretion and preferred dividends on preferred securities of
subsidiaries, net of 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 loss (gain) on disposal of long-lived assets, provision for
impairment of long-lived assets and restructuring costs. EBITDA and EBITDA
(before nonrecurring charges) are provided because they are measures
commonly used in the telecommunications industry. EBITDA and EBITDA (before
nonrecurring charges) are presented to enhance an 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 of
continuing operations as determined using GAAP are also presented in Other
Data.
(4) Capital expenditures includes assets acquired under capital leases and
through the issuance of debt or warrants and excludes payments for
construction of the Company's corporate headquarters. Capital expenditures
of discontinued operations includes the capital expenditures of Zycom and
NETCOM combined for all periods presented.
(5) Net non-current assets of discontinued operations and net current assets
(liabilities) of discontinued operations represents the assets and
liabilities of Zycom and NETCOM combined for all periods presented.
A-4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The following discussion includes certain forward-looking statements which
are affected by important factors including, but not limited to, dependence on
increased traffic on the Company's facilities, the successful implementation of
the Company's strategy of offering an integrated telecommunications package of
local, long distance, enhanced telephony and wholesale and retail data services,
continued development of the Company's network infrastructure and actions of
competitors and regulatory authorities that could cause actual results to differ
materially from the forward-looking statements. The results for the 12 months
ended December 31, 1996 and for fiscal 1997 and 1998 have been derived from the
Company's audited consolidated financial statements included elsewhere herein
and the Company's unaudited consolidated financial statements included in the
Company's Forms 10-Q filed with the Securities and Exchange Commission. The
Company's consolidated financial statements reflect the operations of Zycom and
NETCOM as discontinued for all periods presented. The Company changed its fiscal
year end to December 31 from September 30, effective January 1, 1997. All dollar
amounts are in U.S. dollars.
Company Overview
The Company is one of the nation's leading competitive integrated
communications providers ("ICPs"), based on estimates of the industry's 1998
revenue. ICPs seek to provide an alternative to incumbent local exchange
carriers ("ILECs"), long distance carriers and other communications service
providers for a full range of communications services in the increasingly
deregulated telecommunications industry. The Company's Telecom Services
primarily include its competitive local exchange carrier ("CLEC") operations, in
which the Company operates fiber networks in regional clusters covering major
metropolitan statistical areas in California, Colorado, Ohio, the Southeast and
Texas, offering local, long distance, data and enhanced telephony services to
business end users and Internet service providers ("ISPs"). Additionally, in
February 1999, the Company began providing wholesale network services over its
nationwide data network. The Company also provides a wide range of network
systems integration services and maritime and international satellite
transmission services. Network Services consists of information technology
services and selected networking products, focusing on network design,
installation, maintenance and support. Satellite Services consists of satellite
voice, data and video services provided to major cruise lines, the U.S. Navy,
the offshore oil and gas industry and ICPs. As a leading participant in the
rapidly growing competitive local telecommunications industry, the Company has
experienced significant growth, with total revenue increasing from approximately
$154.1 million for fiscal 1996 to approximately $397.6 million for fiscal 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 communications service offerings.
The Telecommunications Act of 1996 (the "Telecommunications Act") and
pro-competitive state regulatory initiatives have substantially changed the
telecommunications regulatory environment in the United States. Under the
Telecommunications Act, the Company is permitted to offer all interstate and
intrastate telephone services, including competitive local dial tone. In early
1997, the Company began marketing and selling local dial tone services in major
metropolitan areas in California, Colorado, Ohio and the Southeast and, in
December 1998, began offering services through an acquired business. During
fiscal 1997 and 1998, the Company sold 178,470 and 206,458 local access lines,
respectively, net of cancellations, of which 354,482 were in service at December
31, 1998. In addition, the Company's regional fiber networks have grown from
2,143 fiber route miles at the end of fiscal 1996 to 4,255 fiber route miles at
December 31, 1998. The Company had 29 operating high capacity digital voice
switches and 16 data communications switches at December 31, 1998, and plans to
install additional switches as
A-5
<PAGE>
demand warrants. As a complement to its local exchange services offered to
business end users, the Company markets bundled service offerings provided over
its regional fiber network which include long distance, enhanced
telecommunications services and data services. Additionally, the Company owns
and operates a nationwide data network with 236 points of presence ("POPs") over
which the Company recently began providing wholesale Internet access and
enhanced network services to MindSpring Enterprises, Inc. ("MindSpring") and
intends to offer similar services to other ISPs and telecommunications providers
in the future.
The Company will continue to expand its network through construction,
leased facilities, strategic alliances and mergers and acquisitions. For
example, on December 31, 1998, the Company purchased from Central and South West
Corporation ("CSW") 100% of the partnership interests in a limited partnership
named CSW/ICG ChoiceCom, L.P. ("ChoiceCom"), a strategic alliance with CSW
formed for the purpose of developing and marketing telecommunications services
in certain cities in Texas. ChoiceCom is based in Austin, Texas and currently
provides local exchange and long distance services in Austin, Corpus Christi,
Dallas, Houston, and San Antonio, Texas. For fiscal 1997 and 1998, ChoiceCom
reported revenue of $0.3 million and $5.8 million, respectively, and EBITDA
losses (before nonrecurring charges) of $(5.5) million and $(13.6) million,
respectively. Additionally, ChoiceCom has five operating high capacity digital
voice switches and two data communications switches as of December 31, 1998 and
has 19,569 access lines in service, including 15,282 access lines previously
sold by ICG on behalf of ChoiceCom.
To better focus its efforts on its core Telecom Services operations, the
Company progressed toward the disposal of certain assets which management
believes do not complement its overall business strategy. On August 12 and
November 18, 1998, the Company completed the sales of the capital stock of
MarineSat Communications, Inc. ("MCN") and Nova-Net Communications, Inc.
("Nova-Net"), respectively, two wholly owned subsidiaries within the Company's
Satellite Services operations. The results of operations of MCN and Nova-Net,
which are not significant to the Company's consolidated results, have been
included in the Company's consolidated results of operations through the closing
date of each sale. Due primarily to the loss of a major customer, which
generated a significant obligation under a volume discount agreement with its
call transport provider, the board of directors of Zycom approved a plan on
August 25, 1998 to wind down and ultimately discontinue Zycom's operations. On
October 22, 1998, Zycom completed the transfer of all customer traffic to other
providers and on January 4, 1999, the Company completed the sale of the
remainder of Zycom's operating assets to an unrelated third party. Additionally,
effective November 3, 1998, the Company's board of directors adopted the formal
plan to dispose of the operations of NETCOM. On February 17, 1999, the Company
sold certain of the operating assets and liabilities of NETCOM to MindSpring for
total proceeds of $245.0 million, and on March 16, 1999, the Company sold all of
the capital stock of NETCOM's international operations in Canada and the United
Kingdom to other unrelated third parties for total proceeds of approximately
$41.1 million. Since the Company expects to record a gain on the disposition of
NETCOM, the Company has deferred the net operating losses of NETCOM from
November 3, 1998 through December 31, 1998 of approximately $10.8 million. The
Company expects to record a combined gain on the NETCOM transactions of
approximately $200 million, including the recognition of the deferred losses of
NETCOM from November 3, 1998 through the sale dates and net of income taxes of
approximately $6.5 million, during the three months ended March 31, 1999. Since
the operations sold were acquired by the Company in a transaction accounted for
as a pooling of interests, the gain on the NETCOM transaction will be classified
in the Company's consolidated statement of operations as an extraordinary item.
For fiscal 1996, 1997 and 1998, Zycom and NETCOM combined reported revenue of
$135.4 million, $189.0 million and $181.6 million, respectively, and EBITDA
losses (before nonrecurring charges) of $(30.4) million, $(12.1) million and
$(18.0) million, respectively. The Company's consolidated financial statements
reflect the operations of Zycom and NETCOM as discontinued for all periods
presented. The Company will from time to time evaluate all of its assets as
A-6
<PAGE>
to their core need and, based on such analysis, may sell or otherwise dispose of
assets which do not complement its overall business strategy.
In conjunction with the sale to MindSpring, the legal name of the NETCOM
subsidiary was changed to ICG PST, Inc. ("PST"). PST has retained the domestic
Internet backbone assets formerly owned by NETCOM which include 236 POPs serving
approximately 700 cities nationwide. PST intends to utilize the retained network
operating assets to provide wholesale Internet access and enhanced network
services to MindSpring and other ISPs and telecommunications providers. On
February 17, 1999, the Company entered into an agreement to lease to MindSpring
for a one-year period the capacity of certain network operating assets for a
minimum of $27.0 million, although subject to increase dependent upon network
usage. MindSpring will utilize the capacity to provide Internet access to the
dial-up services customers formerly owned by NETCOM. In addition, the Company
will receive for a one-year period 50% of the gross revenue earned by MindSpring
from the dedicated access customers formerly owned by NETCOM.
In August 1998, the Company began offering enhanced telephony services via
IP technology. The Company currently offers these services in 230 major cities
in the United States, covering more than 90% of the commercial long distance
market. The Company carries the IP traffic over its nationwide data network and
terminates a large portion of the traffic via its own POPs, thereby eliminating
terminating charges from the use of other carriers' network facilities. Calls
that cannot be terminated over the Company's own facilities are billed at higher
per minute rates to compensate for the charges associated with using other
carriers' facilities. The Company currently does not generate any significant
revenue from this service.
In December 1998, the Company announced its plans to offer three new
network services (modemless remote access service ("RAS"), expanded originating
service ("EOS") and digital subscriber line ("DSL") technology) to be available
beginning in 1999. RAS allows the Company to provide modem access at its own
switch location, rather than requiring ISPs to deploy modems physically at each
of their POPs. This service will enable the Company to act as an aggregator for
ISP traffic, while limiting the ISP's capital deployment. Through its strategic
relationship with Lucent Technologies, Inc. ("Lucent"), the Company is currently
retrofitting all of its Lucent-5ESS switches with the new Lucent product that
allows for RAS functionality. This service eliminates the need for ISPs to
separately purchase modems and shifts network management responsibilities to the
Company. The Company plans to be the first to market RAS using Lucent's modem
technology and expects the service will be available to customers in the second
quarter of 1999. Through the same technology that allows it to provide RAS, the
Company plans to offer EOS, enabling regional or local ISPs to expand their
geographical footprint outside their current physical locations by carrying the
ISP's out-of-region traffic on the Company's own nationwide data network. The
Company will initially offer this service within its CLEC regional clusters
during the first quarter of 1999, and plans to expand EOS offerings to other
areas as demand warrants. Through DSL technology, the Company plans to provide
high-speed data transmission services primarily to business end users and, on a
wholesale basis, to ISPs. DSL technology utilizes the existing ILEC twisted
copper pair connection to the customer, giving the customer significantly
greater bandwidth, and consequently speed, when connecting to the Internet. The
Company expects to offer DSL in over 400 central offices by the end of 1999
through alliances with other companies focusing on DSL service. For example, on
March 30, 1999, the Company entered into a strategic relationship with
NorthPoint Communications, Inc., a privately held data CLEC based in San
Francisco, California ("NorthPoint"), which designates NorthPoint as the
Company's preferred DSL provider for a two-year period. The Company will
purchase up to 75,000 DSL lines from NorthPoint over the two-year term. This
alliance will enable the Company to accelerate the expansion of its DSL service
offerings and allow the Company to gain access to more than two-thirds of the
businesses in the top 25 U.S. markets in 1999. The Company will sell its DSL
assets to NorthPoint, including those already deployed or scheduled for
A-7
<PAGE>
deployment, and will allow NorthPoint to gain access to the Company's
collocation facilities in markets where NorthPoint currently has limited or no
operations. NorthPoint will provision and manage all of the Company's DSL
services offered under this agreement. The Company expects to begin offering DSL
services under this agreement in the second quarter of 1999. The Company is not
presently able to determine the impact that the offerings of RAS, EOS and DSL
will have on revenue or EBITDA in 1999, 2000 or future years. These service
offerings are dependent upon demand from ISPs and, while the Company believes
this market sector will benefit from these new services, there is no assurance
that the Company will be able to successfully deploy and market these services
efficiently, or at all, or obtain and retain new customers in a competitive
marketplace.
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, EBITDA (before nonrecurring charges), and
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, through and
including the quarter ended December 31, 1998 for which the Company reported
positive EBITDA (before nonrecurring charges) of $4.1 million. 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 performance will continue to improve
in the near term.
A-8
<PAGE>
Results of Operations
The following table provides a breakdown of revenue, operating costs and
selling, general and administrative expenses for Telecom Services, Network
Services and Satellite Services and certain other financial data for the Company
for the periods indicated. The table also shows certain revenue, expenses,
operating loss and EBITDA as a percentage of the Company's total revenue.
<TABLE>
<CAPTION>
12 Months Ended Fiscal Years Ended December 31,
December 31, ------------------------------------------------
1996(1) 1997 1998
---------------------- ---------------------- ----------------------
$ % $ % $ %
--------- --------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
Telecom services $ 87,379 52 149,358 61 303,317 76
Network services 60,380 36 65,678 27 53,851 14
Satellite services 21,317 12 29,986 12 40,451 10
--------- --------- --------- --------- --------- ---------
Total revenue 169,076 100 245,022 100 397,619 100
Operating costs:
Telecom services 81,110 147,338 187,260
Network services 46,545 53,911 47,321
Satellite services 10,241 16,678 20,108
--------- --------- --------- --------- --------- ---------
Total operating costs 137,896 82 217,927 89 254,689 64
Selling, general and administrative:
Telecom services 32,633 94,073 137,207
Network services 15,841 13,136 12,275
Satellite services 13,152 13,234 13,255
Corporate services(2) 19,640 27,811 20,946
--------- --------- --------- --------- --------- ---------
Total selling, general and administrative 81,266 48 148,254 60 183,683 46
Depreciation and amortization 34,888 20 56,501 23 101,545 25
Provision for impairment of long-lived assets 9,994 6 9,261 4 -- --
Net loss on disposal of long-lived assets 3,326 2 243 -- 4,055 1
Restructuring costs -- -- -- -- 2,339 1
Operating loss (98,294) (58) (187,164) (76) (148,692) (37)
--------- --------- --------- --------- --------- ---------
Other Data:
Net cash used by operating activities of
continuing operations (40,829) (117,191) (105,358)
Net cash used by investing activities of
continuing operations (191,932 (429,512) (349,082)
Net cash provided by financing activities of
Continuing operations 362,338 308,136 530,915
EBITDA(3) (63,406) (38) (130,663) (53) (47,147) (12)
EBITDA (before nonrecurring charges)(3) (50,086) (30) (121,159) (49) (40,753) (10)
Capital expenditures of continuing operations 220,350 268,796 368,946
Capital expenditures of discontinued operations 49,770 18,055 25,981
</TABLE>
(1) The Company changed its fiscal year end to December 31 from September 30,
effective January 1, 1997. The results for the 12 months ended December 31,
1996 have been derived from the Company's unaudited consolidated financial
statements included in the Company's Forms 10-Q filed with the Securities
and Exchange Commission and reclassified to present such periods in
conformity with the fiscal 1998 presentation.
A-9
<PAGE>
(2) Corporate Services consists of the operating activities of ICG
Communications, Inc., ICG Funding, LLC, ICG Canadian Acquisition, Inc., ICG
Holdings (Canada) Co., ICG Holdings, Inc. ("Holdings"), ICG Services, Inc.
and ICG Equipment, Inc., which primarily hold securities and provide
certain legal, accounting and finance, personnel and other administrative
support services to the business units.
(3) See note 3 under "Selected Financial Data" for the definitions of EBITDA
and EBITDA (before nonrecurring charges).
Fiscal 1998 Compared to Fiscal 1997
Revenue. Total revenue for fiscal 1998 increased $152.6 million, or 62%,
from fiscal 1997. Telecom Services revenue increased 103% to $303.3 million due
to an increase in revenue from local services (dial tone), long distance and
special access services, offset in part by a decline in average unit pricing and
in wholesale switched services revenue. Local services revenue increased from
$21.3 million (14% of Telecom Services revenue) for fiscal 1997 to $157.1
million (52% of Telecom Services revenue) for fiscal 1998, primarily due to an
increase in local access lines from 141,035 lines in service at December 31,
1997 to 354,482 lines in service at December 31, 1998. In addition, local access
revenue includes revenue of approximately $4.9 million and $58.3 million for
fiscal 1997 and 1998, respectively, for reciprocal compensation relating to the
transport and termination of local traffic to ISPs from customers of ILECs
pursuant to various interconnection agreements. These agreements are subject to
renegotiation over the next several months. While management believes that these
agreements will be replaced by agreements offering the Company some form of
compensation for ISP traffic, the renegotiated agreements may reflect rates for
reciprocal compensation which are lower than the rates under the current
contracts. See "Liquidity - Transport and Termination Charges." Revenue from
long distance services generated $22.7 million for fiscal 1998, compared to no
reported revenue for fiscal 1997. Special access revenue increased from $55.4
million (37% of Telecom Services revenue) for fiscal 1997 to $74.5 million (25%
of Telecom Services revenue) for 1998. Switched access (terminating long
distance) revenue decreased to approximately $49.0 million for fiscal 1998,
compared to $72.7 million for fiscal 1997. The Company has raised prices on its
wholesale switched services product in order to improve margins and has
de-emphasized its wholesale switched services to focus on its higher margin
products. Revenue from data services did not generate a material portion of
total revenue during either period.
Network Services revenue decreased 18% to $53.9 million for fiscal 1998
compared to $65.7 million for fiscal 1997. The decrease in Network Services
revenue is partially due to the decline in network integration services projects
from new and existing customers during fiscal 1998 and project delays by
customers from 1998 into 1999, offset slightly by increases in integrated
cabling services revenue. In addition, Network Services provides certain cabling
and other service installation on behalf of Telecom Services, as Telecom
Services provisions new customers and services. Due to the growth of Telecom
Services during fiscal 1998, Network Services has been and will continue to be
required to spend increasing management attention and resources on providing
cabling and other service installation for Telecom Services. Amounts received
from Telecom Services for work performed is eliminated in consolidation.
Satellite Services revenue increased $10.5 million, or 35%, to $40.5
million for fiscal 1998. This increase is due to the operations of Maritime
Telecommunications Network, Inc. ("MTN"), which comprised $30.0 million of total
Satellite Services revenue for fiscal 1998, compared to $19.0 million for fiscal
1997, offset by decreases in revenue of MCN and Nova-Net, which the Company sold
in August
A-10
<PAGE>
and November 1998, respectively. MTN's C-band installations, which include both
military and cruise vessels, increased from 57 at December 31, 1997 to 76 at
December 31, 1998, an increase of 33%.
Operating costs. Total operating costs for fiscal 1998 increased $36.8
million, or 17%, from fiscal 1997. Telecom Services operating costs increased
from $147.3 million, or 99% of Telecom Services revenue, for fiscal 1997, to
$187.3 million, or 62% of Telecom Services revenue, for fiscal 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 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
Telecom Services 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.
Network Services operating costs decreased 12% to $47.3 million and
increased as a percentage of revenue from 82% for fiscal 1997 to 88% for fiscal
1998. The decrease in operating costs in absolute dollars is due to a decrease
in general business volume from external customers between the comparative
periods. Network Services operating costs increased as a percentage of Network
Services revenue due to cost overruns and the decline in higher margin network
integration services projects during fiscal 1998.
Satellite Services operating costs increased to $20.1 million for fiscal
1998, from $16.7 million for fiscal 1997. Satellite Services operating costs, as
a percentage of Satellite Services revenue, decreased from 56% for fiscal 1997
to 50% for fiscal 1998, due to the increase in revenue of MTN, which provides
relatively higher margins than other maritime services. Satellite Services
operating costs consist primarily of transponder lease costs and the cost of
equipment sold.
Selling, general and administrative expenses. Total selling, general and
administrative ("SG&A") expenses for fiscal 1998 increased $35.4 million, or
24%, compared to fiscal 1997, and decreased as a percentage of total revenue
from 61% for fiscal 1997 to 46% for fiscal 1998. Telecom Services SG&A expense
increased from $94.1 million, or 63% of Telecom Services revenue, for fiscal
1997, to $137.2 million, or 45% of Telecom Services revenue, for fiscal 1998.
The increase in absolute dollars is 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. 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, Telecom Services has experienced and expects to continue to
experience declining SG&A expenses as a percentage of Telecom Services revenue.
Network Services SG&A expense decreased $0.9 million to $12.3 million for
fiscal 1998 compared to fiscal 1997. This decrease is primarily due to a
reduction in personnel as a result of the decentralization of Network Services
during fiscal 1998. In addition, certain long-term operating leases on field
offices expired during fiscal 1998.
Satellite Services SG&A expense was $13.2 million for both fiscal 1997 and
1998. SG&A expense decreased as a percentage of Satellite Services revenue from
44% for fiscal 1997 to 33% for
A-11
<PAGE>
fiscal 1998 due to the growth of MTN revenue, without proportional increases in
SG&A expenses, and the sales of MCN and Nova-Net in August and November, 1998,
respectively, which companies generated higher SG&A expenses in relation to
revenue than MTN.
Corporate Services SG&A expense decreased $6.9 million to $20.9 million for
fiscal 1998 compared to $27.8 million for fiscal 1997. This decrease is
primarily due to a change in the allocation of payroll costs associated with the
Company's information technology and human resources personnel, which costs were
allocated to Corporate Services for fiscal 1997 and to Telecom Services for
fiscal 1998.
Depreciation and amortization. Depreciation and amortization increased
$45.0 million, or 80%, for fiscal 1998 compared to fiscal 1997, primarily due to
increased investment in depreciable assets resulting from the continued
expansion of the Company's networks and services. Additionally, the Company
experienced increased amortization arising from goodwill recorded in conjunction
with the purchases of NikoNET, Inc., CompuFAX Acquisition Corp. and Enhanced
Messaging Services, Inc. (collectively, "NikoNET") and DataChoice Network
Services, L.L.C., a Colorado limited liability company providing point-to-point
transmission resale services through its long-term agreements with multiple
regional carriers and nationwide providers ("DataChoice"), during fiscal 1998 as
well as the full year impact of goodwill amortization from the purchase of
Communications Buying Group, Inc. ("CBG") in October 1997. The Company expects
that depreciation and amortization will continue to increase as the Company
continues to invest in the expansion and upgrade of its regional fiber and
nationwide data networks and begins amortization of the goodwill arising from
the purchase of ChoiceCom on December 31, 1998.
Provision for impairment of long-lived assets. For fiscal 1997, provision
for impairment of long-lived assets includes the write-down of the Company's
investment in StarCom International Optics Corporation, Inc. ("StarCom") ($5.2
million), MCN ($2.9 million) and Nova-Net ($0.9 million) as well as a write-down
of other operating assets ($0.3 million). Provision for impairment of long-lived
assets was recorded based on management's estimate of the net realizable value
of the Company's assets at December 31, 1997. No such provision for impairment
was recorded for fiscal 1998.
Net loss on disposal of long-lived assets. Net loss on disposal of
long-lived assets increased from $0.2 million for fiscal 1997 to $4.1 million
for fiscal 1998. Net loss on disposal of long-lived assets for fiscal 1997
primarily relates to losses recorded on the disposal of the Company's investment
in its Melbourne network. For fiscal 1998, net loss on disposal of long-lived
assets relates to the write-off of certain installation costs of disconnected
special access customers ($0.5 million), the write-off of certain costs
associated with an abandoned operating support system project ($0.8 million),
general disposal of furniture, fixtures and office equipment ($3.5 million) and
the loss on the sale of Nova-Net ($0.2 million), offset by the gain on the sale
of MCN ($0.9 million).
Restructuring costs. For fiscal 1998, restructuring costs of $2.3 million
include $0.2 million in costs, primarily severance costs, related to the
facility closure of a subsidiary of NikoNET, $0.6 million in costs, primarily
severance costs, related to the decentralization of the Company's Network
Services subsidiary and $1.5 million related to the combined restructuring of
Telecom Services and Corporate Services, designed to support the Company's
increased strategic focus on its ISP customer base, as well as to improve the
efficiency of operations and general and administrative support functions.
Restructuring costs under this plan include severance and other employee benefit
costs, of which $0.9 million has been paid as of December 31, 1998.
Interest expense. Interest expense increased $52.6 million, from $117.5
million for fiscal 1997, to $170.1 million for fiscal 1998, which includes
$158.2 million of non-cash interest. This increase was primarily attributable to
an increase in long-term debt, primarily the 10% Senior Discount Notes due
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<PAGE>
2008 (the "10% Notes") issued by ICG Services in February 1998 and the 9 7/8%
Senior Discount Notes due 2008 (the "9 7/8% Notes") issued by ICG Services 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 $6.5 million, from $21.9 million
for fiscal 1997 to $28.4 million for fiscal 1998. The increase is attributable
to the increase in cash and invested cash balances from the proceeds from the
issuances of the 10% Notes in February 1998 and the 9 7/8% Notes in April 1998.
Other expense, net. Other expense, net increased from $0.4 million net
expense for fiscal 1997 to $4.7 million net expense for fiscal 1998. Other
expense, net recorded in fiscal 1997 consists primarily of litigation settlement
costs and the loss on disposal of non-operating assets. For fiscal 1998, other
expense, net primarily includes $3.2 million in settlement costs paid to the
former minority shareholders and warrantholders of MTN, $1.1 million in
litigation settlement costs and a write-off of notes receivable of $0.4 million.
Income tax expense. Income tax expense of $0.1 million for fiscal 1998
relates to current state income taxes of NikoNET.
Accretion and preferred dividends on preferred securities of subsidiaries,
net of minority interest in share of losses. Accretion and preferred dividends
on preferred securities of subsidiaries, net of minority interest in share of
losses increased $17.1 million, from $38.1 million for fiscal 1997 to $55.2
million for fiscal 1998. The increase is due primarily to the issuances by ICG
Funding of the 6 3/4% Exchangeable Limited Liability Company Preferred
Securities Mandatorily Redeemable 2009 (the "6 3/4% Preferred Securities") in
September and October 1997. Accretion and preferred dividends on preferred
securities of subsidiaries, net of minority interest in share of losses recorded
during fiscal 1998 consists of the accretion of issuance costs ($1.3 million)
and the accrual of the preferred securities dividends ($53.9 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% Preferred Stock
Mandatorily Redeemable 2007 (the "14 1/4% Preferred Stock").
Loss from continuing operations. Loss from continuing operations increased
$29.1 million, or 9%, to $350.3 million due to the increases in operating costs,
SG&A expenses, depreciation and amortization, interest expense and accretion and
preferred dividends on preferred securities of subsidiaries, net of minority
interest in share of losses, offset by an increase in revenue, as noted above.
Loss from discontinued operations. For fiscal 1997 and 1998, loss from
discontinued operations was $39.5 million and $67.7 million, respectively, or
11% and 16%, respectively, of the Company's net loss. Loss from discontinued
operations consists of the combined net loss of Zycom and NETCOM for the
respective periods and, for fiscal 1998, includes $1.8 million for estimated
losses on the disposal of Zycom. The remaining increase in loss from
discontinued operations between the comparative periods is due to increases in
SG&A expenses and depreciation and amortization incurred by NETCOM and
approximately $9.4 million for merger costs incurred by NETCOM relating to
NETCOM's merger with ICG in January 1998. Loss from discontinued operations for
fiscal 1998 includes the net loss of NETCOM from January 1, 1998 through
November 2, 1998. Since the Company expects to record a gain on the disposition
of NETCOM, the Company has deferred the net operating losses of NETCOM from
November 3, 1998 through December 31, 1998, to be recognized as a component of
the gain on the disposition.
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<PAGE>
Fiscal 1997 Compared to 12 Months Ended December 31, 1996
Revenue. Total revenue for fiscal 1997 increased $75.9 million, or 45%,
from the 12 months ended December 31, 1996. Telecom Services revenue increased
71% to $149.4 million due to an increase in network usage for both switched and
special access services, offset in part by a decline in average unit pricing.
Local services revenue was $21.3 million (14% of Telecom Services revenue) for
fiscal 1997, but did not generate a material portion of total revenue for the 12
months ended December 31, 1996. Special access revenue increased from $39.3
million (45% of Telecom Services revenue) for the 12 months ended December 31,
1996 to $55.4 million (37% of Telecom Services revenue) for fiscal 1997.
Switched access (terminating long distance) revenue increased to approximately
$72.7 million for fiscal 1997, compared to $48.1 million for the 12 months ended
December 31, 1996. Revenue from long distance and data services did not generate
a material portion of total revenue during either period.
Network Services revenue increased 9% to $65.7 million for fiscal 1997
compared to $60.4 million for the 12 months ended December 31, 1996. The
increase in Network Services revenue is due to a single equipment sale during
fiscal 1997 for $3.2 million as well as general increases in business volume
from external customers.
Satellite Services revenue increased $8.7 million, or 41%, to $30.0 million
for fiscal 1997, compared to $21.3 million for the 12 months ended December 31,
1996. This increase is primarily due to the operations of MCN, which comprised
$6.3 million of total Satellite Services revenue for fiscal 1997 compared to
$1.8 million during the same 12-month period in 1996. The remaining increase can
be attributed to the general growth of MTN and its increased sales of C-Band
equipment to offshore oil and gas customers.
Operating costs. Total operating costs for fiscal 1997 increased $80.0
million, or 58%, from the 12 months ended December 31, 1996. Telecom Services
operating costs increased from $81.1 million, or 93% of Telecom Services
revenue, for the 12 months ended December 31, 1996 to $147.3 million, or 99% of
Telecom Services revenue, for fiscal 1997. The increase in operating costs in
absolute dollars is attributable to the increase in 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 increase in operating costs as a percentage of Telecom
Services revenue is due primarily to the increase in switched access services
revenue, and the investment in the development of local exchange services
without the benefit of substantial corresponding revenue in the same period.
Network Services operating costs increased 16% to $53.9 million and
increased as a percentage of Network Services revenue from 77% for the 12 months
ended December 31, 1996 to 82% for fiscal 1997. The increase is due to a
substantially lower margin earned on equipment sales (which constituted a larger
portion of 1997 revenue) relative to other services and certain indirect project
costs included in operating costs during fiscal 1997 which were treated as SG&A
expenses during the comparable 12-month period in 1996.
Satellite Services operating costs increased to $16.7 million for fiscal
1997, from $10.2 million for the 12 months ended December 31, 1996. Satellite
Services operating costs as a percentage of Satellite Services revenue also
increased from 48% for the 12 months ended December 31, 1996 to 56% for fiscal
1997. This increase is due to an increase in MCN's sales as well the increased
volume of equipment sales, both of which provide lower margins than other
maritime services.
Selling, general and administrative expenses. Total SG&A expenses for
fiscal 1997 increased $67.0 million, or 82%, compared to the 12 months ended
December 31, 1996. This increase was principally due to the continued rapid
expansion of the Company's Telecom Services networks and
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<PAGE>
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. Total SG&A expenses as a percentage of total revenue increased from
48% for the 12 months ended December 31, 1996 to 61% for fiscal 1997. There is
typically a period of higher administrative and marketing expense prior to the
generation of appreciable revenue from newly developed networks or services.
Depreciation and amortization. Depreciation and amortization increased
$21.6 million, or 62%, for fiscal 1997, compared to the 12 months ended December
31, 1996, due to increased investment in depreciable assets resulting from the
continued expansion of the Company's networks and services. The Company reports
high levels of depreciation expense relative to revenue during the early years
of operation of a new network because the full cost of a network is depreciated
using the straight-line method despite the low rate of capacity utilization in
the early stages of network operation.
Provision for impairment of long-lived assets. For the 12 months ended
December 31, 1996, provision for impairment of long-lived assets includes
valuation allowances for the amounts receivable for advances made to the
formerly owned Phoenix network joint venture included in long-term note
receivable ($5.8 million), the investments in the formerly owned Melbourne
network ($2.7 million) and the formerly owned Satellite Services Mexico
subsidiary ($0.1 million) and the note receivable from NovoComm, Inc. ($1.3
million). Provision for impairment of long-lived assets for fiscal 1997 includes
the write-down of the Company's investment in StarCom ($5.2 million), MCN ($2.9
million) and Nova-Net ($0.9 million) as well as a write-down of other operating
assets ($0.3 million). Provision for impairment of long-lived assets was
recorded based on management's estimate of the net realizable value of the
Company's assets at December 31, 1996 and 1997.
Net loss on disposal of long-lived assets. Net loss on disposal of
long-lived assets decreased from $3.3 million for the 12 months ended December
31, 1996 to $0.2 million for fiscal 1997. Net loss on disposal of long-lived
assets for the 12 months ended December 31, 1996 includes the loss recorded on
the sale of four of the Company's teleports used in its Satellite Services
operations ($1.1 million), the loss recorded on the disposal of other operating
assets ($2.7 million) and a write-off of an investment ($0.3 million), offset by
a gain on the sale of the Company's 50% interest in the Phoenix network joint
venture ($0.8 million). For fiscal 1997, net loss on disposal of long-lived
assets primarily relates to losses recorded on the disposal of the Company's
investment in its formerly owned Melbourne network.
Interest expense. Interest expense increased $22.6 million, from $95.0
million for the 12 months ended December 31, 1996, to $117.5 million for fiscal
1997, which includes $109.3 million of non-cash interest. This increase was
primarily attributable to an increase in long-term debt, primarily the 11 5/8%
Senior Discount Notes due 2007 (the "11 5/8% Notes") issued by Holdings in March
1997. In addition, the Company's interest expense increased, and will continue
to increase, because the principal amount of its indebtedness increases until
the Company's senior indebtedness begins to pay interest in cash.
Interest income. Interest income increased $0.5 million, from $21.4 million
for the 12 months ended December 31, 1996 to $21.9 million for fiscal 1997. The
increase is attributable to the increase in cash and invested cash balances from
the proceeds from the issuances of the 11 5/8% Notes and 14% Preferred Stock in
March 1997 and the 6 3/4% Preferred Securities in September and October 1997.
Other expense, net. Other expense, net decreased from $3.7 million net
expense for the 12 months ended December 31, 1996 to $0.4 million net expense
for fiscal 1997. Other expense, net recorded for the 12 months ended December
31, 1996 consists primarily of the write-off of deferred financing costs
associated with the conversion or repayment of debt and litigation settlement
costs. For
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<PAGE>
fiscal 1997, other, net consists primarily of litigation settlement costs and
the loss on disposal of non operating assets.
Accretion and preferred dividends on preferred securities of subsidiaries,
net of minority interest in share of losses. Accretion and preferred dividends
on preferred securities of subsidiaries, net of minority interest in share of
losses increased $11.0 million, from $27.1 million for the 12 months ended
December 31, 1996 to $38.1 million for fiscal 1997. The increase is due
primarily to the issuances of the 14% Preferred Stock in March 1997 and the 6
3/4% Preferred Securities in September and October 1997. Offsetting this
increase is $12.3 million recorded during the 12 months ended December 31, 1996
for the excess of the redemption price over the carrying amount of the 12%
redeemable preferred stock of Holdings redeemed in April 1996. Accretion and
preferred dividends on preferred securities of subsidiaries, net of minority
interest in share of losses recorded during fiscal 1997 consists of the
accretion of issue costs ($0.9 million) and the accrual of the preferred
security dividends ($38.9 million) associated with the 6 3/4% Preferred
Securities, the 14% Preferred Stock and the 14 1/4% Preferred Stock, offset by
minority interest in losses of subsidiaries of $1.7 million.
Share of losses of joint venture. Effective October 1, 1996, the Company
sold its 50% interest in the Phoenix network joint venture. As a result, no
share of losses in joint venture was recorded during fiscal 1997, as compared to
the $1.6 million loss recorded during the comparable 12-month period in 1996.
Loss from continuing operations. Loss from continuing operations increased
$122.2 million, or 61%, to $321.3 million due to the increases in operating
costs, SG&A expenses, depreciation and amortization, interest expense and
accretion and preferred dividends on preferred securities of subsidiaries, net
of minority interest in share of losses, offset by an increase in revenue, as
noted above.
Loss from discontinued operations. For the 12 months ended December 31,
1996 and fiscal 1997, loss from discontinued operations was $50.5 million and
$39.5 million, respectively, or 20% and 11%, respectively, of the Company's net
loss. Loss from discontinued operations consists of the combined net loss of
Zycom and NETCOM for the respective periods. The decrease in loss from
discontinued operations between the comparative periods is due to an increase in
revenue and a decrease in operating costs as a percentage of revenue incurred by
NETCOM.
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<PAGE>
Quarterly Results
The following table presents selected unaudited operating results for
three-month quarterly periods during fiscal 1997 and 1998. The Company believes
that all necessary adjustments have been included in the amounts stated below to
present fairly the quarterly results when read in conjunction with the Company's
consolidated financial statements and related notes included elsewhere in this
Proxy Statement. Results of operations for any particular quarter are not
necessarily indicative of results of operations for a full year or predictive of
future periods. ICG's development and expansion activities, including
acquisitions, during the periods shown below materially affect the comparability
of this data from one period to another.
Three Months Ended
-------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31,
1997 1997 1997 1997
--------- --------- --------- -------
(Dollars in thousands)
Statement of Operations Data:
Revenue $ 55,450 57,937 60,615 71,020
Operating loss (39,747) (45,515) (46,045) (55,857)
Loss from continuing operations (66,039) (75,919) (79,372) (99,922)
Loss from discontinued operations (9,953) (10,830) (7,502) (11,198)
--------- --------- --------- ---------
Net loss $ (75,992) (86,749) (86,874) (111,120)
========= ========= ========= =========
Loss per share from continuing
operations - basic and diluted $ (1.57) (1.80) (1.87) (2.29)
========= ========= ========= =========
Weighted average number of shares
outstanding - basic and diluted 42,003 42,122 42,359 43,553
========= ========= ========= =========
Other Data:
Net cash used by operating
activities of continuing
operations (13,089) (20,755) (30,823) (52,524)
Net cash (used) provided by
investing activities of
continuing operations (60,197) (50,554) (193,445) (125,316)
Net cash provided (used) by
financing activities of
continuing operations 172,689 (4,418) 110,288 29,577
EBITDA (1) (29,000) (32,581) (32,528) (36,554)
EBITDA (before nonrecurring
charges) (1) (29,319) (32,581) (31,174) (28,085)
Capital expenditures of continuing
operations (2) (58,556) (64,233) (64,347) (81,660)
Capital expenditures of
discontinued operations (2) (5,303) (5,771) (3,259) (3,722)
Statistical Data (3):
Full time employees 2,347 2,623 2,861 3,032
Telecom services:
Access lines in service (4) 5,371 20,108 50,551 141,035
Buildings connected (5):
On-net 545 560 590 626
Hybrid (6) 1,550 1,704 1,726 2,527
--------- --------- --------- ---------
Total buildings connected 2,095 2,264 2,316 3,153
Operational switches:
Voice 16 17 18 19
Data 10 15 15 15
--------- --------- --------- ---------
Total operational switches 26 32 33 34
Fiber route miles (7) :
Operational 2,483 2,898 3,021 3,043
Under construction -- -- -- --
Fiber strand miles (8) :
Operational 83,334 101,788 109,510 111,435
Under construction -- -- -- --
Satellite services:
C-Band installations (9) 57 57 54 57
Three Months Ended
---------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998
--------- --------- --------- ---------
(Dollars in thousands)
Statement of Operations Data:
Revenue 78,867 90,657 106,467 121,628
Operating loss (39,082) (39,649) (27,717) (42,244)
Loss from continuing operations (81,564) (89,435) (80,082) (99,249)
Loss from discontinued operations (20,191) (11,401) (16,582) (19,541)
--------- --------- --------- ---------
Net loss (101,755) (100,836) (96,664) (118,790)
========= ========= ========= =========
Loss per share from continuing
operations - basic and diluted (1.84) (1.99) (1.76) (2.16)
========= ========= ========= =========
Weighted average number of shares
outstanding - basic and diluted 44,311 44,865 45,588 46,010
========= ========= ========= =========
Other Data:
Net cash used by operating
activities of continuing (6,539) (30,950) (13,941) (53,928)
operations
Net cash (used) provided by
investing activities of
continuing operations 36,681 (70,471) (151,395) (163,897)
Net cash provided (used) by
financing activities of
continuing operations 294,197 238,628 (7,432) 5,522
EBITDA (1) (25,479) (16,814) (2,834) (2,020)
EBITDA (before nonrecurring
charges) (1) (24,974) (16,268) (3,648) 4,137
Capital expenditures of continuing
operations (2) (65,748) (87,166) (107,108) (108,924)
Capital expenditures of
discontinued operations (2) (6,511) (8,696) (5,021) (5,753)
Statistical Data (3):
Full time employees 3,050 3,089 3,251 3,415
Telecom services:
Access lines in service (4) 186,156 237,458 290,983 354,482
Buildings connected (5):
On-net 637 665 684 777
Hybrid (6) 3,294 3,733 4,217 4,620
--------- --------- --------- ---------
Total buildings connected 3,931 4,398 4,901 5,397
Operational switches:
Voice 20 20 21 29
Data 15 15 15 16
--------- --------- --------- ---------
Total operational switches 35 35 36 45
Fiber route miles (7) :
Operational 3,194 3,812 3,995 4,255
Under construction -- -- -- 625
Fiber strand miles (8) :
Operational 118,074 124,642 127,756 134,152
Under construction -- -- -- 15,284
Satellite services:
C-Band installations (9) 59 66 69 76
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<PAGE>
(1) EBITDA consists of earnings (loss) from continuing operations before
interest, income taxes, depreciation and amortization, other expense, net
and accretion and preferred dividends on preferred securities of
subsidiaries, net of 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 loss (gain) on disposal of long-lived assets, provision for
impairment of long-lived assets and restructuring costs. EBITDA and EBITDA
(before nonrecurring charges) are provided because they are measures
commonly used in the telecommunications industry. EBITDA and EBITDA (before
nonrecurring charges) are presented to enhance an understanding of the
Company's operating results and are not intended to represent cash flows or
results of operations in accordance with 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 of continuing operations as determined using GAAP are also
presented in Other Data.
(2) Capital expenditures includes assets acquired under capital leases and
excludes payments for construction of the Company's corporate headquarters.
Capital expenditures of discontinued operations includes the capital
expenditures of Zycom and NETCOM combined for all periods presented.
(3) Amounts presented are for three-month periods ended, or as of the end of,
the period presented.
(4) Access lines in service at December 31, 1998 includes 271,928 lines which
are provisioned through the Company's switch and 82,554 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 fourth quarter of 1997, buildings connected includes only
special access buildings connected. Beginning December 31, 1997, buildings
connected includes both dial tone and special access buildings connected.
(6) Hybrid buildings connected represent buildings connected to the Company's
network via another carrier's facilities.
(7) Fiber route miles refers to the number of miles of fiber optic cable,
including leased fiber. As of December 31, 1998, the Company had 4,255
fiber route miles, of which 47 fiber route miles were leased under
operating leases. Fiber route miles under construction represents fiber
under construction which is expected to be operational within six months.
(8) Fiber strand miles refers to the number of fiber route miles, including
leased fiber, along a telecommunications path multiplied by the number of
fiber strands along that path. As of December 31, 1998, the Company had
134,152 fiber strand miles, of which 1,595 fiber strand miles were leased
under operating leases. Fiber strand miles under construction represents
fiber under construction which is expected to be operational within six
months.
(9) C-Band installations service cruise ships, U.S. Navy vessels and offshore
oil platform installations.
A-18
<PAGE>
The Company's consolidated revenue has increased every quarter since the
first fiscal quarter of 1992, primarily due to the installation and acquisition
of new networks, the expansion of existing networks and increased services
provided over existing networks. EBITDA, EBITDA (before nonrecurring charges),
and 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, through and
including the quarter ended December 31, 1998 for which the Company reported
positive EBITDA (before nonrecurring charges) of $4.1 million. As the Company
provides a greater volume of higher margin services, principally local exchange
services, carries more traffic on its own facilities rather than ILEC facilities
and obtains the right to use unbundled ILEC facilities, while experiencing
decelerating increases in personnel and other SG&A expenses supporting its
operations, any or all of which may not occur, the Company anticipates that
EBITDA performance will continue to improve in the near term.
Individual operating units may experience variability in quarter to quarter
revenue due to (i) the type and mix of services available to customers, (ii) the
timing and size of contract orders, (iii) the timing of price changes and
associated impact on volume, and (iv) customer usage patterns.
Net Operating Loss Carryforwards
As of December 31, 1998, the Company had federal and foreign net operating
loss carryforwards ("NOLs") of approximately $617.8 million and $35.0 million,
respectively, which expire at various times in varying amounts through 2019.
However, due to the provisions of Section 382, regulations issued under Section
1502 and certain other provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), the utilization of a portion of the NOLs may be limited.
In addition, the Company is also subject to certain state income tax laws which
may also limit the utilization of NOLs for state income tax purposes.
Section 382 of the Code limits the use of NOLs, as well as other tax
attributes, following significant changes in ownership of a corporation's stock,
as defined in the Code. The limitation is expressed as the amount of NOL or
other tax attributes arising during a period prior to the change in ownership
that may be used by the Company in any tax year subsequent to the change in
ownership. Other factors may act to increase or decrease the annual limitation
for any year subsequent to a change in ownership. Future events beyond the
control of the Company could reduce or eliminate the Company's ability to
utilize its NOLs. Future ownership changes under Section 382 will require a new
Section 382 computation which could further restrict the use of the NOLs. In
addition, the Section 382 limitation could be reduced to zero if the Company
fails to satisfy the continuity of business enterprise requirement for the
two-year period following an ownership change.
Liquidity and Capital Resources
The Company's growth has been funded through a combination of equity, debt
and lease financing. As of December 31, 1998, the Company had current assets of
$422.8 million, including $262.8 million of cash, cash equivalents and
short-term investments available for sale which exceeded current liabilities of
$127.9 million, providing working capital of $294.9 million. In addition, during
the first quarter of 1999, the Company completed the sales of NETCOM's
operations for total proceeds of $286.1 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.
A-19
<PAGE>
Net Cash Used By Operating Activities of Continuing Operations
The Company's operating activities of continuing operations used $39.1
million in fiscal 1996, $4.7 million and $6.4 million for the three months ended
December 31, 1995 and 1996, respectively, and $117.2 million and $105.4 million
for fiscal 1997 and 1998, respectively. Net cash used by operating activities of
continuing operations is primarily due to net losses from continuing operations
and increases in receivables, which are partially offset by changes in other
working capital items and non-cash expenses, such as depreciation and
amortization expense, deferred interest expense, accretion and preferred
dividends on subsidiary preferred securities.
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
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 net cash used by operating activities of continuing operations
will continue to improve in the near term.
Net Cash Used By Investing Activities of Continuing Operations
Investing activities of continuing operations used $134.8 million (net of
$21.6 million received in connection with the sale of certain satellite
equipment, including four teleports) in fiscal 1996, $25.2 million (net of $21.1
million received in connection with the aforementioned equipment sale) and $82.3
million for the three months ended December 31, 1995 and 1996, respectively, and
$429.5 million and $349.1 million for fiscal 1997 and 1998, respectively. Net
cash used by investing activities of continuing operations includes cash
expended for the acquisition of property, equipment and other assets of $121.9
million for fiscal 1996, $26.8 million and $50.8 million for the three months
ended December 31, 1995 and 1996, respectively, and $268.8 million and $367.5
million for fiscal 1997 and 1998, respectively. Additionally, net cash used by
investing activities of continuing operations includes payments for construction
of the Company's corporate headquarters of $1.5 million for fiscal 1996, $7.9
million for the three months ended December 31, 1996, and $29.4 million and $4.9
million for fiscal 1997 and 1998, respectively. The Company used $45.9 million
in fiscal 1997 to acquire CBG and $67.8 million in fiscal 1998 for the
acquisitions of ChoiceCom, NikoNET and DataChoice combined. During fiscal 1998,
the Company used $9.5 million to purchase the minority interest of two of the
Company's operating subsidiaries. Offsetting the expenditures for investing
activities of continuing operations for fiscal 1998 are the proceeds from the
sale of the Company's corporate headquarters of $30.3 million and the sale of
short-term investments of $60.3 million. The Company will continue to use cash
in 1999 and subsequent periods for the construction of new networks, the
expansion of existing networks and, potentially, for acquisitions. The Company
acquired assets under capital leases and through the issuance of debt or
warrants of $55.0 million in fiscal 1996, $0.1 million and $19.5 million for the
three months ended December 31, 1995 and 1996, respectively, and $1.4 million
for fiscal 1998.
Net Cash Provided (Used) By Financing Activities of Continuing Operations
Financing activities of continuing operations provided $355.8 million in
fiscal 1996, used $8.4 million and $1.9 million in the three months ended
December 31, 1995 and 1996, respectively, and provided $308.1 million and $530.9
million in fiscal 1997 and 1998, respectively. Net cash provided by financing
activities of continuing operations for these periods includes cash received in
connection with the private placement of the 11 5/8% Notes and the 14% Preferred
Stock in March 1997, the 6 3/4% Preferred Securities in September and October
1997 and the 10% Notes and the 9 7/8% Notes
A-20
<PAGE>
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, with a maturity value of approximately $490.0 million for net proceeds,
after underwriting and other offering costs, of approximately $290.9 million.
Interest will accrue at 10% per annum, beginning February 15, 2003, and is
payable in cash 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, with a maturity value of approximately $405.3 million, for net proceeds,
after underwriting and other offering costs, of approximately $242.1 million.
Interest will accrue at 9 7/8% per annum, beginning May 1, 2003, and is payable
in cash 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 December 31, 1998, the Company had an aggregate of approximately
$68.4 million of capital lease obligations of continuing operations and an
aggregate accreted value of approximately $1.6 billion was outstanding under the
13 1/2% Senior Discount Notes due 2005 (the "13 1/2% Notes"), the 12 1/2% Senior
Discount Notes due 2006 (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 March 15, 2001 and mature on September 15, 2005. The 12 1/2%
Notes require payments of interest to be made in cash commencing November 1,
2001 and mature on May 1, 2006. The 11 5/8% Notes require payments of interest
to be made in cash commencing September 15, 2002 and mature on March 15, 2007.
The 10% Notes require payments of interest to be made in cash commencing August
15, 2003 and mature February 15, 2008. The 9 7/8% Notes require payments of
interest to be made 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 the 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 December 31, 1998, the Company
had $1.1 million of other indebtedness outstanding. With respect to indebtedness
outstanding on December 31, 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 obligations of approximately $6.7
million remaining in 1999 and $8.9 million in 2000, for which the Company has
restricted cash balances available for such dividend payments, $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 capital leases, or obtain such additional funds, and if the
Company is unable to effect such refinancings or obtain additional funds, the
Company's ability to make principal and interest payments on its indebtedness or
make payments of cash dividends on, or the mandatory redemption of, its
preferred securities, would be adversely affected.
A-21
<PAGE>
Capital Expenditures
The Company's capital expenditures of continuing operations (including
assets acquired under capital leases and excluding payments for construction of
the Company's corporate headquarters) were $176.9 million for fiscal 1996, $26.9
million and $70.3 million for the three months ended December 31, 1995 and 1996,
respectively, and $268.8 million and $368.9 million for fiscal 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 $450.0 million
during 1999. 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 footnotes to the Company's
audited consolidated financial statements for the fiscal year ended December 31,
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 asset sales, including the
proceeds from the sales of the operations of NETCOM, cash flows from operations,
including collection of receivables from transport and termination charges,
vendor financing arrangements and credit facilities will provide sufficient
funds necessary for the Company to expand its business as currently planned and
to fund its operations through 2000. Additional sources of cash may include
public and private equity and debt financings, sales of non-strategic assets,
capital leases and other financing arrangements. In the past, the Company has
been able to secure sufficient amounts of financing to meet its capital 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 and sales of non-strategic assets until the Company establishes a
sufficient revenue-generating customer base could have a material adverse effect
on the Company's liquidity.
Transport and Termination Charges
The Company has recorded revenue of approximately $4.9 million and $58.3
million for fiscal 1997 and 1998, respectively, for reciprocal compensation
relating to the transport and termination of local traffic to ISPs from
customers of ILECs pursuant to various interconnection agreements. The
A-22
<PAGE>
ILECs 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. As a result, the Company expects
receivables from transport and termination charges will continue to increase
until these disputes have been resolved.
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 30 state utility commissions
that ISP traffic is subject to the payment of reciprocal compensation under
current interconnection agreements. Many of these state commission decisions
have been appealed by the ILECs. On February 25, 1999, the FCC issued a decision
that ISP-bound traffic is largely jurisdictionally interstate traffic. The
decision relies on the long-standing federal policy that ISP traffic, although
jurisdictionally interstate, is treated as though it is local traffic for
pricing purposes. The decision also emphasizes that because there are no federal
rules governing intercarrier compensation for ISP traffic, the determination as
to whether such traffic is subject to reciprocal compensation under the terms of
interconnection agreements properly is made by the state commissions and that
carriers are bound by their interconnection agreements and state commission
decisions regarding the payment of reciprocal compensation for ISP traffic. The
FCC has initiated a rulemaking proceeding regarding the adoption of prospective
federal rules for intercarrier compensation for ISP traffic. In its notice of
rulemaking, the FCC expresses its preference that compensation rates for this
traffic continue to be set by negotiations between carriers, with disputes
resolved by arbitrations conducted by state commissions, pursuant to the
Telecommunications Act. Comments were filed in the FCC's rulemaking proceeding
on April 12, 1999. After the issuance of the FCC's February 25th decision, six
state utility commissions to date have either ruled or reaffirmed that ISP
traffic is subject to reciprocal compensation under current interconnection
agreements.
On March 4, 1999, the Alabama Public Service Commission (the "Alabama PSC")
issued a decision that found that reciprocal compensation is owed for Internet
traffic under four CLEC interconnection agreements with BellSouth Corporation
("BellSouth"), which agreements were at issue in the proceeding. With respect to
the Company's interconnection agreement, which also was at issue, the state
commission interpreted certain language in the Company's agreement to exempt
ISP-bound traffic from reciprocal compensation under certain conditions. The
Company believes that the Alabama PSC failed to consider (i) the intent of the
parties in negotiating and executing the Company's interconnection agreement,
and (ii) the specific language of the Company's interconnection agreement and
the impact of Alabama PSC and FCC policies, and thereby misinterpreted the
agreement. The Company has filed a request with the Alabama PSC seeking
determination that the ruling with respect to the Company's agreement be
reconsidered, and that the Company should be treated the same as the other CLECs
that participated in the proceeding and for which the Alabama PSC ordered the
payment of reciprocal compensation. While the Company intends to pursue
vigorously the petition for reconsideration with the Alabama PSC, and if the
Company deems it necessary, judicial review, the Company cannot predict the
final outcome of this issue.
The Company has also recorded revenue of approximately $19.1 million for
fiscal 1998, related to other transport and termination charges to the ILECs,
pursuant to the Company's interconnection agreements with these ILECs. Included
in the Company's trade receivables at December 31, 1997 and 1998 are $4.3
million and $72.8 million, respectively, for all receivables related to
transport and termination charges. The receivables balance at December 31, 1998
is net of an allowance of $5.6 million for disputed amounts.
Although the Company's interconnection agreement with BellSouth has
expired, the Company has received written notification from BellSouth that the
Company may continue operating under the
A-23
<PAGE>
expired interconnection agreement, until such agreement is renegotiated or
arbitrated by the relevant state commissions. The Company's agreement with
Ameritech Corporation recently was extended from June 15, 1999 to February 15,
2000. The Company's remaining interconnection agreements expire in 1999 and
2000. When the agreements expire or are extended, the rates are renegotiated.
Some of the Company's agreements already are being affected. The Company's
extension of its Ameritech agreement reduced the rates contained in the
agreement, and the Company's negotiations with BellSouth also will affect the
rates under the existing agreement. While the Company believes that all revenue
recorded through December 31, 1998 is collectible and that future revenue from
transport and termination charges billed under the Company's current
interconnection agreements will be realized, there can be no assurance that
future regulatory and judicial rulings will be favorable to the Company, that
the Alabama PSC will reconsider its ruling, or that different pricing plans for
transport and termination charges between carriers will not be adopted when the
Company's interconnection agreements are renegotiated or as a result of the
FCC's rulemaking proceeding on future compensation methods. In fact, the Company
believes that different pricing plans will be considered and adopted and
although the Company expects that revenue from transport and termination charges
likely will decrease as a percentage of total revenue from local services in
periods after the expiration of current interconnection agreements, the
Company's local termination services still will be required by the ILECs and
must be provided under the Telecommunications Act, and likely will result in
increasing volume in minutes due to the growth of the Internet and related
services markets. The Company expects to negotiate reasonable compensation and
collection terms for local termination services, although there is no assurance
that such compensation will remain consistent with current levels. Additionally,
the Company expects to supplement its current operations with revenue, and
ultimately EBITDA, from new services offerings such as RAS, EOS and DSL,
however, the Company may or may not be successful in its efforts to deploy such
services profitably.
Year 2000 Compliance
Importance
Many computer systems, software applications and other electronics
currently in use worldwide are programmed to accept only two digits in the
portion of the date field which designates the year. The "Year 2000 problem"
arises because these systems and products cannot properly distinguish between a
year that begins with "20" and the familiar "19." If these systems and products
are not modified or replaced, many will fail, create erroneous results and/or
may cause interfacing systems to fail.
Year 2000 compliance issues are of particular importance to the Company
since its operations rely heavily upon computer systems, software applications
and other electronics containing date-sensitive embedded technology. Some of
these technologies were internally developed and others are standard purchased
systems which may or may not have been customized for the Company's particular
application. The Company also relies heavily upon various vendors and suppliers
that are themselves very reliant on computer systems, software applications and
other electronics containing date-sensitive embedded technology. These vendors
and suppliers include: (i) ILECs and other local and long distance carriers with
which the Company has interconnection or resale agreements; (ii) manufacturers
of the hardware and related operating systems that the Company uses directly in
its operations; (iii) providers that create custom software applications that
the Company uses directly in its operations; and (iv) providers that sell
standard or custom equipment or software which allow the Company to provide
administrative support to its operations.
A-24
<PAGE>
Strategy
The Company's approach to addressing the potential impact of Year 2000
compliance issues is focused upon ensuring, to the extent reasonably possible,
the continued, normal operation of its business and supporting systems.
Accordingly, the Company has developed a four-phase plan which it is applying to
each functional category of the Company's computer systems and components. Each
of the Company's computer systems, software applications and other electronics
containing date-sensitive embedded technology is included within one of the
following four functional categories:
() Networks and Products, which consists of all components whether
------------------------
hardware, software or embedded technology used directly in the
Company's operations, including components used by the Company's voice
and data switches and collocations and telecommunications products;
() IT Systems, which consists of all components used to support the
-----------
Company's operations, including provisioning and billing systems;
() Building and Facilities, which consists of all components with
-------------------------
embedded technology used at the Company's headquarters building and
other leased facilities, including security systems, elevators and
internal use telephone systems;
() Office Equipment, which consists of all office equipment with
-----------------
date-sensitive embedded technology.
For each of the categories described above, the Company will apply the
following four-phase approach to identifying and addressing the potential impact
of Year 2000 compliance issues:
() Phase I - Assessment
--------------------
During this phase, the Company's technology staff will perform an
inventory of all components currently in use by the Company. Based
upon this inventory, the Company's business executives and technology
staff will jointly classify each component as a "high," "medium" or
"low" priority item, determined primarily by the relative importance
that the particular component has to the Company's normal business
operations, the number of people internally and externally which would
be affected by any failure of such component and the interdependence
of such component with other components used by the Company that may
be of higher or lower priority.
Based upon such classifications, the Company's business executives and
information technology staff will jointly set desired levels of Year
2000 readiness for each component inventoried, using the following
criteria, as defined by the Company:
- Capable, meaning that such computer system or component will be
-------
capable of managing and expressing calendar years in four digits;
- Compliant, meaning that the Company will be able to use such
---------
component for the purpose for which the Company intended it by
adapting to its ability to manage and express calendar years in
only two digits;
A-25
<PAGE>
- Certified, meaning that the Company has received testing results
---------
to demonstrate, or the vendor or supplier is subject to
contractual terms which requires, that such component requires no
Year 2000 modifications to manage and express calendar years in
four digits; or
- Non-critical, meaning that the Company expects to be able to
------------
continue to use such component unmodified or has determined that
the estimated costs of modification exceed the estimated costs
associated with its failure.
() Phase II - Remediation
----------------------
During this phase, the Company will develop and execute a remediation
plan for each component based upon the priorities set in Phase I.
Remediation may include component upgrade, reprogramming, replacement,
receipt of vendor and supplier certification or other actions as
deemed necessary or appropriate.
() Phase III - Testing
-------------------
During this phase, the Company will perform testing sufficient to
confirm that the component meets the desired state of Year 2000
readiness. This phase will consist of: (i) testing the component in
isolation, or unit testing; (ii) testing the component jointly with
other components, or system testing; and (iii) testing interdependent
systems, or environment testing.
() Phase IV - Implementation
-------------------------
During the last phase, the Company will implement each act of
remediation developed and tested for each component, as well as
implement adequate controls to ensure that future upgrades and changes
to the Company's computer systems, for operational reasons other than
Year 2000 compliance, do not alter the Company's Year 2000 state of
readiness.
Current State of Readiness
The Company has commenced certain of the phases within its Year 2000
compliance strategy for each of its functional system categories, as shown by
the table set forth below. The Company does not intend to wait until the
completion of a phase for all functional category components together before
commencing the next phase. Accordingly, the information set forth below
represents only a general description of the phase status for each functional
category.
A-26
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Phase
- ------------------------------------------------------------------------------------------------------------------------------------
I II III IV
System and Level of Assessment Remediation Testing Implementation
Priority
- ------------------------------------------------------------------------------------------------------------------------------------
Networks and Products
- ------------------------------------------------------------------------------------------------------------------------------------
High Complete In progress In progress To begin Q2 1999
To complete Q2 1999 To complete Q2 1999 To complete Q3 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Medium Complete In progress To begin Q2 1999 To begin Q2 1999
To complete Q2 1999 To complete Q3 1999 To complete Q3 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Low Complete Complete Complete Complete
- -----------------------------------------------------------------------------------------------------------------------------------
IT Systems
- ------------------------------------------------------------------------------------------------------------------------------------
High Complete In progress In progress In progress
To complete Q2 1999 To complete Q2 1999 To complete Q3 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Medium Complete In progress In progress In progress
To complete Q2 1999 To complete Q2 1999 To complete Q3 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Low Complete In progress To be determined based on the results of Phase II
To complete Q2 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Building and Facilities
- ------------------------------------------------------------------------------------------------------------------------------------
High In progress In progress To be determined based on the results of Phase II
To complete Q2 1999 To complete Q2 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Medium In progress To be determined based on the results of Phase I
To complete Q2 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Low To begin Q2 1999 To be determined based on the results of Phase I
To complete Q3 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Office Equipment
- ------------------------------------------------------------------------------------------------------------------------------------
High Complete In progress To begin Q2 1999 To begin Q2 1999
To complete Q2 1999 To complete Q2 1999 To complete Q3 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Medium Complete In progress To begin Q2 1999 To begin Q2 1999
To complete Q2 1999 To complete Q3 1999 To complete Q4 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Low Complete In progress To be determined based on the results of Phase II
To complete Q2 1999
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Separately, the Company is in the process of reviewing the Company's
material contracts with contractors and vendors/suppliers and considering the
necessity of renegotiating certain existing contracts, to the extent that the
contracts fail to address the allocation of potential Year 2000 liabilities
between parties. Prior to entering into any new material contracts, the Company
will seek to address the allocation of potential Year 2000 liabilities as part
of the initial negotiation.
Costs
The Company expenses all incremental costs to the Company associated with
Year 2000 compliance issues as incurred. Through December 31, 1998, such costs
incurred were approximately $0.5 million, consisting of approximately $0.4
million of replacement hardware and software and approximately $0.1 million of
consulting fees and other miscellaneous costs of Year 2000 compliance reference
and planning materials. The Company has also incurred certain internal costs,
including salaries and benefits for employees dedicating various portions of
their time to Year 2000 compliance issues, of which costs the Company believes
has not exceeded $0.5 million through December 31, 1998. The Company expects
that total future incremental costs of Year 2000 compliance efforts will be
approximately $3.8 million, consisting of $2.3 million in consulting fees, $1.5
million in replacement hardware and software and other miscellaneous costs.
These anticipated costs have been included in the Company's fiscal 1999 budget
and represent approximately 4% of the Company's budgeted expenses for
information technology through fiscal 1999. Such cost estimates are based upon
presently available information and may change as the Company continues with its
Year 2000 compliance plan. The Company intends to use cash on hand for Year 2000
compliance costs, as necessary.
A-27
<PAGE>
Risk, Contingency Planning and Reasonably Likely Worst Case Scenario
While the Company is heavily reliant upon its computer systems, software
applications and other electronics containing date-sensitive embedded technology
as part of its business operations, such components upon which the Company
primarily relies were developed with current state-of-the-art technology and,
accordingly, the Company has reasonably assumed that its four-phase approach
will demonstrate that many of its high-priority systems do not present material
Year 2000 compliance issues. For computer systems, software applications and
other electronics containing date-sensitive embedded technology that have met
the Company's desired level of Year 2000 readiness, the Company will use its
existing contingency plans to mitigate or eliminate problems it may experience
if an unanticipated system failure were to occur. For components that have not
met the Company's desired level of readiness, the Company will develop a
specific contingency plan to determine the actions the Company would take if
such component failed.
At the present time, the Company is unable to develop a most reasonably
likely worst case scenario for failure to achieve adequate Year 2000 compliance.
The Company will be better able to develop such a scenario once the status of
Year 2000 compliance of the Company's material vendors and suppliers is
complete. The Company will monitor its vendors and suppliers, particularly the
other telecommunications companies upon which the Company relies, to determine
whether they are performing and implementing an adequate Year 2000 compliance
plan in a timely manner.
The Company acknowledges the possibility that the Company may become
subject to potential claims by customers if the Company's operations are
interrupted for an extended period of time. However, it is not possible to
predict either the probability of such potential litigation, the amount that
could be in controversy or upon which party a court would place ultimate
responsibility for any such interruption.
The Company views Year 2000 compliance as a process that is inherently
dynamic and will change in response to changing circumstances. While the Company
believes that through execution and satisfactory completion of its Year 2000
compliance strategy its computer systems, software applications and electronics
will be Year 2000 compliant, there can be no assurance until the Year 2000
occurs that all systems and all interfacing technology when running jointly will
function adequately. Additionally, there can be no assurance that the
assumptions made by the Company within its Year 2000 compliance strategy will
prove to be correct, that the strategy will succeed or that the remedial actions
being implemented will be able to be completed by the time necessary to avoid
system or component failures. In addition, disruptions with respect to the
computer systems of vendors or customers, which systems are outside the control
of the Company, could impair the Company's ability to obtain necessary products
or services to sell to its customers. Disruptions of the Company's computer
systems, or the computer systems of the Company's vendors or customers, as well
as the cost of avoiding such disruption, could have a material adverse effect on
the Company's financial condition and results of operations.
Accounting Change
During fiscal 1996, the Company changed its method of accounting for
long-term telecom services contracts. Under the new method, the Company
recognizes revenue as services are provided and continues to charge direct
selling expenses to operations as incurred. The Company had previously
recognized revenue in an amount equal to the noncancelable portion of the
contract, which is a minimum of one year on a three-year or longer contract, at
the inception of the contract and upon activation of service to the customer, to
the extent of direct installation and selling expense incurred in obtaining
customers during the period in which such revenue was recognized. Revenue
recognized in excess of normal monthly billings during the year was limited to
an amount which did not exceed such installation
A-28
<PAGE>
and selling expense. The remaining revenue from the contract had been recognized
ratably over the remaining noncancelable portion of the contract. The Company
believes the new method is preferable because it provides a better matching of
revenue and related operating expenses and is more consistent with accounting
practices within the telecommunications industry.
As required by generally accepted accounting principles, the Company has
reflected the effects of the change in accounting as if such change had been
adopted as of October 1, 1995. The Company's results for fiscal 1996 include a
charge of $3.5 million ($0.13 per share) relating to the cumulative effect of
this change in accounting as of October 1, 1995. The effect of this change in
accounting was not significant for fiscal 1996. If the new revenue recognition
method had been applied retroactively, Telecom Services revenue would have
decreased by $0.5 million and $0.7 million for fiscal 1994 and 1995,
respectively. See the Company's Consolidated Financial Statements and the
related notes thereto contained elsewhere in this Proxy Statement.
A-29
<PAGE>
Independent Auditors' Report - Report of KPMG LLP
-------------------------------------------------
The Board of Directors and Stockholders
ICG Communications, Inc.:
We have audited the accompanying consolidated balance sheets of ICG
Communications, Inc. and subsidiaries (the "Company") as of December 31, 1997
and 1998 and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for the fiscal year ended September 30, 1996,
the three-month period ended December 31, 1996, and the fiscal years ended
December 31, 1997 and 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the consolidated financial statements of NETCOM On-Line Communication
Services, Inc. ("NETCOM"), a discontinued wholly owned subsidiary of the
Company, as of December 31, 1997 or for the fiscal year ended December 31, 1996,
the three-month period ended December 31, 1996, or the fiscal year ended
December 31, 1997, whose total assets constitute 11.7 percent at December 31,
1997, and whose loss from operations constitutes 100.5 percent in fiscal 1996,
96.0 percent in the three months ended December 31, 1996, and 83.8 percent in
fiscal 1997 of the consolidated loss from discontinued operations. Those
consolidated financial statements were audited by other auditors whose reports
have been furnished to us, and our opinion, insofar as it relates to the amounts
included for NETCOM, is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of ICG Communications, Inc. and
subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for the fiscal year ended September 30, 1996,
the three-month period ended December 31, 1996, and the fiscal years ended
December 31, 1997 and 1998, in conformity with generally accepted account
principles.
As explained in note 2 to the consolidated financial statements, during fiscal
year ended September 30, 1996, the Company changed its method of accounting for
long-term telecom services contracts.
KPMG LLP
Denver, Colorado
February 15, 1999
A-30
<PAGE>
Independent Auditors' Report - Report of Ernst & Young LLP
----------------------------------------------------------
The Board of Directors and Stockholders
NETCOM On-Line Communication Services, Inc.
We have audited the consolidated balance sheet of NETCOM On-Line Communication
Services, Inc. as of December 31, 1997, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the two years in
the period ended December 31, 1997 (not presented separately herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of NETCOM
On-Line Communication Services, Inc. at December 31, 1997 and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
San Jose, California
February 13, 1998
A-31
<PAGE>
Independent Auditors' Report - Report of Ernst & Young LLP
----------------------------------------------------------
The Board of Directors and Stockholders
NETCOM On-Line Communication Services, Inc.
We have audited the consolidated balance sheet of NETCOM On-Line
Communication Services, Inc. as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the three months then ended (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
NETCOM On-Line Communication Services, Inc. at December 31, 1996 and the
consolidated results of its operations and its cash flows for the three months
then ended, in conformity with generally accepted accounting principles.
Ernst & Young LLP
San Jose, California
April 16, 1998
A-32
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1998
----------- -----------
(in thousands)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 118,569 210,831
Short-term investments available for sale (note 6) 112,281 52,000
Receivables:
Trade, net of allowance of $5,254 and $15,473 at
December 31, 1997 and 1998, respectively (note 14) 57,163 132,920
Revenue earned, but unbilled 8,599 11,063
Due from affiliate (note 13) 9,384 --
Other (note 13) 1,696 1,156
----------- -----------
76,842 145,139
----------- -----------
Inventory 3,901 2,821
Prepaid expenses and deposits 10,495 12,036
Net current assets of discontinued operations (note 3) 38,331 --
----------- -----------
Total current assets 360,419 422,827
----------- -----------
Property and equipment (notes 7, 9 and 10) 737,424 1,112,067
Less accumulated depreciation (105,970) (177,933)
----------- -----------
Net property and equipment 631,454 934,134
----------- -----------
Long-term notes receivable from affiliate and others, net (note 13) 10,375 --
Restricted cash (note 11) 24,649 16,912
Other assets, net of accumulated amortization:
Goodwill (note 4) 75,673 130,503
Deferred financing costs (note 10) 23,196 35,958
Transmission and other licenses 6,031 5,659
Deposits and other (note 8) 9,066 25,189
----------- -----------
113,966 197,309
----------- -----------
Net non-current assets of discontinued operations (note 3) 76,577 54,243
----------- -----------
Total assets (note 15) $ 1,217,440 1,625,425
=========== ===========
(Continued)
</TABLE>
A-33
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1998
----------- -----------
(in thousands)
<S> <C> <C>
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 27,458 33,781
Accrued liabilities 56,817 55,816
Deferred revenue 5,049 9,892
Current portion of capital lease obligations (notes 9 and 14) 5,637 5,086
Current portion of long-term debt (note 10) 1,784 46
Net current liabilities of discontinued operations
(note 3) -- 23,272
----------- -----------
Total current liabilities 96,745 127,893
----------- -----------
Capital lease obligations, less current portion (notes 9 and 14) 66,939 63,359
Long-term debt, net of discount, less current portion (note 10) 890,568 1,598,998
----------- -----------
Total liabilities 1,054,252 1,790,250
----------- -----------
Redeemable preferred stock of subsidiary ($301.2 million and $346.2 million
liquidation value at December 31, 1997 and 1998, respectively) (note 11)
292,442 338,310
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 1998) (note 11)
127,729 128,042
Stockholders' deficit (note 12):
Common stock, $.01 par value, 100,000,000 shares authorized; 43,974,659
and 46,360,185 shares issued and outstanding at December 31, 1997 and
1998,
respectively (notes 1 and 12) 749 584
Additional paid-in capital 533,541 577,820
Accumulated deficit (791,417) (1,209,462)
Accumulated other comprehensive income (loss) 144 (119)
----------- -----------
Total stockholders' deficit (256,983) (631,177)
----------- -----------
Commitments and contingencies (notes 10, 11, 13 and 14)
Total liabilities and stockholders' deficit $ 1,217,440 1,625,425
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
A-34
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Fiscal Year Ended September 30, 1996,
the Three Months Ended December 31, 1995 (unaudited) and 1996,
and Fiscal Years Ended December 31, 1997 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal year Three months ended Fiscal years ended
ended December 31, December 31,
September 30, ---------------------- ----------------------
1996 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenue (notes 2, 14 and 15) $ 154,143 34,544 49,477 245,022 397,619
Operating costs and expenses:
Operating costs 121,983 26,572 42,485 217,927 254,689
Selling, general and administrative expenses
75,646 18,248 23,868 148,254 183,683
Depreciation and amortization (notes 7 and 15)
30,030 4,833 9,691 56,501 101,545
Provision for impairment of long-lived assets
(note 16) 9,994 -- -- 9,261 --
Net loss (gain) on disposal of long-lived assets
(note 5) 5,128 1,030 (772) 243 4,055
Restructuring costs (note 17) -- -- -- -- 2,339
--------- --------- --------- --------- ---------
Total operating costs and expenses 242,781 50,683 75,272 432,186 546,311
--------- --------- --------- --------- ---------
Operating loss (88,638) (16,139) (25,795) (187,164) (148,692)
Other income (expense):
Interest expense (notes 10 and 15) (85,714) (15,215) (24,454) (117,520) (170,127)
Interest income 19,212 3,750 5,962 21,907 28,414
Other (expense) income, net (3,627) 7 (64) (358) (4,652)
--------- --------- --------- --------- ---------
(70,129) (11,458) (18,556) (95,971) (146,365)
--------- --------- --------- --------- ---------
Loss from continuing operations before income
taxes, preferred dividends, share of losses
and cumulative effect of change in accounting (158,767) (27,597) (44,351) (283,135) (295,057)
Income tax benefit (expense) (note 18) 5,131 -- -- -- (90)
--------- --------- --------- --------- ---------
Loss from continuing operations before preferred
dividends, share of losses and cumulative effect
of change in accounting (153,636) (27,597) (44,351) (283,135) (295,147)
Accretion and preferred dividends on preferred
securities of subsidiaries, net of minority
interest in share of losses (note 11) (25,409) (3,294) (4,988) (38,117) (55,183)
Share of losses of joint venture (1,814) (228) -- -- --
--------- --------- --------- --------- ---------
Loss from continuing operations before cumulative
effect of change in accounting $(180,859) (31,119) (49,339) (321,252) (350,330)
--------- --------- --------- --------- ---------
(Continued)
</TABLE>
A-35
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations, Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal year Three months ended Fiscal years ended
ended December 31, December 31,
September 30, ------------------------ ------------------------
1996 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Discontinued operations (notes 1 and 3):
Loss from discontinued operations $ (44,060) (5,516) (11,974) (39,483) (65,938)
Loss on disposal of discontinued operations -- -- -- -- (1,777)
--------- --------- --------- --------- ---------
(44,060) (5,516) (11,974) (39,483) (67,715)
--------- --------- --------- --------- ---------
Loss before cumulative effect of change in
accounting (224,919) (36,635) (61,313) (360,735) (418,045)
--------- --------- --------- --------- ---------
Cumulative effect of change in accounting
(note 2) (3,453) (3,453) -- -- --
--------- --------- --------- --------- ---------
Net loss $(228,372) (40,088) (61,313) (360,735) (418,045)
========= ========= ========= ========= =========
Other comprehensive income (loss):
Foreign currency translation adjustment 699 (28) 544 (527) (263)
Unrealized gain (loss) on short-term
investments available for sale (note 6) 540 -- 540 (540) --
--------- --------- --------- --------- ---------
Other comprehensive income (loss) 1,239 (28) 1,084 (1,067) (263)
--------- --------- --------- --------- ---------
Comprehensive loss $(227,133) (40,116) (60,229) (361,802) (418,308)
========= ========= ========= ========= =========
Loss per share - basic and diluted:
Continuing operations before cumulative
effect of change in accounting $ (4.90) (0.96) (1.18) (7.56) (7.75)
Discontinued operations (1.20) (0.17) (0.29) (0.93) (1.50)
Cumulative effect of change in accounting (0.09) (0.11) -- -- --
--------- --------- --------- --------- ---------
Net loss per share - basic and diluted $ (6.19) (1.24) (1.47) (8.49) (9.25)
========= ========= ========= ========= =========
Weighted average number of shares
outstanding - basic and diluted 36,875 32,343 41,760 42,508 45,194
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
A-36
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Fiscal Year Ended September 30, 1996, the Three Months Ended December 31, 1996,
and Fiscal Years Ended December 31, 1997 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common stock Additional
------------------------ paid-in
Shares Amount capital
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Balances at October 1, 1995 34,565 $ 190,849 229,667
Shares issued for cash in connection with the exercise of options and warrants (note 12) 1,983 1,747 2,498
Shares issued as repayment of debt and related accrued interest 130 687 --
Shares issued in connection with business combinations (note 4) 64 749 --
Conversion of ICG Holdings (Canada), Inc. preferred shares 496 3,780 --
Shares issued as contribution to 401(k) plan (note 19) 87 856 300
Shares issued upon conversion of subordinated notes 4,413 76,336 --
Repurchase of warrants -- -- (2,671)
Compensation expense related to issuance of common stock options -- -- 53
Exchange of ICG Holdings (Canada), Inc. common shares for ICG common stock -- (248,682) 248,682
Unrealized gains on short-term investments available for sale -- -- --
Cumulative foreign currency translation adjustment -- -- --
Net loss -- -- --
---------- ---------- ----------
Balances at September 30, 1996 41,738 26,322 478,529
Shares issued for cash in connection with the exercise of options and warrants (note 12) 132 1,800 284
Shares issued in connection with business combination (note 4) 18 -- 350
Shares issued as contribution to 401(k) plan (note 19) 19 -- 480
Shares issued upon conversion of subordinated notes 23 417 --
Exchange of ICG Holdings (Canada), Inc. common shares for ICG common stock -- (20,350) 20,350
Net loss -- -- --
Net loss of NETCOM for the three months ended December 31, 1996 (note 2) -- -- --
---------- ---------- ----------
Balances at December 31, 1996 41,930 8,189 499,993
Shares issued for cash in connection with the exercise of options and warrants (note 12) 938 5 4,111
Shares issued in connection with business combination (note 4) 687 7 15,953
Shares issued for cash in connection with employee stock purchase plan (note 12) 240 2 3,020
Shares issued as contribution to 401(k) plan (note 19) 179 2 3,008
Exchange of ICG Holdings (Canada), Inc. common shares for ICG common stock -- (7,456) 7,456
Reversal of unrealized gains on short-term investments available for sale -- -- --
Cumulative foreign currency translation adjustment -- -- --
Net loss -- -- --
---------- ---------- ----------
Balances at December 31, 1997 43,974 749 533,541
Shares issued for cash by subsidiary, net of selling costs 127 1 3,384
Shares issued for cash in connection with the exercise of options and warrants (note 12) 1,519 15 19,268
Shares issued in connection with business combinations (note 4) 502 5 15,527
Shares issued for cash in connection with the employee stock purchase plan (note 12) 111 1 2,249
Shares issued as contribution to 401(k) plan (note 19) 127 2 3,662
Exchange of ICG Holdings (Canada), Inc. common shares for ICG common stock -- (189) 189
Cumulative foreign currency translation adjustment -- -- --
Net loss -- -- --
---------- ---------- ----------
Balances at December 31, 1998 46,360 $ 584 577,820
========== ========== ==========
<CAPTION>
Accumulated
other Total
Accumulated comprehensive stockholders'
deficit (loss) income equity(deficit)
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Balances at October 1, 1995 (152,487) (28) 268,001
Shares issued for cash in connection with the exercise of options and warrants (note 12) -- -- 4,245
Shares issued as repayment of debt and related accrued interest -- -- 687
Shares issued in connection with business combinations (note 4) -- -- 749
Conversion of ICG Holdings (Canada), Inc. preferred shares -- -- 3,780
Shares issued as contribution to 401(k) plan (note 19) -- -- 1,156
Shares issued upon conversion of subordinated notes -- -- 76,336
Repurchase of warrants -- -- (2,671)
Compensation expense related to issuance of common stock options -- -- 53
Exchange of ICG Holdings (Canada), Inc. common shares for ICG common stock -- -- --
Unrealized gains on short-term investments available for sale -- 540 540
Cumulative foreign currency translation adjustment -- 699 699
Net loss (228,372) -- (228,372)
---------- ---------- ----------
Balances at September 30, 1996 (380,859) 1,211 125,203
Shares issued for cash in connection with the exercise of options and warrants (note 12) -- -- 2,084
Shares issued in connection with business combination (note 4) -- -- 350
Shares issued as contribution to 401(k) plan (note 19) -- -- 480
Shares issued upon conversion of subordinated notes -- -- 417
Exchange of ICG Holdings (Canada), Inc. common shares for ICG common stock -- -- --
Net loss (61,313) -- (61,313)
Net loss of NETCOM for the three months ended December 31, 1996 (note 2) 11,490 -- 11,490
---------- ---------- ----------
Balances at December 31, 1996 (430,682) 1,211 78,711
Shares issued for cash in connection with the exercise of options and warrants (note 12) -- -- 4,116
Shares issued in connection with business combination (note 4) -- -- 15,960
Shares issued for cash in connection with employee stock purchase plan (note 12) -- -- 3,022
Shares issued as contribution to 401(k) plan (note 19) -- -- 3,010
Exchange of ICG Holdings (Canada), Inc. common shares for ICG common stock -- -- --
Reversal of unrealized gains on short-term investments available for sale -- (540) (540)
Cumulative foreign currency translation adjustment -- (527) (527)
Net loss (360,735) -- (360,735)
---------- ---------- ----------
Balances at December 31, 1997 (791,417) 144 (256,983)
Shares issued for cash by subsidiary, net of selling costs -- -- 3,385
Shares issued for cash in connection with the exercise of options and warrants (note 12) -- -- 19,283
Shares issued in connection with business combinations (note 4) -- -- 15,532
Shares issued for cash in connection with the employee stock purchase plan (note 12) -- -- 2,250
Shares issued as contribution to 401(k) plan (note 19) -- -- 3,664
Exchange of ICG Holdings (Canada), Inc. common shares for ICG common stock -- -- --
Cumulative foreign currency translation adjustment -- (263) (263)
Net loss (418,045) -- (418,045)
---------- ---------- ----------
Balances at December 31, 1998 (1,209,462) (119) (631,177)
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
A-37
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Fiscal Year Ended September 30, 1996,
the Three Months Ended December 31, 1995 (unaudited) and 1996,
and Fiscal Years Ended December 31, 1997 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal year Three months ended Fiscal years ended
ended December 31, December 31,
September 30, ----------------------- -----------------------
1996 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(228,372) (40,088) (61,313) (360,735) (418,045)
Loss from discontinued operations 44,060 5,516 11,974 39,483 67,715
Adjustments to reconcile net loss to net cash used by
operating activities of continuing operations:
Cumulative effect of change in accounting 3,453 3,453 -- -- --
Share of losses of joint venture 1,814 228 -- -- --
Accretion and preferred dividends on preferred
securities of subsidiaries, net of minority
interest in share of losses 24,383 2,268 4,988 37,002 55,183
Depreciation and amortization 30,030 4,833 9,691 56,501 101,545
Provision for uncollectible accounts 1,531 977 914 3,985 12,031
Compensation expense related to issuance of
common stock options 53 14 -- -- --
Interest expense deferred and included in long-
term debt, net of amounts capitalized on
assets under construction 63,951 12,004 22,087 102,947 152,601
Interest expense deferred and included in capital
lease obligations 4,416 -- 1,716 6,345 5,637
Amortization of deferred financing costs
included in interest expense 2,573 527 612 2,514 4,478
Write-off of non-operating assets 2,650 -- -- 200 250
Contribution to 401(k) plan through issuance of
common shares 1,156 405 480 3,010 3,664
Deferred income tax benefit (5,329) -- -- -- --
Provision for impairment of long-lived assets 9,994 -- -- 9,261 --
Net loss (gain) on disposal of long-lived assets 5,128 1,030 (772) 243 4,055
Change in operating assets and liabilities,
excluding the effects of business
combinations, dispositions and non-cash
transactions:
Receivables (14,150) (3,865) (8,632) (28,891) (96,659)
Inventory (1,200) (272) 361 (2,822) 1,198
Prepaid expenses and deposits (2,938) (459) (901) (5,405) (1,492)
Accounts payable and accrued liabilities 16,244 7,944 9,784 19,541 (2,452)
Deferred revenue 1,454 779 2,575 (370) 4,933
--------- --------- --------- --------- ---------
Net cash used by operating activities of
continuing operations $ (39,099) (4,706) (6,436) (117,191) (105,358)
--------- --------- --------- --------- ---------
(Continued)
</TABLE>
A-38
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal year Three months ended Fiscal years ended
ended December 31, December 31,
September 30, ---------------------- -----------------------
1996 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Cash flows from investing activities:
Decrease (increase) in notes receivable from affiliate and
others $ 4 (1,263) 133 (9,552) (4,880)
Advances to affiliates (109) (15) -- -- --
Investment in and advances to joint venture (4,308) -- -- -- --
Payments for business acquisitions, net of cash acquired (8,441) -- -- (45,861) (67,841)
Acquisition of property, equipment and other assets (121,905) (26,798) (50,818) (268,796) (367,519)
Payments for construction of corporate headquarters (1,501) -- (7,945) (29,432) (4,944)
Proceeds from disposition of property, equipment and other
assets 21,593 21,146 2,057 15,125 386
Proceeds from sale of subsidiary, net of selling costs and
cash included in sale -- -- -- -- 6,874
Proceeds from sale of corporate headquarters, net of selling
and other costs -- -- -- -- 30,283
(Purchase) sale of short-term investments available for
sale (6,832) (4,979) (25,769) (65,580) 60,281
(Increase) decrease in restricted cash (13,333) (13,333) -- (25,416) 7,737
Purchase of minority interest in subsidiaries -- -- -- -- (9,459)
--------- --------- --------- --------- ---------
Net cash used by investing activities of continuing
operations (134,832) (25,242) (82,342) (429,512) (349,082)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock:
Sale by subsidiary -- -- -- -- 3,385
Business combination -- -- -- 15,960 --
Exercise of options and warrants 1,894 101 2,084 4,116 19,283
Employee stock purchase plan -- -- -- 1,319 2,250
Proceeds from issuance of redeemable preferred securities of
subsidiaries, net of issuance costs 144,000 -- -- 223,628 --
Payments of preferred dividends -- -- -- (1,240) (8,927)
Redemption of preferred shares (5,570) (5,570) -- -- --
Repurchase of redeemable preferred stock of subsidiary and
payment of accrued dividend (32,629) -- -- -- --
Repurchase of redeemable warrants (2,671) -- -- -- --
Proceeds from issuance of short-term debt 17,500 17,500 -- -- --
Principal payments on short-term debt (21,192) (3,692) -- -- --
Proceeds from issuance of long-term debt 300,034 -- -- 99,908 550,574
Deferred long-term debt issuance costs (11,915) -- -- (3,554) (17,591)
Principal payments on capital lease obligations (16,720) (2,991) (3,691) (30,403) (11,195)
Principal payments on long-term debt (16,920) (13,761) (279) (1,598) (6,864)
--------- --------- --------- --------- ---------
Net cash provided (used) by financing activities of
continuing operations 355,811 (8,413) (1,886) 308,136 530,915
--------- --------- --------- --------- ---------
Net (decrease) increase in cash and cash equivalents of
continuing operations 181,880 (38,361) (90,664) (238,567) 76,475
Net cash (used) provided by discontinued operations (728) (359) (602) (2,154) 15,787
Cash and cash equivalents, beginning of period 269,404 269,404 450,556 359,290 118,569
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period $ 450,556 230,684 359,290 118,569 210,831
========= ========= ========= ========= =========
(Continued)
</TABLE>
A-39
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal year Three months ended Fiscal years ended
ended December 31, December 31,
September 30, --------------------- ---------------------
1996 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Supplemental disclosure of cash flows information of
continuing operations:
Cash paid for interest $ 14,774 2,684 39 5,714 7,411
========= ========= ========= ========= =========
Cash paid for income taxes $ -- -- -- -- 90
========= ========= ========= ========= =========
Supplemental schedule of non-cash investing and
financing activities of continuing operations:
Common stock issued in connection with business
combinations, repayment of debt or conversion of
liabilities to equity $ 77,772 -- 350 -- 15,532
========= ========= ========= ========= =========
Assets acquired under capital leases $ 55,030 84 19,479 -- 1,427
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
A-40
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) Organization and Nature of Business
ICG Communications, Inc., a Delaware corporation ("ICG"), was incorporated
on April 11, 1996, for the purpose of becoming the new publicly-traded U.S.
parent company of ICG Holdings (Canada), Inc., a Canadian federal
corporation ("Holdings-Canada"), ICG Holdings, Inc., a Colorado corporation
("Holdings"), and its subsidiaries. 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, ICG 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, was
automatically converted 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 Company issued approximately 10.2
million shares of ICG Common Stock in connection with the merger, valued at
approximately $284.9 million on the date of the merger. The business
combination was accounted for as a pooling of interests. Effective November
3, 1998, the Company's board of directors adopted a formal plan to dispose
of the operations of NETCOM (see note 3) and, accordingly, the Company's
consolidated financial statements reflect the operations and net assets of
NETCOM as discontinued for all periods presented. The Company completed the
sales of the operations of NETCOM on February 17 and March 16, 1999. In
conjunction with the sales, the legal name of the NETCOM subsidiary was
changed to ICG PST, Inc. ("PST").
On January 23, 1998, ICG formed ICG Services, Inc., a Delaware corporation
and wholly owned subsidiary of ICG ("ICG Services"). ICG Services is the
parent company of PST (formerly NETCOM) and ICG Equipment, Inc., a Colorado
corporation formed on January 23, 1998 to purchase or lease
telecommunications equipment, software, network 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."
Pursuant to a Plan of Arrangement (the "Arrangement"), which was approved
by Holdings-Canada shareholders on July 30, 1996, and by the Ontario Court
of Justice on August 2, 1996, each shareholder of Holdings-Canada exchanged
their common shares on a one-for-one basis for either (i) shares of ICG
Common Stock, or (ii) Class A common shares of Holdings-Canada (the "Class
A Shares"), which were exchangeable, prior to January 1, 1999, at any time
on a one-for-one basis into shares of ICG Common Stock. On August 2, 1996,
28,795,132, or approximately 98%, of the total issued and outstanding
common shares of Holdings-Canada were exchanged for an equal number of
shares of Common Stock of ICG. In accordance with generally accepted
accounting principles, the Arrangement was accounted for in a manner
similar to a pooling of interests since ICG and Holdings-Canada had common
shareholders, and the number of shares outstanding and the weighted average
number of shares outstanding reflected the equivalent shares outstanding
for the combined companies. On November 25, 1998, the shareholders of
Holdings-Canada approved the Plan of Reorganization (the "Reorganization")
among ICG, Holdings-Canada, ICG Canadian Acquisition, Inc., a newly formed
Delaware corporation and
A-41
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(1) Organization and Nature of Business (continued)
wholly owned subsidiary of ICG ("ICG Acquisition"), and ICG Holdings
(Canada) Co., a newly formed Nova Scotia unlimited liability company and
wholly owned subsidiary of ICG Acquisition. Pursuant to the Reorganization,
on December 1, 1998, ICG Acquisition acquired 100% of the issued and
outstanding Class A Shares of Holdings-Canada, including those
Holdings-Canada common shares owned by ICG, in exchange solely for voting
common stock of ICG Acquisition which was contributed to ICG Acquisition as
part of the Reorganization. On January 1, 1999, Holdings-Canada merged with
and into ICG Holdings (Canada) Co. The merger and Reorganization was
accounted for in a manner similar to a pooling of interests since the
transactions involved entities under common control.
The Company's principal business activity is telecommunications services,
including Telecom 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,
Internet service providers ("ISPs") and long distance carriers and
resellers. Network Services supplies information technology services and
selected networking products, focusing on network design, installation,
maintenance and support for a variety of end users, including Fortune 1000
firms and other large businesses and telecommunications companies.
Satellite Services consists of satellite voice, data and video services
provided to major cruise ship lines, the U.S. Navy, the offshore oil and
gas industry and integrated communications providers.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying consolidated financial statements give retroactive
effect to the merger of ICG and NETCOM on January 21, 1998, which was
accounted for as a pooling of interests, and include the accounts of
NETCOM and its subsidiaries as of the end of and for the periods
presented. Effective November 3, 1998, the Company's board of
directors adopted a formal plan to dispose of the operations of NETCOM
(see note 3) and, accordingly, the accompanying consolidated financial
statements reflect the operations of NETCOM as discontinued for all
periods presented. Financial information prior to the completion of
the Arrangement on August 2, 1996 represents the combined financial
position and results of operations of NETCOM as well as
Holdings-Canada and Holdings, which are considered to be predecessor
entities to ICG.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
(b) Fiscal Year Ends of ICG and NETCOM
The Company changed its fiscal year end to December 31 from September
30, effective January 1, 1997. References to fiscal 1996, 1997 and
1998 relate to the years ended September 30, 1996 and December 31,
1997 and 1998, respectively.
A-42
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
Unaudited consolidated statements of operations and cash flows for the
three months ended December 31, 1995 have been included in the
accompanying consolidated financial statements for comparative
purposes.
Prior to the merger, NETCOM's consolidated financial statements were
prepared using a year end of December 31. Accordingly, the
consolidated statements of operations for fiscal 1996 reflect the
combination of NETCOM's results of operations for the year ended
December 31, 1996 with ICG's results of operations for the year ended
September 30, 1996. Consequently, NETCOM's results of operations for
the three months ended December 31, 1996 have been combined with ICG's
results of operations for the same period in the accompanying
consolidated statement of operations, although they have been
presented as discontinued (see note 3). The net loss of NETCOM for the
three months ended December 31, 1996 has been eliminated in the
consolidated statement of stockholders' equity (deficit).
(c) Cash Equivalents and Short-term Investments Available for Sale
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. The Company
invests primarily in high grade short-term investments which consist
of money market instruments, commercial paper, certificates of
deposit, government obligations and corporate bonds, all of which are
considered to be available for sale and generally have maturities of
one year or less. The Company's short-term investment objectives are
safety, liquidity and yield, in that order. The Company carries all
cash equivalents at cost, which approximates fair value. Short-term
investments available for sale are carried at amortized cost, which
approximates fair market value, with unrealized gains and losses, net
of tax, reported as a separate component of stockholders' equity
(deficit). Realized gains and losses and declines in value judged to
be other than temporary are included in the statement of operations.
(d) Inventory
Inventory, consisting of satellite systems equipment and equipment to
be utilized in the installation of communications systems, services
and networks for customers, is recorded at the lower of cost or
market, using the first-in, first-out method of accounting for cost.
(e) Investments
Investments representing an interest of 20% or more, but less than 50%
are accounted for using the equity method of accounting, under which
the Company's share of earnings or losses are reflected in operations
and dividends are credited against the investment when received.
Losses recognized in excess of the Company's investment due to
additional investment or financing requirements, or guarantees, are
recorded as a liability in the consolidated financial statements.
Investments of less than a 20% equity interest are accounted for using
the cost method, unless the Company exercises significant influence
A-43
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
and/or control over the operations of the investee company, in which
case the equity method is used. As of December 31, 1998, the Company
held no equity interests in investee companies of 50% or less.
(f) Property and Equipment
Property and equipment are stated at cost. Costs of construction are
capitalized, including interest costs related to construction.
Equipment held under capital leases is stated at the lower of the fair
value of the asset or the net present value of the minimum lease
payments at the inception of the lease. For equipment held under
capital leases, depreciation is provided using the straight-line
method over the estimated useful lives of the assets owned, or the
related lease term, whichever is shorter.
Estimated useful lives of major categories of property and equipment
are as follows:
Furniture, fixtures and office equipment 3 to 7 years
Machinery and equipment 3 to 8 years
Fiber optic equipment 8 years
Switch equipment 10 years
Fiber optic network 20 years
Buildings and improvements 31.5 years
(g) Capitalized Labor Costs
Also included in property and equipment are capitalized labor and
other costs associated with network development, service installation
and internal-use software development.
The Company capitalizes costs of direct labor and other employee
benefits associated with the development, installation and expansion
of the Company's networks. Depreciation begins in the period the
network is substantially complete and available for use and is
recorded on a straight-line basis over the estimated useful life of
the equipment or network, ranging from 8 to 20 years.
The Company capitalizes costs of direct labor and other employee
benefits associated with installing and provisioning local access
lines for new customers and providing new services to existing
customers, since these costs are directly associated with
multi-period, contractual, revenue-producing activities. Direct labor
costs are capitalized only when directly related to the provisioning
of customer services with multi-period contracts. Capitalization
begins upon the acceptance of the customer order and continues until
the installation is complete and the service is operational.
Capitalized service installation costs are depreciated on a
straight-line basis over 2 years, the average customer contract term.
A-44
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
The Company capitalizes costs of direct labor and other employee
benefits associated with the development of internal-use computer
software in accordance with Statement of Position 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal
Use." Internal-use software costs are depreciated over the estimated
useful life of the software, typically 2 to 5 years, beginning in the
period when the software is substantially complete and ready for use.
(h) Other Assets
Amounts related to the acquisition of transmission and other licenses
are recorded at cost and amortized over 20 years using the
straight-line method. Goodwill results from the application of the
purchase method of accounting for business combinations and is
amortized over a maximum of 20 years using the straight-line method.
Rights of way, minutes of use, and non-compete agreements are recorded
at cost, and amortized using the straight-line method over the terms
of the agreements, ranging from 2 to 12 years.
Amortization of deferred financing costs is provided over the life of
the related financing agreement, the maximum term of which is 10
years.
(i) Foreign Currency Translation Adjustments
The functional currency for all foreign operations of NETCOM, which
were sold subsequent to December 31, 1998, is the local currency. As
such, all assets and liabilities denominated in foreign currencies are
translated at the exchange rate on the balance sheet date. Revenue and
costs and expenses are translated at weighted average rates of
exchange prevailing during the period. Translation adjustments are
included in other comprehensive income (loss), which is a separate
component of stockholders' equity (deficit). Gains and losses
resulting from foreign currency transactions are included in
discontinued operations and are not significant for the periods
presented.
(j) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting periods. Actual results
could differ from those estimates.
A-45
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
(k) Revenue Recognition
The Company recognizes Telecom Services and Satellite Services revenue
as services are provided and charges direct selling expenses to
operations as incurred. Revenue from Network Services contracts for
the design and installation of communications systems and networks,
which are generally short-term in duration, is recognized using the
percentage of completion method of accounting. Maintenance revenue is
recognized as services are provided. Uncollectible trade receivables
are accounted for using the allowance method.
Revenue which has been earned under the percentage of completion
method, but has not been billed to the customer, is included in
revenue earned, but unbilled in the consolidated financial statements.
Deferred revenue includes monthly advance billings to customers for
certain services provided by the Company's Telecom Services and
Satellite Services, as well as Network Services revenue which has been
billed to the customer in compliance with contract terms, but not yet
earned under the percentage of completion method.
NETCOM recognizes revenue and operating costs on the same basis as
Telecom Services and Satellite Services, although such amounts are
included in loss from discontinued operations for all periods
presented.
Prior to January 1, 1996, the Company recognized Telecom Services
revenue in an amount equal to the non-cancelable portion of the
contract, which is a minimum of one year on a three-year or longer
contract, at the inception of the contract and upon activation of
service to the customer to the extent of direct installation and
selling expenses incurred in obtaining customers during the period in
which such revenue was recognized. Revenue recognized in excess of
normal monthly billings during the year was limited to an amount which
did not exceed such installation and selling expense. The remaining
revenue from the contract was recognized ratably over the remaining
non-cancelable portion of the contract. The Company believes the new
method is preferable because it provides a better matching of revenue
and related operating expenses and is more consistent with accounting
practices within the telecommunications industry. As required by
generally accepted accounting principles, the Company has reflected
the effects of the change in accounting as if such change had been
adopted as of October 1, 1995, and has included in the results of
operations for fiscal 1996 a charge of approximately $3.5 million
relating to the cumulative effect of this change in accounting. Other
than the cumulative effect of adopting this new method of accounting,
the effect of this change in accounting for the periods presented was
not significant.
(l) Income Taxes
The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes ("SFAS 109"). Under the
A-46
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
asset and liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
Under SFAS 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date.
(m) Net Loss Per Share
Net loss per share is calculated by dividing the net loss by the
weighted average number of shares outstanding. Weighted average number
of shares outstanding for the three months ended December 31, 1995
represents outstanding Holdings-Canada common shares and ICG Common
Stock resulting from the exchange of NETCOM common shares. Weighted
average number of shares outstanding for fiscal 1996, the three months
ended December 31, 1996, and fiscal 1997 and 1998 represents
Holdings-Canada common shares outstanding for the period from October
1, 1995 through August 2, 1996, and combined ICG Common Stock and
Holdings-Canada Class A common shares outstanding for the periods
presented subsequent to August 5, 1996.
Net loss per share is determined in accordance with Financial
Accounting Standards Board Statement No. 128, Earnings Per Share
("SFAS 128"), which revises the calculation and presentation
provisions of Accounting Principles Board Opinion No. 15 and related
interpretations. Under SFAS 128, basic loss per share is computed on
the basis of weighted average common shares outstanding. Diluted loss
per share considers potential common stock instruments in the
calculation of weighted average common shares outstanding. Potential
common stock instruments, which include options, warrants and
convertible subordinated notes and preferred securities, are not
included in the net loss per share calculation as their effect is
anti-dilutive.
(n) Stock-Based Compensation
The Company accounts for its stock-based employee and non-employee
director compensation plans using the intrinsic value based method
prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related Interpretations ("APB 25").
The Company has provided pro forma disclosures of net loss and net
loss per share as if the fair value based method of accounting for
these plans, as prescribed by Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("SFAS
123"), had been applied. Pro forma disclosures include the effects of
employee and non-employee director stock options granted during fiscal
1996, the three months ended December 31, 1996, and fiscal 1997 and
1998.
A-47
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
(o) Impairment of Long-Lived Assets
The Company provides for the impairment of long-lived assets,
including goodwill, pursuant to Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of ("SFAS 121"), which
requires that long-lived assets and certain identifiable intangibles
held and used by an entity be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying value of an
asset may not be recoverable. An impairment loss is recognized when
estimated undiscounted future cash flows expected to be generated by
the asset are less than its carrying value. Measurement of the
impairment loss is based on the estimated fair value of the asset,
which is generally determined using valuation techniques such as the
discounted present value of expected future cash flows.
(p) Reclassifications
Certain prior period amounts have been reclassified to conform with
the current period's presentation.
(3) Discontinued Operations
Loss from discontinued operations consists of the following:
<TABLE>
<CAPTION>
Fiscal year Three months ended Fiscal years ended
ended December 31, December 31,
September 30, ----------------------- -----------------------
1996 1995 1996 1997 1998
-------- -------- -------- -------- --------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Zycom (a) $ 205 (70) (484) (6,391) (4,848)
NETCOM (b) (44,265) (5,446) (11,490) (33,092) (61,090)
-------- -------- ------- -------- --------
Loss from discontinued
operations $(44,060) (5,516) (11,974) (39,483) (65,938)
======== ======== ======== ======== ========
</TABLE>
(a) Zycom
The Company owns a 70% interest in Zycom Corporation ("Zycom") which,
through its wholly owned subsidiary, Zycom Network Services, Inc.
("ZNSI"), operated an 800/888/900 number services bureau and a switch
platform in the United States and supplied 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
AT&T Corp. ("AT&T"), its call transport provider, ZNSI entered into an
A-48
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(3) Discontinued Operations (continued)
agreement on July 1, 1998 with an unaffiliated entity, ICN Limited
("ICN"), whereby ZNSI assigned the traffic of its largest audiotext
customer and its other 900-number customers to ICN, effective October
1, 1998. As part of this agreement, ICN assumed all minimum call
traffic volume obligations to AT&T.
The call traffic assigned to ICN represents approximately 86% of
Zycom's revenue for the year ended December 31, 1997. The loss of this
significant portion of Zycom's business, despite management's best
efforts to secure other sources of revenue, raised substantial doubt
as to Zycom's ability to operate in a manner which would benefit
Zycom's or the Company's shareholders. Accordingly, on August 25,
1998, Zycom's board of directors approved a plan to wind down and
ultimately discontinue Zycom's operations. On October 22, 1998, Zycom
completed the transfer of all customer traffic to other providers and
Zycom anticipates that the disposition of its remaining assets and the
discharge of its remaining liabilities will be completed in 1999.
The Company's consolidated financial statements reflect the operations
of Zycom as discontinued for all periods presented. Zycom incurred net
losses from operations of approximately $1.2 million for the period
from August 25, 1998 to December 31, 1998. Included in net current
assets (liabilities) and net non-current assets of discontinued
operations in the Company's consolidated balance sheets are the
following accounts of Zycom:
December 31,
--------------------
1997 1998
------- -------
(in thousands)
Cash and cash equivalents $ 265 47
Receivables 1,879 90
Prepaid expenses and deposits 48 11
Accounts payable and accrued liabilities (2,559) (1,092)
------- -------
Net current liabilities of Zycom $ (367) (944)
======= =======
Property and equipment, net $ 1,050 220
Other assets, net 1,890 --
------- -------
Net non-current assets of Zycom $ 2,940 220
======= =======
On January 4, 1999, the Company completed the sale of the remainder of
Zycom's operating assets to an unrelated third party for total
proceeds of $0.2 million. As Zycom's assets were recorded at estimated
fair market value at December 31, 1998, no gain or loss was recorded
on the sale.
A-49
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(3) Discontinued Operations (continued)
(b) NETCOM
Effective November 3, 1998, the Company's board of directors adopted
the formal plan to dispose of the operations of NETCOM and,
accordingly, the Company's consolidated financial statements reflect
the operations of NETCOM as discontinued for all periods presented.
Since the Company expects to record a gain on the disposition of
NETCOM, the Company has deferred the net operating losses of NETCOM
from November 3, 1998 through December 31, 1998, to be recognized as a
component of the gain on the disposition. Included in net current
assets (liabilities) and net non-current assets of discontinued
operations in the Company's consolidated balance sheets are the
following accounts of NETCOM:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
-------- --------
(in thousands)
<S> <C> <C>
Cash and cash equivalents $ 63,368 --
Receivables 2,397 3,936
Inventory 341 423
Prepaid expenses and deposits 3,554 2,436
Deferred losses of NETCOM -- 10,847
Accounts payable and accrued liabilities (28,471) (37,009)
Current portion of capital lease obligations (2,491) (2,961)
-------- --------
Net current assets (liabilities) of NETCOM $ 38,698 (22,328)
======== ========
Property and equipment, net $ 72,945 50,394
Other assets, net 4,242 5,703
Capital lease obligations, less current portion (3,550) (2,074)
-------- --------
Net non-current assets of NETCOM $ 73,637 54,023
======== ========
</TABLE>
On February 17, 1999, the Company sold certain of the operating assets
and liabilities of NETCOM to MindSpring Enterprises, Inc., an Internet
service provider ("ISP") located in Atlanta, Georgia ("MindSpring").
Total proceeds from the sale were $245.0 million, consisting of $215.0
million in cash and 376,116 shares of unregistered common stock of
MindSpring, valued at approximately $79.76 per share at the time of
the transaction. Assets and liabilities sold to MindSpring include
those directly related to the domestic operations of NETCOM's Internet
dial-up, dedicated access and Web site hosting services. On March 16,
1999, the Company sold all of the capital stock of NETCOM's
international operations for total proceeds of approximately $41.1
million. MetroNET Communications Corp.
A-50
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(3) Discontinued Operations (continued)
("MetroNET"), a Canadian entity, and Providence Equity Partners
("Providence"), located in Providence, Rhode Island, together
purchased the 80% interest in NETCOM Canada Inc. owned by NETCOM for
approximately $28.9 million in cash. Additionally, Providence
purchased all of the capital stock of NETCOM Internet Access Services
Limited, NETCOM's operations in the United Kingdom, for approximately
$12.2 million in cash. The Company expects to record a combined gain
on the NETCOM transactions of approximately $200 million, net of
income taxes of approximately $6.5 million, during the three months
ended March 31, 1999. Since the operations sold were acquired by the
Company in a transaction accounted for as a pooling of interests, the
gain on the NETCOM transactions will be classified in the Company's
consolidated statement of operations as an extraordinary item.
In conjunction with the sale to MindSpring, the Company entered into
an agreement to lease to MindSpring for a one-year period the capacity
of certain network operating assets formerly owned by NETCOM and
retained by the Company for a minimum of $27.0 million, although
subject to increase dependent upon network usage. MindSpring will
utilize the capacity to provide Internet access to the dial-up
services customers formerly owned by NETCOM. In addition, the Company
will receive for a one-year period 50% of the gross revenue earned by
MindSpring from the dedicated access customers formerly owned by
NETCOM. The Company intends to utilize the retained network operating
assets to provide similar wholesale capacity and other enhanced
network services to MindSpring and other ISPs and telecommunications
providers, beginning in 1999.
(4) Purchase Acquisitions and Investments
The acquisitions described below have been accounted for using the purchase
method of accounting and, accordingly, the net assets and results of
operations of the acquired businesses are included in the Company's
consolidated financial statements from the respective dates of acquisition.
Revenue, net loss and net loss per share on a pro forma basis, assuming the
acquisitions were completed at the beginning of the periods presented, are
not significantly different from the Company's historical results for the
periods presented herein.
(a) Fiscal 1998
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. The excess of the purchase price over the fair
value of the net identifiable assets acquired of $5.7 million has been
recorded as goodwill and is being amortized on a straight-line basis
over five years. 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.
A-51
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(4) Purchase Acquisitions and Investments (continued)
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, which included dividends payable
by NikoNET to its former owners and amounts to satisfy NikoNET's
former line of credit, assumed approximately $0.7 million in
liabilities and issued 356,318 shares of ICG Common Stock with a fair
market value of approximately $10.7 million on the date of the
acquisition, for all the capital stock of NikoNET. The excess of the
purchase price over the fair value of the net identifiable assets
acquired of $22.6 million has been recorded as goodwill and is being
amortized on a straight-line basis over five years. Located in
Atlanta, Georgia, NikoNET provides broadcast facsimile services and
enhanced messaging services to financial institutions, corporate
investor and public relations departments and other customers. The
Company believes the acquisition of NikoNET enables the Company to
offer expanded services to its Telecom Services customers.
On August 27, 1998, the Company purchased, for $9.0 million in cash,
the remaining 20% equity interest in ICG Ohio LINX, Inc. ("ICG Ohio
LINX") which it did not already own. ICG Ohio LINX is a
facilities-based competitive local exchange carrier which operates a
fiber optic telecommunications network in Cleveland and Dayton, Ohio.
The Company's additional investment in ICG Ohio LINX, including
incremental costs of obtaining that investment of $0.1 million, is
included in goodwill in the accompanying consolidated balance sheet at
December 31, 1998.
In January 1997, the Company announced a strategic alliance with
Central and South West Corporation ("CSW") formed for the purpose of
developing and marketing telecommunications services in certain cities
in Texas. Based in Austin, Texas, the venture entity was a limited
partnership named CSW/ICG ChoiceCom, L.P ("ChoiceCom"). On December
31, 1998, the Company purchased 100% of the partnership interests in
ChoiceCom from CSW for approximately $55.7 million in cash and the
assumption of certain liabilities of approximately $7.3 million. In
addition, the Company converted approximately $31.6 million of
receivables from prior advances made to ChoiceCom by the Company to
its investment in ChoiceCom. The excess of the purchase price over the
fair value of the net identifiable assets acquired of $28.9 million
has been recorded as goodwill and is being amortized on a
straight-line basis over 10 years. The acquired company currently
provides local exchange and long distance services in Austin, Corpus
Christi, Dallas, Houston and San Antonio, Texas.
(b) Fiscal 1997
On October 17, 1997, the Company purchased approximately 91% of the
outstanding capital stock of Communications Buying Group, Inc.
("CBG"), an Ohio based local exchange and Centrex reseller. The
Company paid total consideration of approximately $46.5 million, plus
the assumption of certain liabilities. Separately, on October 17,
1997,
A-52
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(4) Purchase Acquisitions and Investments (continued)
the Company sold 687,221 shares of ICG Common Stock for approximately
$16.0 million to certain shareholders of CBG. On March 24, 1998, the
Company purchased the remaining approximate 9% interest in CBG for
approximately $2.9 million in cash. The excess of the purchase price
over the fair value of the net identifiable assets acquired in the
combined transactions of $48.9 million has been recorded as goodwill
and is being amortized on a straight-line basis over six years.
(c) Fiscal 1996
In January 1996, the Company purchased the remaining 49% minority
interest of Fiber Optic Technologies, Inc. ("FOTI"), making FOTI a
wholly owned subsidiary. Consideration for the purchase was
approximately $2.0 million in cash and 66,236 common shares of
Holdings-Canada valued at approximately $0.8 million, for total
consideration of approximately $2.8 million. The Company's Network
Services are provided by FOTI.
In February 1996, the Company entered into an agreement with Linkatel
California, L.P. ("Linkatel") and its other partners, Linkatel
Communications, Inc. and The Copley Press, Inc., under which the
Company acquired a 60% interest in Linkatel for an aggregate purchase
price of $10.0 million in cash and became the general partner of
Linkatel. In April 1996, the partnership was renamed ICG Telecom of
San Diego, L.P.
In March 1996, the Company acquired a 90% equity interest in MarineSat
Communications Network, Inc. ("MCN"), (formally Maritime Cellular
Tele-network, Inc.), a Florida-based provider of cellular and
satellite communications for commercial ships, private vessels,
offshore oil platforms and land-based mobile units, for approximately
$0.7 million in cash and approximately $0.1 million of assumed debt,
for total consideration of approximately $0.8 million. In April 1997,
the Company received the remaining 10% interest in MCN as partial
consideration for the sale of its investment in Mexico.
In August 1996, the Company acquired certain Signaling System 7
("SS7") assets of Pace Network Services, Inc. ("Pace"), a division of
Pace Alternative Communications, Inc. SS7 is used by local exchange
companies, long-distance carriers, wireless carriers and others to
signal between network elements, creating faster call set-up resulting
in a more efficient use of network resources. The Company paid cash
consideration of $1.6 million as of September 30, 1996 and an
additional $1.0 million in January 1997, based on the operating
results of the underlying business since the date of acquisition.
(5) Dispositions
(a) Fiscal 1998
On July 17, 1998, the Company entered into separate definitive
agreements to sell the capital stock of MCN and Nova-Net
Communications, Inc. ("Nova-Net"), two wholly
A-53
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(5) Dispositions (continued)
owned subsidiaries within the Company's Satellite Services operations.
The sale of MCN was completed on August 12, 1998 and, accordingly, the
Company's consolidated financial statements include the results of
operations of MCN through that date. The Company recorded a gain on
the sale of MCN of approximately $0.9 million during fiscal 1998. The
sale of Nova-Net was completed on November 18, 1998 and, accordingly,
the Company's consolidated financial statements include the results of
operations of Nova-Net through that date. The Company recorded a loss
on the sale of Nova-Net of approximately $0.2 million during the three
months ended December 31, 1998. The combined revenue, net loss or net
loss per share of MCN and Nova-Net do not represent a significant
portion of the Company's historical consolidated revenue, net loss or
net loss per share.
(b) Fiscal 1996
In October 1996, the Company sold its interest in its Phoenix network
joint venture to its venture partner, GST Telecommunications, Inc. The
Company received approximately $2.1 million in cash, representing $1.3
million of consideration for its 50% interest and $0.8 million for
equipment and amounts advanced to the joint venture. In addition, the
Company received equipment with a net book value of $2.4 million and
assumed liabilities of $0.3 million. A gain on sale of the joint
venture of approximately $0.8 million was recorded in the consolidated
financial statements during the three months ended December 31, 1996.
In December 1995, the Company received approximately $21.1 million as
partial payment for the sale of four of its teleports and certain
related assets, and entered into a management agreement with the
purchaser whereby the purchaser assumed control of the teleport
operations. Upon approval of the transaction by the Federal
Communications Commission ("FCC"), the Company completed the sale in
March 1996 and received an additional $0.4 million due to certain
closing adjustments, for total proceeds of $21.5 million. The Company
recognized a loss of approximately $1.1 million on the sale. Revenue
associated with these operations was approximately $2.5 million for
fiscal 1996. The Company has reported results of operations from these
assets through December 31, 1995.
(6) Short-term Investments Available for Sale
Short-term investments available for sale are comprised of the following:
December 31,
----------------------
1997 1998
-------- --------
(in thousands)
Certificates of deposit $ -- 31,000
Commercial paper 4,000 16,000
U.S. Treasury securities 108,281 5,000
-------- --------
$112,281 52,000
======== ========
A-54
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(6) Short-term Investments Available for Sale (continued)
At December 31, 1997 and 1998, the estimated fair value of the Company's
certificates of deposit, commercial paper and U.S. Treasury securities
approximated cost. All certificates of deposit, commercial paper and U.S.
Treasury securities mature within one year.
(7) Property and Equipment
Property and equipment, including assets held under capital leases, is
comprised of the following:
December 31,
-----------------------------
1997 1998
----------- -----------
(in thousands)
Land $ 709 709
Buildings and improvements 2,238 2,296
Furniture, fixtures and office equipment 42,295 123,108
Internal-use software costs 3,681 13,655
Machinery and equipment 12,600 20,998
Fiber optic equipment 181,000 259,015
Satellite equipment 29,760 32,418
Switch equipment 85,546 156,313
Fiber optic network 179,705 225,453
Site improvements 13,898 20,029
Service installation costs -- 20,679
Construction in progress 185,992 237,394
----------- -----------
737,424 1,112,067
Less accumulated depreciation (105,970) (177,933)
=========== ===========
$ 631,454 934,134
=========== ===========
Property and equipment includes approximately $237.4 million of equipment
which has not been placed in service at December 31, 1998, and accordingly,
is not being depreciated. The majority of this amount is related to
uninstalled transport and switch equipment and new network construction.
For fiscal 1996, the three months ended December 31, 1996, fiscal 1997 and
1998, the Company capitalized interest costs on assets under construction
of $4.9 million, $2.0 million, $3.2 million and $10.4 million,
respectively. Such costs are included in property and equipment as
incurred. The Company recognized interest expense of $85.7 million, $24.5
million, $117.5 million and $170.1 million for fiscal 1996, the three
months ended December 31, 1996, fiscal 1997 and 1998, respectively.
Also included in property and equipment at December 31, 1997 and 1998 are
unamortized costs associated with the development of internal-use computer
software of $2.3 million and $11.5
A-55
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(7) Property and Equipment (continued)
million, respectively. The Company capitalized $0.7 million, $0.1 million,
$2.4 million and $10.0 million of such costs during fiscal 1996, the three
months ended December 31, 1996, fiscal 1997 and 1998, respectively.
Certain of the assets described above have been pledged as security for
long-term debt and are held under capital leases at December 31, 1998. The
following is a summary of property and equipment held under capital leases:
December 31,
-------------------------
1997 1998
--------- ---------
(in thousands)
Machinery and equipment $ 3,926 7,072
Fiber optic equipment 6,314 798
Switch equipment 21,380 12,957
Fiber optic network 58,806 77,523
Construction in progress 17,895 --
--------- ---------
108,321 98,350
Less accumulated depreciation (8,409) (7,875)
========= =========
$ 99,912 90,475
========= =========
Amortization of capital leases is included in depreciation and amortization
in the Company's consolidated statements of operations for all periods
presented.
(8) Other Assets
Other assets are comprised of the following:
December 31,
-----------------------
1997 1998
-------- --------
(in thousands)
Deposits $ 2,429 17,035
Pace customer base 2,805 2,805
Collocation costs 2,998 5,472
Non-compete agreements 1,386 1,050
Right of entry costs 1,984 2,684
Other 588 2,486
-------- --------
12,190 31,532
Less accumulated amortization (3,124) (6,343)
======== ========
$ 9,066 25,189
======== ========
A-56
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(9) Capital Lease Obligations
The Company has payment obligations under various capital lease agreements
for equipment. Required payments due each year on or before December 31
under the Company's capital lease obligations are as follows (in
thousands):
1999 $ 14,406
2000 15,000
2001 17,098
2002 11,085
2003 11,008
Thereafter 82,607
--------
Total minimum lease payments 151,204
Less amounts representing interest (82,759)
--------
Present value of net minimum lease payments 68,445
Less current portion (5,086)
========
$ 63,359
========
(10) Long-term Debt
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1998
----------- -----------
(in thousands)
<S> <C> <C>
9 7/8% Senior discount notes of ICG Services, net of discount (a) $ -- 266,918
10% Senior discount notes of ICG Services, net of discount (b) -- 327,699
11 5/8% Senior discount notes of Holdings, net of discount (c) 109,436 122,528
121/2% Senior discount notes of Holdings, net of discount (d) 367,494 414,864
131/2% Senior discount notes of Holdings, net of discount (e) 407,409 465,886
Note payable with interest at the 90-day commercial paper rate plus 4
3/4%, paid in full on August 19, 1998 4,932 --
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 1,084
Other 90 65
----------- -----------
892,352 1,599,044
Less current portion (1,784) (46)
----------- -----------
$ 890,568 1,598,998
=========== ===========
</TABLE>
A-57
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(10) Long-term Debt (continued)
(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
$7.9 million, were approximately $242.1 million.
The 9 7/8% Notes are unsecured senior obligations of ICG Services that
mature on May 1, 2008, at a maturity value of $405.3 million. Interest
will accrue at 9 7/8% per annum, beginning May 1, 2003, and is payable
each May 1 and November 1, commencing November 1, 2003. The indenture
for the 9 7/8% Notes contains certain covenants which provide
limitations on indebtedness, dividends, asset sales and certain other
transactions.
The 9 7/8% Notes were originally recorded at approximately $250.0
million. The discount on the 9 7/8% Notes is being accreted through
May 1, 2003, the date on which the 9 7/8% Notes may first be redeemed.
The accretion of the discount and the amortization of the debt
issuance costs are included in interest expense in the accompanying
consolidated statements of operations.
(b) 10% Notes
On February 12, 1998, ICG Services completed a private placement of
10% Senior Discount Notes due 2008 (the "10% Notes") for gross
proceeds of approximately $300.6 million. Net proceeds from the
offering, after underwriting and other offering costs of approximately
$9.7 million, were approximately $290.9 million.
The 10% Notes are unsecured senior obligations of ICG Services that
mature on February 15, 2008, at a maturity value of $490.0 million.
Interest will accrue at 10% per annum, beginning February 15, 2003,
and is payable each February 15 and August 15, commencing August 15,
2003. The indenture for the 10% Notes contains certain covenants which
provide limitations on indebtedness, dividends, asset sales and
certain other transactions.
The 10% Notes were originally recorded at approximately $300.6
million. The discount on the 10% Notes is being accreted through
February 15, 2003, the date on which the 10% Notes may first be
redeemed. The accretion of the discount and the amortization of the
debt issuance costs are included in interest expense in the
accompanying consolidated statements of operations.
(c) 11 5/8% Notes
On March 11, 1997, Holdings completed a private placement (the "1997
Private Offering") of 11 5/8% Senior Discount Notes due 2007 (the "11
5/8% Notes") and 14% Exchangeable Preferred Stock Mandatorily
Redeemable 2008 (the "14% Preferred Stock") for gross
A-58
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(10) Long-term Debt (continued)
proceeds of $99.9 million and $100.0 million, respectively. Net
proceeds from the 1997 Private Offering, after costs of approximately
$7.5 million, were approximately $192.4 million.
The 11 5/8% Notes are unsecured senior obligations of Holdings
(guaranteed by ICG) that mature on March 15, 2007, at a maturity value
of $176.0 million. Interest will accrue at 11 5/8% per annum,
beginning March 15, 2002, and is payable each March 15 and September
15, commencing September 15, 2002. The indenture for the
11 5/8% Notes contains certain covenants which provide for limitations
on indebtedness, dividends, asset sales and certain other transactions
and effectively prohibit the payment of cash dividends.
The 11 5/8% Notes were originally recorded at approximately $99.9
million. The discount on the 11 5/8% Notes is being accreted through
March 15, 2002, the date on which the 11 5/8% Notes may first be
redeemed. The accretion of the discount and the amortization of the
debt issuance costs are included in interest expense in the
accompanying consolidated statements of operations.
(d) 12 1/2% Notes
On April 30, 1996, Holdings completed a private placement (the "1996
Private Offering") of 12 1/2% Senior Discount Notes due 2006 (the "12
1/2% Notes") and of 14 1/4% Exchangeable Preferred Stock Mandatorily
Redeemable 2007 (the "14 1/4% Preferred Stock") for gross proceeds of
$300.0 million and $150.0 million, respectively. Net proceeds from the
1996 Private Offering, after issuance costs of approximately $17.0
million, were approximately $433.0 million.
The 12 1/2% Notes are unsecured senior obligations of Holdings
(guaranteed by ICG and Holdings-Canada) that mature on May 1, 2006,
with a maturity value of $550.3 million. Interest will accrue at 12
1/2% per annum, beginning May 1, 2001, and is payable each May 1 and
November 1, commencing November 1, 2001. The indenture for the 12 1/2%
Notes contains certain covenants which provide for limitations on
indebtedness, dividends, asset sales and certain other transactions
and effectively prohibit the payment of cash dividends.
The 12 1/2% Notes were originally recorded at approximately $300.0
million. The discount on the 12 1/2% Notes is being accreted through
May 1, 2001, the date on which the 12 1/2% Notes may first be
redeemed. The accretion of the discount and the amortization of the
debt issuance costs are included in interest expense in the
accompanying consolidated statements of operations.
A-59
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(10) Long-term Debt (continued)
Approximately $35.3 million of the proceeds from the 1996 Private
Offering were used to redeem the 12% redeemable preferred stock of
Holdings (the "Redeemable Preferred Stock") issued in August 1995
($30.0 million), pay accrued preferred dividends ($2.6 million) and to
repurchase 916,666 warrants of the Company ($2.7 million) issued in
connection with the Redeemable Preferred Stock. The Company recognized
a charge to accretion and preferred dividends on preferred securities
of subsidiaries, net of minority interest in share of losses of
approximately $12.3 million for the excess of the redemption price of
the Redeemable Preferred Stock over the carrying amount at April 30,
1996, and recognized a charge to interest expense of approximately
$11.5 million for the payments made to noteholders with respect to
consents to amendments to the indenture governing the 13 1/2% Notes to
permit the 1996 Private Offering.
(e) 13 1/2% Notes
On August 8, 1995, Holdings completed a private placement (the "1995
Private Offering") through the issuance of 58,430 units (the "Units"),
each Unit consisting of ten $1,000, 13 1/2% Senior Discount Notes due
2005 (the "13 1/2% Notes") and warrants to purchase 33 common shares
of Holdings-Canada (the "Unit Warrants"). Net proceeds from the 1995
Private Offering, after issuance costs of approximately $14.0 million,
were approximately $286.0 million.
The 13 1/2% Notes are unsecured senior obligations of Holdings
(guaranteed by ICG and Holdings-Canada) that mature on September 15,
2005, with a maturity value of $584.3 million. Interest will accrue at
the rate of 13 1/2% per annum, beginning September 15, 2000, and is
payable in cash each March 15 and September 15, commencing March 15,
2001. The indenture for the 13 1/2% Notes contains certain covenants
which provide for limitations on indebtedness, dividends, asset sales
and certain other transactions and effectively prohibit the payment of
cash dividends.
The 13 1/2% Notes were originally recorded at approximately $294.0
million, which represents the $300.0 million in proceeds less the
approximate $6.0 million value assigned to the Unit Warrants, which is
included in additional paid-in capital. The discount on the 13 1/2%
Notes is being accreted over five years until September 15, 2000, the
date on which the 13 1/2% Notes may first be redeemed. The value
assigned to the Unit Warrants, representing additional debt discount,
is also being accreted over the five-year period. The accretion of the
total discount and the amortization of the debt issuance costs are
included in interest expense in the accompanying consolidated
statements of operations. Holdings may redeem the 13 1/2% Notes on or
after September 15, 2000, in whole or in part, at the redemption
prices set forth in the agreement, plus unpaid interest, if any, at
the date of redemption.
A-60
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(10) Long-term Debt (continued)
The Unit Warrants entitled the holder to purchase one common share of
Holdings-Canada, which was exchangeable into one share of ICG Common
Stock, through August 8, 2005 at the exercise price of $12.51 per
share. In connection with the Reorganization of Holdings-Canada, all
Unit Warrants outstanding are exchangeable only for shares of ICG
Common Stock on a one-for-one basis and are no longer exchangeable for
shares of Holdings-Canada.
(f) Subsequent to December 31, 1998
As of December 31, 1998, the Company's corporate headquarters
building, land and improvements (collectively, the "Corporate
Headquarters") were leased by the Company under an operating lease
from an unrelated third party. Subsequent to December 31, 1998, the
Company entered into a letter of intent to purchase the Corporate
Headquarters for approximately $43.7 million, which amount represents
historical cost and approximates fair value. The Company intends to
finance the purchase through the conversion of a $10.0 million
security deposit previously paid on the existing operating lease and
through a mortgage on the Corporate Headquarters' assets. Payments on
the mortgage will be due monthly through January 1, 2013, at an
initial interest rate of approximately 14% per annum.
Scheduled principal maturities of long-term debt as of December 31,
1998 are as follows (in thousands):
Fiscal year:
1999 $ 111
2000 50
2001 50
2002 50
2003 50
Thereafter 2,206,688
-----------
2,206,999
Less unaccreted discount (607,955)
Less current portion (46)
-----------
$ 1,598,998
===========
A-61
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(11) Redeemable Preferred Securities of Subsidiaries
Redeemable preferred stock of subsidiary is summarized as follows:
December 31,
-------------------
1997 1998
-------- --------
(in thousands)
14% Exchangeable preferred stock of Holdings,
mandatorily redeemable in 2008 (a) $108,022 124,867
14 1/4% Exchangeable preferred stock of Holdings,
mandatorily redeemable in 2007 (b) 184,420 213,443
-------- --------
$292,442 338,310
======== ========
(a) 14% Preferred Stock
In connection with the 1997 Private Offering, Holdings sold 100,000
shares of exchangeable preferred stock that bear a cumulative dividend
at the rate of 14% per annum. The dividend is payable quarterly in
arrears each March 15, June 15, September 15, and December 15, and
commenced June 15, 1997. Through March 15, 2002, the dividend is
payable at the option of Holdings in cash or additional shares of 14%
Preferred Stock. Holdings may exchange the 14% Preferred Stock into
14% Senior Subordinated Exchange Debentures at any time after the
exchange is permitted by certain indenture restrictions. The 14%
Preferred Stock is subject to mandatory redemption on March 15, 2008.
(b) 14 1/4% Preferred Stock
In connection with the 1996 Private Offering, Holdings sold 150,000
shares of exchangeable preferred stock that bear a cumulative dividend
at the rate of 14 1/4% per annum. The dividend is payable quarterly in
arrears each February 1, May 1, August 1 and November 1, and commenced
August 1, 1996. Through May 1, 2001, the dividend is payable, at the
option of Holdings, in cash or additional shares of 14 1/4% Preferred
Stock. Holdings may exchange the 14 1/4% Preferred Stock into 14 1/4%
Senior Subordinated Exchange Debentures at any time after the exchange
is permitted by certain indenture restrictions. The 14 1/4% Preferred
Stock is subject to mandatory redemption on May 1, 2007.
(c) 6 3/4% Preferred Securities
On September 24, 1997 and October 3, 1997, ICG Funding completed a
private placement of 6 3/4% Exchangeable Limited Liability Company
Preferred Securities Mandatorily Redeemable 2009 (the "6 3/4%
Preferred Securities") for gross proceeds of $132.25 million. Net
proceeds from the private placement, after offering costs of
approximately $4.7 million, were approximately $127.6 million.
Restricted cash at December 31, 1998 of $16.9 million consists of the
proceeds from the private placement which are designated for
A-62
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(11) Redeemable Preferred Securities of Subsidiaries (continued)
the payment of cash dividends on the 6 3/4% Preferred Securities
through November 15, 2000.
The 6 3/4% Preferred Securities consist of 2,645,000 exchangeable
preferred securities of ICG Funding that bear a cumulative dividend at
the rate of 6 3/4% per annum. The dividend is paid quarterly in
arrears each February 15, May 15, August 15 and November 15, and
commenced November 15, 1997. The dividend is payable in cash through
November 15, 2000 and, thereafter, in cash or shares of ICG Common
Stock, at the option of ICG Funding. The 6 3/4% Preferred Securities
are exchangeable, at the option of the holder, at any time prior to
November 15, 2009 into shares of ICG Common Stock at an exchange rate
of 2.0812 shares of ICG Common Stock per preferred security, or
$24.025 per share, subject to adjustment. ICG Funding may, at its
option, redeem the 6 3/4% Preferred Securities at any time on or after
November 18, 2000. Prior to that time, ICG Funding may redeem the 6
3/4% Preferred Securities if the current market value of ICG Common
Stock equals or exceeds, for at least 20 days of any 30-day trading
period, 160% of the exchange price prior to November 15, 1999, and
150% of the exchange price from November 16, 1999 through November 15,
2000. The 6 3/4% Preferred Securities are subject to mandatory
redemption on November 15, 2009.
On February 13, 1998, ICG made a capital contribution of 126,750
shares of ICG Common Stock to ICG Funding. Immediately thereafter, ICG
Funding sold the contributed shares to unrelated third parties for
proceeds of approximately $3.4 million. ICG Funding recorded the
contribution of the ICG Common Stock as additional paid-in capital at
the then fair market value and, consequently, no gain or loss was
recorded by ICG Funding on the subsequent sale of those shares.
Also, on February 13, 1998, ICG Funding used the remaining proceeds
from the private placement of the 6 3/4% Preferred Securities, which
were not restricted for the payment of cash dividends, along with the
proceeds from the sale of the contributed ICG Common Stock to purchase
approximately $112.4 million of ICG Communications, Inc. Preferred
Stock ("ICG Preferred Stock") which pays dividends each February 15,
May 15, August 15 and November 15 in additional shares of ICG
Preferred Stock through November 15, 2000. Subsequent to November 15,
2000, dividends on the ICG Preferred Stock are payable in cash or
shares of ICG Common Stock, at the option of ICG. The ICG Preferred
Stock is exchangeable, at the option of ICG Funding, at any time prior
to November 15, 2009 into shares of ICG Common Stock at an exchange
rate based on the exchange rate of the 6 3/4% Preferred Securities and
is subject to mandatory redemption on November 15, 2009. The ICG
Preferred Stock has been eliminated in consolidation of the Company's
consolidated financial statements.
The accreted value of the 6 3/4% Preferred Securities is included in
Company-obligated mandatorily redeemable preferred securities of
subsidiary limited liability company which
A-63
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(11) Redeemable Preferred Securities of Subsidiaries (continued)
holds solely Company preferred stock in the accompanying consolidated
balance sheet at December 31, 1998.
Included in accretion and preferred dividends on preferred securities
of subsidiaries, net of minority interest in share of losses is
approximately $27.0 million, $5.8 million, $39.8 million and $55.2
million for fiscal 1996, the three months ended December 31, 1996, and
fiscal 1997 and 1998, respectively, associated with the accretion of
issuance costs, discount and preferred security dividend accruals for
the 6 3/4% Preferred Securities, the 14% Preferred Stock, the 14 1/4%
Preferred Stock and the Redeemable Preferred Stock (issued in
connection with the 1995 Private Offering and redeemed in April 1996).
These costs are partially offset by the minority interest share in
losses of subsidiaries of approximately $1.6 million, $0.8 million and
$1.7 million for fiscal 1996, the three months ended December 31,
1996, and fiscal 1997, respectively. There was no reported minority
interest share in losses of subsidiaries for fiscal 1998.
(12) Stockholders' Equity (Deficit)
(a) Stock Options and Employee Stock Purchase Plan
In fiscal years 1991, 1992 and 1993, the Company's Board of Directors
approved incentive stock option plans and replenishments to those
plans which provide for the granting of options to directors,
officers, employees and consultants of the Company to purchase
285,000, 724,400 and 1,692,700 shares, respectively, of the Company's
Common Stock, with exercise prices between 80% and 100% of the fair
value of the shares at the date of grant. A total of 1,849,600 options
have been granted under these plans with exercise prices ranging from
approximately $2.92 to $14.03.
Compensation expense has been recorded for options granted at an
exercise price below the fair market value of the Company's Common
Stock at the date of grant, pursuant to the provisions of APB 25. The
options granted under these plans are subject to various vesting
requirements and expire in five and ten years from the date of grant.
The NETCOM 1993 Stock Option Plan was assumed by ICG at the time of
the merger, and approved by ICG's Board of Directors as an incentive
and non-qualified stock option plan which provides for the granting of
options to certain directors, officers and employees to purchase
2,720,901 shares of ICG Common Stock. A total of 2,224,273 options,
net of 2,155,856 cancellations, have been granted under this plan at
exercise prices ranging from $0.65 to $92.14, none of which were less
than 100% of the fair market value of the shares underlying options on
the date of grant, and accordingly, no compensation expense was
recorded for these options under APB 25. The options granted under
this plan are subject to various vesting requirements, generally three
and five years, and expire within ten years from the date of grant.
A-64
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
From fiscal 1994 through fiscal 1998, the Company's Board of Directors
approved incentive and non-qualified stock option plans and
replenishments to those plans which provide for the granting of
options to certain directors, officers and employees to purchase
2,536,000 shares of the Company's Common Stock under the 1994 plan, an
aggregate of 2,700,000 shares of the Company's Common Stock under the
1995 and 1996 plans and 3,400,000 shares of ICG Common Stock under the
1998 plan. A total of 6,922,696 options, net of 4,587,300
cancellations, have been granted under these plans at original
exercise prices ranging from $7.94 to $35.75, none of which were less
than 100% of the fair market value of the shares underlying options on
the date of grant, and accordingly, no compensation expense was
recorded for these options under APB 25. The options granted under
these plans are subject to various vesting requirements and expire in
five and ten years from the date of grant.
In order to continue to provide non-cash incentives and retain key
employees, all employee stock options outstanding on April 16, 1997
with exercise prices at or in excess of $15.875 were canceled by the
Stock Option Committee of the Company's Board of Directors and
regranted with an exercise price of $10.375, the closing price of ICG
Common Stock on the Nasdaq National Market on April 16, 1997.
Approximately 598,000 options, with original exercise prices ranging
from $15.875 to $26.25, were canceled and regranted on April 16, 1997.
For the same business purpose, all employee stock options outstanding
on September 18, 1998 with exercise prices at or in excess of $22.00
were canceled by the Stock Option Committee of the Company's Board of
Directors and regranted with an exercise price of $16.875, the closing
price of ICG Common Stock on the Nasdaq National Market on September
18, 1998. A total of 2,413,260 options, with original exercise prices
ranging from $22.00 to $35.75 were canceled and regranted on September
18, 1998. There was no effect on the Company's consolidated financial
statements as a result of the cancellation and regranting of options.
In October 1996, the Company established an Employee Stock Purchase
Plan whereby employees can elect to designate 1% to 30% of their
annual salary to be used to purchase shares of ICG Common Stock, up to
a limit of $25,000 in ICG Common Stock each year, at a 15% discount to
fair market value. Stock purchases occur four times a year on February
1, May 1, August 1 and November 1, with the price per share equaling
the lower of 85% of the market price at the beginning or end of the
offering period. The Company is authorized to issue a total of
1,000,000 shares of ICG Common Stock to participants in the plan.
During fiscal 1997 and 1998, the Company sold 109,213 and 111,390
shares of ICG Common Stock, respectively, to employees under this
plan.
During fiscal 1994, NETCOM's Board of Directors approved and adopted
an Employee Stock Purchase Plan which was dissolved upon NETCOM's
merger with ICG. Shares purchased under this plan were converted into
an estimated 119,000 shares of ICG Common Stock.
A-65
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
The Company recorded compensation expense in connection with its
stock-based employee and non-employee director compensation plans of
$0.1 million for fiscal 1996 pursuant to the intrinsic value based
method of APB 25. Had compensation expense for the Company's plans
been determined based on the fair market value of the options at the
grant dates for awards under those plans consistent with the
provisions of SFAS 123, the Company's pro forma net loss and loss per
share would have been as presented below. Pro forma disclosures
include the effects of employee and non-employee director stock
options granted during fiscal 1996, the three months ended December
31, 1996, and fiscal 1997 and 1998.
<TABLE>
<CAPTION>
Fiscal year Three months Fiscal years ended
ended ended December 31,
September 30, December 31, ---------------------------
1996 1996 1997 1998
---------- ---------- ---------- ----------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net loss:
As reported $ (228,372) (61,313) (360,735) (418,045)
Pro forma (242,974) (64,985) (369,677) (439,362)
Net loss per share -
basic and diluted:
As reported $ (6.19) (1.47) (8.49) (9.25)
Pro forma (6.59) (1.56) (8.70) (9.72)
</TABLE>
The fair value of each option grant to employees and non-employee
directors other than NETCOM employees and non-employee directors was
estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions: an expected
option life of three years for directors, officers and other
executives, and two years for other employees, for all periods;
expected volatility of 50% for fiscal 1996, the three months ended
December 31, 1996 and fiscal 1997, and 70% for fiscal 1998; and
risk-free interest rates ranging from 5.03% to 7.42% for fiscal 1996
and the three months ended December 31, 1996, 5.61% to 6.74% for
fiscal 1997 and 4.09% to 5.77% for fiscal 1998. Risk-free interest
rates, as were currently available on the grant date, were assigned to
each granted option based on the zero-coupon rate of U.S. Treasury
bills to be held for the same period as the assumed option life. Since
the Company does not anticipate issuing any dividends on the ICG
Common Stock, the dividend yield for all options granted was assumed
to be zero. The weighted average fair market value of combined ICG and
NETCOM options granted during fiscal 1996, the three months ended
December 31, 1996, and fiscal 1997 and 1998 was approximately $11.10,
$9.48, $10.31 and $13.23 per option, respectively.
A-66
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
As options outstanding at December 31, 1998 will continue to vest in
subsequent periods, additional options are expected to be awarded
under existing and new plans; accordingly, the above pro forma results
are not necessarily indicative of the impact on net loss and net loss
per share in future periods.
The following table summarizes the status of the Company's stock-based
compensation plans:
<TABLE>
<CAPTION>
Shares underlying Weighted average Options
options exercise price exercisable
----------------- ---------------- --------------
(in thousands) (in thousands)
<S> <C> <C> <C>
Outstanding at October 1, 1995 4,828 $ 14.92 1,230
Granted 2,054 18.30
Exercised (415) 7.35
Canceled (631) 24.73
------
Outstanding at September 30, 1996 5,836 15.49 2,771
Granted 335 18.59
Exercised (31) 8.95
Canceled (56) 12.65
------
Outstanding at December 31, 1996 6,084 15.68 3,476
Granted 3,377 14.94
Exercised (709) 8.13
Canceled (2,604) 25.32
------
Outstanding at December 31, 1997 6,148 11.97 3,532
Granted 5,968 23.34
Exercised (1,395) 12.08
Canceled (3,941) 25.62
------
Outstanding at December 31, 1998 6,780 13.95 3,299
======
</TABLE>
A-67
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
The following table summarizes information about options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
-------------------------------------------------------------- --------------------------------------------
Weighted average
Range of remaining Weighted average Weighted average
Exercise Price Number outstanding contractual life exercise price Number exercisable exercise price
-------------------- ------------------ ------------------- --------------------- ---------------------- -------------------
(in thousands) (in years) (in thousands)
<S> <C> <C> <C> <C> <C>
$2.60 - 7.94 1,558 6.40 $ 7.91 1,558 $ 7.91
8.50 - 14.58 1,714 7.15 11.07 1,099 11.31
14.93 - 16.75 381 8.37 15.67 296 15.67
16.88 - 46.65 3,127 9.37 18.32 346 21.02
================== ======================
6,780 3,299
================== ======================
</TABLE>
(b) Warrants
Between fiscal 1993 and fiscal 1995, the Company issued a series of
warrants at varying prices to purchase common shares of
Holdings-Canada which, after August 5, 1996, were exchangeable on a
one-for-one basis for Class A Shares of ICG Common Stock. The
following table summarizes warrant activity for fiscal 1996, the three
months ended December 31, 1996, and fiscal 1997 and 1998:
Outstanding Exercise
warrants price range
-------------- ------------------
(in thousands)
Outstanding, October 1, 1995 5,502 $ 7.38 - 21.51
Exercised (1,854) 7.94 - 8.73
Repurchased (917) 2.52 - 3.21
--------------
Outstanding, September 30, 1996 2,731 7.38 - 21.51
Exercised (100) 18.00
Canceled (8) 7.38 - 11.80
--------------
Outstanding, December 31, 1996 2,623 7.38 - 21.51
Exercised (599) 7.38 - 14.50
Canceled (50) 14.50
--------------
Outstanding, December 31, 1997 1,974 12.51 - 21.51
Exercised (113) 12.51 - 21.51
Canceled (9) 20.01 - 21.51
==============
Outstanding, December 31, 1998 1,852 12.51
==============
A-68
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
All warrants outstanding at December 31, 1998 have an expiration date
of August 6, 2005 and, in connection with the Reorganization of
Holdings-Canada, are exchangeable only for shares of ICG Common Stock
on a one-for-one basis.
(c) Preferred Stock
The Company is authorized to issue 1,000,000 shares of preferred stock
and 50,000 shares of ICG Preferred Stock. At December 31, 1998, the
Company had no shares of preferred stock outstanding. All of the
issued and outstanding shares of ICG Preferred Stock at December 31,
1998 are held by ICG Funding.
(13) Related Party Transactions
At December 31, 1997, the Company had $10.0 million outstanding under a
promissory note from ChoiceCom, which was payable on demand at LIBOR plus
2% per annum (7.97% at December 31, 1997). During fiscal 1998, the Company
advanced another $5.0 million to ChoiceCom under a separate promissory note
with similar terms. Additionally, the Company agreed to perform certain
administrative services for ChoiceCom and make certain payments to vendors
on behalf of ChoiceCom, for which such services and payments were to be
conducted on an arm's length basis and reimbursed by ChoiceCom. At December
31, 1997, amounts outstanding under this arrangement and included in notes
receivable from affiliate were approximately $9.4 million. All amounts due
from ChoiceCom were included in the purchase price of the Company's
acquisition of ChoiceCom on December 31, 1998.
During fiscal 1996, Holdings-Canada and International Communications
Consulting, Inc. ("ICC") entered into a consulting agreement whereby ICC
will provide various consulting services to the Company through December
1999 for approximately $4.2 million to be paid during the term of the
agreement. During fiscal 1996, the three months ended December 31, 1996,
fiscal 1997 and 1998, the Company paid approximately $1.3 million, $0.3
million, $1.1 million and $1.0 million, respectively, related to this
consulting agreement. William W. Becker, a stockholder and former director
of the Company, is President and Chief Executive Officer of ICC.
(14) Commitments and Contingencies
(a) Network Construction
In March 1996, the Company and Southern California Edison Company
("SCE") 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 will
A-69
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
be entitled to receive an annual fee for ten years, certain fixed
quarterly payments, a quarterly payment equal to a percentage of
certain network revenue, and certain other installation and fiber
connection fees. The aggregate fixed payments remaining under the
agreement totaled approximately $135.3 million at December 31, 1998.
The agreement has been accounted for as a capital lease in the
accompanying consolidated balance sheets.
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 completed in
1999. The Company is responsible for payment on the construction as
segments of the network are completed and has incurred approximately
$19.2 million as of December 31, 1998, with remaining costs
anticipated to be approximately $15.8 million. Additionally, the
Company has committed to purchase $6.0 million in network capacity
from Qwest prior to the end of 1999.
(b) Network Capacity Commitments
In November 1998, the Company entered into two service agreements with
WorldCom Network Services, Inc. ("WorldCom"). Both of the agreements
have three-year terms and were effective in September 1998. Under the
Telecom Services Agreement, WorldCom provides, at designated rates,
switched telecommunications services and other related services to the
Company, including termination services, toll-free origination,
switched access, dedicated access and travel card services. Under the
Carrier Digital Services Agreement, WorldCom provides the Company, at
designated rates, with the installation and operation of dedicated
digital telecommunications interexchange services, local access and
other related services, which the Company believes expedites service
availability to its customers. Both agreements require that the
Company provide WorldCom with certain minimum monthly revenue, which
if not met, would require payment by the Company for the difference
between the minimum commitment and the actual monthly revenue.
Additionally, both agreements limit the Company's ability to utilize
vendors other than WorldCom for certain telecommunications services
specified in the agreements. The Company's policy is to accrue and
include in operating costs the effect of any shortfall in minimum
revenue commitments under these agreements in the period in which the
shortfall occurred. The Company has successfully achieved all minimum
revenue commitments to WorldCom under these agreements through
December 31, 1998.
(c) 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
A-70
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
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 $80.6 million at December 31, 1998.
(d) Operating Leases
The Company leases office space and equipment under non-cancelable
operating leases. Lease expense was approximately $4.9 million, $1.2
million, $11.8 million and $27.0 million for fiscal 1996, the three
months ended December 31, 1996 and fiscal 1997 and 1998, respectively.
Minimum lease payments due each year on or before December 31 under
the Company's operating leases are as follows (in thousands):
1999 $ 30,327
2000 28,734
2001 25,509
2002 19,890
2003 16,384
Thereafter 64,802
=========
$185,646
=========
(e) Transport and Termination Charges
The Company has recorded revenue of approximately $4.9 million and
$58.3 million for fiscal 1997 and 1998, respectively, for reciprocal
compensation relating to the transport and termination of local
traffic to ISPs from customers of incumbent local exchange carriers
("ILECs") pursuant to various interconnection agreements. The ILECs
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 29 states that ISP traffic is subject to the payment of
reciprocal compensation under interconnection agreements. On February
25, 1999, the FCC issued a decision that ISP-bound traffic is largely
jurisdictionally interstate traffic. The decision relies on the
long-standing federal policy that ISP traffic, although
jurisdictionally interstate, is treated as though it is local traffic
for pricing purposes. The decision also emphasizes that because there
are no federal rules governing intercarrier compensation for ISP
traffic, the determination as to whether such traffic is subject to
reciprocal compensation under the terms of interconnection agreements
properly is made by the state
A-71
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
commissions and that carriers are bound by their interconnection
agreements and state commission decisions regarding the payment of
reciprocal compensation for ISP traffic. The FCC has initiated a
rulemaking proceeding regarding the adoption of prospective federal
rules for intercarrier compensation for ISP traffic. In its notice of
rulemaking, the FCC expresses its preference that compensation rates
for this traffic continue to be set by negotiations between carriers,
with disputes resolved by arbitrations conducted by state commissions
pursuant to the Telecommunications Act of 1996 (the
"Telecommunications Act").
On March 4, 1999, the Alabama Public Service Commission (the "Alabama
PSC") issued a decision that found that reciprocal compensation is
owed for Internet traffic under four CLEC interconnection agreements
with BellSouth Corporation ("BellSouth"), which agreements were at
issue in the proceeding. With respect to the Company's interconnection
agreement, which was also at issue, the state commission interpreted
certain language in the Company's agreement to exempt ISP-bound
traffic from reciprocal compensation under certain conditions. The
Company believes that the Alabama PSC failed to consider the intent of
the parties in negotiating and executing the Company's interconnection
agreement, the specific language of the Company's interconnection
agreement and the impact of Alabama PSC and FCC policies, and thereby
misinterpreted the agreement. The Company intends to file a request
with the Alabama PSC by April 1, 1999 seeking determination that the
ruling with respect to the Company's agreement be reconsidered, and
that the Company should be treated the same as the other CLECs that
participated in the proceeding and for which the Alabama PSC ordered
the payment of reciprocal compensation. While the Company intends to
pursue vigorously a petition for reconsideration with the Alabama PSC,
and if the Company deems it necessary, judicial review, the Company
cannot predict the final outcome of this issue.
The Company has also recorded revenue of approximately $19.1 million
for fiscal 1998, related to other transport and termination charges to
the ILECs, pursuant to the Company's interconnection agreements with
these ILECs. Included in the Company's trade receivables at December
31, 1997 and 1998 are $4.3 million and $72.8 million, respectively,
for all receivables related to transport and termination charges. The
receivables balance at December 31, 1998 is net of an allowance of
$5.6 million for disputed amounts.
Although the Company's interconnection agreement with BellSouth has
expired, the Company has received written notification from BellSouth
that the Company may continue billing BellSouth under the pricing
terms within the expired interconnection agreement, until such
agreement is renegotiated or arbitrated by the relevant state
commissions. The Company's remaining interconnection agreements expire
in 1999 and 2000. While the Company believes that all revenue recorded
through December 31, 1998 is collectible and that future revenue from
transport and termination charges billed under the Company's current
interconnection agreements will be realized, there can be no assurance
that future
A-72
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
regulatory and judicial rulings will be favorable to the Company, that
the Alabama PSC will reconsider its ruling, or that different pricing
plans for transport and termination charges between carriers will not
be adopted when the Company's interconnection agreements are
renegotiated or as a result of the FCC's rulemaking proceeding on
future compensation methods. In fact, the Company believes that
different pricing plans will be considered and adopted, and although
the Company expects that revenue from transport and termination
charges likely will decrease as a percentage of total revenue from
local services in periods subject to future interconnection
agreements, the Company's local termination services still will be
required by the ILECs and must be provided under the
Telecommunications Act, and likely will result in increasing volume in
minutes due to the growth of the Internet and related services
markets. The Company expects to negotiate reasonable compensation and
collection terms for local termination services, although there is no
assurance that such compensation will remain consistent with current
levels.
(f) Litigation
On April 4, 1997, certain shareholders of Zycom 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 plaintiffs were
denied class certification by the trial court and this decision has
been appealed. Trial has been tentatively set for August 1999. The
Company is vigorously defending the claims. While it is not possible
to predict the outcome of this litigation, management believes these
proceedings will not have a material adverse effect on the Company's
financial condition, results of operations or cash flows.
The Company is a party to certain other litigation which has arisen in
the ordinary course of business. In the opinion of management, the
ultimate resolution of these matters will not have a material adverse
effect on the Company's financial condition, results of operations or
cash flows.
(15) Business Units
The Company conducts transactions with external customers through the
operations of its Telecom Services, Network Services and Satellite Services
business units. Shared administrative services are provided to the business
units by Corporate Services. Corporate Services consists of the operating
activities of ICG Communications, Inc., ICG Funding, LLC, ICG Canadian
Acquisition, Inc., ICG Holdings (Canada) Co., ICG Holdings, Inc. and ICG
Services, Inc., which primarily hold securities and provide certain legal,
accounting and finance, personnel and other administrative support services
to the business units.
A-73
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(15) Business Units (continued)
Direct and certain indirect costs incurred by Corporate Services on behalf
of the business units are allocated among the business units based on the
nature of the underlying costs. Transactions between the business units for
services performed in the normal course of business are recorded at amounts
which are intended to approximate fair value.
Set forth below are revenue, EBITDA (before nonrecurring charges), which
represents the measure of operating performance used by management to
evaluate operating results, depreciation and amortization, interest
expense, total assets and capital expenditures of continuing operations for
each of the Company's business units and for Corporate Services. As
described in note 3, the operating results of the Company reflect the
operations of Zycom and NETCOM as discontinued for all periods presented.
<TABLE>
<CAPTION>
Fiscal year Three months ended Fiscal years ended
ended December 31, December 31,
September 30, ------------------------- -------------------------
1996 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenue:
Telecom Services $ 72,815 12,743 27,307 149,358 305,612
Network Services 61,080 15,826 16,460 69,881 62,535
Satellite Services 21,297 6,168 6,188 29,986 40,451
Elimination of intersegment revenue (1,049) (193) (478) (4,203) (10,979)
--------- --------- --------- --------- ---------
Total revenue $ 154,143 34,544 49,477 245,022 397,619
========= ========= ========= ========= =========
EBITDA (before nonrecurring charges) (a):
Telecom Services $ (19,902) (4,462) (10,924) (92,053) (19,995)
Network Services (2,417) (423) 295 (544) (3,245)
Satellite Services (2,999) (1,371) (448) 74 7,088
Corporate Services (17,953) (3,996) (5,682) (27,811) (20,909)
Elimination (215) (24) (117) (825) (3,692)
--------- --------- --------- --------- ---------
Total EBITDA (before nonrecurring charges) $ (43,486) (10,276) (16,876) (121,159) (40,753)
========= ========= ========= ========= =========
Depreciation and amortization (b):
Telecom Services $ 21,295 2,871 7,442 45,798 86,775
Network Services 1,086 145 441 2,110 2,305
Satellite Services 4,809 1,272 1,133 4,462 7,314
Corporate Services 2,447 444 750 3,744 4,286
Eliminations 393 101 (75) 387 865
--------- --------- --------- --------- ---------
Total depreciation and amortization $ 30,030 4,833 9,691 56,501 101,545
========= ========= ========= ========= =========
(Continued)
</TABLE>
A-74
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(15) Business Units (continued)
<TABLE>
<CAPTION>
Fiscal year Three months ended Fiscal years ended
ended December 31, December 31,
September 30, --------------------------- ---------------------------
1996 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Interest expense (b):
Telecom Services $ 6,814 2,432 1,744 11,996 2,693
Network Services 240 148 -- 6 23
Satellite Services 175 52 13 -- 88
Corporate Services 78,485 12,583 22,697 105,518 167,323
----------- ----------- ----------- ----------- -----------
Total interest expense $ 85,714 15,215 24,454 117,520 170,127
=========== =========== =========== =========== ===========
Total assets:
Telecom Services (c) $ 349,786 218,579 400,003 663,864 1,135,937
Network Services 25,994 23,214 33,308 31,911 34,378
Satellite Services (c) 46,087 56,498 46,212 46,797 46,760
Corporate Services (c) 761,720 307,188 709,412 353,898 376,796
Eliminations (253,478) (28,312) (254,107) 6,062 (22,689)
Net current assets of discontinued
operations (d) 54,226 131,902 54,481 38,331 --
Net non-current assets of discontinued
operations 97,561 59,850 97,425 76,577 54,243
----------- ----------- ----------- ----------- -----------
Total assets $ 1,081,896 768,919 1,086,734 1,217,440 1,625,425
=========== =========== =========== =========== ===========
Capital expenditures of continuing operations (e):
Telecom Services $ 159,997 24,036 67,192 252,008 357,991
Network Services 2,983 279 764 1,577 1,804
Satellite Services 11,442 1,484 2,020 5,901 11,107
Corporate Services 2,728 1,108 438 10,384 960
Eliminations (215) (25) (117) (1,074) (2,916)
----------- ----------- ----------- ----------- -----------
Total capital expenditures of
continuing operations $ 176,935 26,882 70,297 268,796 368,946
=========== =========== =========== =========== ===========
</TABLE>
(a) EBITDA (before nonrecurring charges) consists of net loss from
continuing operations before interest, income taxes, depreciation and
amortization, provision for impairment of long-lived assets, net loss
(gain) on disposal of long-lived assets, restructuring costs, other
expense, net and accretion and preferred dividends on preferred
securities of subsidiaries, or simply, revenue less operating costs
and selling, general and
A-75
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(15) Business Units (continued)
administrative expenses. EBITDA (before nonrecurring charges) is
presented as the Company's measure of operating performance because it
is a measure commonly used in the telecommunications industry. EBITDA
(before nonrecurring charges) is presented to enhance an understanding
of the Company's operating results and is not intended to represent
cash flows or results of operations in accordance with generally
accepted accounting principles ("GAAP") for the periods indicated.
EBITDA (before nonrecurring charges) is not a measurement under GAAP
and is not necessarily comparable with similarly titled measures of
other companies.
(b) Although not included in EBITDA (before nonrecurring charges), which
represents the measure of operating performance used by management to
evaluate operating results, the Company has supplementally provided
depreciation and amortization and interest expense for each of the
Company's business units and Corporate Services. Interest expense
excludes amounts charged for interest on outstanding cash advances and
expense allocations among the business units and Corporate Services.
(c) Total assets of Telecom Services, Satellite Services and Corporate
Services excludes investments in consolidated subsidiaries which
eliminate in consolidation.
(d) At December 31, 1998, the Company had net current liabilities of
discontinued operations of $23.3 million, and accordingly, such amount
was not included within net current assets of discontinued operations
on that date.
(e) Capital expenditures include assets acquired under capital leases and
excludes payments for construction of the Company's corporate
headquarters. (16)
(16) Provision for Impairment of Long-Lived Assets
For fiscal 1997, provision for impairment of long-lived assets includes the
impairment of the Company's Corporate Services investments in StarCom
International Optics Corporation, Inc. ("StarCom") and Zycom of
approximately $5.2 million and $2.7 million, respectively, and the
Company's Satellite Services investments in MCN and Nova-Net of
approximately $2.9 million and $0.9 million, respectively. The Company
recorded its impairment in the investment in StarCom upon notification by a
senior secured creditor of StarCom that it intended to foreclose on its
collateral in StarCom, which subsequently caused the bankruptcy of StarCom.
Based on circumstances of continuing net operating losses and management's
assessment of the estimated fair value of related long-lived assets at
December 31, 1997, the Company recorded an impairment of its investments in
Zycom, MCN and Nova-Net.
For fiscal 1996, provision for impairment of long-lived assets includes the
Company's Telecom Services investments in the Phoenix and Melbourne
networks of approximately $5.8 million and $2.7 million, respectively, and
the Company's Satellite Services investment in its subsidiary in Mexico of
approximately $0.2 million. The provision for impairment of long-lived
assets was
A-76
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(16) Provision for Impairment of Long-Lived Assets (continued)
based on circumstances of continuing net operating losses and management's
assessment of the estimated fair value of related long-lived assets at
September 30, 1996. Additionally, the Company provided an allowance for a
note receivable from NovoComm, Inc. of approximately $1.3 million based on
management's assessment at September 30, 1996 of the collectibility of
amounts due.
(17) Restructuring Costs
During fiscal 1998, the Company completed a decentralization of the
Company's Network Services business unit. The Company recorded
approximately $0.6 million in restructuring costs, consisting primarily of
severance costs, resulting from the decentralization.
Also during fiscal 1998, the Company recorded approximately $1.5 million of
restructuring costs associated with a combined restructuring plan for
Telecom Services and Corporate Services, which was designed to support the
Company's increased strategic focus on its ISP customer base, as well as to
improve the efficiency of operations and general and administrative support
functions. Restructuring costs under this plan include severance and other
employee benefit costs. At December 31, 1998, approximately $0.6 million
remains in accrued liabilities related to the Telecom Services and
Corporate Services restructuring plan, which is expected to be paid during
the first quarter of 1999.
Following the Company's acquisition of NikoNET in July 1998, the Company
closed a regional facility of a newly acquired subsidiary of NikoNET.
Restructuring costs, consisting primarily of severance costs, of
approximately $0.2 million were recorded as a result of the facility
closure during fiscal 1998. Approximately $0.2 million remains in accrued
liabilities at December 31, 1998 related to the facility closure.
(18) Income Taxes
The components of income tax benefit for fiscal 1996 are as follows (in
thousands):
Current income tax expense $ (198)
Deferred income tax benefit 5,329
-------
Total $ 5,131
=======
Current income tax expense of $0.2 million and $0.1 million for fiscal 1996
and 1998, respectively, represents state income tax relating to operations
of a subsidiary company in a state requiring a separate entity tax return.
Accordingly, this entity's taxable income cannot be offset by the Company's
consolidated net operating loss carryforwards. During fiscal 1996, the
deferred tax liability was adjusted for the effects of certain changes in
estimated lives of property and equipment as discussed in note 2. As a
result, the Company recognized an income tax benefit of $5.3 million. No
income tax expense or benefit was recorded in the three months ended
December 31, 1996 or fiscal 1997.
A-77
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(18) Income Taxes (continued)
Income tax benefit differs from the amounts computed by applying the U.S.
federal income tax rate to loss before income taxes primarily because the
Company has not recognized the income tax benefit of certain of its net
operating loss carryforwards and other deferred tax assets due to the
uncertainty of realization.
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1998
--------- ---------
(in thousands)
<S> <C> <C>
Deferred income tax liabilities:
Property and equipment, due to excess
Purchase price of tangible assets and
differences in depreciation for book and
tax purposes $ 6,254 10,173
--------- ---------
Deferred income tax assets:
Net operating loss carryforwards (141,185) (247,126)
Accrued interest on high yield debt obligations
deductible when paid (72,330) (108,895)
Accrued expenses not currently deductible for tax
purposes, including deferred revenue (7,968) (9,275)
Less valuation allowance 215,229 355,123
--------- ---------
Deferred income tax assets (6,254) (10,173)
--------- ---------
Net deferred income tax liability $ -- --
========= =========
</TABLE>
As of December 31, 1998, the Company has federal and foreign net operating
loss carryforwards ("NOLs") of approximately $617.8 million and $35.0
million, respectively, which expire in varying amounts through 2019.
However, due to the provisions of Section 382, Section 1502 and certain
other provisions of the Internal Revenue Code (the "Code"), the utilization
of these NOLs will be limited. The Company is also subject to certain state
income tax laws, which will also limit the utilization of NOLs. As a result
of ICG's merger with NETCOM, which created a change in ownership of NETCOM
of greater than 50%, the NOLs generated by NETCOM prior to January 21, 1998
that can be used to reduce future taxable income are limited to
approximately $15.0 million per year, before realization of unrecognized
built-in gains.
A valuation allowance has been provided for the deferred tax asset relating
to the Company's NOLs, as management is not presently able to determine
when the Company will generate future taxable income.
A-78
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(19) Employee Benefit Plans
The Company has established salary reduction savings plans under Section
401(k) of the Code which the Company administers for participating
employees. All full-time employees are covered under the plans after
meeting minimum service and age requirements. Under the plan available to
NETCOM employees from January 1, 1997 through July 1, 1998, the Company
made a matching contribution of 100% of each NETCOM employee's contribution
up to a maximum of 3% of the employee's eligible earnings. Prior to 1997,
NETCOM's matching contribution was limited to 50% of each NETCOM employee's
contribution up to a maximum of 6% of the employee's eligible earnings.
Under the plan available to all ICG employees, including NETCOM employees
subsequent to July 1, 1998, the Company makes a matching contribution of
ICG Common Stock up to a maximum of 6% of the employee's eligible earnings.
Aggregate matching contributions under the Company's employee benefit plans
were approximately $1.6 million, $0.6 million, $3.6 million and $4.0
million during fiscal 1996, the three months ended December 31, 1996, and
fiscal 1997 and 1998, respectively. The portion of this expense which
relates directly to employees of NETCOM is included in loss from
discontinued operations for all periods presented.
(20) Summarized Financial Information of ICG Holdings, Inc.
As discussed in note 10, the 11 5/8% Notes issued by Holdings during 1997
are guaranteed by ICG. The 12 1/2% Notes and the 13 1/2% Notes issued by
Holdings during fiscal 1996 and 1995, respectively, are also guaranteed by
ICG and Holdings-Canada.
The separate complete financial statements of Holdings have not been
included herein because such disclosure is not considered to be material to
the holders of the 11 5/8% Notes, the 12 1/2% Notes and the 13 1/2% Notes.
However, summarized combined financial information for Holdings and
subsidiaries and affiliates is as follows:
A-79
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(20) Summarized Financial Information of ICG Holdings, Inc. (continued)
Summarized Consolidated Balance Sheet Information
December 31,
-----------------------
1997 1998
---------- ----------
(in thousands)
Current assets $ 213,625 277,098
Property and equipment, net 631,117 636,747
Other non-current assets, net 120,878 170,151
Net non-current assets of discontinued operations 2,940 220
Current liabilities 95,792 81,299
Net current liabilities of discontinued operations 367 944
Long-term debt, less current portion 890,503 1,004,316
Capital lease obligations, less current portion 66,939 63,359
Due to parent 30,970 191,889
Due to ICG Services - 137,762
Redeemable preferred stock 292,442 338,311
Stockholders' deficit (408,453) (733,664)
Summarized Consolidated and Combined Statement of Operations Information
<TABLE>
<CAPTION>
Fiscal year Three months ended Fiscal years ended
ended December 31, December 31,
September 30, --------------------------- ---------------------------
1996 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Total revenue $ 154,143 34,544 49,477 245,022 400,309
Total operating costs and expenses 239,343 50,322 75,199 430,816 546,850
Operating loss (85,200) (15,778) (25,722) (185,794) (146,541)
Loss from continuing operations
before cumulative effect of
change in accounting (169,439) (34,211) (49,266) (321,802) (320,363)
Net loss (172,687) (34,281) (49,750) (328,193) (325,211)
</TABLE>
A-80
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(21) Condensed Financial Information of ICG Holdings (Canada) Co.
Condensed financial information for Holdings-Canada only is as follows:
Condensed Balance Sheet Information
December 31,
-----------------------
1997 1998
---------- ----------
(in thousands)
Current assets $ 162 162
Advances to subsidiaries 30,970 191,889
Non-current assets, net 2,604 2,414
Current liabilities 107 73
Long-term debt, less current portion 65 65
Due to parent 21,146 182,101
Share of losses of subsidiary 408,453 733,664
Shareholders' deficit (396,035) (721,438)
<TABLE>
<CAPTION>
Fiscal year Three months ended Fiscal years ended
ended December 31, December 31,
September 30, --------------------------- ---------------------------
1996 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Total revenue $ -- -- -- -- --
Total operating costs and expenses 3,438 361 73 195 192
Operating loss (3,438) (361) (73) (195) (192)
Losses from subsidiaries (172,687) (34,281) (49,750) (328,193) (325,211)
Net loss attributable to common
shareholders (184,107) (34,642) (49,823) (328,388) (325,403)
</TABLE>
(22) Condensed Financial Information of ICG Communications, Inc. (Parent
company)
At December 31, 1998, the primary assets of ICG are its investments in ICG
Services, ICG Funding, ICG Acquisition and NikoNET, including advances to
those subsidiaries. Certain corporate expenses of the parent company are
included in ICG's statement of operations and were approximately $1.2
million and $2.2 million for fiscal 1997 and 1998, respectively. At
December 31, 1998, ICG had no operations other than those of ICG Services,
ICG Funding, ICG Acquisition and their subsidiaries.
A-81
<PAGE>
MARKET FOR THE COMPANY'S COMMON EQUITY AND
-----------------------------------------
RELATED STOCKHOLDER MATTERS
---------------------------
ICG Common Stock, $.01 par value per share, has been quoted on the Nasdaq
National Market ("Nasdaq") since March 25, 1997 under the symbol "ICGX" and was
previously listed on the American Stock Exchange ("AMEX"), from August 5, 1996
to March 24, 1997 under the symbol "ICG." Prior to August 5, 1996,
Holdings-Canada's common shares had been listed on the AMEX under the symbol
"ITR" from January 14, 1993 through February 28, 1996, and under the symbol
"ICG" thereafter through August 2, 1996. Holdings-Canada Class A Common Shares
(the "Class A Shares") ceased trading on the AMEX at the close of trading on
August 2, 1996. The Class A Shares, which were listed on the Vancouver Stock
Exchange ("VSE") under the symbol "IHC.A," ceased trading on the VSE at the
close of trading on March 12, 1997. During fiscal 1998, all of the remaining
Class A Shares outstanding held by third parties were exchanged into shares of
ICG Common Stock.
The following table sets forth, for the fiscal periods indicated, the high
and low sales prices of the ICG Common Stock as reported on the AMEX through
March 24, 1997 and on the Nasdaq from March 25, 1997 through the date indicated
below. The VSE reported no trading activity for the Class A Shares from January
1, 1997 through March 12, 1997, the date on which the Class A Shares ceased
trading on the VSE.
American Stock
Exchange/Nasdaq National
Market
------------------------
High Low
-------- --------
Fiscal 1997:
First Quarter $ 18.13 $ 10.38
Second Quarter 21.13 8.63
Third Quarter 24.63 17.75
Fourth Quarter 28.63 19.75
Fiscal 1998:
First Quarter $ 44.25 $ 24.38
Second Quarter 38.88 28.50
Third Quarter 36.63 15.50
Fourth Quarter 26.56 11.13
Fiscal 1999:
First Quarter $ 24.13 $ 15.25
Second Quarter (through April
28, 1999)
On April 28, 1999, the last reported sale price of the Common Stock on the
Nasdaq National Market was $23.75 per share. On April 28, 1999, there were 294
holders of record.
The Company has never declared or paid dividends on the ICG Common Stock
and does not intend to pay cash dividends on the ICG Common Stock in the
foreseeable future. The Company intends to retain future earnings, if any, to
finance the development and expansion of its business. In addition, the payment
of any dividends on the ICG Common Stock is effectively prohibited by the
restrictions contained in the Company's indentures to the Company's senior
indebtedness and in the Second Amended and Restated Articles of Incorporation of
Holdings, which prohibits Holdings from making
A-82
<PAGE>
any material payment to the Company. Certain of the Company's debt facilities
contain covenants which also may restrict the Company's ability to pay cash
dividends.
In April 1998, ICG Services sold $405.3 million principal amount at
maturity ($250.0 million original issue price) of 9 7/8% Notes. Morgan Stanley &
Co. Incorporated acted as placement agent for the offering and received
placement fees of approximately $7.5 million. In February 1998, ICG Services
sold $490.0 million principal amount at maturity ($300.6 million original issue
price) of 10% Notes. Morgan Stanley & Co. Incorporated acted as placement agent
for the offering and received placement fees of approximately $9.0 million.
In September and October 1997, ICG Funding, LLC, a Delaware limited
liability company and wholly owned subsidiary of the Company, completed a
private placement of $132.25 million of 6 3/4% Preferred Securities. The 6 3/4%
Preferred Securities are mandatorily redeemable November 15, 2009 at the
liquidation preference of $50.00 per security, plus accrued and unpaid
dividends. Dividends on the 6 3/4% Preferred Securities are cumulative at the
rate of 6 3/4% per annum and are payable in cash through November 15, 2000 and,
thereafter, in cash or shares of ICG Common Stock at the option of ICG Funding.
The 6 3/4% Preferred Securities are exchangeable, at the option of the holder,
into ICG Common Stock at an exchange price of $24.025 per share, subject to
adjustment. ICG Funding may, at its option, redeem the 6 3/4% Preferred
Securities at any time on or after November 18, 2000. Prior to that time, ICG
Funding may redeem the 6 3/4% Preferred Securities if the current market value
of ICG Common Stock equals or exceeds, for at least 20 days of any consecutive
30-day trading period, 160% of the exchange price through November 15, 1999, and
150% of the exchange price from November 16, 1999 through November 15, 2000.
Morgan Stanley & Co. Incorporated and Deutsche Morgan Grenfell Inc. acted as
placement agents for the offering and received aggregate placement fees of
approximately $4.0 million.
In March 1997, Holdings sold $176.0 million principal amount at maturity
($99.9 million original issue price) of 11 5/8% Notes and 100,000 shares of 14%
Preferred Stock, having a liquidation preference of $1,000 per share. These
securities are guaranteed by the Company on a full and unconditional basis.
Morgan Stanley & Co. Incorporated acted as placement agent for the offering and
received placement fees of approximately $7.5 million.
In April 1996, Holdings sold $550.3 million principal amount at maturity
($300.0 million original issue price) of 12 1/2% Notes and 150,000 shares of 14
1/4% Preferred Stock, having a liquidation preference of $1,000 per share. These
securities are guaranteed by the Company on a full and unconditional basis.
Morgan Stanley & Co. Incorporated acted as placement agent for the offering and
received placement fees of approximately $16.5 million.
Each of the foregoing offerings were exempt from registration pursuant to
Rule 144A under the Securities Act. Sales were made only to "qualified
institutional buyers," as defined in Rule 144A under the Securities Act, and
other institutional accredited investors. The securities sold in each of the
foregoing offerings were subsequently registered under the Securities Act.
In October 1997, the Company issued 687,221 shares of Common Stock (the
"CBG Shares") to certain shareholders of CBG in connection with the acquisition
of CBG for a purchase price of approximately $16.0 million. The sale of the CBG
Shares was exempt from registration under Section 4(2) of the Securities Act
because the offers and sales were made to a limited number of investors in a
private transaction. Resale of the CBG Shares was subsequently registered on a
Form S-3 registration statement which was declared effective on October 31,
1997.
A-83
<PAGE>
In July 1998, the Company issued 145,997 shares of ICG Common Stock in
connection with the acquisition of DataChoice, valued at approximately $32.88
per share on the date of the sale (the "DataChoice Shares"). The sale of the
DataChoice Shares was exempt from registration under Section 4(2) of the
Securities Act because the offers and sales were made to a limited number of
investors in a private transaction. The Company is required to register the
resale of the DataChoice Shares.
Also in July 1998, the Company issued 356,318 shares of ICG Common Stock in
connection with the acquisition of NikoNET, valued at approximately $30.03 per
share on the date of the sale (the "NikoNET Shares"). The sale of the NikoNET
Shares was exempt from registration under Section 4(2) of the Securities Act
because the offer and sales were made to a limited number of investors in a
private transaction.
A-84
<PAGE>
ICG COMMUNICATIONS, INC. 1999 ANNUAL MEETING
June 9, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of ICG COMMUNICATIONS, INC., a
Delaware corporation (the "Company"), acknowledges receipt of the
Notice of Annual Meeting of Stockholders and Proxy Statement,
dated May 7, 1999, and hereby constitutes and appoints J. Shelby
Bryan and H. Don Teague, or either of them acting singly in the
absence of the other, with the power of substitution in either of
them, the proxies of the undersigned to vote with the same force
and effect as the undersigned all shares of Common Stock of the
Company held by the undersigned at the Annual Meeting of
Stockholders of the Company to be held at the Company's principal
executive offices at 161 Inverness Drive West, Englewood,
Colorado 80112, on June 9, 1999, at 9:30 a.m., local time, and at
any adjournment or adjournments thereof, hereby revoking any
proxy or proxies heretofore given and ratifying and confirming
all that said proxies may do or cause to be done by virtue
thereof with respect to the following matters:
1. Election of Directors:
FOR all nominees listed below WITHHOLD AUTHORITY
(except as indicated) [ ] to vote for all nominees
listed below [ ]
NOMINEES: William J. Laggett, J. Shelby Bryan
INSTRUCTION: To withhold authority to vote for any individual
nominee or nominees, write such nominee's or
nominees' name(s) in the space provided below.
2. Ratification of the appointment of KPMG LLP as
independent auditors of the Company and its
subsidiaries for the fiscal year ending December 31,
1999.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
<PAGE>
3. Transaction of such other business as may properly come
before the Meeting and any adjournments thereof.
The proxy when properly executed will be voted as directed.
If no direction is indicated, the proxy will be voted FOR the
election of the two named individuals as directors, FOR the
ratification of the appointment of the independent auditors and
FOR the transaction of such other business as may properly come
before the Meeting.
PLEASE SIGN, DATE AND MAIL THIS
PROXY IMMEDIATELY IN THE ENCLOSED
ENVELOPE.
Date . . . . . . . . . . . . 1999
. . . . . . . . . . . . . . (L.S.)
. . . . . . . . . . . . . . (L.S.)
Please sign your name exactly as it
appears hereon. When signing as
attorney, executor, administrator,
trustee or guardian, please give
your full title as it appears
hereon. When signing as joint
tenants, all parties in the joint
tenancy must sign. When a proxy is
given by a corporation, it should
be signed by an authorized officer
and the corporate seal affixed. No
postage is required if returned in
the enclosed envelope and mailed in
the United States.
