<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [_]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
ICG COMMUNICATIONS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(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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Notes:
Reg. (S) 240.14a-101.
SEC 1913 (3-99)
<PAGE>
ICG Communications, Inc.
-----------------------------
Notice of Annual Meeting of Stockholders
To the Stockholders of ICG Communications, Inc.:
Notice is hereby given that the 2000 Annual Meeting of Stockholders (the
"Meeting") of ICG COMMUNICATIONS, INC., a Delaware corporation (the "Company"),
will be held on Wednesday, June 7, 2000, 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 three directors to serve until the 2003 Annual Meeting
of Stockholders or until their successors have been duly elected and qualified;
2. The approval of the adoption by the Board of Directors of the Company's
Year 2000 Executive Long-Term Incentive Plan (the "Option Plan");
3. The approval of the Board of Directors' plan to amend the Company's
Certificate of Incorporation to increase the number of authorized shares of the
Company's Common Stock from 100,000,000 to 200,000,000 and to increase the
number of authorized shares of the Company's Preferred Stock from 1,000,000 to
2,000,000;
4. The ratification of the appointment of KPMG LLP as independent auditors
of the Company and its subsidiaries for the fiscal year ending December 31,
2000; and
5. The transaction of such other business as may properly come before the
Meeting and at any adjournments thereof.
Only stockholders of record of the Company's Common Stock, par value $0.01
per share, and the Company's 8% Series A-1, A-2 and A-3 Convertible Preferred
Stock, at the close of business on May 4, 2000, 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 mailed in their
Proxies.
By Order of the Board of Directors
/s/ J. Shelby Bryan
J. Shelby Bryan
Chairman and Chief Executive Officer
May 9, 2000
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.
---------------------------------------------
Proxy Statement
2000 Annual Meeting of Stockholders
June 7, 2000
---------------------------------------------
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 2000 Annual Meeting of
Stockholders of the Company (the "Meeting") which will be held at the Company's
principal executive offices, on June 7, 2000, 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 9, 2000.
Voting Securities and Vote Required
Stockholders of record as of the close of business on May 4, 2000 (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 48,641,790 shares of
the Company's common stock, par value $0.01 per share (the "Common Stock"),
outstanding. On the Record Date, there were (i) 50,000 shares of the 8% Series
A-1 Convertible Preferred Stock, (ii) 23,000 shares of 8% Series A-2
Convertible Preferred Stock and (iii) 2,000 shares of 8% Series A-3 Convertible
Preferred Stock outstanding and eligible to vote (collectively, the "Series A
Preferred Stock"). The holders of the Series A Preferred Stock outstanding on
the Record Date are entitled to vote on all matters that the holders of the
Company's Common Stock are entitled to vote upon. There were no other classes 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. As of the
Record Date, each holder of Series A Preferred Stock is entitled to 357.14 votes
for each share of Series A Preferred Stock held by such holder, an amount equal
to the number of shares of Common Stock issuable upon conversion of one share of
Series A Preferred Stock. The presence, in person or by proxy, of the holders of
one-third of the votes entitled to be cast at the Annual Meeting shall
constitute a quorum. If a quorum is present, (i) a plurality of the votes cast
by the holders of the Common Stock and Series A Preferred Stock, voting as a
single class, in person or by proxy at the Meeting, is required for the election
of directors, other than one director nominee who shall be elected by a
plurality of the votes cast by holders of the Series A-1 Convertible Preferred
Stock, voting as a separate class, (ii) the approval of holders of a majority of
the outstanding shares of Common Stock and Series A Preferred Stock, voting as a
single class, is required to amend the Certificate of Incorporation and (iii)
the approval of holders of a majority of the outstanding shares of Common Stock
and Series A Preferred Stock, voting as a single class, in person or by proxy at
the Meeting, is required to approve any other matter presented at the Meeting.
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
-1-
<PAGE>
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 Bylaws. 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.
An abstention from a vote with respect to a proposal (other than for the
election of directors) will have the same practical effect as a vote against
such proposal. 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
result 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.
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 herein. If no specification is indicated on the Proxy,
the shares represented thereby will be voted (i) FOR the election of the three
directors; (ii) FOR the approval of the adoption of the Company's Year 2000
Executive Long-Term Incentive Plan; (iii) FOR the approval of the Directors'
plan to amend the Company's Certificate of Incorporation to increase the number
of shares of the Company's Common Stock and Preferred Stock; (iv) FOR the
ratification of the appointment of the Company's auditors; and (v) 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.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS,
DIRECTORS, NOMINEES AND OFFICERS
Certain Beneficial Owners. To the best of the Company's knowledge, based
on filings with the Securities and Exchange Commission, the following are the
only persons who own beneficially five percent or more of the Company's voting
securities outstanding, as of April 24, 2000.
<TABLE>
<CAPTION>
Percent of
Series A Series A Percent of
Preferred Preferred Common Common
Name and Address of Beneficial Owner Stock(1) Stock(2) Stock(3) Stock(4)
- ------------------------------------ ---------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Liberty Media Corporation.......... 50,000 66.7% 24,528,810 33.5%
9197 South Peoria Street
Englewood, Colorado 80112
Thomas O. Hicks(5)................. 23,000 30.7% 11,280,954 18.8%
200 Crescent Court, Suite 1600
Dallas, Texas 75201-6950
Capital Guardian Trust Company(6).. - - 3,763,710 7.7%
11100 Santa Monica Boulevard
Los Angeles, CA 90025
- -----------------------------------
</TABLE>
(1) The Series A Preferred Stock includes 8% Series A-1 Convertible
Preferred Stock due 2015 (the "Series A-1 Preferred Stock"), 8% Series
A-2 Convertible Preferred Stock due 2015 (the "Series A-2 Preferred
Stock") and the 8% Series A-3 Convertible Preferred Stock due 2015
(the "Series A-3 Preferred Stock"). Except in relation to director
appointment rights, the powers, preferences and relative,
participating, optional and other special rights of the Series A-1
Preferred Stock, the Series A-2 Preferred Stock and the Series A-3
Preferred Stock are identical. The holder of Series A-1 Preferred
Stock is entitled to elect two directors to the Company's Board. The
holders of Series A-2 Preferred Stock are entitled to elect one
director to the Company's Board. Liberty Media Corporation ("Liberty
Media") is the beneficial owner of all Series A-1 Preferred Stock. All
of the other beneficial owners of Series A Preferred Stock listed in
the above table are beneficial owners of the Series A-2 Preferred
Stock.
(2) Based on 75,000 shares of Series A Preferred Stock outstanding as of
April 24, 2000.
(3) Amounts for Liberty Media and Thomas O. Hicks include shares of Common
Stock issuable upon conversion of the Series A Preferred Stock and
upon exercise of warrants. All amounts were reported by these holders
on Schedules 13D on April 20, 2000.
(4) Based on 48,632,769 shares of Common Stock issued and outstanding as
of April 24, 2000, plus shares of Common Stock issuable to such
beneficial owner upon conversion or exercise of Preferred Stock and
warrants, as the case may be. All share percentages assume that each
respective beneficial owner has converted its shares of Series A
Preferred Stock, if any, into Common Stock at a conversion price of
$28.00 per share and has exercised its warrants to purchase shares of
Common Stock, if any.
(5) Includes shares of Series A-1 Preferred Stock and warrants to purchase
Common Stock exercisable by various entities controlled by Hicks,
Muse, Tate & Furst, Inc. ("Hicks, Muse"). Mr. Hicks is the chief
executive officer of Hicks, Muse and sole member and manager of Hicks,
Muse (1999) Fund IV, LLC, which is the sole general partner of Hicks,
Muse GP (1999) Partners IV, L.P., which is the sole general partner of
HM4/GP (1999) Partners, L.P., which is the sole general partner of
each of HMTF Equity Fund IV (1999), L.P. and HMTF Private Equity Fund
IV (1999), L.P. HMTF Equity Fund IV (1999), L.P. is the sole member of
HM4 ICG Qualified Fund, LLC, and HMTF Private Equity Fund IV (1999),
L.P. is the sole member of HM4 ICG Private Fund, LLC. Hicks, Muse GP
(1999) Partners IV, L.P. is also the sole general partner of each of
HM 4-SBS (1999) Coinvestors, L.P. and HM 4-E.Q. (1999) Coinvestors,
L.P. HM 4-SBS (1999) Coinvestors, L.P. is the sole member of HM 4-SBS
ICG Coinvestors, LLC, and HM 4-E.Q. (1999) Coinvestors, L.P. is the
sole member of HM 4-EQ ICG Coinvestors, LLC. Mr. Hicks is also the
sole member of HM Fund IV Cayman LLC, which
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<PAGE>
is the sole general partner of HM GP Partners IV Cayman, L.P., which is the
sole general partner of HM Equity Fund IV/GP Partners (1999), C.V., which
is the sole general partner of Hicks, Muse PG-IV (1999), C.V. Hicks, Muse
PG-IV (1999), C.V. is the sole member of HM PG-IV ICG, LLC. Mr. Hicks is
also the sole member of HMTF Bridge Partners, LLC, which is the sole
general partner of HMTF Bridge Partners, L.P., which is the sole member of
HMTF Bridge ICG, LLC. Mr. Hicks reported on Schedule 13D that, as of April
10, 2000, he has shared voting and dispositive power with respect to
11,280,954 shares of Common Stock; each of HMTF Bridge ICG, LLC and HMTF
Bridge Partners, L.P. has shared voting and dispositive power with respect
to 5,640,477 shares of Common Stock; each of Hicks, Muse (1999) Fund IV,
LLC and Hicks, Muse GP (1999) Partners IV, L.P. has shared voting and
dispositive power with respect to 5,367,267 shares of Common Stock; HM4/GP
(1999) Partners, L.P. has shared voting and dispositive power with respect
to 5,168,710 shares of Common Stock; each of HM4 ICG Qualified Fund, LLC
and HMTF Equity Fund IV (1999), L.P. has shared voting and dispositive
power with respect to 5,132,396 shares of Common Stock; each of HM PG-IV
ICG, LLC, Hicks, Muse PG-IV (1999), C.V., HM Equity Fund IV/GP Partners
(1999), C.V., HM GP Partners IV Cayman, L.P. and HM Fund IV Cayman LLC has
shared voting and dispositive power with respect to 273,210 shares of
Common Stock; each of HM 4-SBS ICG Coinvestors, LLC and HM 4-SBS (1999)
Coinvestors, L.P. has shared voting and dispositive power with respect to
123,055 shares of Common Stock; each of HM 4-EQ ICG Coinvestors, LLC and HM
4-EQ (1999) ICG Coinvestors, L.P. has shared voting and dispositive power
with respect to 75,502 shares of Common Stock; and each of HM4 ICG Private
Fund, LLC and HMTF Private Equity Fund IV (1999), L.P. has shared voting
and dispositive power with respect to 36,314 shares of Common Stock.
(6) Capital Guardian Trust Company ("CGTC"), a bank, reported on Schedule 13G
that, as of December 31, 1999, it beneficially owns the shares of Common
Stock reflected in this table. CGTC reported that it has sole voting power
with respect to 2,986,800 of the shares.
Ownership of Management. The following table sets forth, as of April 24,
2000, the number of shares of ICG voting securities owned by all executive
officers, directors and nominees of ICG individually and as a group. The persons
named in the table below have sole voting and investment power with respect to
all of the shares of ICG voting securities owned by them, unless otherwise
noted.
<TABLE>
<CAPTION>
Amount/Nature of
Name of Beneficial Owner Beneficial Ownership Percent(1)
- ------------------------ -------------------- ----------
<S> <C> <C>
J. Shelby Bryan 2,236,678(2) 4.4%
Chairman of the Board of Directors and Chief Executive
Officer
William J. Laggett....................................... 137,797(3) *
Vice Chairman of the Board of Directors
William S. Beans, Jr..................................... 38,570(4) *
President, Chief Operating Officer and Director
Harry R. Herbst.......................................... 133,202(5) *
Executive Vice President and Chief Financial Officer
Pamela S. Jacobson....................................... 0 *
Executive Vice President, Sales and Marketing
Michael D. Kallet........................................ 119,001(6) *
Executive Vice President, Products and Technology
(continued)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Amount/Nature of
Name of Beneficial Owner Beneficial Ownership Percent(1)
- ------------------------ -------------------- ----------
<S> <C> <C>
Cindy Z. Schonhaut....................................... 28,636(7) *
Executive Vice President, Government and
External Affairs
H. Don Teague............................................ 76,035(8) *
Executive Vice President, General Counsel
and Secretary
James R. Washington...................................... 0 *
Executive Vice President, Network Services
W. Terrell Wingfield, Jr................................. 1,000(9) *
Executive Vice President, Corporate Development
Carla J. Wolin........................................... 6,250(10) *
Executive Vice President, People Services
Thomas O. Hicks.......................................... 11,280,954(11) 18.8%
Director
Gary S. Howard........................................... 0 *
Director
John U. Moorhead II...................................... 57,500(12) *
Director
Leontis Teryazos......................................... 137,500(13) *
Director
Walter Threadgill........................................ 67,500(14) *
Director
Carl E. Vogel............................................ 0 *
Director
All current executive officers and directors as a group
(17 persons).......................................... 14,317,623(15) 24.6%
- ---------------------------------------------------------
</TABLE>
* Less than one percent of the outstanding shares of Common Stock.
(1) Based on 48,632,769 issued and outstanding shares of Common Stock on April
24, 2000, 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 the conversion of any outstanding shares of the Company's
Preferred Stock, or pursuant to any shares vesting under the Company's
401(k) Plan, within 60 days.
(2) Includes 165,000 shares of ICG Common Stock held by Mr. Bryan, 21,678
shares of ICG Common Stock held by a 401(k) Plan in Mr. Bryan's name and
2,050,000 shares of ICG Common Stock that may be acquired pursuant to the
exercise of outstanding stock options. This figure does not include 2,000
shares held in the name of Mr. Bryan's spouse for which Mr. Bryan
specifically disclaims beneficial ownership.
(3) Includes 137,797 shares of ICG Common Stock that may be acquired by Mr.
Laggett pursuant to the exercise of outstanding options.
-5-
<PAGE>
(4) Includes 1,000 unrestricted shares owned by Mr. Beans, 60 shares of ICG
Common Stock held by a 401(k) Plan in Mr. Beans' name and 613 shares held
in ICG's Employee Stock Purchase Plan and 36,897 shares of ICG Common
Stock that may be acquired by Mr. Beans pursuant to the exercise of
outstanding stock options.
(5) Includes 3,518 unrestricted shares of ICG Common Stock held by Mr. Herbst
in ICG's Employee Stock Purchase Plan and 129,684 shares of ICG Common
Stock that may be acquired by Mr. Herbst pursuant to the exercise of
outstanding stock options.
(6) Includes 937 shares of ICG Common Stock held by a 401(k) Plan in Mr.
Kallet's name, 719 shares of ICG Common Stock held by Mr. Kallet in ICG's
Employee Stock Purchase Plan and 117,345 shares of ICG Common Stock that
may be acquired by Mr. Kallet pursuant to the exercise of outstanding stock
options.
(7) Includes 1,261 shares of ICG Common Stock held by a 401(k) Plan in Ms.
Schonhaut's name and 27,375 shares of ICG Common Stock that may be acquired
by Ms. Schonhaut pursuant to the exercise of outstanding stock options.
(8) Includes 1,035 shares of ICG Common Stock held by a 401(k) Plan in Mr.
Teague's name and 75,000 shares of ICG Common Stock that may be acquired by
Mr. Teague pursuant to the exercise of outstanding options.
(9) Represents 1,000 unrestricted shares owned by Mr. Wingfield.
(10) Includes 6,250 shares of ICG Common Stock that may be acquired by Ms. Wolin
pursuant to the exercise of outstanding stock options.
(11) See Note 5 to "Certain Beneficial Owners."
(12) Includes 57,500 shares of ICG Common Stock that may be acquired by Mr.
Moorhead pursuant to the exercise of outstanding options.
(13) Includes 137,500 shares of ICG Common Stock that may be acquired by Mr.
Teryazos pursuant to the exercise of outstanding options.
(14) Includes 67,500 shares of ICG Common Stock that may be acquired by Mr.
Threadgill pursuant to the exercise of outstanding options.
(15) Includes 167,000 shares of ICG Common Stock held directly by the officers
and directors as a group, 24,971 shares of ICG Common Stock held by ICG's
401(k) Plan in the names of the individual officers and directors of the
Company, 4,850 shares of ICG Common Stock held by ICG's Employee Stock
Purchase Plan and 2,842,848 shares of ICG Common Stock that may be acquired
pursuant to the exercise of outstanding stock options.
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<PAGE>
PROPOSAL I
ELECTION OF DIRECTORS
---------------------
A total of three directors ("Class I Directors") are to be elected at the
Meeting to serve until the 2003 Annual Meeting of Stockholders and until their
successors have been elected and qualified or until their death, resignation or
removal. The three Class I Directors whose terms expire at the Meeting and who
are up for election are William S. Beans, Jr., John U. Moorhead II and Carl E.
Vogel. The Board of Directors recommends the election as Directors of these
nominees. 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 (other than the nominees of the holders
of the Series A Preferred Stock) as a director in accordance with the Company's
Bylaws.
Holders of the Series A-1 Convertible Preferred Stock have designated Carl
E. Vogel to be elected to the Board of Directors. The holders of the Series A-1
Convertible Preferred Stock have the exclusive right to vote for the election of
Mr. Vogel. As of the Record Date, Liberty Media Corporation ("Liberty Media")
beneficially owned all the shares of Series A-1 Convertible Preferred Stock.
Liberty Media has advised the Company that it intends to vote in favor of the
election of Mr. Vogel. Accordingly, approval of this director nominee is
assured.
The terms of the three Class II Directors, Thomas O. Hicks, Leontis
Teryazos and Walter Threadgill, expire at the 2001 Annual Meeting of
Stockholders. The terms of the three Class III Directors, J. Shelby Bryan,
William J. Laggett and Gary S. Howard, expire at the 2002 Annual Meeting of
Stockholders.
There were eleven meetings of the Board of Directors of the Company, nine
meetings of the Stock Option Committee, ten meetings of the Compensation
Committee and three meetings of the Audit Committee of the Board of Directors of
the Company held during the fiscal year ended December 31, 1999. There were no
meetings of the Executive Committee in 1999. With the exception of Messrs.
Beans, Vogel, Hicks and Howard, who did not serve on the Board during 1999, all
directors attended 75% or more of the meetings of the Board and the committees
on which they served.
Class I Directors (to serve until the 2003
Annual Meeting of Stockholders)
Name Age Title
- ---- --- -----
William S. Beans, Jr................ 34 President, Chief Operating Officer
and Director
John U. Moorhead II(1)(2)(3)........ 47 Director
Carl E. Vogel....................... 42 Director
- ---------------------------------------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Member of Stock Option Committee.
-7-
<PAGE>
William S. Beans, Jr. has been a director since April 2000. Mr. Beans has
served as President and Chief Operating Officer since January 2000 and, prior
thereto, was Executive Vice President and President of Network Services from
June 1999. Prior to joining the Company, Mr. Beans held several positions in
Teleport Communications Group, Inc., a division of AT&T Local Services. He was
National Vice President - Operations from November 1997 until June 1999, Vice
President Customer Care/Customer Service from October 1995 to November 1997 and
Vice President of Network Development from September 1993 to October 1995.
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.
Carl E. Vogel has been a Director since April 2000. Mr. Vogel has been
Senior Vice President of Liberty Media since December 1999. Mr. Vogel previously
served as Executive Vice President/Chief Operating Officer of Field Operations
for AT&T Broadband from June 1999 until joining Liberty Media. He served as
Chairman and Chief Executive Officer of PrimeStar, Inc. from June 1998 to June
1999. From October 1997 to June 1998, Mr. Vogel was Chief Executive Officer of
Star Choice Communications. From March 1994 to March 1997, he served first as
Executive Vice President and Chief Operating Officer and later as President of
EchoStar Communications Corporation. Mr. Vogel serves on the Boards of Directors
of Satellite Communications and Teligent, Inc.
OTHER DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Set forth below are the names, ages and positions of the other directors
and executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
J. Shelby Bryan (2)(6)........................ 54 Chairman of the Board of Directors and Chief
Executive Officer
William J. Laggett (2)(4)(5)(6)............... 70 Vice-Chairman of the Board of Directors
Harry R. Herbst............................... 48 Executive Vice President and Chief Financial
Officer
Pamela S. Jacobson............................ 42 Executive Vice President, Sales and Marketing
Michael D. Kallet............................. 46 Executive Vice President, Products and Technology
Cindy Z. Schonhaut............................ 45 Executive Vice President, Government and External Affairs
H. Don Teague................................. 57 Executive Vice President, General Counsel and
Secretary
James R. Washington........................... 47 Executive Vice President, Network Services
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
W. Terrell Wingfield, Jr...................... 47 Executive Vice President, Corporate
Development
Carla J. Wolin................................ 50 Executive Vice President, People Services
Thomas O. Hicks(1)............................ 54 Director
Gary S. Howard(2)............................. 49 Director
Leontis Teryazos(1)(3)(4)(5).................. 57 Director
Walter Threadgill(1)(3)(4)(5)................. 54 Director
- ----------------------------------------------
</TABLE>
(1) Term as Director expires at annual meeting of stockholders in 2001.
(2) Term as Director expires at annual meeting of stockholders in 2002.
(3) Member of Audit Committee.
(4) Member of Compensation Committee.
(5) Member of Stock Option Committee.
(6) Member of Executive Committee.
J. Shelby Bryan has been Chairman of the Board of Directors and Chief
Executive Officer since June 1999. Prior thereto, he served as President, Chief
Executive Officer and Director from May 1995. Mr. Bryan has over 20 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.
William J. Laggett has been Vice-Chairman of the Board of Directors since
June 1999. Prior to such time, he was Chairman of the Board of Directors from
June 1995 and a Director from 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.
Harry R. Herbst has been Executive Vice President since July 1998 and, in
August 1998, he also became Chief Financial Officer. Mr. Herbst served as a
Director from October 1995 until April 2000. 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.
Pamela S. Jacobson joined the Company in March 2000 as the Executive Vice
President for Sales and Marketing. Prior to joining the Company, Ms. Jacobson
held several positions at GTE, including President of General Markets from 1998
to March 2000 and Vice President-Strategic and Technology Planning from 1996
to 1998.
Michael D. Kallet has been Executive Vice President, Products and
Technology since July 1999 and, prior thereto, was Senior Vice President of
Products and Services from December 1995.
-9-
<PAGE>
He has been General Manager and Chief Operations Officer of ICG NetAhead, Inc.,
a subsidiary of the Company, since February 1999. Prior to joining the Company,
he held several positions in the technology industry, including positions at
IBM, Computer Support Corporation, Walker Interactive and Software Publishing
Corporation (Harvard Graphics).
Cindy Z. Schonhaut has been Executive Vice President, Government and
External Affairs since June 1999 and, prior thereto, was Executive Vice
President, Government and Corporate Affairs from November 1998 and Vice
President of Government and External Affairs from 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 Boards of Directors of CompTel,
the leading trade association representing competitive telecommunications
interests, and the Association for Local Telecommunications Services.
H. Don Teague has been Executive Vice President, General Counsel and
Secretary since 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 LLP.
James R. Washington joined the Company in January 2000 as Executive Vice
President of Network Services. Prior to joining the Company, Mr. Washington was
Vice President of Local Planning at AT&T Corp. from June 1998 to December 1999.
From January 1993 to June 1998, Mr. Washington held several positions at
Teleport Communications Group, Inc., including Regional Vice President and Vice
President of Carrier Relations and Settlements. Mr. Washington also held
executive positions at American Mobile Systems, PacTel Paging and MobileComm.
W. Terrell Wingfield, Jr. joined the Company in March 2000 as the Executive
Vice President for Corporate Development. Prior to joining the Company, Mr.
Wingfield was Senior Vice President of Telephony Ventures for AT&T Broadband and
Services. Mr. Wingfield was also Legal and Government Affairs Vice President for
AT&T Corporation's Local Services Division from 1998 through 1999. From 1993 to
1998, Mr. Wingfield held several positions at Teleport Communications Group
Inc., including Vice President and General Counsel, Regional Operations Vice
President - Central Region, and Counsel - Affiliate Services. Previously, Mr.
Wingfield held a variety of positions at Cox Communications.
Carla J. Wolin joined the Company as Senior Vice President of Human
Resources in April 1999 and became Executive Vice President, People Services on
January 1, 2000. Prior to joining the Company, Ms. Wolin served as a Vice
President of Operations and Administration for Fischer Imaging Corporation.
Previously, Ms. Wolin held executive positions with Time-Warner, Aerospatiale
Helicopter Corporation, United Technologies Corporation and Executive Jet
Aviation.
Thomas O. Hicks has been a director since April 2000. He has been Chairman
of the Board and Chief Executive Officer of Hicks, Muse, Tate & Furst, Inc.
since June 1989. From 1984 to May 1989, Mr. Hicks was Co-Chairman of the Board
and Co-Chief Executive Officer of Hicks & Haas Incorporated, a Dallas-based
private investment firm. Mr. Hicks has been Chairman of the Board of AMFM Inc.
since September 1997 and was elected Chief Executive Officer in March 1999. He
had been Chairman of the Board of Chancellor Broadcasting Company and Chancellor
Radio Broadcasting Company prior to that time, since April 1996. Mr. Hicks has
served as a director of AMFM Interactive Inc. since August 1999. Mr. Hicks
serves as a director of LIN Holdings Corp., Sybron International Corporation,
Inc., Cooperative Computing, Inc., International Home Foods, Inc., Triton Energy
Limited,
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<PAGE>
D.A.C. Vision Inc., Olympus Real Estate Corporation, Viasystems Group, Inc.,
Home Interiors & Gifts, Inc., Teligent, Inc. and G.H. Mumm Perrier-Jouet.
Gary S. Howard has been an Executive Vice President and Chief Operating
Officer of Liberty Media since July 1998. He has been a member of the Board of
Directors of Liberty Media since July 1998. Prior to joining Liberty Media, Mr.
Howard was the President and Chief Executive Officer of TCI Ventures Group
("TCIVA"), the technology business development unit of Tele-Communications, Inc.
from December 1997 to March 1999. Mr. Howard served as the Chairman and Chief
Executive Officer of United Video Satellite Group (recently renamed TV Guide,
Inc.) from June 1997 to March 1999. Mr. Howard remains on the Board of Directors
of TV Guide, Inc. Mr. Howard served as Chief Executive Officer and President of
TCI Satellite Entertainment, Inc. ("TSAT") from February 1995 to August 1997.
Immediately prior to his position at TSAT, Mr. Howard was Senior Vice President
in charge of Mergers and Acquisitions for TCI Communications, Inc. Mr. Howard
originally joined TCI in 1991 through that Company's merger with United Artists
Entertainment Company ("UAE"). At UAE, he was Senior Vice President-Acquisitions
and Chief Administrative Officer, responsible for cable and theater
acquisitions, corporate facilities, risk management, employee benefits and human
resources. He also served UAE as Treasurer and Senior Vice President. Mr. Howard
serves on the Boards of Directors of Liberty Media, PrimeStar, Inc.,
TVGuide/UVSG, TSAT and Teligent, Inc.
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. Mr. Threadgill also
serves on the Board of Directors of Ravisent Technologies, Inc. Previously, Mr.
Threadgill was the President and Chief Executive Officer of Multimedia Broadcast
Investment Corporation. He has held positions 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 any other current director or officer.
-11-
<PAGE>
Information Regarding Certain Directorships
In connection with the private placement of the Series A Preferred Stock in
April 2000, the Company granted certain stockholders the right to elect three
directors to the Board of Directors. Liberty Media, the sole holder of the
Series A-1 Convertible Preferred Stock through its affiliate, is entitled to
elect one director or such greater number as is necessary to cause the total
number of directors elected by the holders of the Series A-1 Convertible
Preferred Stock to equal ten percent (10%) of the total number of members of the
Company's Board of Directors so long as Liberty Media and its affiliates own any
combination of shares of Common Stock and Series A-1 Convertible Preferred Stock
representing at least 2,687,571 shares of Common Stock (on an as-converted
basis, as adjusted for any stock dividends, splits and combinations and similar
events affecting the Common Stock from time to time). In addition, Liberty Media
is entitled to elect one additional director or such greater number as is
necessary to cause the total number of additional directors elected by the
holders of the Series A-1 Convertible Preferred Stock to equal ten percent (10%)
of the total number of members of the Company's Board of Directors so long as
Liberty Media and its affiliates own any combination of shares of Common Stock
and Series A-1 Convertible Preferred Stock representing at least 8,928,571
shares of Common Stock (on an as-converted basis, as adjusted for any stock
dividends, splits and combinations and similar events affecting the Common Stock
from time to time). Liberty Media has designated two directors, the current
maximum number to which it is entitled. Messrs. Howard and Vogel have been
designated by Liberty Media. In electing these directors, the holders of the
Series A-1 Convertible Preferred Stock vote separately as a class. Affiliates of
Hicks, Muse, the sole holders of the Series A-2 Convertible Preferred Stock, are
entitled to elect one director or such greater number as is necessary to cause
the total number of directors elected by the holders of the Series A-2
Convertible Preferred Stock to equal 10% of the total number of members of the
Company's Board of Directors so long as Hicks, Muse owns any combination of
shares of Common Stock and Series A-2 Convertible Preferred Stock representing
at least 4,107,143 shares of Common Stock (on an as-converted basis, as adjusted
for any stock dividend, splits and similar events affecting the Common Stock
from time to time). Hicks, Muse has designated one director, the current maximum
number to which it is entitled. Mr. Hicks has been designated by Hicks, Muse. In
electing this director, the holders of the Series A-2 Convertible Preferred
Stock vote separately as a class.
DIRECTOR AND EXECUTIVE COMPENSATION
Director Compensation
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 of Directors 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. In addition, the Vice-Chairman of the Board of Directors
receives an annual fee of $80,000 payable in quarterly installments. 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 vested as to 5,000 shares at the end of each fiscal quarter
of 1999 commencing March 31, 1999. On June 9, 1999, all non-employee Directors
of the Company were granted options to purchase 5,000 shares of ICG Common Stock
under the Company's 1996 Stock Option Plan. On December 15, 1999, all non-
employee Directors of the Company were granted options to purchase 20,000 shares
of ICG Common Stock under the Company's 1998 Stock Option Plan.
-12-
<PAGE>
Compensation Committee Interlocks and Insider Participation
The Compensation Committee consists of four non-employee Directors:
William J. Laggett, Vice-Chairman of the Board of Directors, John U. Moorhead
II, Walter Threadgill and Leontis Teryazos.
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 all of its executive officers.
See "Executive Employment Agreements" for descriptions of those agreements. All
senior management, except for J. Shelby Bryan, Chairman of the Board of
Directors 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 the year ended December 31, 1999, 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, on June 1, 1999 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 during the year ended December
31, 1998 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 Chairman and Chief Executive Officer, J.
Shelby Bryan, is set forth in his employment contract, as amended, and other
agreements. 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 fiscal quarter over
revenues of the Company for the immediately prior fiscal quarter and (ii) three
percent (3%) of the increase in EBITDA (before non-recurring and non-cash
charges) of the Company for such fiscal quarter over EBITDA of the Company for
the immediately prior fiscal quarter. Such payments were
-13-
<PAGE>
previously calculated on a monthly basis prior to July 1, 1999. In addition, as
further incentive to Mr. Bryan, 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 position as
Chief Executive Officer of the Company. Mr. Bryan was also granted, on March 10,
1999, an option to purchase 200,000 shares of ICG Common Stock at $18.8125 per
share. See "Option/SAR Grants In Last Fiscal Year."
Each of Messrs. Bryan, Herbst and Teague is a party to separate agreements
with the Company that provide in the event any executive payments are of the
type encompassed within Section 280G of the Internal Revenue Code (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, and Teague 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. The employment agreements of Ms. Jacobson
and Messrs. Beans, Kallet, Washington and Wingfield each contain a provision
that provides the Company shall be responsible for any gross-up payment required
to off-set any excise taxes placed on the officers if any payments made to them
are considered "parachute payments" within the meaning of Section 280G of the
Code.
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)
Executive Compensation and Other Benefits
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 Chairman and Chief Executive Officer
and the four other most highly compensated executive officers of the Company
(the "Named Officers") for the fiscal years ended December 31, 1999, December
31, 1998 and December 31, 1997. The Company has not maintained any long-term
incentive plans, and the Company has not granted stock appreciation rights.
-14-
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-term
Compensation
-------------------------------------------------------- -----------------
All
Name and Principal Fiscal Other Annual Securities Other ($)
Position Year Salary ($) Bonus ($)(1) Compensation Underlying Compensation
($) Options ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
J. Shelby Bryan 1999 1,500,000(2) - 98,658(3) 200,000 -
Chairman of the Board of 1998 1,435,191(2) - 159,554(4) - -
Directors and Chief
Executive Officer 1997 473,065(2) - 86,095(5) - -
John Kane 1999 337,463 1,059,745 9,049(7) 150,000(6) -
President and Chief 1998 157,236 101,916 4,200(8) 110,000 -
Operating Officer (6) 1997 - - - - -
Douglas I. Falk 1999 278,846 470,288 150,659(10) 30,000 -
Executive Vice 1998 192,231 234,885 20,182(11) 75,000(12) -
President(9) 1997 160,000 57,360 8,400(8) 27,500(13) -
Harry R. Herbst 1999 325,000 188,000 40,341(14) 90,000 -
Executive Vice 1998 111,827 187,019 13,879(15) 150,000 6,500(16)
President and 1997 - - - - -
Chief Financial Officer
H. Don Teague 1999 281,538 134,169 132,609(17) 60,000 -
Executive Vice 1998 204,865 138,552 26,829(18) 50,000(12) -
President, General
Counsel and Secretary 1997 121,250 64,065 51,387(19) 50,000(13) -
- --------------------------
</TABLE>
(1) Consists of amounts earned and paid in the current year and earned in the
current year but paid in the subsequent year.
(2) Consists of amounts earned pursuant to the compensation formula in Mr.
Bryan's employment agreement, as adjusted for amounts earned in 1999.
(3) Consists of $13,997 for car allowance, $49,583 for housing expenses and
Company contributions to 401(k) Defined Contribution Plan in the amount of
$35,078.
(4) 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.
(5) 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.
(6) Mr. Kane resigned from the Company effective January 1, 2000. In connection
with Mr. Kane's resignation, 82,500 of these options were canceled on
February 13, 2000. See "Option/SAR Grants in Last Fiscal Year."
(7) Consists of $8,400 for car allowance and $649 for group term life insurance
premiums.
(8) Consists of amounts for car allowance.
(9) Mr. Falk resigned from the Company effective January 17, 2000.
(10) Consists of payments for relocation expenses of $109,566, $14,160 for car
allowance, Company contributions to 401(k) Defined Contribution Plan in the
amount of $25,449, $933 for group term life insurance premiums and
membership dues of $551.
(11) Consists of $12,479 for car allowance and Company contributions to 401(k)
Defined Contribution Plan in the amount of $7,703.
(12) Includes options regranted as a result of the repricing of the Company's
options on September 18, 1998. See "Ten-Year Option/SAR Repricings."
(13) Includes options regranted as a result of the repricing of the Company's
options on April 16, 1997. See "Ten-Year Option/SAR Repricings."
-15-
<PAGE>
(14) Consists of $8,400 for car allowance, Company contributions to 401(k)
Defined Contribution Plan in the amount of $31,281 and $660 for group term
life insurance premiums.
(15) Consists of $4,200 for car allowance and Company contributions to 401(k)
Defined Contribution Plan in the amount of $9,679.
(16) 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. Mr. Herbst resigned as a Director in April 2000.
(17) Consists of payments for relocation expenses of $97,534, $8,400 for car
allowance, Company contributions to 401(k) Defined Contribution Plan in the
amount of $24,911, $1,498 for group term life insurance premiums and
membership dues of $266.
(18) Consists of $8,400 for car allowance and Company contributions to 401(k)
Defined Contribution Plan in the amount of $18,429.
(19) Consists of payments for relocation expenses of $42,522, car allowance of
$5,918 and Company contributions to 401(k) Defined Contribution Plan in the
amount of $2,947.
Option/SAR Grants in Last Fiscal Year
The Company granted no stock appreciation rights during the year ended
December 31, 1999 to the Named Officers or to other employees. The following
table provides information on option grants during the year ended December 31,
1999 to the Named Officers:
<TABLE>
<CAPTION>
Individual grants Potential realizable value
------------------------------------------------------- at assumed
Number of Percent of total Exercise annual rates of stock
securities options granted or price appreciation
underlying options granted to employees in fiscal base price Expiration for
Name (#) year ($/Sh) date option term
--------------------------
5% ($) 10% ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
J. Shelby Bryan 200,000 7.2 18.8125 3/9/09 2,365,397 5,993,908
John Kane(1) 90,000(1) 3.2 17.8750 7/1/00 89,353 183,267
60,000(2) 2.2 20.6563 7/1/00 68,837 141,189
Douglas I. Falk(3) 30,000 1.1 17.8750 7/17/00 29,784 61,089
Harry R. Herbst 90,000 3.2 17.8750 5/31/09 1,011,384 2,562,844
H. Don Teague 60,000 2.2 17.8750 5/31/09 674,256 1,708,563
- ---------------------------------------------
</TABLE>
(1) In connection with Mr. Kane's resignation from the Company effective
January 1, 2000, 22,500 of these options were canceled on February 13,
2000.
(2) In connection with Mr. Kane's resignation from the Company effective
January 1, 2000, all of these options were canceled on February 13, 2000.
(3) Mr. Falk resigned from the Company effective January 17, 2000.
-16-
<PAGE>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
The following table provides information on options exercised during the
year ended December 31, 1999 by the Named Officers and the value of such
officers' unexercised options at December 31, 1999:
<TABLE>
<CAPTION>
Number of securities Value of unexercised in-the-
underlying unexercised money options at
Shares options at fiscal year end (#) fiscal year end ($)(1)
acquired on Value -------------------------------- -----------------------------
Name exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
J. Shelby Bryan - - 1,750,000 100,000 17,634,375 -
John Kane - - 17,500 202,500 18,750 135,000
Douglas I. Falk - - 31,250 94,375 118,750 136,484
Harry R. Herbst - - 107,184 183,750 232,511 219,375
H. Don Teague - - 37,500 122,500 259,375 349,375
- --------------------------------------
</TABLE>
(1) Based on the closing price of a share of ICG Common Stock on the NASDAQ
National Market of $18.75 on December 31, 1999.
Ten-Year Option/SAR Repricings
The following provides information on the repricing of stock options of the
Named Officers:
<TABLE>
<CAPTION>
Length of
Number of original
Securities Market price of Exercise price option term
underlying stock at time of at time of remaining at
Options repriced repricing or repricing or New exercise repricing or
or amended amendment amendment price date of
Name Date (#) ($) ($) ($) amendment
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
J. Shelby Bryan - - - - - -
Chairman of the Board
of Directors and
Chief Executive
Officer
John Kane 9/18/98 20,000 16.8750 30.0000 16.8750(1) 116 months
President and Chief 9/18/98 20,000 16.8750 26.5625 16.8750(1) 113 months
Operating Officer
Douglas I. Falk 9/18/98 30,000 16.8750 30.0000 16.8750(1) 116 months
Executive Vice 4/16/97 15,000 10.3750 20.2500 10.3750(2) 112 months
President
4/16/97 7,500 10.3750 19.1250 10.3750(2) 114 months
</TABLE>
(Continued)
-17-
<PAGE>
<TABLE>
<CAPTION>
Length of
Number of original
Securities Market price of Exercise price option term
underlying stock at time of at time of remaining at
Options repriced repricing or repricing or New exercise repricing or
or amended amendment amendment price date of
Name Date (#) ($) ($) ($) amendment
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Harry R. Herbst 9/18/98 100,000 16.8750 35.7500 16.8750(1) 117 months
Executive Vice
President,
Chief Financial
Officer
and Director
H. Don Teague 9/18/98 40,000 16.8750 31.3750 16.8750(1) 115 months
Executive Vice
President
General Counsel and
Secretary
- ----------------------
</TABLE>
(1) Represents the closing price of a share of ICG Common Stock on the NASDAQ
National Market on September 18, 1998.
(2) Represents the closing price of a share of ICG Common Stock on the NASDAQ
National Market on April 16, 1997.
Executive Employment Agreements
The Company and its subsidiaries have employment agreements with J. Shelby
Bryan, William S. Beans, Jr., Harry R. Herbst, Pamela S. Jacobson, Michael D.
Kallet, Cindy Z. Schonhaut, H. Don Teague, James, R. Washington, W. Terrell
Wingfield Jr. and Carla J. Wolin. The Company has executed a general release,
covenant not to sue and agreement with each of John Kane and Douglas I. Falk.
The Company's amended employment agreement with Mr. Bryan provides for a
term of two years which commenced June 1, 1999. The agreement automatically
renews from month to month so that there are always two years remaining in the
employment term, until either the Company or Mr. Bryan provides notice of its or
his desire to terminate. In such case, the term ends upon the date indicated in
the notice of termination. As compensation, the Company pays Mr. Bryan a
quarterly salary equal to the sum of one percent (1%) of the quarterly increase
in the Company's revenue and three percent (3%) of the quarterly increase in
Earnings Before Interest, Income Taxes, Depreciation and Amortization ("EBITDA")
(and certain non-recurring and non-cash charges). If Mr. Bryan's salary exceeds
$1,500,000 in any fiscal year, the Company may elect to pay such excess in
unregistered shares of 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 amended employment agreement also provides for the grant of up to
200,000 stock options to Mr. Bryan at an exercise price of $18.8125 per share,
which is the closing price of a share of ICG Common Stock on the NASDAQ National
Market on the date of grant. 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 good reason or due to a
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 good reason, 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 five percent (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
-18-
<PAGE>
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
one-year non-solicitation and non-competition commitments.
The Company's amended employment agreement with Mr. Beans provides for an
initial three-year term which commenced December 22, 1999. Upon completion of
one year of the initial term, the agreement automatically renews from month to
month such that there are always two years remaining in the term until either
the Company or Mr. Beans provides notice of its or his desire to terminate. In
such case, the term ends upon the date indicated in the notice of termination.
The agreement provides for an annual base salary and an incentive bonus
determined by the Board of Directors or the Compensation Committee. Mr. Beans
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, and reimbursement of reasonable out-of-pocket expenses incurred on behalf
of the Company. He is also entitled to reimbursement of relocation expenses
pursuant to a Company-wide plan, an after-tax moving allowance of the sum of
$50,000, a $100,000 advance on his compensation, and a life insurance policy
paid for by the Company in the amount of $1.5 million and a leased vehicle. The
amended employment agreement also provides for the grant to Mr. Beans of an
option to purchase 14,814 shares of Company Common Stock under the 1998 Stock
Option Plan, a non-qualified option to purchase 135,186 shares of Company Common
Stock, a share price appreciation vesting non-qualified stock option to purchase
260,000 shares of Company Common Stock, a share price appreciation vesting non-
qualified stock option to purchase 240,000 shares of Company Common Stock under
the 1998 Stock Option Plan and a non-qualified option to purchase 100,000 shares
of Company Common Stock under the 1996 Stock Option Plan. The agreement may be
terminated by the Company upon 30 days' written notice if Mr. Beans 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. Beans
upon 30 days' written notice in certain other circumstances. If the agreement
is terminated due to the death of Mr. Beans, his estate will receive an amount
equal to six months' salary and his unvested options will fully vest. Upon a
change in control of the Company, Mr. Beans will receive an amount equal to his
annual base salary, his targeted incentive bonus and the value of his other
benefits and perquisites, and his unvested options will fully vest. If Mr.
Beans is generally terminated without cause, terminated pursuant to a change in
control transaction or if he resigns for good reason, he will receive an amount
equal to two times his annual base salary, his targeted incentive bonus and the
value of his other benefits and perquisites, and his unvested options will fully
vest. Mr. Beans is also subject to a ten-year confidentiality covenant, a one-
year non-competition commitment and a two-year non-solicitation agreement.
The Company's amended employment agreement with Mr. Herbst provides for an
initial three-year term which commenced May 19, 1999. Upon completion of one
year of the initial term, the agreement automatically renews from month to month
such that there are always two years remaining in the term until either the
Company or Mr. Herbst provides notice of its or his desire to terminate. In
such case, the term ends upon the date indicated in the notice of termination.
The agreement provides for an annual base salary and an incentive bonus
determined by the Board of Directors or the Compensation Committee. 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, 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
-19-
<PAGE>
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. Herbst upon 30 days'
written notice in certain other circumstances. If the agreement is terminated
due to the death of Mr. Herbst, his estate will receive an amount equal to three
months' salary. Upon a change in control of the Company, Mr. Herbst will
receive an amount equal to his annual base salary, targeted incentive bonus and
the value of his other benefits and perquisites, and his unvested options will
fully vest. If Mr. Herbst is terminated pursuant to a change in control
transaction or generally otherwise without cause, or if he resigns for good
reason, he will receive an amount equal to three times his annual base salary,
targeted incentive bonus and the value of his other benefits and perquisites,
and his unvested options will fully vest. Mr. Herbst is also subject to a ten-
year confidentiality covenant, a one-year non-competition commitment and a two-
year non-solicitation agreement.
The Company's employment agreement with Ms. Jacobson provides for an
initial term of two years which commenced March 8, 2000. The agreement
automatically renews from month to month so that there are always two years
remaining in the term until either the Company or Ms. Jacobson provides notice
of its or her desire to terminate. In such case, the term ends upon the date
indicated in the notice of termination. The agreement provides for an annual
base salary and an incentive bonus determined by the Board of Directors or the
Compensation Committee. Ms. Jacobson is also entitled to benefits of such
insurance plans, hospitalization plans, reimbursement of reasonable out-of-
pocket business expenses, stock options and other perquisites as are generally
provided to employees at her level. The agreement may be terminated by the
Company upon 30 days' written notice if Ms. Jacobson is prevented from
performing her duties by reason of illness or incapacity for 140 days in any
180-day period. The agreement may also be terminated by the Company or Ms.
Jacobson upon 30 days' written notice in certain other circumstances. If the
agreement is terminated due to the death of Ms. Jacobson, her estate will
receive an amount equal to three months' salary. Upon the change in control of
the Company, certain of Ms. Jacobson's unvested stock options shall fully vest.
If Ms. Jacobson is terminated by the Company pursuant to a change in control
transaction or generally without cause she shall receive an amount equal to two
times her annual base salary and her targeted annual bonus, the annual value of
her benefits and perquisites, and certain of her unvested stock options will
fully vest. If Ms. Jacobson resigns for good reason, she will receive an amount
equal to her annual base salary, her targeted annual bonus, the annual value of
her benefits and perquisites, and certain of her unvested stock options will
fully vest. Ms. Jacobson is also subject to a ten-year confidentiality
covenant, a one-year non-competition commitment and a two-year non-solicitation
agreement.
The Company's employment agreement with Mr. Kallet provides for an initial
term of two years which commenced July 1, 1999. Upon completion of one year of
the initial term, the agreement automatically renews from month to month such
that there is always one year remaining in the term until either the Company or
Mr. Kallet provides notice of its or his desire to terminate. In such case, the
term ends upon the date indicated in the notice of termination. The agreement
provides for an annual base salary and an incentive bonus determined by the
Board of Directors. Mr. Kallet 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.
Kallet is prevented from performing his duties by reason of illness or
incapacity for 140 days in any 180-day period. The agreement may also be
terminated by the Company or Mr. Kallet upon 30 days' written notice in certain
other circumstances. If the agreement is terminated due to the death of Mr.
Kallet, his estate will receive an amount equal to three months' salary. Upon a
change in control of the Company, Mr. Kallet will receive an amount equal to his
annual base salary, his targeted incentive bonus and the value of his other
benefits and perquisites, and his unvested options
-20-
<PAGE>
shall fully vest. If Mr. Kallet is terminated by the Company without cause
within one year of a change of control of the Company, by the Company pursuant
to a change in control transaction or if he resigns for good reason, he will
receive an amount equal to two times his annual base salary, his targeted
incentive bonus and the value of his other benefits and perquisites, his
targeted annual bonus, the annual value of his benefits and perquisites and his
unvested options shall fully vest. If Mr. Kallet is terminated by the Company
without cause and not involving a change in control transaction, he will receive
an amount equal to his salary for the remaining term of the agreement, and
certain of his unvested options shall fully vest. If Mr. Kallet resigns without
good reason after February 17, 2000, he will receive six months' salary, bonus
and health insurance benefits. Mr. Kallet is also subject to a ten-year
confidentiality covenant, a one-year non-competition commitment and a two-year
non-solicitation agreement.
The Company's employment agreement with Ms. Schonhaut provides for an
initial term of one year which commenced on February 1, 2000. The agreement
automatically renews so that there is always one year remaining in the term
until either the Company or Ms. Schonhaut provides notice of its or her desire
to terminate. In such case, the term ends up on the date indicated in the
notice of termination. The agreement provides for an annual base salary and an
incentive bonus determined by the Board of Directors or the Compensation
Committee. Ms. Schonhaut is also entitled to benefits of such insurance plans,
hospitalization plans, reimbursement of reasonable out-of-pocket business
expenses, stock options and other benefits as are generally provided to
employees at her level. The agreement may be terminated by the Company upon 30
days' written notice if Ms. Schonhaut is prevented from performing her duties by
reason of illness or incapacity for 140 days in any 180-day period. The
agreement may also be terminated by the Company or Ms. Schonhaut upon 30 days'
written notice in certain other circumstances. If the agreement is terminated
due to the death of Ms. Schonhaut, her estate will receive an amount equal to
three months' salary. If Ms. Schonhaut is terminated by the Company pursuant to
a change of control transaction she will receive an amount equal to her annual
base salary plus her targeted annual bonus. If Ms. Schonhaut is terminated by
the Company generally without cause or if Ms. Schonhaut resigns for good reason,
she will receive an amount equal to her annual base salary plus her targeted
annual bonus and certain of her unvested stock options will fully vest. Ms.
Schonhaut is also subject to a ten-year confidentiality covenant, a one-year
non-competition commitment and a one-year non-solicitation agreement.
The Company's amended employment agreement with Mr. Teague provides for an
initial three-year term which commenced May 19, 1999. Upon completion of one
year of the initial term, the agreement automatically renews from month to month
such that there are always two years remaining in the term until either the
Company or Mr. Teague provides notice of its or his desire to terminate. In
such case, the term ends upon the date indicated in the notice of termination.
The agreement provides for an annual base salary and an incentive bonus
determined by the Board of Directors or the Compensation Committee. 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 agreement is terminated
due to the death of Mr. Teague, his estate will receive an amount equal to three
months' salary. Upon a change in control of the Company, Mr. Teague will
receive an amount equal to his annual base salary, targeted incentive bonus and
the value of his other benefits and perquisites, and his unvested options will
fully vest. If Mr. Teague is terminated by the Company pursuant to a change in
control transaction or generally otherwise without cause, or if he resigns for
good reason, he will receive an amount equal to three times his annual base
salary, targeted incentive bonus
-21-
<PAGE>
and the value of his other benefits and perquisites, and his unvested options
will fully vest. Mr. Teague is also subject to a ten-year confidentiality
covenant, a one-year non-competition commitment and a two-year non-solicitation
agreement.
The Company's employment agreement with Mr. Washington provides for an
initial term of two years which commenced January 7, 2000. The agreement
automatically renews so that there are always two years remaining in the term
until either the Company or Mr. Washington provides notice of its or his desire
to terminate. In such case, the term ends upon the date indicated in the notice
of termination. The agreement provides for an annual base salary and an
incentive bonus determined by the Board of Directors or the Compensation
Committee. Mr. Washington is also entitled to benefits of such insurance plans,
hospitalization plans, reimbursement of reasonable out-of-pocket business
expenses, stock options and other perquisites as are generally provided to
employees at his level. The agreement may be terminated by the Company upon 30
days' written notice if Mr. Washington is prevented from performing his duties
by reason of illness or incapacity for 140 days in any 180-day period. The
agreement may also be terminated by the Company or Mr. Washington upon 30 days'
written notice in certain other circumstances. If the agreement is terminated
due to the death of Mr. Washington, his estate will receive an amount equal to
three months' salary. If Mr. Washington is terminated by the Company pursuant
to a change in control transaction or generally without cause, he will receive
an amount equal to two times his annual base salary, his targeted annual bonus
and the annual value of his benefits and perquisites, and certain of his
unvested stock options will fully vest. If Mr. Washington resigns for good
reason, he will receive an amount equal to his annual salary, his targeted
annual bonus and the annual value of his benefits and perquisites, and certain
of his unvested stock options will fully vest. Mr. Washington is also subject
to a ten-year confidentiality covenant, a one-year non-competition commitment
and a two-year non-solicitation agreement.
The Company's employment agreement with Mr. Wingfield provides for an
initial term of two years which commenced March 23, 2000. The agreement
automatically renews so that there are always two years remaining in the term
until either the Company or Mr. Wingfield provides notice of its or his desire
to terminate. In such case, the term ends upon the date indicated in the notice
of termination. The agreement provides for an annual base salary and an
incentive bonus determined by the Board of Directors or the Compensation
Committee. Mr. Wingfield is also entitled to benefits of such insurance plans,
hospitalization plans, reimbursement of reasonable out-of-pocket business
expenses, stock options and other perquisites as are generally provided to
employees at his level. The agreement may be terminated by the Company upon 30
days' written notice in certain other circumstances. If the agreement is
terminated due to the death of Mr. Wingfield, his estate will receive an amount
equal to three months' salary. Upon the change of control of the Company,
certain of Mr. Wingfield's stock options shall fully vest. If Mr. Wingfield is
terminated pursuant to a change of control transaction or generally without
cause, he will receive an amount equal to two times his annual base salary, his
targeted annual bonus and the annual value of his benefits and perquisites, and
certain of his unvested stock options will fully vest. If Mr. Wingfield resigns
for good reason, he will receive an amount equal to his annual salary, his
targeted annual bonus and the annual value of his benefits and perquisites, and
certain of his stock options will fully vest. Mr. Wingfield is also subject to
a ten-year confidentiality covenant, a one-year non-competition commitment and a
two-year non-solicitation agreement.
The Company's amended employment agreement with Ms. Wolin provides for an
initial term of one year which commenced July 1, 1999. The agreement
automatically renews so that there is always one year remaining in the term
until either the Company or Ms. Wolin provides notice of its or her desire to
terminate. In such case, the term ends upon the date indicated in the notice of
termination. The agreement provides for an annual base salary and an incentive
bonus determined by the Board of
-22-
<PAGE>
Directors or the Compensation Committee. Ms. Wolin is also entitled to benefits
of such insurance plans, hospitalization plans, reimbursement of reasonable out-
of-pocket business expenses, stock options and other benefits and perquisites as
are generally provided to employees at her level. The agreement may be
terminated by the Company upon 30 days' written notice if Ms. Wolin is prevented
from performing her duties by reason of illness or incapacity for 140 days in
any 180-day period. The agreement may also be terminated by the Company or Ms.
Wolin upon 30 days' written notice in certain other circumstances. If the
agreement is terminated due to the death of Ms. Wolin, her estate will receive
an amount equal to three months' salary. Upon a change of control of the
Company, Ms. Wolin will receive an amount equal to one-half of the aggregate of
her annual base salary and her targeted annual bonus, and her unvested options
will fully vest. If Ms. Wolin is terminated generally without cause, she will
receive an amount equal to her annual base salary that would have been paid
during the remainder of the term of the agreement. If Ms. Wolin is terminated by
the Company pursuant to a change in control transaction or if she resigns for
good reason, she will receive an amount equal to her annual base salary and her
targeted annual bonus, and certain of her unvested stock options will fully
vest. Ms. Wolin is also subject to a ten-year confidentiality covenant, a one-
year non-competition commitment and a one-year non-solicitation agreement.
The Company's general release, covenant not to sue and agreement with John
Kane provides for the termination of Mr. Kane's employment and the resignation
from his positions with the Company as of January 1, 2000 under the terms of
this agreement. Mr. Kane received approximately $1,931,000 in severance and
bonus payments, and the Company canceled $280,000 of promissory notes which were
executed by Mr. Kane during fiscal 1999. In addition, all of Mr. Kane's
unvested options become fully vested and are exercisable through June 30, 2000.
Mr. Kane is also subject to a ten-year confidentiality covenant, a one-year non-
competition commitment and a two-year non-solicitation agreement. On January
19, 2000, the Company filed a complaint against Mr. Kane in Arapahoe County
District Court. On February 13, 2000, the Company entered into an agreement
(the "Settlement Agreement") with Mr. Kane whereby the Company waived any claims
it may have had against Mr. Kane. The Settlement Agreement provides, among
other things, as follows: (i) 82,500 of Mr. Kane's vested options to purchase
220,000 shares of ICG Stock are revoked by ICG and relinquished by Mr. Kane;
(ii) Mr. Kane's remaining options shall become fully vested and exercisable from
February 14, 2000 through July 1, 2000; and (iii) upon violation of the terms of
the Settlement Agreement by ICG, Mr. Kane is entitled to 150% of the-then net
value of the stock underlying such options. The Settlement Agreement also
contains a non-solicitation agreement.
The Company's general release and covenant not to sue with Doug Falk
provides for the termination of Mr. Falk's employment and his resignation from
his positions with the Company as of January 17, 2000 under the terms of this
agreement. Mr. Falk received $468,265.07 in severance and bonus payments. In
addition, all of Mr. Falk's unvested options are fully vested and are
exercisable through July 17, 2000. On January 17, 2001, the Company will make a
determination as to whether Mr. Falk has fully complied with all of the terms
and conditions of the general release covenant not to sue and agreement. If Mr.
Falk has fully complied, the Company shall pay him the additional sum of
$250,000. Mr. Falk is subject to a ten-year confidentiality covenant, a one-
year non-competition commitment and a two-year non-solicitation agreement.
-23-
<PAGE>
Comparison of Total Stockholder Return
The following is 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 stockholder return for the period from September 30,
1994 through December 31, 1999. 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.
<TABLE>
<CAPTION>
Sept. 30, Sept. 30, Sept. 30, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1994 1995 1996 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C> <C> <C>
Company 100 93 153 128 198 156 136
NASDAQ Composite Index (1) 100 137 161 169 205 287 532
Peer Group 100 128 127 152 259 162 312
</TABLE>
- --------------------
(1) Common Shares of the Company's predecessor, IntelCom Group Inc.
("IntelCom"), traded on the American Stock Exchange ("AMEX") Emerging
Company Marketplace until January 4, 1993, when IntelCom Common Shares
began trading on the AMEX. 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.; MFS Communications Company, Inc. until the
date of its purchase by MCI/WorldCom, Inc. on December 31, 1996; GST
Telecommunications, Inc.; 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.
-24-
<PAGE>
Compliance With Section 16(a) of the Exchange Act
The following table lists the current and former directors, officers and
beneficial owners of more than 10% of the outstanding ICG 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:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Transactions Known Failures
Reporting Person Late Reports Untimely Reported To File Forms
- ---------------- ------------ ----------------- -------------
William S. Beans, Jr. 1 (Form 3) None None
Michael D. Kallet 1 (Form 3) None None
John Kane 1 (Form 4) None None
</TABLE>
Except as set forth above, the Company believes that during the year ended
December 31, 1999, its executive officers, directors and holders of more than
10% of the ICG Common Stock complied with all Section 16(a) filing requirements.
In making these statements, ICG 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
ADOPTION OF THE COMPANY'S YEAR 2000
-----------------------------------
EXECUTIVE LONG-TERM INCENTIVE PLAN
----------------------------------
General.
The Board of Directors of the Company has adopted, subject to stockholder
approval, the ICG Communications, Inc. Year 2000 Executive Long-Term Incentive
Plan (the "Option Plan"). The Option Plan was adopted primarily because the
Company's existing stock option plans no longer have sufficient shares of Common
Stock available thereunder for future grants of options.
A summary of the principal features of the Option Plan is provided below,
but this Summary is qualified in its entirety by reference to the full text of
the Option Plan which was filed electronically with this Proxy Statement with
the Securities and Exchange Commission. Such text is not included in the
printed version of this Proxy Statement. Copies of the Option Plan may be
obtained from the Company and will also be available for inspection at the
Meeting.
-25-
<PAGE>
Purpose and Effective Date.
The purpose of the Option Plan is to attract and retain the services of
participants whose judgment, interest and special efforts will contribute to the
success of the Company and will enhance the value of the Company, to provide
incentive compensation opportunities that are comparable to those of the
Company's competitors, and to identify participants' personal interests to those
of the Company's other stockholders. The Option Plan provides for the granting
of stock options and other stock-based awards ("Awards"), as determined by a
Committee appointed by the Board of Directors. The Option Plan will be
effective, subject to stockholder approval at the Meeting, as of June 7, 2000
(the "Effective Date"). In the event that stockholder approval is not received,
the Option Plan will not become effective.
Administration of the Plan.
The Option Plan will be administered by a Committee appointed by the Board
of Directors of the Company (the "Committee"). With respect to Award grants for
which the exemption from Section 16(b) of the Exchange Act is desired, the
Committee will be comprised solely of at least two Non-Employee Directors as
defined in Rule l6b-3(b)(3) under the Exchange Act. It also is expected that
the composition of the Committee will satisfy the requirements of U.S. Treasury
Regulation Section 1.162-27(e)(3), or any successor provision, with respect to
performance-based grants made to certain key executive officers. Compliance
with this requirement is one of the factors necessary to enable the Company to
avoid the income tax deduction limitation under Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"), on annual compensation in excess
of $1,000,000.
Shares Subject to the Option Plan.
The Option Plan authorizes the grant of Awards relating to an aggregate of
2,000,000 shares of Common Stock. If any corporate transaction occurs which
causes a change in the capitalization of the Company (such as a reorganization,
recapitalization, stock split, stock dividend, or the like), the number and kind
of shares of Common Stock available, and the number and kind and/or price of the
shares of Common Stock subject to outstanding Awards granted under the Option
Plan shall be adjusted appropriately and equitably to prevent dilution or
enlargement of participants' rights. Shares underlying Awards will be counted
against the 2,000,000 shares limitation and may be reused to the extent that an
Award expires, is terminated unexercised or is forfeited, or shares of Common
Stock are returned to the Company's treasury as a result of any form of
"cashless" exercise of Options or tax withholding of shares permitted by the
Committee under the Option Plan. On April 24, 2000, the last reported sale
price of the Common Stock on the NASDAQ National Market was $24.56 per share.
Eligibility and Participation.
Employees eligible to participate in the Option Plan include officers and
employees of the Company, its parents and subsidiaries, including employees who
are members of the Board. Directors who are not employees ("Director
Participants") will be able to participate in the Option Plan as described below
in the section captioned "Awards to Director Participants." All employees of the
Company will be eligible to participate in the Option Plan, although the
Option Plan will be used primarily to attract and retain senior management,
including vice presidents, senior vice presidents and other executive officers
and directors.
-26-
<PAGE>
Amendment and Termination of the Option Plan.
In no event may any Award under the Option Plan be granted after the tenth
anniversary of the Option Plan's Effective Date. The Board of Directors may
amend, suspend or terminate the Option Plan at any time; provided that no
amendment may alter or impair any outstanding Award without the consent of the
participant.
Awards Under the Option Plan.
Awards for Employees. The Committee may grant to employees incentive stock
options ("ISOs"), non-qualified stock options ("NSOs"), stock appreciation
rights ("SARs"), restricted stock, stock units, restricted stock units,
performance shares, or a combination thereof under the Option Plan. The
exercise price for each grant of NSOs or SARs intended to satisfy the
"performance-based" exception to the deduction limitation under Code Section
162(m) or any ISO granted under the Option Plan shall be at least equal to 100%
of the fair market value of the Common Stock on the date the NSO, SAR, or ISO is
granted. ISOs, NSOs, and SARs shall expire at such times as the Committee
determines at the time of grant; provided, however, that no such Award shall be
exercisable later than the tenth anniversary of its grant.
The exercise price for ISOs, NSOs, and SARs is payable by cashier's check
or certified check, by tendering shares of Common Stock having a fair market
value equal to the exercise price, by share withholding, by any form of
"cashless" exercise or a combination of the foregoing.
In addition to ISOs, NSOs and SARs, the Option Plan permits the grant of
restricted stock (the grant of shares of Common Stock subject to transfer and
forfeiture restrictions), stock units (the grant of future rights to shares of
Common Stock), restricted stock units (the grant of future rights to shares of
Common Stock subject to transfer and forfeiture provisions), and performance
shares (the grant of shares of Common Stock contingent upon the achievement of
certain performance goals).
Awards granted under the Option Plan shall be exercisable or payable at
such times and subject to such restrictions and conditions as the Committee
shall approve.
Awards may be transferred only under the laws of descent and distribution
and, during his or her lifetime, shall be exercisable only by the participant or
his or her legal representative.
With respect to ISOs, the fair market value (determined at the date of
grant of the ISO) of shares of Common Stock subject to ISOs which are
exercisable for the first time by any one employee in any calendar year, shall
not exceed $100,000.
Awards to Director Participants. The Option Plan provides that as of
December 15, 2000, and as of December 15, 2001, each person who is not an
employee of the Company and who is serving as a Director on such date shall
automatically be granted NSOs to purchase 20,000 shares of Common Stock (the
"Formula Options"); provided, however, that each Director who receives formula
grant options under the Company's 1998 Stock Option Plan, as amended (the "1998
Plan"), will not be eligible to receive grants of Formula Options under this
provision covering the same periods. Each Formula Option will have an exercise
price equivalent to the fair market value of the Common Stock on the date such
Option is granted. Each Formula Option granted will vest and become exercisable
as to 5,000 shares of Common Stock on the March 31 of the year following the
fiscal year during which the date of grant
-27-
<PAGE>
occurs and on the last day of each succeeding fiscal quarter thereafter, but
only if the Director has served in such capacity for more than 50% of the
business days contained in each such quarter.
In addition to the Formula Options, the Committee has the discretionary
authority to grant Awards to one or more Directors from time to time, upon such
terms, conditions and exercise prices as the Committee determines.
Grant Information.
Except in the case of Formula Options granted to Director Participants, it
is not possible at this time to determine the Awards that will be granted in the
future to employees and Directors pursuant to the Option Plan.
Federal Income Tax Consequences of Awards Under the Option Plan.
The Company has been advised by its counsel that under currently applicable
provisions of the Code, the following federal income tax consequences may be
expected by a participant (including a Director Participant) and by the Company
in respect of the grant and exercise of Awards under the Option Plan:
Non-Qualified Stock Options (NSOs). The grant of an NSO will not result in
taxable income to the participant. Except as described below, the participant
will realize ordinary income at the time of exercise in an amount equal to the
excess of the fair market value of the shares of Common Stock acquired over the
exercise price for those shares, and the Company will be entitled to a
corresponding deduction. Gains or losses realized by the participant upon
disposition of such shares will be treated as capital gains and losses, with the
basis in such shares equal to the fair market value of the shares at the time of
exercise.
The exercise of an NSO through the delivery of previously acquired shares
of Common Stock will generally be treated as a non-taxable, like-kind exchange
as to the number of shares surrendered and the identical number of shares
received under the option. That number of shares will take the same basis and,
for capital gains purposes, the same holding period as the shares that are given
up. The value of the shares received upon such an exchange that are in excess
of the number given up will be taxed to the participant at the time of the
exercise as ordinary income. The excess shares will have a new holding period
for capital gains purposes and a basis equal to the value of such shares
determined at the time of exercise.
Incentive Stock Options (ISOs). The grant of an ISO will not result in
taxable income to the participant. The exercise of an ISO will not result in
taxable income to the participant provided that the participant was, without a
break in service, an employee of the Company or a parent or subsidiary during
the period beginning on the date of the grant of the option and ending on the
date three months prior to the date of exercise (one year prior to the date of
exercise if the participant is disabled, as that term is defined in the Code).
If the participant does not sell or otherwise dispose of the Common Stock within
two years from the date of the grant of the ISO or within one year after the
transfer of such Common Stock to the participant, then, upon disposition of such
shares, any amount realized in excess of the exercise price will be taxed to the
participant as capital gain, and the Company will not be entitled to any
deduction for Federal income tax purposes. If the foregoing holding period
requirements are not met, the participant generally will realize ordinary
income, and a corresponding deduction will be allowed to the Company, at the
time of the disposition of the shares, in an amount equal to the lesser of (i)
the excess of
-28-
<PAGE>
the fair market value of the shares on the date of exercise over the exercise
price, or (ii) the excess, if any, of the amount realized upon disposition of
the shares over the exercise price. The excess of the fair market value of the
shares at the time of the exercise of an ISO over the exercise price is an
adjustment that is included in the calculation of the participant's alternative
minimum taxable income for the tax year in which the ISO is exercised. For
purposes of determining the participant's alternative minimum tax liability for
the year of disposition of the shares acquired pursuant to the ISO exercise, the
participant will have a basis in those shares equal to the fair market value of
the shares at the time of exercise.
The exercise of an ISO through the exchange of previously acquired Common
Stock will generally be treated in the same manner as such an exchange would be
treated in connection with the exercise of an NSO; that is, as a non-taxable,
like-kind exchange as to the number of shares given up and the identical number
of shares received under the option. That number of shares will take the same
basis and, for capital gains purposes, the same holding period as the shares
that are given up. However, such holding period will not be credited for
purposes of the one-year holding period required for the new shares to receive
ISO treatment. Shares received in excess of the number of shares given up will
have a new holding period and will have a basis of zero or, if any cash was paid
as part of the exercise price, the excess shares received will have a basis
equal to the amount of the cash.
If the exercise price of an ISO is paid with shares of Common Stock of the
Company acquired through a prior exercise of an ISO, gain will be realized on
the shares given up (and will be taxed as ordinary income) if those shares have
not been held for the minimum ISO holding period (two years from the date of
grant and one year from the date of transfer), but the exchange will not affect
the tax treatment, as described in the immediately preceding paragraph, of the
shares received.
Stock Appreciation Rights (SARs). The grant of an SAR will not result in
taxable income to the participant. Upon exercise of an SAR, the amount of cash
or the fair market value of shares received will be taxable to the participant
as ordinary income, and a corresponding deduction will be allowed to the
Company. Gains or losses realized by the participant upon disposition of such
shares will be treated as capital gains and losses, with the basis in such
shares equal to the fair market value of the shares at the time of exercise.
Performance Shares. A participant who has been granted performance shares
will not realize taxable income at the time of grant, and the Company will not
be entitled to a deduction at that time. The participant will have compensation
income at the time of distribution of the shares of Common Stock equal to the
then fair market value of the distributed performance shares, and the Company
will have a corresponding deduction.
Restricted Stock and Other Stock Awards. A participant who has been
granted a restricted stock Award will not realize taxable income at the time of
grant, and the Company will not be entitled to a deduction at that time,
assuming that the restrictions constitute a "substantial risk of forfeiture" for
Federal income tax purposes. Upon the vesting of shares subject to an award,
the holder will realize ordinary income in an amount equal to the then fair
market value of those shares, and the Company will be entitled to a
corresponding deduction. Gains or losses realized by the participant upon
disposition of such shares will be treated as capital gains and losses, with the
basis in such shares equal to the fair market value of the shares at the time of
vesting. Dividends paid to the holder during the restriction period will also
be compensation income to the participant and deductible as such by the Company.
-29-
<PAGE>
A participant may elect pursuant to Code Section 83(b) to have the income
recognized and measured at the date of grant of restricted stock and to have the
applicable capital gain holding period commence as of that date, as described
below.
A participant who has been granted a stock Award that is not subject to a
substantial risk of forfeiture for Federal income tax purposes (i.e., bonus
stock) will realize ordinary income in an amount equal to the fair market value
of the shares at such time, and the Company will be entitled to a corresponding
deduction.
Section 83(b) Election. If a participant is granted shares of Stock that
are subject to a substantial risk of forfeiture, recognition of income may be
accelerated to the date of grant if the participant files an election under Code
Section 83(b). Such an election must be filed with the IRS not later than 30
days after the date the property was transferred (i.e., the date of grant), and
may be filed prior to the date of transfer. A copy of the election should be
filed with the Company. If such an election is properly filed in a timely
manner: (i) the Company will be entitled to a deduction at the time of grant and
in an amount equal to the fair market value of the shares at the time of grant
(determined without regard to forfeiture restrictions and other non-permanent
restrictions), (ii) dividends paid to such holder during the restriction period
will be taxable as dividends to such holder and not deductible by the Company,
and (iii) there will be no further tax consequences when the restrictions lapse.
Gains or losses realized by the participant upon disposition of such shares will
be treated as capital gains and losses, with the basis in such shares equal to
the fair market value of the shares at the time of grant. If a participant who
has made such an election subsequently forfeits the shares, the participant will
not be entitled to any deduction or loss. The Company, however, will be
required to include as ordinary income the lesser of the fair market value of
the forfeited shares or the amount of the deduction originally claimed with
respect to the shares.
Withholding of Taxes. Pursuant to the Option Plan, the Company may deduct,
from any payment or distribution of shares under the Option Plan, the amount of
any tax required by law to be withheld with respect to such payment, or may
require the participant to pay such amount to the Company prior to, and as a
condition of, making such payment or distribution. Subject to rules and
limitations established by the Committee, a participant may elect to satisfy the
withholding required, in whole or in part, either by having the Company withhold
shares of Common Stock from any payment under the Option Plan or by the
participant delivering shares of Common Stock to the Company. Any election must
be made in writing on or before the date when the amount of taxes to be withheld
is determined. The portion of the withholding that is so satisfied will be
determined using the fair market value of the Common Stock on the date when the
amount of taxes to be withheld is determined.
The use of shares of Common Stock to satisfy any withholding requirement
will be treated, for Federal income tax purposes, as a sale of such shares for
an amount equal to the fair market value of the stock on the date when the
amount of taxes to be withheld is determined. If previously-owned shares of
Common Stock are delivered by a participant to satisfy a withholding
requirement, the disposition of such shares would result in the recognition of
gain or loss by the participant for tax purposes, depending on whether the basis
in the delivered shares is less than or greater than the fair market value of
the shares at the time of disposition.
Change In Control. Any acceleration of the vesting or payment of Awards
under the Option Plan in the event of a change in control in the Company may
cause part or all of the consideration involved to be treated as an "excess
parachute payment" under the Internal Revenue Code, which may subject the
participant to a 20% excise tax and which may not be deductible by the Company.
-30-
<PAGE>
Tax Advice. The preceding discussion is based on Federal tax laws and
regulations presently in effect, which are subject to change, and the discussion
does not purport to be a complete description of the Federal income tax aspects
of the plan. A participant may also be subject to state and local taxes in
connection with the grant of Awards under the plan. The Company will encourage
participants to consult with their individual tax advisors to determine the
applicability of the tax rules to the Awards granted to them in their personal
circumstances.
The approval of the adoption by the Board of Directors of the Option Plan
requires the affirmative vote of a majority of the outstanding shares of Common
Stock voting at the Meeting or at any adjournment or adjournments thereof.
The Board of Directors recommends a vote "FOR" Proposal II.
PROPOSAL III
ADOPTION OF THE COMPANY'S PLAN TO INCREASE THE NUMBER OF SHARES
---------------------------------------------------------------
The Board of Directors has adopted, subject to shareholder approval, an
amendment to the Company's Certificate of Incorporation to increase the
authorized shares of the Company's Common Stock from one hundred million
(100,000,000) to two hundred million (200,000,000) shares and to increase the
number of the Company's authorized Preferred Stock from one million (1,000,000)
to two million (2,000,000).
On April 24, 2000, there were 48,632,769 shares of Common Stock and 87,650
shares of Preferred Stock outstanding. The Company has reserved (i) 26,785,715
shares of Common Stock for issuance upon the conversion of the Series A
Preferred Stock issued in a private placement in April 2000, (ii) 10,000,000
shares of Common Stock for issuance upon the exercise of warrants issued in
connection with the private placement of Series A Preferred Stock, and (iii) an
aggregate of approximately 8,000,000 shares of Common Stock for issuance upon
the exercise of options and rights granted under the Company's employee stock
purchase plans. As the conversion price of the Series A Preferred Stock and the
exercise price of the warrants are adjusted in accordance with the terms of the
documents governing the Series A Preferred Stock and the warrants, the Company
will be required to reserve additional shares of Common Stock. In addition, in
February 2000, the Company and Teligent, Inc. ("Teligent") agreed to a Common
Stock share exchange whereby the Company will issue 2,996,076 shares of Common
Stock to a wholly-owned subsidiary of Teligent, and Teligent will issue
1,000,000 shares of its Common Stock to a wholly-owned subsidiary of the
Company.
On April 24, 2000, the Company had 96,414,560 authorized and reserved
shares of Common Stock and 87,650 authorized and reserved shares of Preferred
Stock. Thus, as of such date, the Company had 3,585,440 authorized but
unreserved shares of Common Stock and 912,350 authorized but unreserved shares
of Preferred Stock. If the proposal to change the Company's authorized Common
Stock is approved by the stockholders, the Company will have 103,585,440 shares
of Common Stock authorized but unreserved and 1,912,350 shares of Preferred
Stock authorized but unreserved.
Although the Company has no current definitive plans to issue any shares to
be authorized under this proposal, the increase in capital stock will provide
the Company's Board of Directors with additional flexibility to use its capital
stock for business and financial purposes in the future, including possible
financing and acquisition transactions, employee benefit plan issuances and
general corporate purposes. The Board of Directors believes it is beneficial to
the Company to have the additional shares available for such purposes without
delay or the necessity of a special stockholders' meeting.
-31-
<PAGE>
If the proposed amendment is adopted by the stockholders, the additional
shares will be available for issuance from time to time without further action
by the stockholders (unless required by applicable law, regulatory agencies or
by the rules of any stock exchange or automated quotation system on which the
Company's securities may then be listed or quoted). While the increase in
authorized capital stock will not change substantially the rights of holders of
the Company's Common Stock or Preferred Stock, issuance of shares in future
transactions may have a dilutive effect. The Board of Directors could use the
additional shares of capital stock to discourage an attempt to change control of
the Company. However, the Board has no present intention of issuing any shares
of capital stock for such purposes and this proposal is not being recommended in
response to any specific effort to obtain control of the Company of which the
Company is aware.
If this amendment is adopted, it will become effective upon the filing of a
certificate of amendment to the Company's Certificate of Incorporation with the
Secretary of State of the State of Delaware.
The Board of Directors recommends a vote "FOR" Proposal III.
PROPOSAL IV
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, 2000 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 IV.
ANNUAL REPORT AND APPENDIX
All stockholders of record as of May 4, 2000 are being sent concurrently
with this Proxy Statement a copy of the Company's 1999 Summary Annual Report.
The 1999 Summary Annual Report is not incorporated by reference into this Proxy
Statement and is not to be deemed a part hereof. The Company's consolidated
financial statements for the fiscal years ended December 31, 1997, 1998 and
1999, as well as additional information required to be provided to stockholders
pursuant to Rule l4a-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 2001 Annual
Meeting of Stockholders and seeks to have the proposal included in the Company's
Proxy Statement relating to that meeting, pursuant to Rule l4a-8 of the Exchange
Act, the proposal must be received by the Company no later than the close of
business on January 9, 2001. If a stockholder wishes to present a matter at the
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<PAGE>
2001 Annual Meeting of Stockholders that is outside of the processes of Rule
l4a-8, the Company must receive notice of such a matter on or before April 9,
2001. 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/ Don Teague
H. DON TEAGUE
Secretary
-33-
<PAGE>
APPENDIX
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
<S> <C>
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 LLC........................... A-22
Independent Auditors' Report - Report of Ernst & Young LLP.................. A-23
Consolidated Balance Sheets, December 31, 1998 and 1999..................... A-24
Consolidated Statements of Operations, Fiscal Years Ended December 31,
1997, 1998 and 1999...................................................... A-26
Consolidated Statements of Stockholders' Equity (Deficit),
Fiscal Year Ended December 31, 1997, 1998 and 1999....................... A-28
Consolidated Statements of Cash Flows, Fiscal Years Ended
December 31, 1997, 1998 and 1999......................................... A-29
Notes to Consolidated Financial Statements, December 31, 1998 and 1999...... A-32
Market for the Company's Common Equity and Related Stockholder Matters...... A-79
</TABLE>
A-1
<PAGE>
SELECTED FINANCIAL DATA
-----------------------
The selected financial data for the fiscal years ended September 30, 1995
and 1996, the three months ended December 31, 1996 and the years ended December
31, 1997, 1998 and 1999 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 Annual Report. 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, NETCOM, Network Services and Satellite Services as discontinued for
all periods presented. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
Three Months
Fiscal Years Ended Ended
September 30, December 31, Years Ended December 31,
------------------------- ----------------- -----------------------------------------
1995 1996 1996 1997 1998 1999
----------- --------- ----------------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
(in thousands, except per share amounts)
Statement of Operations Data:
Revenue (1) $ 30,906 72,731 27,307 149,358 303,317 479,226
Operating costs and expenses:
Operating costs 20,924 65,436 27,018 147,338 187,260 238,927
Selling, general and
administrative expenses 32,671 45,150 16,895 121,884 158,153 239,756
Depreciation and amortization 10,399 24,041 8,266 49,836 91,927 174,239
Provision for impairment of
long-lived assets 2,000 9,800 - 5,169 - 31,815
Restructuring costs - - - - 1,786 -
Other, net 241 1,030 (805) 292 4,877 387
----------- --------- ----------------- ---------- ----------- ----------
Total operating costs and
expenses 66,235 145,457 51,374 324,519 444,003 685,124
Operating loss (35,329) (72,726) (24,067) (175,161) (140,686) (205,898)
Interest expense (23,190) (85,299) (24,441) (117,521) (170,015) (212,420)
Other income, net 3,398 14,182 5,885 21,404 27,283 13,778
----------- --------- ----------------- ---------- ----------- ----------
Loss from continuing
operations before income
taxes, preferred dividends,
share of losses,
extraordinary gain and (55,121) (143,843) (42,623) (271,278) (283,418) (404,540)
cumulative effect of change
in accounting
Income tax benefit (expense) - 5,305 (1) - (90) (25)
Accretion and preferred
dividends on preferred
securities of subsidiaries,
net of minority interest in (1,764) (27,598) (5,529) (39,019) (55,183) (61,897)
share of losses
Share of losses of joint (741) (1,814) - - - -
venture
----------- --------- ----------------- ---------- ----------- ----------
Loss from continuing
operations before
extraordinary gain and (57,626) (167,950) (48,153) (310,297) (338,691) (466,462)
cumulative effect of change
in accounting
Net (loss) income from
discontinued operations (33,086) (56,969) (13,161) (50,438) (79,354) 36,789
Extraordinary gain on sales of
operations of NETCOM - - - - - 195,511
Cumulative effect of change in
accounting(1) - (3,453) - - - -
----------- --------- ----------------- ---------- ----------- ----------
Net loss $ (90,712) (228,372) (61,314) (360,735) (418,045) (234,162)
=========== ========= ================= ========== =========== ==========
Loss per share from continuing
operations basic and diluted $(1.87) (4.55) (1.15) (7.30) (7.49) (9.90)
Net loss per sharebasic and
diluted $(2.94) (6.19) (1.47) (8.49) (9.25) (4.97)
=========== ========= ================= ========== =========== ==========
Weighted average number of
shares outstanding basic and
diluted(2) 30,808 36,875 41,760 42,508 45,194 47,116
=========== ========= ================= ========== =========== ==========
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
Three Months
Fiscal Years Ended Ended
September 30, December 31, Years Ended December 31,
------------------------- ------------------ ----------------------------------------
1995 1996 1996 1997 1998 1999
---------- ---------- ------------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(in thousands, except per share amounts)
Other Data:
Net cash (used) provided by
operating activities $ (41,947) (29,375) 200 (106,761) (100,060) 21,083
Net cash used by investing (65,772) (137,148) (79,621) (422,585) (343,561) (186,971)
activities
Net cash provided (used) by
financing activities 377,772 365,272 (1,741) 308,804 525,601 67,018
EBITDA(3) (24,930) (48,685) (15,801) (125,325) (48,759) (31,659)
EBITDA (before non-recurring
and non-cash charges)(3) (22,689) (37,855) (16,606) (119,864) (42,096) 543
Capital expenditures of
continuing operations(4) 82,623 162,510 67,515 261,318 356,036 735,233
Capital expenditures of
discontinued operations(4) 49,714 68,789 11,336 25,533 38,891 12,264
Balance Sheet Data:
Cash, cash equivalents and
short-term investments $ 268,688 458,640 392,921 232,855 262,307 125,507
available for sale
Net current assets
(liabilities) of discontinued 135,419 62,173 68,950 58,586 66 (529)
operations(5)
Working capital (deficit) 381,006 499,810 415,247 263,674 294,934 (67,761)
Property and equipment, net 169,907 308,615 374,924 603,988 908,058 1,525,680
Net non-current assets of
discontinued operations(5) 108,604 149,378 154,481 128,206 102,774 -
Total assets 737,099 1,066,224 1,071,699 1,205,331 1,589,647 2,020,621
Current portion of long-term
debt and capital lease 17,509 7,661 24,877 7,096 4,892 8,886
obligations
Long-term debt and capital
lease obligations, less 397,168 739,308 761,135 957,508 1,661,944 1,969,249
current portion
Redeemable preferred
securities of subsidiaries 24,336 153,318 159,120 420,171 466,352 519,323
Common stock and additional
paid-in capital 420,516 504,851 508,182 534,290 577,940 599,760
Accumulated deficit (152,487) (380,859) (430,682) (791,417) (1,209,462) (1,443,624)
Stockholders' equity (deficit) 268,001 125,203 78,711 (256,983) (631,177) (843,864)
- -------------------------------
</TABLE>
(1) During the fiscal year ended September 30, 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.
(2) Weighted average number of shares outstanding for the fiscal year ended
September 30, 1995 represents Holdings-Canada common shares outstanding.
Weighted average number of shares outstanding for the fiscal year ended
September 30, 1996, the three months ended December 31, 1996, and the years
ended December 31, 1997 and 1998 represents Holdings-Canada common shares
outstanding for the period from October 1, 1995 through August 2, 1996, and
represents ICG Common Stock and HoldingsCanada Class A Shares (not owned by
the Company) outstanding for the periods from August 5, 1996 through
December 31, 1998. During the year ended December 31, 1998, all of the
remaining Class A Shares outstanding held by third parties were exchanged
into shares of ICG Common Stock and, accordingly, weighted average number
of shares outstanding for the year ended December 31, 1999 represents ICG
Common Stock only.
(3) EBITDA consists of 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, operating loss plus depreciation
and amortization. EBITDA (before non-recurring and non-cash charges)
represents EBITDA before certain nonrecurring charges such as the provision
for impairment of long-lived assets, restructuring costs and other, net
operating costs and expenses, including deferred compensation and net loss
(gain) on disposal of long-lived assets. EBITDA and EBITDA (before non-
recurring and non-cash charges) are provided because they are measures
commonly used in the telecommunications industry. EBITDA and EBITDA
(before non-recurring and non-cash 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 non-recurring and non-cash charges) are not measurements
under GAAP and are not necessarily comparable with similarly titled
A-3
<PAGE>
measures of other companies. Net cash flows from operating, investing and
financing activities 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 and corporate
headquarters assets acquired through the issuance of long-term debt.
Capital expenditures of discontinued operations include the capital
expenditures of Zycom, NETCOM, Network Services and Satellite Services
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, NETCOM, Network Services and Satellite Services
combined for periods presented prior to the respective dates of each sale.
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, the ability of
the Company to obtain adequate financing to fund expansion, the dependence on
increased traffic on the Company's facilities, the successful implementation of
the Company's strategy of offering an integrated telecommunications package of
local, long distance, data and enhanced telephony and network services, the
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 years ended
December 31, 1997, 1998 and 1999 have been derived from the Company's audited
consolidated financial statements included elsewhere herein. The Company's
consolidated financial statements reflect the operations of Zycom, NETCOM,
Network Services and Satellite Services as discontinued for all periods
presented. All dollar amounts are in U.S. dollars.
Company Overview
ICG Communications, Inc. ("ICG" or "the Company") is a facilities-based
communications provider and, based on revenue and customer lines in service, one
of the largest competitive communications companies in the United States. The
Company primarily offers voice and data services directly to small- to medium-
sized business customers and offers network facilities and data management to
ISP customers. In addition, the Company offers special access and switched
access services to long-distance companies and other customers.
The Company began marketing and selling local dial-tone services in major
metropolitan areas in early 1997 subsequent to passage of the Telecommunications
Act, which permitted competitive interstate and intrastate telephone services
including local dial tone. In 1999, the Company offered competitive telephone
services in five regions within the United States. In early 1998, the Company
acquired NETCOM On-Line Communication Services, Inc. ("NETCOM"), which provided
the Company with a Tier 1 national data network that enabled the Company to
launch its business of providing network infrastructure to ISPs. By year-end
1999, the company had 730,975 customer lines and data access ports in service,
over 12,000 business customers and approximately 500 ISP customers.
As of December 31, 1999, the Company had 496,530 data access ports in
service for its ISP customers. The Company provides data access and transport
services to ISPs that in many cases rely on the Company to provide network
ownership and management. The Company's current product offerings to the ISP
market include dial-up products such as primary rate interface ("PRI"), remote
access service ("RAS") and Internet remote access service ("IRAS"), as well as
broadband access services including T-1 and T-3 connections and DSL.
As of December 31, 1999, the Company had 234,445 business customer lines in
service. Voice and data communication services offered to business customers
include local, long distance and enhanced telephony services through its
Internet protocol, circuit switch and regional fiber optic networks. In
regional markets, the Company is a cost-efficient alternative to the area's
incumbent local telephone company for businesses.
The Company provides interexchange services to long-distance carriers and
other customers including "special access" services that connect end-users to
long-distance carrier's facilities, connect a long-distance carrier's facilities
to the local telephone company central office and connect facilities of the same
or different long-distance carrier.
In 1999, the Company realized significant growth as demonstrated by a 58%
increase in revenue over 1998 and a more than doubling of the number of lines in
service compared to December 31, 1998. In connection with its high level of
growth, the Company took steps to streamline its business and focus on its core
operations.
A-5
<PAGE>
To better focus its efforts on its core business operations, the Company
disposed of certain assets which management believes do not complement its
overall business strategy. During the year ended December 31, 1999, the Company
sold non-core assets and related securities for net cash proceeds of
approximately $405 million, including the sale of the Company's retail ISP
customer business and its Network Services and Satellite Services divisions (see
"Discontinued Operations and Divestitures," note 3). The Company also
centralized its provisioning process with two new provisioning centers that
replaced 30 regional centers and added new, comprehensive operating support
systems ("OSS") from Telcordia for provisioning service and from Saville for
improved customer billing.
The Company owns and operates a Tier 1 nationwide data network, which at
December 31, 1999, included public and private peering locations, 227 POPs, 31
voice switches, 16 frame relay switches and high-performance routers connecting
a backbone of 24 ATM switches and 18,000 miles of leased long-haul fiber lines.
In addition, at year-end the Company had 4,596 miles of local fiber and
connections to 8,078 buildings.
The Company's business continues to grow as a result of increased Internet
demand, new technologies and increased market share for customers traditionally
served by incumbent telephone companies. The Company's business plan calls for
accelerated network expansion in 2000 into 22 new major metropolitan areas by
year-end. The Company will also invest in developing and delivering new
products and services to complete its portfolio of offerings to each market
segment.
In conjunction with the increase in its service offerings, the Company has
and will continue to need to spend significant amounts on equipment, sales,
marketing, customer service, engineering and support personnel prior to the
generation of corresponding revenue. EBITDA losses, EBITDA (before non-
recurring and non-cash charges) losses 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 non-recurring and non-cash charges) have
improved for each consecutive quarter, through and including the quarter ended
June 30, 1999 for which the Company reported positive EBITDA (before non-
recurring and non-cash charges) of $15.2 million. Due to the Company's decision
to suspend the revenue recognition for certain elements of transport and
termination services provided to ILECs and a nonrecurring provision for certain
of the Company's accounts receivable (see "Liquidity and Capital Resources -
Transport and Termination Charges"), the Company's EBITDA (before non-recurring
and non-cash charges) for the quarter ended September 30, 1999 was a loss of
$45.7 million. For the quarter ended December 31, 1999, the Company's EBITDA
(before non-recurring and non-cash charges) improved to $23.1 million.
Operating costs and operating loss in the fourth quarter were lower and
therefore EBITDA and EBITDA (before non-recurring and non-cash charges) were
higher due to an in-depth management review of network costs that was conducted
during the fourth quarter of 1999 following the centralization of network
functions. The analysis identified $9.5 million in costs from the first nine
months of 1999 related to capital activities under the existing Company
capitalization policy.
A-6
<PAGE>
Results of Operations
The following table provides certain statement of operations data and
certain other financial data for the Company for the periods indicated. The
table also presents revenue, operating costs and expenses, operating loss,
EBITDA and EBITDA (before non-recurring and non-cash charges) as a percentage of
the Company's revenue.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------------
1997 1998 1999
-------------------------------------------------------------------------------
$ % $ % $ %
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C> <C>
Revenue 149,358 100 303,317 100 479,226 100
Operating costs 147,338 99 187,260 62 238,927 50
Selling, general and administrative 121,884 82 158,153 52 239,756 50
Depreciation and amortization 49,836 33 91,927 30 174,239 36
Provision for impairment of long-lived assets 5,169 3 - - 31,815 7
Restructuring costs - - 1,786 - - -
Other, net 292 - 4,877 2 387 -
---------- ---------- ---------- ---------- ---------- ----------
Operating loss (175,161) (117) (140,686) (46) (205,898) (43)
Other Data:
Net cash (used) provided by operating activities (106,761) (100,060) 21,083
Net cash used by investing activities (422,585) (343,561) (186,971)
Net cash provided by financing activities 308,804 525,601 67,018
EBITDA(1) (125,325) (84) (48,759) (16) (31,659) (7)
EBITDA (before non-recurring and non-cash
charges)(1) (119,864) (80) (42,096) (14) 543 -
Capital expenditures of continuing operations(2) 261,318 356,036 735,233
Capital expenditures of discontinued operations(2) 25,533 38,891 12,264
- ----------------------------------------------------
</TABLE>
(1) See note 3 under "Selected Financial Data" for the definitions of EBITDA and
EBITDA (before non-recurring and non-cash charges).
(2) See note 4 under "Selected Financial Data" for the definitions of capital
expenditures of continuing operations and capital expenditures of
discontinued operations.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenue. Revenue increased $175.9 million, or 58%, from $303.3 million for
the year ended December 31, 1998 to $479.2 million for the year ended December
31, 1999. Local services revenue increased from $159.2 million, for the year
ended December 31, 1998 to $299.9 million, for the year ended December 31, 1999
increasing from 52% to 63% of total revenue respectively. The increase in local
services revenue is primarily due to an increase in the number of customer lines
in service from 354,482 lines at December 31, 1998 to 730,975 lines at December
31, 1999. In addition, local access revenue includes revenue of approximately
$58.3 million and $124.1 million for the years ended December 31, 1998 and 1999,
respectively, for reciprocal compensation relating to the transport and
termination of local traffic pursuant to various interconnection agreements.
The Company ceased recording revenue for tandem and transport reciprocal
compensation effective June 30, 1999. These agreements are currently under
renegotiation or 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 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.") Special access revenue increased from $74.5 million, or
25% of revenue, for the year ended December 31, 1998 to $113.9 million, or 24%
of revenue, for the year ended December 31, 1999, due to increased sales and
$18.1 million of revenue recognized during the year ended December 31, 1999
under the Company's fiber optic lease agreement with a major interexchange
carrier. The Company expects to record a minimum of approximately
A-7
<PAGE>
$11.0 million in additional revenue under this agreement during the first half
of 2000. Switched access (terminating long distance) revenue decreased to $46.7
million for the year ended December 31, 1999, compared to $49.0 million for the
year ended December 31, 1998. The Company has raised prices on its wholesale
switched services product in order to improve margins. Revenue from long
distance services was $20.6 million and $18.7 million for years ended December
31, 1998 and 1999, respectively. The Company's long distance revenue for the
year ended December 31, 1999 was impacted by planned attrition of resale access
lines which had high long distance service penetration rates. Revenue from data
services did not generate a material portion of total revenue during either
period.
Operating costs. Operating costs, which consist solely of operating costs
from telecommunications services, increased $51.6 million, or 28%, from $187.3
million for the year ended December 31, 1998 to $238.9 million for the year
ended December 31, 1999. Operating costs decreased as a percentage of revenue
from 62% for the year ended December 31, 1998 to 50% for the year ended December
31, 1999. Operating costs consist of payments to ILECs for the use of network
facilities to support local, 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 increase in network operating costs which
include engineering and operations personnel dedicated to the provision of local
exchange services. The Company expects the ratio of operating costs to revenue
will continue to improve as the Company provides a greater volume of higher
margin services, principally RAS and 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.
Selling, general and administrative expenses. Total selling, general and
administrative ("SG&A") expenses increased $81.6 million, or 52%, from $158.2
million for the year ended December 31, 1998 to $239.8 million for the year
ended December 31, 1999. Total SG&A expenses decreased as a percentage of
revenue from 52% for the year ended December 31, 1998 to 50% for the year ended
December 31, 1999. SG&A expenses related to the Company's communication
services ("Telecom Services") increased from $137.3 million, or 45% of revenue,
for the year ended December 31, 1998 to $210.5 million, or 44% of revenue, for
the year ended December 31, 1999. The increase in absolute dollars is
principally due to a provision of approximately $45 million recorded during the
year ended December 31, 1999 for accounts receivable related to certain elements
of transport and termination services provided to ILECs recorded in periods
prior to June 30, 1999, which the Company believes may be uncollectible. (See
"Liquidity Transport and Termination Charges.") As the Company benefits from
the revenue generated by newly developed services requiring substantial
administrative and marketing expense prior to initial service offerings,
principally local exchange services, Telecom Services has experienced declining
SG&A expenses as a percentage of revenue, which more than offset the effect of
the provision for accounts receivable recorded during the year ended December
31, 1999. From time to time, the Company will experience increases in SG&A
expenses as the Company prepares for offerings of newly developed services, such
as RAS. Corporate Services SG&A expenses increased $8.4 million, from $20.9
million for the year ended December 31, 1998 to $29.3 million for the year ended
December 31, 1999, primarily due to an increase in the number of employees
necessary to support the Company's expanding operations.
Depreciation and amortization. Depreciation and amortization increased
$82.3 million, or 90%, for the year ended December 31, 1999, compared to the
year ended December 31, 1998, primarily due to increased investment in
depreciable assets resulting from the continued expansion of the Company's
networks and services as well as a reduction in the overall weighted-average
useful life of depreciable assets outstanding. In addition, amortization
increased due to goodwill recorded in conjunction with the acquisition of
CSW/ICG ChoiceCom, L.P. ("ChoiceCom") completed on December 31, 1998. 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.
Provision for impairment of long-lived assets. For the year ended December
31, 1999, provision for impairment of long-lived assets of $31.8 million relates
to the impairment of software and other capitalized costs associated with
Telecom Services' billing and provisioning system projects under development.
The provision for impairment of long-
A-8
<PAGE>
lived assets was based on management's decision to abandon the billing and
provisioning systems under development and to select new vendors for these
systems, which vendors are expected to provide the Company with billing and
provisioning solutions with improved functionality and earlier delivery dates at
lower costs than what was proposed by the former vendors. 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, 1999.
Restructuring costs. For the year ended December 31, 1998, restructuring
costs of $1.8 million include $0.3 million in costs, primarily severance costs,
related to the facility closure of a subsidiary of NikoNet, Inc. ("NikoNet") 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.
Other, net. Other, net operating costs and expenses decreased from $4.9
million for the year ended December 31, 1998 to $0.4 million for the year ended
December 31, 1999. Other, net operating costs and expenses for the year ended
December 31, 1999 consists of deferred compensation expense of $1.3 million
related to the Company's deferred compensation arrangement with its chief
executive officer, offset by a net gain on disposal of miscellaneous long-lived
assets of $0.9 million. Other, net operating costs and expenses for the year
ended December 31, 1998 relates to the write-off of certain installation costs
of disconnected special access customers of $0.5 million, the write-off of
certain costs associated with an abandoned operating support system project of
$0.8 million and general disposal of furniture, fixtures and office equipment of
$3.6 million.
Interest expense. Interest expense increased $42.4 million, from $170.0
million for the year ended December 31, 1998 to $212.4 million for the year
ended December 31, 1999, which includes $197.2 million of non-cash interest.
The Company's interest expense increased, and will continue to increase, because
the principal amount of its indebtedness increases until the Company's fixed
rate senior indebtedness begins to pay interest in cash, beginning in 2001.
Additionally, interest expense increased due to the increase in long-term debt
associated with the Company's purchase of the corporate headquarters, effective
January 1, 1999, and the senior secured financing facility completed in August
1999.
Other income, net, including realized gains and losses on marketable
trading securities. Other income, net decreased $13.5 million from $27.3
million to $13.8 million from the year ended December 31, 1998 to the year ended
December 31, 1999, respectively. The decrease is primarily due to a decrease in
interest income of $12.1 million from $28.4 million for the year ended December
31, 1998 to $16.3 million for the year ended December 31, 1999. The decrease is
attributable to the decrease in cash, cash equivalents and short-term
investments as the Company funds operating losses and continues to invest
available cash balances in telecommunications equipment and other assets.
Additionally, other income, net decreased due to an increase in other expenses
of $1.4 million from $1.1 million net expense for the year ended December 31,
1998 to $2.5 million net expense for the year ended December 31, 1999. Other
expenses primarily consist of litigation settlement costs offset by a gain on
the sale of the common stock of MindSpring for the year ended December 31, 1999.
For the year ended December 31, 1998, other expenses primarily consist of
litigation settlement costs.
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 $6.7 million, from $55.2 million for the year ended December
31, 1998 to $61.9 million for the year ended December 31, 1999. The increase is
due primarily to the periodic payment of dividends on the 14% Exchangeable
Preferred Stock Mandatorily Redeemable 2008 (the "14% Preferred Stock") and the
14 1/4% Exchangeable Preferred Stock Mandatorily Redeemable 2009 (the "14 1/4%
Preferred Stock") in additional shares of 14% Preferred Stock and 14 1/4%
Preferred Stock. Accretion and preferred dividends on preferred securities of
subsidiaries, net of minority
A-9
<PAGE>
interest in share of losses recorded during the year ended December 31, 1999
includes the accretion of issuance costs of $1.3 million and the accrual of the
preferred securities dividends of $60.6 million associated with the 6 3/4%
Exchangeable Limited Liability Company Preferred Securities Mandatorily
Redeemable 2009 (the "6 3/4% Preferred Securities"), the 14% Preferred Stock and
the 14 1/4% Preferred Stock.
Loss from continuing operations. Loss from continuing operations increased
$127.8 million, or 38%, from $338.7 million for the year ended December 31, 1998
to $466.5 million for the year ended December 31, 1999 due to the increases in
operating costs, SG&A expenses, depreciation and amortization, provision for
impairment of long-lived assets and interest expense, and a decrease in interest
income, offset by an increase in revenue, as noted above.
Net (loss) income from discontinued operations. Net (loss) income from
discontinued operations improved to $116.2 million from a $79.4 million net loss
for the year ended December 31, 1998 to $36.8 million net income for the year
ended December 31, 1999. Net loss from discontinued operations for the year
ended December 31, 1998 consists of the combined net losses of Zycom, NETCOM,
Network Services and Satellite Services. Net income from discontinued
operations for the year ended December 31, 1999 consists of the combined net
losses of Network Services and net income of Satellite Services. Zycom
terminated its normal operations on October 22, 1998 and, accordingly, the
Company reported no loss from discontinued operations of Zycom for the year
ended December 31, 1999. Since the Company expected to report a gain on the
disposition of NETCOM, the Company deferred the net losses from operations of
NETCOM from November 3, 1998 (the date on which the Company's board of directors
adopted the formal plan to dispose of the operations of NETCOM) through the
dates of the sales and, accordingly, the Company reported no loss from
discontinued operations of NETCOM prior to or subsequent to the dates of the
sales for the year ended December 31, 1999. Additionally, net income from
discontinued operations for the year ended December 31, 1999 includes the gain
on the sale of Satellite Services of $48.7 million, offset by the loss on the
sale of Network Services of $10.9 million. Net loss from discontinued
operations for the year ended December 31, 1998 includes an estimated loss on
the disposal of Zycom of $1.8 million.
Extraordinary gain on sales of operations of NETCOM. The Company reported
an extraordinary gain on the sales of operations of NETCOM during the year ended
December 31, 1999 of $195.5 million, net of income taxes of $2.0 million.
Offsetting the gain on the sales is approximately $16.6 million of net losses of
operations of NETCOM from November 3, 1998 through the dates of the sales and
$34.7 million of deferred sales proceeds from the sale of certain of the
domestic operating assets and liabilities of NETCOM to MindSpring. The deferred
proceeds were recognized on a periodic basis over the term of the Company's
network capacity agreement with MindSpring.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenue. Revenue increased $153.9 million, or 103%, from $149.4 million
for the year ended December 31, 1997 to $303.3 million for the year ended
December 31, 1998. Local services revenue increased from $21.3 million, or 14%
of revenue, for the year ended December 31, 1997 to $159.2 million, or 52% of
revenue, for the year ended December 31, 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 the years
ended December 31, 1997 and 1998, respectively, for reciprocal compensation
relating to the transport and termination of local traffic from customers of
ILECs pursuant to various interconnection agreements. Special access revenue
increased from $55.4 million, or 37% of revenue, for the year ended December 31,
1997 to $74.5 million, or 25% of revenue, for the year ended December 31, 1998.
Switched access (terminating long distance) revenue decreased to $49.0 million
for the year ended December 31, 1998, compared to $72.7 million for the year
ended December 31, 1997. The Company raised prices on its wholesale switched
services product in order to improve margins. Revenue from long distance
services was $20.6 million for the year ended
A-10
<PAGE>
December 31, 1998, compared to no reported revenue for the year ended December
31, 1997. Revenue from data services did not generate a material portion of
total revenue during either period.
Operating costs. Operating costs, which consist solely of operating costs
from Telecom Services, increased $40.0 million, from $147.3 million for the year
ended December 31, 1997 to $187.3 million, for the year ended December 31, 1998.
Additionally, operating costs decreased as a percentage of revenue from 99% for
the year ended December 31, 1997 to 62% for the year ended December 31, 1998.
The increase in operating costs in absolute dollars is attributable to the
increase in volume of local and special access services and the increase in
network operating costs which include engineering and operations personnel
dedicated to the development and provision of local exchange services. The
decrease in operating costs as a percentage of revenue is due primarily to a
greater volume of higher margin services, principally local exchange services.
Selling, general and administrative expenses. Total SG&A expenses
increased $36.3 million, or 30%, from $121.9 million for the year ended December
31, 1997 to $158.2 million for the year ended December 31, 1998, and decreased
as a percentage of revenue from 82% for the year ended December 31, 1997 to 52%
for the year ended December 31, 1998. Telecom Services SG&A expenses increased
from $94.1 million, or 63% of revenue, for the year ended December 31, 1997 to
$137.2 million, or 45% of revenue, for the year ended December 31, 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
benefits from the revenue generated by newly developed services requiring
substantial administrative and marketing expense prior to initial service
offerings, principally local exchange services, Telecom Services has experienced
declining SG&A expenses as a percentage of revenue. Corporate Services SG&A
expenses decreased $6.9 million, from $27.8 million for the year ended December
31, 1997 to $20.9 million for the year ended December 31, 1998, 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 the year ended December 31, 1997 and to Telecom
Services for the year ended December 31, 1998.
Depreciation and amortization. Depreciation and amortization increased
$42.1 million, or 84%, for the year ended December 31, 1998, compared to the
year ended December 31, 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 and DataChoice Network Services, L.L.C. ("DataChoice") in July 1998 as
well as the full year impact of goodwill amortization from the purchase of
Communications Buying Group, Inc. in October 1997.
Provision for impairment of long-lived assets. For the year ended December
31, 1997, provision for impairment of long-lived assets relates to the write-
down of the Company's investment in StarCom International Optics Corporation,
Inc. of $5.2 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.
Restructuring costs. For the year ended December 31, 1998, restructuring
costs of $1.8 million include $0.3 million in costs, primarily severance costs,
related to the facility closure of a subsidiary of NikoNet 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.
Other, net. Other, net operating costs and expenses increased from $0.3
million for the year ended December 31, 1997 to $4.9 million for the year ended
December 31, 1998. Other, net operating costs and expenses for the year ended
A-11
<PAGE>
December 31, 1998 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) and general disposal of furniture, fixtures and office equipment ($3.6
million). Other, net operating costs and expenses for the year ended December
31, 1997 primarily relates to losses recorded on the disposal of the Company's
investment in its Melbourne network.
Interest expense. Interest expense increased $52.5 million, from $117.5
million for the year ended December 31, 1997 to $170.0 million for the year
ended December 31, 1998, which includes $162.7 million of non-cash interest.
This increase was primarily attributable to an increase in long-term debt,
primarily the 10% Senior Discount Notes due 2008 (the "10% Notes") and the 9
7/8% Senior Discount Notes due 2008 (the "9 7/8% Notes") issued in February 1998
and April 1998, respectively. In addition, the Company's interest expense
increased because the principal amount of its indebtedness increases until the
Company's fixed rate senior indebtedness begins to pay interest in cash,
beginning in 2001.
Other income, net. Other income, net increased from $21.4 million net
income for the year ended December 31, 1997 to $27.3 million net income for the
year ended December 31, 1998. The increase is primarily due to an increase in
interest income of $6.5 million, from $21.9 million for the year ended December
31, 1997 to $28.4 million for the year ended December 31, 1998. The increase is
attributable to the increase in cash and invested cash balances from the
proceeds from the issuances of the 10% Notes and the 9 7/8% Notes in February
1998 and April 1998, respectively. Additionally, for the year ended December
31, 1998, other income, net consists of litigation settlement costs. For the
year ended December 31, 1997, other income, net consists 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 $16.2 million, from $39.0 million for the year ended December
31, 1997 to $55.2 million for the year ended December 31, 1998. The increase is
due primarily to the issuances of 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 the
year ended December 31, 1998 consists of the accretion of issuance costs of $1.3
million and the accrual of the preferred securities dividends of $53.9 million
associated with the 6 3/4% Preferred Securities, the 14% Preferred Stock and the
14 1/4% Preferred Stock.
Loss from continuing operations. Loss from continuing operations increased
$28.4 million, or 9%, from $310.3 million for the year ended December 31, 1997
to $338.7 million for the year ended December 31, 1998 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.
Net (loss) income from discontinued operations. Net (loss) income from
discontinued operations increased $29.0 million, or 58%, from a $50.4 million
net loss for the year ended December 31, 1997 to a $79.4 million net loss for
the year ended December 31, 1998. Net loss from discontinued operations for the
years ended December 31, 1997 and 1998 consists of the combined net losses of
Zycom, NETCOM, Network Services and Satellite Services. Since the Company
expected to report a gain on the disposition of NETCOM, the Company deferred the
net losses from operations of NETCOM from November 3, 1998 (the date on which
the Company's board of directors adopted the formal plan to dispose of the
operations of NETCOM) through the dates of the sales. Net loss from
discontinued operations for the year ended December 31, 1998 includes an
estimated loss on the disposal of Zycom of $1.8 million.
A-12
<PAGE>
Quarterly Results
The following table presents selected unaudited operating results for
three-month quarterly periods during the years ended December 31, 1998 and 1999.
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
footnotes included elsewhere in this Annual Report. Results of operations for
any particular quarter are not necessarily indicative of results of operations
for a full year or predictive of future periods. 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.
Operating costs and net loss in the fourth quarter were lower, and EBITDA
and EBITDA (before non-recurring and non-cash charges) were higher due to an in-
depth management review of network costs that was conducted during the fourth
quarter of 1999 following the centralization of network functions. The analysis
identified approximately $9.5 million in costs from the first nine months of
1999 that related to capital activities under the existing Company
capitalization policy. Of the $9.5 million adjustment booked in the fourth
quarter, approximately $5.0 million related to expenses which should have been
capitalized in the second quarter and $4.5 million which should have been
capitalized in the third quarter.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
-------------------------------------------- -------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1999 1999 1999 1999 1999
--------- -------- --------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands except per share and statistical data amounts)
Statement of Operations Data:
Revenue $ 58,487 64,215 82,567 98,048 104,331 117,654 115,166 142,075
Operating loss (36,064) (35,509) (27,778) (41,335) (27,568) (59,160) (91,381) (27,789)
Loss from continuing operations (78,475) (82,416) (79,928) (97,872) (86,206) (123,759) (156,527) (99,970)
Net (loss) income from discontinued
operations (23,280) (18,420) (16,736) (20,918) (111) (8,651) 748 44,803
Net loss $(101,755) (100,836) (96,664) (118,790) 106,712 (132,410) (155,779) (52,685)
========= ======== ======== ========= ========= ========= ========= ========
Loss per share from continuing
operations - basic and diluted $ (1.77) (1.84) (1.75) (2.13) (1.85) (2.63) (3.31) (2.10)
========= ======== ======== ========= ========= ========= ========= ========
Weighted average number of shares
outstanding - basic and diluted 44,311 44,865 45,588 46,010 46,538 46,988 47,320 47,618
========= ======== ======== ========= ========= ========= ========= ========
Other Data:
Net cash used (provided) by
operating activities $ (5,285) (25,568) (14,075) (55,132) (47,906) 25,910 (22,911) 65,990
Net cash provided (used) by
investing activities 36,846 (67,411) (148,579) (164,417) 133,100 (82,206) (130,758) (107,107)
Net cash provided (used) by
financing activities 294,816 238,725 (7,353) (587) (456) (4,390) 73,848 (1,984)
EBITDA(1) (23,058) (16,920) (5,063) (3,718) 8,807 (14,477) (46,302) 20,313
EBITDA (before non-recurring and
non-cash charges)(1) (22,553) (16,927) (5,063) 2,447 7,874 15,221 (45,676) 23,124
Capital expenditures of continuing 65,419 84,625 103,444 102,548 102,912 133,025 138,387 360,909
operations(2)
Capital expenditures of
discontinued operations(2) 6,840 11,237 8,685 12,129 2,805 3,354 4,970 1,135
</TABLE>
A-13
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
-------------------------------------------- -------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1999 1999 1999 1999 1999
--------- -------- --------- --------- --------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands except per share and statistical data amounts)
Statistical Data(3):
Full time employees 3,050 3,089 3,251 3,415 2,665 2,753 3,054 2,853
Telecom services:
Access lines in service(4) 186,156 237,458 290,983 354,482 418,610 494,405 584,827 730,975
Buildings connected:
On-net 637 665 684 777 789 874 939 963
Hybrid (5) 3,294 3,733 4,217 4,620 5,337 5,915 6,476 7,115
--------- -------- --------- --------- --------- --------- ---------- --------
Total buildings connected 3,931 4,398 4,901 5,397 6,126 6,789 7,415 8,078
Operational switches:
Circuit 20 20 21 29 29 29 29 31
ATM - - - - - - - 24
Frame relay 15 15 15 16 17 16 16 16
--------- -------- --------- --------- --------- --------- ---------- --------
Total operational switches 35 35 36 45 46 45 45 71
Regional fiber route miles (6) :
Operational 3,194 3,812 3,995 4,255 4,351 4,406 4,449 4,596
Under construction - - - - - - - 531
Regional fiber strand miles (7) :
Operational 118,074 124,642 127,756 134,152 155,788 164,416 167,067 174,644
Under construction - - - - - - - 18,564
Long-haul broadband fiber route - - - - - - - 18,000
miles
Collocations with ILECs 35 45 47 59 111 126 139 147
- -----------------------------------
</TABLE>
(1) See note 3 under "Selected Financial Data" for the definitions of EBITDA
and EBITDA (before non-recurring and non-cash charges).
(2) See note 4 under "Selected Financial Data" for the definitions of capital
expenditures of continuing operations and capital expenditures of
discontinued operations.
(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, 1999 includes 666,227 lines which
are provisioned through the Company's switch and 64,748 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) Hybrid buildings connected represent buildings connected to the Company's
network via another carrier's facilities.
(6) Regional fiber route miles refers to the number of miles of regional fiber
optic cable, including leased fiber. As of December 31, 1999, the Company
had 4,596 regional fiber route miles, of which 48 regional fiber route
miles were leased under operating leases. Regional fiber route miles under
construction represents fiber under construction which is expected to be
operational within six months.
(7) Regional fiber strand miles refers to the number of regional fiber route
miles, including leased fiber, along a telecommunications path multiplied
by the number of fiber strands along that path. As of December 31, 1999,
the Company had 174,644 regional fiber strand miles, of which 856 regional
fiber strand miles were leased under operating leases. Regional fiber
strand miles under construction represents fiber under construction which
is expected to be operational within six months.
Net Operating Loss Carryforwards
As of December 31, 1999, the Company had federal and foreign net operating
loss carryforwards ("NOLs") of approximately $662.7 million, which expire in
varying amounts through December 31, 2019. However, due to the provisions of
Section 382 and certain other provisions of the Internal Revenue Code and
Treasury Regulations (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.
Liquidity and Capital Resources
The Company's growth to date has been funded through a combination of
equity, debt and lease financing and non-core asset sales. The Company has also
incurred losses from continuing operations since inception and, as of December
31, 1999, had a working capital deficit of $67.8 million. As of December 31,
1999, the Company had
A-14
<PAGE>
approximately $125.5 million of cash and short term investments, $17.7 million
of investments in U.S. Treasury securities with maturities in excess of one year
and approximately $120.0 million of credit available under the Senior Facility.
At year end 1999, the Company's capital requirements under its year 2000
business plan well exceeded its liquidity and capital resources indicating that
additional financing will be required to meet its financial objectives.
The Company has entered into several financing agreements during the first
quarter of 2000 to provide additional capital to support the Company's earnings
deficit and planned capital expansion, including:
(i) The Company signed a definitive agreement with affiliates of Liberty
Media Corporation, Hicks, Muse, Tate & Furst, Inc. and Gleacher Capital Partners
to sell 75,000 shares of Series A Convertible Preferred Stock and warrants for
estimated proceeds to the Company of approximately $750 million, (before
estimated expenses and fees of $45.0 million).
(ii) The Company signed letters of intent with two major vendors, Lucent
Technologies, Inc. and Cisco Systems, Inc., to provide financing for the
acquisition of equipment. When completed, it is anticipated that these financing
agreements together will provide the Company with $355.0 million of capital
which will be used to support continued growth, and an additional $75.0 million
may also be provided if and when the Company raises additional equity. The
Company anticipates that these transactions will close during the second quarter
of 2000.
(iii) The Company closed an IRU agreement with Qwest whereby the Company
will provide designated portions of the Company's local fiber network over an
initial 6-year term for approximately $126.0 million. The $126.0 million is
expected to be paid to the Company in installments during the first six months
of 2000.
Management believes that the preferred stock purchase and warrant agreement
discussed in (i) above, as well as the letters of intent for the $430.0 million
in debt and capital lease financing discussed in (ii) above, will provide the
financing necessary for the Company's 2000 business plan and into the year 2001.
Importantly, should the Company be unable to complete the above vendor-
financing arrangements discussed in (ii) above, management may be required to
obtain alternative sources of financing or curtail or otherwise significantly
modify its business plan for the year 2000. Such modifications would likely
result in a significant reduction in planned capital expenditures, which could
be material and affect its ability to expand its network facilities within the
time frame originally planned. Network expansion is a key component of
achieving the Company's targeted future growth. While the Company believes that
it could obtain requisite additional financing, there can be no assurance that
such financing would be available on a timely basis or on acceptable terms.
Net Cash (Used) Provided By Operating Activities
The Company's operating activities used $106.8 million, $100.1 million, and
provided $21.1 million for years ended December 31, 1997, 1998 and 1999,
respectively. Net cash used by operating activities is primarily due to 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, deferred interest expense, accretion and
preferred dividends on subsidiary preferred securities.
Net Cash Used By Investing Activities
Investing activities used $422.6 million, $343.6 million and $187.0 million
for the years ended December 31, 1997, 1998 and 1999, respectively. Net cash
used by investing activities includes cash expended for the acquisition of
property, equipment and other assets of $261.3 million, $355.3 million and
$591.5 million for the years ended December 31, 1997, 1998 and 1999,
respectively. Additionally, net cash used by investing activities of continuing
A-15
<PAGE>
operations includes payments for construction of corporate headquarters of $29.4
million, $4.9 million and $3.3 million for the years ended December 31, 1997,
1998 and 1999, respectively. The Company used $45.9 million for the year ended
December 31, 1997 to acquire CBG and $67.8 million for the year ended December
31, 1998 for the acquisitions of ChoiceCom, NikoNet and DataChoice combined.
During the year ended December 31, 1998, the Company also used $9.1 million to
purchase the minority interest of two of the Company's subsidiaries. Offsetting
the expenditures for investing activities for the year ended December 31, 1998
are the proceeds from the sale of the Company's corporate headquarters of $30.3
million and the sale of the short-term investments of $60.3 million. During the
year ended December 31, 1999, the Company also used $28.9 million for the
purchase of long-term investments and $6.1 million to purchase the minority
interest of two of the Company's subsidiaries. Offsetting the expenditures of
investing activities for the year ended December 31, 1999 are the net proceeds
from the sales of NETCOM, Network Services and Satellite Services combined of
$404.9 million, including $30.0 million in proceeds from the sale of common
stock of MindSpring, which the Company received as partial consideration for the
sale of the domestic operations of NETCOM, and proceeds from the sales of short-
term investments available for sale of $29.8 million. The Company will continue
to use cash in 2000 and subsequent periods for the construction of new networks,
the expansion of existing networks and potentially, for acquisitions. The
Company acquired assets under capital leases of $0.8 million and $143.7 million
for the years ended December 31, 1998 and 1999, respectively.
Net Cash Provided By Financing Activities
Financing activities provided $308.8 million, $525.6 million and $67.0
million for the years ended December 31, 1997, 1998 and 1999, respectively. Net
cash provided by financing activities for these periods includes cash received
in connection with the private placement of the 11 5/8% Senior Discount Notes
due 2007 (the "11 5/8% Notes") and the 14% Preferred Stock in March 1997, the 6
3/4% Preferred Securities in September and October 1997, the 10% Notes and the 9
7/8% Notes in February 1998 and April 1998, respectively, and the Senior
Facility completed in August 1999. 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 the Company 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. Net cash provided by financing
activities for the years ended December 31, 1997, 1998 and 1999 also include
proceeds from the issuance of common stock in conjunction with the exercise of
options and warrants and the Company's employee stock purchase plan, offset by
principal payments on long-term debt and capital leases and payments of
preferred dividends on preferred securities of subsidiaries.
On August 12, 1999, ICG Equipment and NetAhead entered into a $200.0
million senior secured financing facility ("Senior Facility") consisting of a
$75.0 million term loan, a $100.0 million term loan and a $25.0 million
revolving line of credit. During the year ended December 31, 1999, the Company
borrowed approximately $80.0 million under the loans at interest rates ranging
from LIBOR plus 3.125% to 3.5% or 9.35% to 9.67% at December 31, 1999.
Quarterly repayments on the debt commence at various dates beginning September
30, 1999 with remaining outstanding balances maturing on June 30, 2005 for the
$100.0 million term loan and the $25.0 million line of credit and March 31, 2006
for the $75.0 million term loan.
As of December 31, 1999 the Company had an aggregate accreted value of
approximately $1.8 billion outstanding under the 13 1/2% Senior Discount Notes
due 2005 (the "13 1/2% Notes"), the 12 1/2% 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
A-16
<PAGE>
10% Notes require payments of interest in cash commencing August 15, 2003 and
mature February 15, 2008. The 9 7/8% Notes require payments of interest in cash
commencing November 1, 2003 and mature May 1, 2008. With respect to fixed rate
senior indebtedness outstanding on December 31, 1999, the Company has cash
interest payment obligations of approximately $113.3 million in 2001, $158.0
million in 2002, $212.6 million in 2003 and $257.2 million in 2004.
As of December 31, 1999, an aggregate amount of $519.3 million was
outstanding under the 6 3/4% Preferred Securities, the 14% Preferred Stock and
the 14 1/4% Preferred Stock. 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. With
respect to preferred securities currently outstanding, the Company has cash
dividend obligations of approximately $8.9 million in 2000, for which the
Company has restricted cash balances of $8.7 million available for such dividend
payments, $10.7 million in 2001 and $35.4 million in 2002 and each year
thereafter through 2007.
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 $261.3 million, $356.0 million and
$735.2 million for the years ended December 31, 1997, 1998 and 1999,
respectively. The Company anticipates that the expansion of existing networks
construction of new networks and further development of the Company's products
and services as currently planned will require capital expenditures of
approximately $1.0 billion for the year ended December 31, 2000. In the event
that the Company's efforts to acquire new customers and deploy new services are
more successful than planned, the Company may be required to expend capital
resources earlier in the year than expected to accommodate customer demands.
In the first quarter of 2000, the Company entered into letters of intent
with its two biggest vendors, Lucent Technologies, Inc. and Cisco Systems, Inc.
The Company believes that these financing agreements will better enable the
Company to fund its scheduled network expansion through the purchase of Lucent
and Cisco equipment. The Lucent credit agreement provides the Company with up
to $250.0 million of capital which can be drawn down during the year following
the closing date to purchase network equipment. The Company is currently
committed to purchase a minimum of $175.0 million of equipment under this
facility. The Lucent financing provides for a five-year repayment schedule and
requires quarterly principal repayments beginning in March 2001. The Cisco
credit facility provides for up to $180.0 million of capital lease financing
with a three-year repayment term. The Company anticipates that these
transactions will close during the second quarter of 2000. There is no
assurance, however, that these transactions will close during the second
quarter, or at all.
To facilitate the expansion of its services and networks, the Company has
entered into other 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.
Further, the Company's ability to make capital expenditures to meet its business
plan will depend on numerous factors, including certain factors beyond the
Company's control. These factors include, but are not limited to, economic
conditions, competition, regulatory developments and the availability of equity,
debt and lease financing.
A-17
<PAGE>
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 year ended December 31, 1999
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 significant additional
amounts of cash in the future from outside sources. Changes in the Company's
business plan may require additional sources of cash which may be obtained
through public and private equity and debt financings, credit facilities 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, however, that additional financing will be available to the Company
or, if available, that it can be obtained on terms acceptable to the Company.
The failure to obtain sufficient amounts of financing could result in the
delay or abandonment of some or all of the Company's development and expansion
plans, which could have a material adverse effect on the Company's business. In
addition, the inability to fund operating deficits with the proceeds of
financings until the Company establishes a sufficient revenue-generating
customer base could have a material adverse effect on the Company's liquidity.
Transport and Termination Charges
The Company has recorded revenue of approximately $4.9 million, $58.3
million and $124.1 million for the years ended December 31, 1997, 1998 and 1999,
respectively, for reciprocal compensation relating to the transport and
termination of local traffic to ISPs from customers of ILECs pursuant to various
interconnection agreements. During this period, some of the ILECs have not paid
all of the bills they have received from the Company and have disputed these
charges based on the belief that such calls are not local traffic as defined by
the various agreements and not subject to payment of transport and termination
charges under state and federal laws and public policies. In addition, some
ILECs, while paying a portion of reciprocal compensation due to ICG for ISP-
bound traffic, have disputed other portions of the charges. However, the Company
has resolved certain of these disputes with some of the ILECs.
The resolution of these disputes have been, and will continue to be, based
on rulings by state public utility commissions and/or by the Federal
Communications Commission ("FCC"), or through negotiations between the parties.
To date, there have been favorable final rulings from 31 state public 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. To date, five federal
court decisions, including two federal circuit court of appeals decisions have
been issued upholding state commission decisions ordering the payment of
reciprocal compensation for ISP traffic. 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 currently
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 is properly 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
A-18
<PAGE>
between carriers, with disputes resolved by arbitrations conducted by state
commissions, pursuant to the Telecommunications Act. Since the issuance of the
FCC's decision on February 25, 1999, 19 state utility commissions, have either
ruled or reaffirmed that ISP traffic is subject to reciprocal compensation under
current interconnection agreements, and two state commissions have declined to
apply reciprocal compensation for ISP traffic under current interconnection
agreements. Additionally, 11 state commissions have awarded reciprocal
compensation for ISP traffic in arbitration proceedings involving new
agreements. One state has declined to order reciprocal compensation in an
arbitration proceeding, and two states have declined to decide the issue in the
arbitration until after the FCC and/or the state commission reaches a decision
in pending proceedings on prospective compensation.
On March 24, 2000, the United States Court of Appeals for the District of
Columbia Circuit vacated and remanded the FCC's February 25, 1999 decision. The
Company does not believe that the Circuit Court's decision will adversely affect
the state decisions noted above with respect to reciprocal compensation. The
decision does, however, create some uncertainty and there can be no assurance
that future FCC or state rulings will be favorable to the Company.
The Company has aggressively participated in a number of regulatory
proceedings that address the obligation of the ILECs to pay the Company
reciprocal compensation for ISP-bound traffic under the Company's
interconnection agreements. These proceedings include complaint proceedings
brought by the Company against individual ILECs for failure to pay reciprocal
compensation under the terms of a current interconnection agreement; generic
state commission proceedings concerning the obligations of ILECs to pay
reciprocal compensation to CLECs, and arbitration proceedings before state
commissions addressing the payment of reciprocal compensation on a prospective
basis under the new interconnection agreements.
In 1999, the state utility commission in Colorado issued a final decision
granting a complaint filed by the Company against US West Communications, Inc.
("US West") and ruled that the Company is entitled to be paid reciprocal
compensation for ISP-bound traffic under the terms of the Company's
interconnection agreement in effect at the time of the complaint proceeding.
Additionally, in June 1999, the Alabama Public Service Commission ruled that the
Company is entitled to be treated the same as other CLECs for which the Alabama
commission had previously ordered the payment of reciprocal compensation for ISP
traffic by BellSouth Corporation ("BellSouth"). The ILECs filed for judicial
review in federal district court of each of these favorable commission rulings;
the appeals are pending. Also in 1999, the California PUC issued a decision
affirming a previously issued decision that held that reciprocal compensation
must be paid by Pacific Bell and GTE-California for the termination of ISP
traffic by CLECs under existing interconnection agreements. The ILECs also have
appealed the California PUC decision, and the appeal is pending.
Subsequent to the issuance of the favorable rulings by the Colorado,
Alabama and California state commissions, the Company has received payments from
US West, Pacific Bell and GTE-California for amounts owed for reciprocal
compensation. Pursuant to an earlier decision by the Ohio Commission, Ameritech
has been paying ICG reciprocal compensation for ISP traffic under its original
interconnection agreement which expired on February 15, 2000. Through December
31, 1999, the Company has received $65.8 million from Ameritech, $7.7 million
from Pacific Bell and $11.7 million from GTE-California in reciprocal
compensation payments. Additionally, in January and February 2000 the Company
received additional payments from Pacific Bell of $16.8 million, a portion of
which represents amounts previously placed in an escrow account by Pacific Bell
calculated as being owed to the Company for reciprocal compensation for ISP-
bound traffic. Also in January 2000, US West released to the Company $10.1
million in reciprocal compensation payments that had been in an escrow account.
Additionally, through December 31, 1999, Southwestern Bell Telephone
Company ("SWBT") has remitted payment to the Company of $3.9 million for
reciprocal compensation owed to the Company for traffic from SWBT customers in
Texas to ISPs served by the Company. On December 29, 1999, SWBT initiated
commercial arbitration to determine whether the terms of the Company's current
interconnection agreement with SWBT require that the rates that the Company has
been billing SWBT for reciprocal compensation be reduced to rates established by
the Texas PUC in a
A-19
<PAGE>
1998 consolidated arbitration with SWBT involving AT&T Corporation, MCI
Communications Corporation and other parties. Due to subsequent procedural
developments, this issue will be decided by the Texas PUC, rather than in
commercial arbitration, after the parties have completed dispute resolution in
accordance with the terms of the interconnection agreement.
On September 16, 1999, the CPUC rendered a decision against MFS/Worldcom, a
CLEC ("MFS"), in an arbitration between Pacific Bell and MFS. The California
PUC ruled that MFS should not be permitted to charge reciprocal compensation
rates for the tandem switching and common transport rate elements. Although the
California PUC's ruling did not involve the Company, the Company made a decision
effective for the three months beginning on September 30, 1999 and thereafter to
suspend the revenue recognition for the tandem switching and common transport
rate elements for services provided in California and in all other states where
the Company operates and such rate elements are included in the Company's
interconnection agreement with the ILEC. Additionally, the Company recorded a
provision of $45.2 million during the three months September 30, 1999 for
accounts receivable related to these elements recognized in periods through June
30, 1999, which the Company believes may be uncollectible. The Company
continues to bill Pacific Bell, SWBT and GTE for the tandem switching and common
transport rate elements, and will pursue collection of its accounts receivable,
despite any provision. On February 4, 2000, the California PUC initiated a new
proceeding to examine, on a prospective basis, compensation for ISP-bound
traffic, including the tandem and transport rate elements issue.
The Company has also recorded revenue of approximately $19.1 million and
$18.4 million for the years ended December 31, 1998 and 1999, respectively,
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, 1998 and 1999 are $72.8 million and
$76.3 million, respectively, for all receivables related to reciprocal
compensation and other transport and termination charges. The receivables
balance at December 31, 1998 and 1999 is net of an allowance of $5.6 million and
$58.2 million, respectively, for disputed amounts and tandem switching and
common transport rate elements.
As the Company's interconnection agreements expire or are extended, rates
for transport and termination charges are being and will continue to be
renegotiated and/or arbitrated. Rates for transport and termination also may be
impacted by ongoing state and federal regulatory proceedings addressing
intercarrier compensation for Internet traffic on a prospective basis. In
addition to the FCC's pending rulemaking proceeding and the District of Columbia
Court of Appeals recent remand, of the states in which the Company currently
operates, the Ohio, Texas and California commissions currently are conducting
proceedings on prospective compensation.
The Company has negotiated and/or arbitrated new or extended
interconnection agreements with BellSouth, Ameritech, GTE-California and Pacific
Bell. The Company has completed arbitration proceedings with BellSouth before
the state commissions in Alabama, North Carolina, Georgia, Kentucky, Florida and
Tennessee and with Ameritech before the Ohio commission. Final decisions issued
by the Alabama, North Carolina, Kentucky and Georgia commissions awarded the
Company reciprocal compensation for ISP traffic in new agreements to be executed
by the parties, including the tandem and transport rate element. The
arbitration decisions of the Florida and Ohio commissions declined to rule on
the merits of whether the Company should be paid reciprocal compensation for ISP
traffic. The Florida decision ruled that the compensation provisions of the
parties' current interconnection agreement would continue to apply, subject to
true up, until the completion of the FCC's rulemaking on future compensation.
The Ohio commission deferred ruling on the merits until completion of the Ohio
commission's generic proceeding on prospective compensation, and ordered that in
the interim period until completion of the generic proceeding, bill and keep
procedures should be followed, subject to true up once the commission proceeding
is concluded. Arbitration proceedings with US West before the Colorado
commission and with SWBT before the Texas commission are pending. The Company
has negotiated an extension of its current agreement with GTE-California until
August 2000 that provides that reciprocal compensation will be paid for ISP
traffic, at rates that are lower than the rates that previously applied under
the
A-20
<PAGE>
agreement, and the Company has adopted the MFS WorldCom/Pacific Bell
interconnection agreement, effective as of March 12, 2000, which agreement also
provides for the payment of the end office rate element of reciprocal
compensation for ISP traffic, with the tandem and transport rate elements issue
subject to further litigation.
Subsequent to completion of the arbitration proceedings with BellSouth, the
Company signed a three-year agreement with BellSouth that, among other issues,
addresses the payment of reciprocal compensation for Internet traffic.
BellSouth agreed to pay past monies due to the Company for reciprocal
compensation for the period beginning when ISP traffic was first received by the
Company from BellSouth and ending December 31, 1999, and the parties also agreed
to the payment of reciprocal compensation for Internet and voice traffic for the
period from January 1, 2000 through December 31, 2002 at per-minute rates that
gradually reduce over the three year period. The agreement is applicable to all
nine states in the BellSouth operating territory.
While the Company intends to pursue the collection of all receivables
related to transport and termination charges as of December 31, 1999 and
believes that future revenue from transport and termination charges recognized
under the Company's interconnection agreements will be realized, there can be no
assurance that future regulatory and judicial rulings will be favorable to the
Company, or that different pricing plans for transport and termination charges
between carriers will not be adopted when the Company's interconnection
agreements continue to be renegotiated or arbitrated, or as a result of FCC or
state commission proceedings on future compensation methods. In fact, the
Company believes that different pricing plans will continue to 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 subsequent periods, 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 and/or arbitrate 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, Internet RAS and
DSL, however, the Company may or may not be successful in its efforts to deploy
such services profitably.
New Accounting Pronouncement
In June 1999, the Financial Accounting Standards Board (the "FASB") issued
FASB Interpretation No. 43, Real Estate Sales, an interpretation of FASB
Statement No. 66 ("FIN 43"). FIN 43 establishes standards for recognition of
profit on all real estate sales transactions without regard to the nature of the
seller's business. Specifically, FIN 43 expands the concept of real estate to
include "integral equipment," which is defined in FIN 43 as "any physical
structure or equipment attached to the real estate that cannot be removed and
used separately without incurring significant costs." The provisions of FIN 43
are effective for all sales of real estate with property improvements or
integral equipment entered into after June 30, 1999.
The Company believes FIN 43 limits the application of sale-type lease
accounting to grants of indefeasible rights of use ("IRUs") of constructed dark
fiber in exchange for cash unless the Company transfers ownership of the
underlying assets to the lessee as, under this interpretation, dark fiber is
considered integral equipment and accordingly title must transfer to a lessee in
order for a lease transaction to be accounted for as a sales-type lease. In the
event that sales-type lease accounting is not applicable to portions or all of
an IRU, the Company will apply operating lease accounting and recognize revenue
and operating costs ratable over the term of the agreement. Since the Company's
IRUs which were accounted for as sales-type leases and excluded ownership
transfer terms for underlying assets deemed to be integral equipment do not
represent a significant portion of the Company's historical revenue or operating
costs, the Company does not expect the adoption of FIN 43 to have a material
impact on the Company's financial operations or results of operations in the
future.
A-21
<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, 1998
and 1999 and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for each of the years in the three-year period
ended December 31, 1999. 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, for the year ended December 31, 1997, whose loss from operations
constitutes 83.8 percent of the consolidated loss from discontinued operations
in 1997. Those consolidated financial statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for NETCOM in 1997, is based solely on the report 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 report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report 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, 1998 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
Denver, Colorado
February 16, 2000
A-22
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
NETCOM On-Line Communication Services, Inc.
We have audited the consolidated statements of operations, stockholders' equity
and cash flows of NETCOM On-Line Communication Services, Inc. for the year 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 results of operations and
cash flows of NETCOM On-Line Communication Services, Inc. for the year December
31, 1997, in conformity with accounting principles generally accepted in the
United States.
Ernst & Young LLP
San Jose, California
February 13, 1998
A-23
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1999
________________________________________________________________________________
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
Assets 1998 1999
- ------ -------------------- -------------------
<S> <C> <C>
(in thousands)
Current assets:
Cash and cash equivalents $ 210,307 103,288
Short-term investments available for sale (note 5) 52,000 22,219
Receivables:
Trade, net of allowance of $14.4 million and $78.7
million at December 31, 1998 and 1999, respectively
(note 14) 113,030 167,273
Other 529 1,458
-------------------- -------------------
113,559 168,731
-------------------- -------------------
Prepaid expenses, deposits and inventory 11,530 11,388
Net current assets of discontinued operations (note 3) 66 -
-------------------- -------------------
Total current assets 387,462 305,626
-------------------- -------------------
Property and equipment (notes 6, 9, 10, 14 and 16) 1,064,112 1,805,378
Less accumulated depreciation (156,054) (279,698)
-------------------- -------------------
Net property and equipment 908,058 1,525,680
-------------------- -------------------
Restricted cash (note 11) 16,912 12,537
Investments (note 7) - 28,939
Other assets:
Goodwill, net of accumulated amortization of $12.4
million and $31.7 million at December 31, 1998 and
1999, respectively (note 4) 110,513 95,187
Deferred financing costs, net of accumulated
amortization of $9.6 million and $14.4 million at
December 31, 1998 and 1999, respectively (note 10) 35,958 35,884
Transmission and other licenses 5,646 -
Other, net (note 8) 22,324 16,768
-------------------- -------------------
174,441 147,839
-------------------- -------------------
Net non-current assets of discontinued operations (note 3) 102,774 -
-------------------- -------------------
Total assets (note 15) $ 1,589,647 2,020,621
==================== ===================
(Continued)
</TABLE>
A-24
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
________________________________________________________________________________
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
Liabilities and Stockholders' Deficit 1998 1999
- ------------------------------------- ---------------------- --------------------
<S> <C> <C>
(in thousands)
Current liabilities:
Accounts payable $ 30,424 112,291
Payable pursuant to IRU agreement (note 9) - 135,322
Accrued liabilities 51,565 85,709
Deferred revenue (note 14) 5,647 25,175
Deferred gain on sale (note 3) - 5,475
Current portion of capital lease obligations (notes 9 and 14) 4,846 8,090
Current portion of long-term debt (note 10) 46 796
Current liabilities of discontinued operations (note 3) - 529
---------------------- --------------------
Total current liabilities 92,528 373,387
---------------------- --------------------
Capital lease obligations, less current portion (notes 9 and 14) 62,946 63,348
Long-term debt, net of discount, less current portion (note 10) 1,598,998 1,905,901
Other long-term liabilities - 2,526
---------------------- --------------------
Total liabilities 1,754,472 2,345,162
---------------------- --------------------
Redeemable preferred stock of subsidiary ($346.2 million and
$397.9 million liquidation value at December 31, 1998
and 1999, respectively) (note 11) 338,310 390,895
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, 1998 and 1999) (note 11) 128,042 128,428
Stockholders' deficit (note 12):
Common stock, $.01 par value, 100,000,000 shares authorized;
46,360,185 and 47,761,337 shares issued and outstanding at
December 31, 1998 and 1999, respectively (notes 1 and 12) 464 478
Additional paid-in capital 577,940 599,282
Accumulated deficit (1,209,462) (1,443,624)
Accumulated other comprehensive loss (119) -
---------------------- --------------------
Total stockholders' deficit (631,177) (843,864)
---------------------- --------------------
Commitments and contingencies (notes 7, 9, 10, 11 and 14)
Total liabilities and stockholders' deficit $ 1,589,647 2,020,621
====================== ====================
</TABLE>
See accompanying notes to consolidated financial statements.
A-25
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31, 1997, 1998 and 1999
________________________________________________________________________________
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------------------
1997 1998 1999
------------------- ------------------- ----------------------
<S> <C> <C> <C>
(in thousands, except per share data)
Revenue (notes 2, 14 and 15) $ 149,358 303,317 479,226
Operating costs and expenses:
Operating costs 147,338 187,260 238,927
Selling, general and administrative expenses 121,884 158,153 239,756
Depreciation and amortization (notes 6 and
15) 49,836 91,927 174,239
Provision for impairment of long-lived
assets (note 15 and 16) 5,169 - 31,815
Restructuring costs (note 17) - 1,786 -
Other, net 292 4,877 387
------------------- ------------------- ----------------------
Total operating costs and expenses 324,519 444,003 685,124
------------------- ------------------- ----------------------
Operating loss (175,161) (140,686) (205,898)
Other (expense) income:
Interest expense (notes 10 and 15) (117,521) (170,015) (212,420)
Interest income 21,828 28,401 16,300
Other expense, net, including realized
gains and losses on marketable trading
securities (note 7) (424) (1,118) (2,522)
------------------- ------------------- ----------------------
(96,117) (142,732) (198,642)
------------------- ------------------- ----------------------
Loss from continuing operations before income
taxes, preferred dividends and extraordinary
gain (271,278) (283,418) (404,540)
Income tax expense (notes 15 and 18) - (90) (25)
Accretion and preferred dividends on
preferred securities of subsidiaries, net of
minority interest in share of losses (note
11) (39,019) (55,183) (61,897)
------------------- ------------------- ----------------------
Loss from continuing operations before
extraordinary gain $(310,297) (338,691) (466,462)
------------------- ------------------- ----------------------
(Continued)
</TABLE>
A-26
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations, Continued
________________________________________________________________________________
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------------------
1997 1998 1999
------------------- ------------------- ----------------------
(in thousands, except per share data)
<S> <C> <C> <C>
Discontinued operations (notes 1 and 3):
Loss from discontinued operations $ (50,438) (77,577) (1,036)
(Loss) gain on disposal of discontinued
operations, net of income taxes of $4.7
million in 1999 - (1,777) 37,825
------------------- ------------------- ----------------------
(50,438) (79,354) 36,789
------------------- ------------------- ----------------------
Net loss before extraordinary gain (360,735) (418,045) (429,673)
------------------- ------------------- ----------------------
Extraordinary gain on sales of operations of
NETCOM, net of income taxes of $2.0 million
(notes 3 and 15) - - 195,511
------------------- ------------------- ----------------------
Net loss $ (360,735) (418,045) (234,162)
=================== =================== ======================
Other comprehensive loss:
Foreign currency translation adjustment (527) (263) -
Unrealized loss on short-term investments
available for sale (540) - -
------------------- ------------------- ----------------------
Other comprehensive loss (1,067) (263) -
------------------- ------------------- ----------------------
Comprehensive loss $ (361,802) (418,308) (234,162)
=================== =================== ======================
Net loss per share - basic and diluted:
Loss from continuing operations $ (7.30) (7.49) (9.90)
(Loss) income from discontinued operations (1.19) (1.76) 0.78
Extraordinary gain on sales of operations
of NETCOM - - 4.15
------------------- ------------------- ----------------------
Net loss per share - basic and diluted $ (8.49) (9.25) (4.97)
=================== =================== ======================
Weighted average number of shares outstanding
- basic and diluted 42,508 45,194 47,116
=================== =================== ======================
</TABLE>
See accompanying notes to consolidated financial statements.
A-27
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years Ended December 31, 1997, 1998 and 1999
________________________________________________________________________________
<TABLE>
<CAPTION>
Additional
Common stock paid-in
Shares Amount capital
------------ ------------ -------------
(in thousands)
<S> <C> <C> <C>
Balances at January 1, 1997 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 - (309) 309
Cumulative foreign currency translation adjustment - - -
Net loss - - -
------------ ------------ -------------
Balances at December 31, 1998 46,360 464 577,940
Shares issued for cash in connection with the exercise of options and
warrants (note 12) 935 9 12,524
Shares issued for cash in connection with the employee stock purchase plan
(note 12) 206 2 3,359
Shares issued as contribution to 401 (k) plan (note 19) 260 3 5,457
Shares issued upon conversion of long-term debt - - 2
Reversal of cumulative foreign currency translation adjustment - - -
Net loss - - -
------------ ------------ -------------
Balances at December 31, 1999 47,761 $ 478 599,282
============ ============ =============
Accumulated
other Total
Accumulated comprehensive stockholders'
deficit income (loss) equity (deficit)
----------- ------------- ----------------
(in thousands)
Balances at January 1, 1997 (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)
Shares issued for cash in connection with the exercise of options and
warrants (note 12) - - 12,533
Shares issued for cash in connection with the employee stock purchase plan
(note 12) - - 3,361
Shares issued as contribution to 401 (k) plan (note 19) - - 5,460
Shares issued upon conversion of long-term debt - - 2
Reversal of cumulative foreign currency translation adjustment - 119 119
Net loss (234,162) - (234,162)
----------- ------------- ----------------
Balances at December 31, 1999 (1,443,624) - (843,864)
=========== ============= ================
</TABLE>
See accompanying notes to consolidated financial statements.
A-28
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1998 and 1999
________________________________________________________________________________
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------
1997 1998 1999
---------------- ---------------- -----------------
<S> <C> <C> <C>
(in thousands)
Cash flows from operating activities:
Net loss $(360,735) (418,045) (234,162)
Net loss (income) from discontinued operations 50,438 79,354 (36,789)
Extraordinary gain on sales of discontinued operations - - (195,511)
Adjustments to reconcile net loss to net cash (used)
provided by operating activities:
Recognition of deferred gain - - (29,250)
Accretion and preferred dividends on preferred
securities of subsidiaries, net of minority
interest in share of losses 37,904 55,183 61,897
Depreciation and amortization 49,836 91,927 174,239
Provision for impairment of long-lived assets 5,169 - 31,815
Deferred compensation - - 1,293
Net loss (gain) on disposal of long-lived assets 292 4,877 (906)
Provision for uncollectible accounts 3,573 11,238 60,019
Interest expense deferred and included in long-term
debt, net of amounts capitalized on assets under
construction 102,947 152,601 186,080
Interest expense deferred and included in capital
lease obligations 6,345 5,637 5,294
Amortization of deferred advertising costs included
in selling, general and administrative expenses - 1,795 -
Amortization of deferred financing costs included in
interest expense 2,514 4,478 4,860
Write-off of non-operating assets 200 - -
Contribution to 401(k) plan through issuance of
common stock 3,010 3,664 5,460
Change in operating assets and liabilities,
excluding the effects of business combinations,
dispositions and non-cash transactions:
Receivables (24,257) (88,962) (120,857)
Prepaid expenses, deposits and inventory (5,426) (1,566) 3,474
Deferred advertising costs - (1,795) -
Accounts payable and accrued and other liabilities 20,846 (2,288) 83,406
Deferred revenue 583 1,842 20,721
---------------- ---------------- -----------------
Net cash (used) provided by operating activities $(106,761) (100,060) 21,083
---------------- ---------------- -----------------
(Continued)
</TABLE>
A-29
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
________________________________________________________________________________
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------
1997 1998 1999
---------------- ---------------- -----------------
<S> <C> <C> <C>
(in thousands)
Cash flows from investing activities:
Proceeds from sales of discontinued operations, net of
selling costs and cash included in sales $ - - 374,897
Payments for business acquisitions, net of cash acquired (45,861) (67,841) -
Acquisition of property, equipment and other assets (261,318) (355,261) (591,518)
Payments for construction of corporate headquarters (29,432) (4,944) (3,300)
Purchase of corporate headquarters - - (528)
Proceeds from disposition of property, equipment and
other assets 14,574 168 4,300
Proceeds from sale of corporate headquarters, net of
selling and other costs - 30,283 -
(Purchase) sale of short-term investments available for (65,580) 60,281 29,781
sale
Proceeds from sale of marketable securities, net of
realized gain - - 30,000
(Increase) decrease in restricted cash (25,416) 7,737 4,375
Increase in long-term notes receivable from affiliate
and others (9,552) (4,880) -
Purchase of investments - - (28,939)
Purchase of minority interest in subsidiaries - (9,104) (6,039)
---------------- ---------------- -----------------
Net cash used by investing activities (422,585) (343,561) (186,971)
---------------- ---------------- -----------------
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 4,116 19,283 12,533
Employee stock purchase plan 1,319 2,250 3,361
Proceeds from issuance of redeemable preferred
securities of subsidiary, net of issuance costs 223,628 - -
Proceeds from issuance of long-term debt 99,908 550,574 80,000
Deferred long-term debt issuance costs (3,554) (17,591) (4,785)
Principal payments on capital lease obligations (29,735) (16,509) (14,662)
Principal payments on long-term debt (1,598) (6,864) (502)
Payments of preferred dividends (1,240) (8,927) (8,927)
---------------- ---------------- -----------------
Net cash provided by financing activities 308,804 525,601 67,018
---------------- ---------------- -----------------
Net (decrease) increase in cash and cash equivalents (220,542) 81,980 (98,870)
Net cash (used) provided by discontinued operations (19,204) 7,753 (8,149)
Cash and cash equivalents, beginning of year 360,320 120,574 210,307
Cash and cash equivalents, end of year $ 120,574 210,307 103,288
================ ================ =================
(Continued)
</TABLE>
A-30
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
________________________________________________________________________________
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------
1997 1998 1999
---------------- ---------------- -----------------
(in thousands)
<S> <C> <C> <C>
Supplemental disclosure of cash flows information of
continuing operations:
Cash paid for interest $ 5,715 7,299 15,216
================ ================ =================
Cash paid for income taxes $ - 90 2,848
================ ================ =================
Supplemental schedule of non-cash investing and
financing activities of continuing operations:
Common stock issued in connection with business
combinations (note 4) $ - 15,532 -
Acquisition of corporate headquarters assets through
the issuance of long-term debt and conversion of
security deposit (note 10) $ - - 33,077
================ ================ =================
Assets acquired pursuant to IRU agreement - - 135,322
Assets acquired under capital leases - 775 8,393
---------------- ---------------- -----------------
Total (notes 9 and 14) $ - 775 143,715
================ ================ =================
</TABLE>
A-31
<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 and is the publicly-traded U.S. parent company of ICG
Funding, LLC, a special purpose Delaware limited liability company and
wholly owned subsidiary of ICG ("ICG Funding"), ICG Holdings (Canada) Co.,
a Nova Scotia unlimited liability company ("Holdings-Canada"), ICG
Holdings, Inc., a Colorado corporation ("Holdings"), and ICG Services,
Inc., a Delaware corporation ("ICG Services") and their subsidiaries. ICG
and its subsidiaries are collectively referred to as the "Company."
The Company's principal business activity is telecommunications services
("Telecom Services"). Telecom Services consists primarily of the Company's
competitive local exchange carrier operations which provide local, long
distance, data and enhanced telephony services to business end-users and
Internet service providers ("ISPs"). Additionally, beginning in February
1999, the Company began providing wholesale network services over its
nationwide data network to ISPs and other telecommunications providers.
Through October 22, 1999, the Company provided Network Services which
consisted of 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. Through November 30, 1999,
the Company also provided Satellite Services which consisted 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. The Company's consolidated financial statements reflect the
operations and net assets of Network Services and Satellite Services as
discontinued for all periods presented.
On January 21, 1998, ICG completed a merger with NETCOM On-Line
Communication Services, Inc. ("NETCOM"). 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 the
formal plan to dispose of the operations of NETCOM and, accordingly, the
Company's consolidated financial statements reflect the operations and net
assets of NETCOM as discontinued for all periods presented.
In conjunction with the sales, the legal name of the NETCOM subsidiary was
changed to ICG NetAhead, Inc. ("NetAhead") (see note 3).
A-32
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries and 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. Additionally, the accompanying consolidated
financial statements reflect the operations of NETCOM, Network
Services, Satellite Services and Zycom Corporation ("Zycom") as
discontinued for all periods presented.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
(b) Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
(c) Inventory
Inventory, consisting of equipment to be utilized in the installation
of telecommunications systems, services and networks for customers, is
recorded at the lower of cost or market.
(d) Investments
The Company's short-term investment objectives are safety, liquidity
and yield, in that order. 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. Realized gains and losses and declines in value
judged to be other than temporary are included in the statement of
operations.
Investments in partnership interests and in common or preferred stock
for which there is no public trading market and which represent less
than a 20% equity interest in the investee company are accounted for
using the cost method, unless the Company exercises significant
influence and/or control over the operations of the investee company,
in which case the equity method of accounting is used.
(e) 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
A-33
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
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
(f) 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 eight 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 two years, the estimated average customer contract term.
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 two to five years, beginning in the
period when the software is substantially complete and ready for use.
A-34
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
(g) Other Assets
Amounts related to the acquisition of transmission and other licenses
are recorded at cost and amortized over 20 years using the straight-
line method. Goodwill resulting from the application of the purchase
method of accounting for business combinations 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 two to twelve years.
Amortization of deferred financing costs is provided over the life of
the related financing agreement, the maximum term of which is ten
years, and is included in interest expense.
(h) 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.
(i) Foreign Currency Translation Adjustments
The functional currency for all operations of NETCOM, which were sold
during the year ended December 31, 1999, was the local currency. As
such, all assets and liabilities denominated in foreign currencies
were translated through March 16, 1999 at the exchange rate on the
balance sheet date. Revenue and costs and expenses were translated at
weighted average rates of exchange prevailing during the period.
Translation adjustments are included in other comprehensive loss,
which is a separate component of stockholders' equity (deficit).
Gains and losses resulting from foreign currency translations are
included in discontinued operations and are not significant for the
periods presented.
(j) Revenue Recognition
The Company recognizes revenue from services provided to its business
end-user and ISP customers as such services are provided and charges
direct selling expenses to
A-35
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
operations as incurred. Maintenance revenue is recognized as services
are provided. Uncollectible trade receivables are accounted for using
the allowance method.
Generally, the Company recognizes revenue earned under indefeasible
rights of use ("IRUs"), of constructed dark fiber, in exchange for
cash, ratably over the term of the agreement. In the event that the
IRU meets the definition of a sales-type lease pursuant to Statement
of Financial Accounting Standards No. 13, Accounting for Leases ("SFAS
No. 13"), and the Company transfers ownership of the underlying assets
to the customer, the Company will apply sales-type lease accounting
and recognize revenue and related costs at the inception of the
agreement. Prior to June 30, 1999, the Company applied sales-type
lease accounting to IRUs that met the criteria included in SFAS No.
13, whether or not the agreement provided for the transfer of
ownership of the underlying assets. Under either application, revenue
recognition begins in the period that facilities are available for use
by the customer. Revenue earned on the portion of IRUs attributable
to the provision of maintenance services is recognized as services are
provided, or ratably over the term of the agreement.
Deferred revenue includes advance billings to customers for services
provided by the Company's operations which have been billed in advance
to the customer in compliance with contract terms.
(k) Income Taxes
The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes ("SFAS 109"). Under the asset and liability method of
SFAS 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under SFAS 109, the effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(l) 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 represents combined ICG Common Stock and
Holdings-Canada Class A common shares outstanding for the years ended
December 31, 1997 and 1998, and ICG Common Stock only for the year
ended December 31, 1999.
Net loss per share is determined in accordance with Financial
Accounting Standards Board Statement No. 128, Earnings Per Share
("SFAS 128"). Under SFAS 128, basic
A-36
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
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 Company's net loss per share
calculation, as their effect is anti-dilutive.
(m) 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 the
periods presented.
(n) 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.
(o) Reclassifications
Certain prior period amounts have been reclassified to conform with
the current period's presentation.
A-37
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(3) Discontinued Operations and Divestures
Loss from discontinued operations consists of the following:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------
1997 1998 1999
----------------- ----------------- ----------------
<S> <C> <C> <C>
(in thousands)
NETCOM (a) $ (33,092) (61,090) -
Network Services (b) (3,494) (8,583) (1,349)
Satellite Services (c) (7,461) (3,056) 313
Zycom (d) (6,391) (4,848) -
----------------- ----------------- ----------------
Loss from discontinued operations $ (50,438) (77,577) (1,036)
================= ================= ================
</TABLE>
(a) NETCOM
On February 17, 1999, the Company sold certain of the operating assets
and liabilities of NETCOM to MindSpring Enterprises, Inc., an ISP
located in Atlanta, Georgia and predecessor to EarthLink, Inc.
("MindSpring"). Total proceeds from the sale were $245.0 million,
consisting of $215.0 million in cash and 376,116 shares of common
stock of MindSpring, valued at approximately $79.76 per share at the
time of the transaction. Assets and liabilities sold to MindSpring
included those directly related to the domestic operations of NETCOM's
Internet dial-up, dedicated access and Web site hosting services. 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. MindSpring utilized the Company's network capacity
under this agreement to provide Internet access to the dial-up
services customers formerly owned by NETCOM. In addition, the Company
received for a one-year period 50% of the gross revenue earned by
MindSpring from the dedicated access customers formerly owned by
NETCOM. The carrying value of the assets retained by the Company was
approximately $21.7 million, including approximately $17.5 million of
network equipment, on February 17, 1999. The Company also retained
approximately $11.3 million of accrued liabilities and capital lease
obligations.
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 Canadian entity, and
Providence Equity Partners, located in Providence, Rhode Island
("Providence"), 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.
A-38
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(3) Discontinued Operations and Divestures (continued)
During the year ended December 31, 1999, the Company recorded a
combined gain on the sales of the operations of NETCOM of
approximately $195.5 million, net of income taxes of approximately
$2.0 million. Offsetting the gain on the sales is approximately $16.6
million of net losses from operations of NETCOM from November 3, 1998
(the date on which the Company's board of directors adopted the formal
plan to dispose of the operations of NETCOM) through the dates of the
sales. Additionally, since the Company expected to generate operating
costs in excess of revenue under its network capacity agreement with
MindSpring and the terms of the sale agreement were dependent upon and
negotiated in conjunction with the terms of the network capacity
agreement, the Company deferred approximately $34.7 million of the
proceeds from the sale agreement to be applied on a periodic basis to
the network capacity agreement. The deferred proceeds were recognized
in the Company's statement of operations as the Company incurred cash
operating losses under the network capacity agreement. Accordingly,
the Company did not recognize any revenue, operating costs or selling,
general and administrative expenses from services provided to
MindSpring for the term of the agreement. Any incremental revenue or
costs generated by other customers were recognized in the Company's
consolidated statement of operations as incurred. During the year
ended December 31, 1999, the Company applied $29.3 million of deferred
proceeds from the sale of the operating assets and liabilities of
NETCOM to the network capacity agreement with MindSpring, which
entirely offset the costs of the Company's operations under the
agreement. The Company, through NetAhead, is currently utilizing the
retained network operating assets to provide wholesale capacity and
other enhanced network services on an ongoing basis to MindSpring
under a new agreement as well as to other ISPs and telecommunications
providers. Operating results from such services will be included in
the Company's statement of operations as incurred. Since the
operations sold were acquired by the Company in a transaction
accounted for as a pooling of interests, the gain on the sales of the
operations of NETCOM is classified as an extraordinary item in the
Company's consolidated statement of operations.
(b) Network Services
On July 15, 1999, the Company's board of directors adopted a formal
plan to dispose of the Company's investments in its wholly-owned
subsidiaries, ICG Fiber Optic Technologies, Inc. and Fiber Optic
Technologies of the Northwest, Inc. (collectively, "Network
Services"). Accordingly, the Company's consolidated financial
statements reflect the operations of Network Services as discontinued
for all periods presented. During the three months ended June 30,
1999, the Company accrued approximately $8.0 million for estimated
losses on the disposal of Network Services, including approximately
$0.3 million for estimated operating losses of Network Services during
the phase out period. On October 22, 1999, the Company completed the
sale of all of the capital stock of Network Services to ACS
Communications, Inc. for total proceeds of $23.9 million in cash. For
the year ended December 31, 1999, the Company recorded a loss on the
disposal of Network Services of $10.9 million. The Company has
included in
A-39
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(3) Discontinued Operations and Divestures (continued)
its loss on disposal of Network Services income from operations of
$0.8 million of Network Services from July 15, 1999 through the date
of sale.
(c) Satellite Services
On July 15, 1999, the Company's board of directors adopted a formal
plan to dispose of the Company's investments in ICG Satellite
Services, Inc. and Maritime Telecommunications Network, Inc.
(collectively, "Satellite Services"). Accordingly, the Company's
consolidated financial statements reflect the operations of Satellite
Services as discontinued for all periods presented. On November 30,
1999, the Company completed the sale of all of the capital stock of
Satellite Services to ATC Teleports, Inc. for total proceeds of $98.1
million in cash. For the year ended December 31, 1999, the Company
recorded a gain on the disposal of Satellite Services of $48.7 million
net of income taxes of approximately $4.7 million. Offsetting the
gain on the sale is $0.7 million in net losses from operations of
Satellite Services from July 15, 1999 through the date of sale.
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 owned subsidiaries
within the Company's Satellite Services operations. The sale of MCN
was completed on August 12, 1998. The Company recorded a gain on the
sale of MCN of approximately $0.9 million during the year ended
December 31, 1998. The sale of Nova-Net was completed on November 18,
1998. The Company recorded a loss on the sale of Nova-Net of
approximately $0.2 million during the year ended December 31, 1998.
(d) 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
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 represented approximately 86% of
Zycom's revenue for the year ended December 31, 1998. The loss of
this significant portion of Zycom's business, despite management's
best efforts to secure other sources of revenue, raised
A-40
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(3) Discontinued Operations and Divestures (continued)
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. On January 4, 1999, the Company completed the sale of the
remainder of Zycom's long-lived 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 during the year ended December 31,
1999.
The Company's consolidated financial statements reflect the operations
of Zycom as discontinued for all periods presented. Zycom reported
net losses from operations of approximately $1.2 million for the
period from August 25, 1998 to December 31, 1998 and reported no
income or losses from operations for the year ended December 31, 1999.
The Company has accrued for all expected future net losses of Zycom.
Included in net current liabilities and net non-current assets of
discontinued operations in the Company's consolidated balance sheets
are the following accounts of Zycom:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1998 1999
--------------------- --------------------
<S> <C> <C>
(in thousands)
Cash and cash equivalents $ 47 -
Receivables, net 90 -
Prepaid expenses and deposits 11 -
Accounts payable and accrued liabilities (1,092) (529)
--------------------- --------------------
Net current liabilities of Zycom $ (944) (529)
===================== ====================
Net non-current assets of Zycom property and equipment, net
$ 220 -
===================== ====================
</TABLE>
(4) Purchase Acquisitions
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.
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
A-41
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(4) Purchase Acquisitions (continued)
approximately $1.1 million in cash. The excess of the purchase price over
the fair value of the net identifiable assets acquired of $5.8 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.
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 sheets.
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 $9.1 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 $29.4 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.
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
A-42
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(4) Purchase Acquisitions (continued)
assumption of certain liabilities. Separately, on October 17, 1997, 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 was initially being
amortized on a straight-line basis over six years. Due to unanticipated
turnover in CBG's customer base existing at the time of the acquisition,
the Company shortened the estimated useful life of goodwill associated with
the acquisition of CBG to four years during the year ended December 31,
1999.
(5) Short-term Investments Available for Sale
Short-term investments available for sale are comprised of the following:
December 31,
-----------------------------------
1998 1999
----------------- ----------------
(in thousands)
Certificates of deposit $ 31,000 10,442
Commercial paper 16,000 11,777
U.S. Treasury securities 5,000 -
----------------- ----------------
$ 52,000 22,219
================= ================
At December 31, 1998 and 1999, 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 included in short-term investments available for sale
mature within one year.
A-43
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(6) Property and Equipment
Property and equipment, including assets held under capital leases, is
comprised of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1998 1999
------------------- -------------------
<S> <C> <C>
(in thousands)
Land $ 709 11,503
Buildings and improvements 2,296 38,502
Furniture, fixtures and office equipment 54,859 108,024
Internal-use software costs 13,655 14,797
Machinery and equipment 20,155 32,884
Fiber optic equipment 278,596 401,676
Switch equipment 180,022 319,398
Fiber optic network 231,615 428,195
Site improvements 25,004 37,814
Service installation costs 20,679 52,649
Construction in progress 236,522 359,936
------------------- -------------------
1,064,112 1,805,378
Less accumulated depreciation (156,054) (279,698)
------------------- -------------------
$ 908,058 1,525,680
=================== ===================
</TABLE>
Property and equipment includes approximately $359.9 million of equipment
which has not been placed in service at December 31, 1999, and accordingly,
is not being depreciated. The majority of this amount is related to
uninstalled transport and switch equipment, software development and new
network construction.
For the years ended December 31, 1997, 1998 and 1999, the Company
capitalized interest costs on assets under construction of $3.2 million,
$10.4 million and $9.0 million, respectively. Such costs are included in
property and equipment as incurred. The Company recognized interest
expense of $117.5 million, $170.0 million and $212.4 million for the years
ended December 31, 1997, 1998 and 1999, respectively.
Also included in property and equipment at December 31, 1998 and 1999 are
remaining unamortized costs associated with the development of internal-use
computer software of $11.7 million and $17.9 million, respectively. The
Company capitalized $2.4 million, $10.0 million and $31.6 million of such
costs during the years ended December 31, 1997, 1998 and 1999,
respectively.
Certain of the assets described above have been pledged as security for
long-term debt, specifically, substantially all of the assets of ICG
Services were pledged as of December 31, 1999.
A-44
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(6) Property and Equipment (continued)
The following is a summary of property and equipment held under capital
leases or acquired pursuant to an IRU agreement as of December 31, 1999:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1998 1999
------------------ -------------------
<S> <C> <C>
(in thousands)
Machinery and equipment $ 6,419 5,270
Fiber optic equipment 798 581
Switch equipment 12,957 14,819
Fiber optic network 77,523 203,556
------------------ -------------------
97,697 224,226
Less accumulated depreciation (7,816) (19,575)
$ 89,881 204,651
================== ===================
</TABLE>
Amortization of capital leases is included in depreciation and amortization
in the Company's consolidated statements of operations for all periods
presented.
(7) Investments
On March 30, 1999, the Company purchased, for approximately
$10.0 million in cash, 454,545 shares of restricted Series D-1 Preferred
Stock of NorthPoint Communications Holdings, Inc., a Delaware corporation
and competitive local exchange carrier ("CLEC") based in San Francisco,
California ("NorthPoint") which was converted into 555,555 shares of Class
B common stock of NorthPoint (the "NorthPoint Class B Shares") on May 5,
1999. The NorthPoint Class B Shares are convertible on or after March 31,
2000 on a one-for-one basis into a voting class of common stock of
NorthPoint. The Company is accounting for its investment in NorthPoint
under the cost method of accounting until the NorthPoint Class B Shares are
converted into voting and tradable common stock of NorthPoint.
On August 11, 1999, the Company purchased 1,250,000 shares of Series C
Preferred Stock (the "ThinkLink Preferred Stock") of International
ThinkLink Corporation ("ThinkLink"), for $1.0 million in cash. The
ThinkLink Preferred Stock will automatically convert to common stock upon
the completion of the initial public offering of the common stock of
ThinkLink or upon election to convert by the holders of a majority of the
ThinkLink Preferred Stock. The conversion rate from the ThinkLink
Preferred Stock to common stock of ThinkLink is initially one-for-one;
however, such conversion rate is subject to adjustment. The Company has
accounted for its investment in ThinkLink under the cost method of
accounting. Dividends on the ThinkLink Preferred Stock will be included in
income when paid. ThinkLink is an Internet and enhanced services provider.
On November 15, 1999, the Company entered into an agreement to purchase a
limited partnership interest in Centennial Strategic Partners VI, L.P.
("Centennial"). The primary purpose of the partnership is to invest in
venture capital investments, principally by investing in
A-45
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(7) Investments (continued)
equity or equity-oriented securities of privately held companies in the
electronic communications industry. The Company has capital contribution
commitments to Centennial of $1.0 million to be funded in installments
through January 15, 2002. Through December 31, 1999, the Company had
contributed approximately $0.3 million to the partnership. The Company has
accounted for its investment in Centennial under the cost method of
accounting.
Investments in debt securities available for sale, partnership interests
and restricted and exchangeable common and preferred stock at December 31,
1999 includes approximately $17.7 million of available for sale investments
in U.S. Treasury securities, which mature in periods in excess of one year.
(8) Other Assets
Other assets are comprised of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1998 1999
----------------- ------------------
<S> <C> <C>
(in thousands)
Deposits $ 14,896 3,448
Collocation costs 5,472 12,771
Right of entry costs 2,684 2,654
Non-compete agreements 800 -
Other 206 830
----------------- ------------------
24,058 19,703
Less accumulated amortization (1,734) (2,935)
----------------- ------------------
$ 22,324 16,768
================= ==================
</TABLE>
A-46
<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 property and equipment. Required payments due each year on or before
December 31 under the Company's capital lease obligations are as follows
(in thousands):
2000 $ 17,454
2001 17,569
2002 12,200
2003 12,056
2004 12,040
Thereafter 85,716
--------------
Total minimum lease payments 157,035
Less amounts representing interest (85,597)
--------------
Present value of net minimum lease payments 71,438
Less current portion (8,090)
$ 63,348
==============
In December 1999, the Company entered into a maximum 20-year agreement with
a major interexchange carrier to lease approximately 18,000 miles of long-
haul capacity in various regions of the United States for $140.1 million,
payable in installments through June 2000. The discounted value of the
Company's remaining payments on the lease of $135.3 million is included in
payable pursuant to IRU agreement in the accompanying consolidated balance
sheet at December 31, 1999.
A-47
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(10) Long-term Debt
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1998 1999
---------------- ----------------
<S> <C> <C>
(in thousands)
Senior Facility with adjustable rate of interest due on scheduled
maturity dates, secured by assets of ICG Equipment and
NetAhead (a) $ - 79,625
9 7/8% Senior discount notes of ICG Services, net of discount (b) 266,918 293,925
10% Senior discount notes of ICG Services, net of discount (c) 327,699 361,290
11 5/8% Senior discount notes of Holdings, net of discount (d) 122,528 137,185
12 1/2% Senior discount notes of Holdings, net of discount (e) 414,864 468,344
13 1/2% Senior discount notes of Holdings, net of discount (f) 465,886 532,252
Mortgage payable with interest at 8 1/2%, due monthly through 2009,
secured by building 1,084 999
Mortgage loan payable with adjustable rate of interest (14.77%
at December 31, 1999) due in full on January 31, 2013,
secured by corporate headquarters (g) - 33,077
Other 65 -
---------------- ----------------
1,599,044 1,906,697
Less current portion (46) (796)
---------------- ----------------
$ 1,598,998 1,905,901
================ ================
</TABLE>
(a) Senior Facility
On August 12, 1999 and amended on December 29, 1999, ICG Equipment
and NetAhead entered into a $200.0 million senior secured
financing facility ("Senior Facility") consisting of a $75.0
million term loan, a $100.0 million term loan and a $25.0 million
revolving line of credit. The Senior Facility is guaranteed by ICG
Services and is secured by the assets of ICG Equipment and
NetAhead.
As required under the terms of the loan, the Company borrowed on
August 12, 1999 the available $75.0 million on the $75.0 million
term loan. The loan bears interest at an annual interest rate of
LIBOR plus 3.5% or the base rate, as defined in the credit
agreement, plus 2.5%, at the Company's option. At December 31,
1999, the $75.0 million term loan bears annual interest at LIBOR
plus 3.5%, or 9.67%. Quarterly repayments commenced September 30,
1999 and require quarterly loan balance reductions of 0.25%
through June 30, 2005 with the remaining outstanding balance to be
repaid during the final three quarters of the loan term. The $75.0
million term loan matures on March 31, 2006. At December 31, 1999,
the Company has $74.6 million outstanding under the $75.0 million
term loan.
A-48
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(10) Long-term Debt (continued)
On August 12, 1999, the Company borrowed $5.0 million on the $100.0
million term loan. The $100.0 million term loan is available for
borrowing through August 10, 2000 at an initial annual interest rate
of LIBOR plus 3.125% or the base rate, as defined in the credit
agreement, plus 2.125%, at the Company's option. At December 31,
1999, the $5.0 million outstanding under the $100.0 million term loan
bears annual interest at LIBOR plus 3.125%, or 9.35%. Quarterly
repayments commence September 30, 2002 and require aggregate loan
balance reductions of 25% through June 30, 2003, 35% through June 30,
2004 and 40% through June 30, 2005. The $100.0 million term loan
matures on June 30, 2005.
The $25.0 million revolving line of credit is available through the
maturity date of June 30, 2005 at an initial annual interest rate of
LIBOR plus 3.125% or the base rate, as defined in the credit
agreement, plus 2.125%, at the Company's option.
The Company is required to pay commitment fees ranging from 0.625% to
1.375% for the unused portion of available borrowings under the Senior
Facility.
The terms of the Senior Facility provide certain limitations on the
use of proceeds, additional indebtedness, dividends, prepayment of the
Senior Facility and other indebtedness and certain other transactions.
Additionally, the Company is subject to certain financial covenants
based on its results of operations. During the year ended December
31, 1999, certain defined terms in the credit agreement for the Senior
Facility were amended to ensure that the Company would remain in
compliance with the financial covenants of the Senior Facility.
(b) 9 7/8% Notes
On April 27, 1998, ICG Services completed a private placement of 9
7/8% Senior Discount Notes due 2008 (the "9 7/8% Notes") for gross
proceeds of approximately $250.0 million. Net proceeds from the
offering, after underwriting 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.
A-49
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(10) Long-term Debt (continued)
(c) 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.
(d) 11 5/8% Notes
On March 11, 1997, Holdings completed a private placement (the "1997
Private Offering") of 11 5/8% Senior Discount Notes due 2007 (the "11
5/8% Notes") and 14% Exchangeable Preferred Stock Mandatorily
Redeemable 2008 (the "14% Preferred Stock") for gross proceeds of
$99.9 million and $100.0 million, respectively. Net proceeds from the
1997 Private Offering, after costs of approximately $7.5 million, were
approximately $192.4 million.
The 11 5/8% Notes are unsecured senior obligations of Holdings
(guaranteed by ICG) that mature on March 15, 2007, at a maturity value
of $176.0 million. Interest will accrue at 11 5/8% per annum,
beginning March 15, 2002, and is payable each March 15 and September
15, commencing September 15, 2002. The indenture for the 11 5/8%
Notes contains certain covenants which provide for limitations on
indebtedness, dividends, asset sales and certain other transactions
and effectively 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.
A-50
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(10) Long-term Debt (continued)
(e) 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.
(f) 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,
A-51
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(10) Long-term Debt (continued)
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.
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.
(g) Mortgage Loan Payable
Effective January 1, 1999, the Company purchased its corporate
headquarters, land and improvements (collectively, the "Corporate
Headquarters") for approximately $43.4 million. The Company, through
a newly formed subsidiary, financed the purchase primarily through a
loan secured by a mortgage on the Corporate Headquarters, guaranteed
by ICG Services, Inc. The amended loan agreement, dated May 1, 1999,
requires monthly interest payments at an initial interest rate of
14.77% per annum, which rate increases annually by 0.003% with the
mortgage balance due January 31, 2013. The seller of the Corporate
Headquarters has retained an option to repurchase the Corporate
Headquarters at the original sales price, which option is exercisable
from January 1, 2004 through January 31, 2012.
Scheduled principal maturities of long-term debt as of December 31, 1999
are as follows (in thousands):
Year:
2000 $ 796
2001 800
2002 800
2003 800
2004 800
Thereafter 2,315,556
----------------------
2,319,552
Less unaccreted discount (412,855)
Less current portion (796)
----------------------
$ 1,905,901
======================
A-52
<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:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1998 1999
----------------- ------------------
<S> <C> <C>
(in thousands)
14% Exchangeable preferred stock of Holdings,
mandatorily redeemable in 2008 (a) $ 124,867 144,144
14 1/4% Exchangeable preferred stock of
Holdings, mandatorily redeemable in 2007 (b) 213,443 246,751
----------------- ------------------
$ 338,310 390,895
================= ==================
</TABLE>
(a) 14% Preferred Stock
In connection with the 1997 Private Offering, Holdings sold 100,000
shares of exchangeable preferred stock that bear a cumulative dividend
at the rate of 14% per annum. The dividend is payable quarterly in
arrears each March 15, June 15, September 15 and December 15, and
commenced June 15, 1997. Through March 15, 2002, the dividend is
payable at the option of Holdings in cash or additional shares of 14%
Preferred Stock. All dividends paid through December 31, 1999 have
been paid through the issuance of 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.
Included in restricted
A-53
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(11) Redeemable Preferred Securities of Subsidiaries (continued)
cash at December 31, 1999 is $8.7 million which consists of the
proceeds from the private placement which are designated for the
payment of cash dividends on the 6 3/4% Preferred Securities through
November 15, 2000.
The 6 3/4% Preferred Securities consist of 2,645,000 exchangeable
preferred securities of ICG Funding that bear a cumulative dividend at
the rate of 6 3/4% per annum. The dividend is paid quarterly in
arrears each February 15, May 15, August 15 and November 15, and
commenced November 15, 1997. The dividend is payable in cash through
November 15, 2000 and, thereafter, in cash or shares of ICG Common
Stock, at the option of ICG Funding. The 6 3/4% Preferred Securities
are exchangeable, at the option of the holder, at any time prior to
November 15, 2009 into shares of ICG Common Stock at an exchange rate
of 2.0812 shares of 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 the exchange price by 150%, for at least 20
days of any 30-day trading period, 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
A-54
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(11) Redeemable Preferred Securities of Subsidiaries (continued)
which solely holds Company preferred stock in the accompanying
consolidated balance sheets.
Included in accretion and preferred dividends on preferred securities of
subsidiaries, net of minority interest in share of losses is approximately
$39.8 million, $55.2 million and $61.9 million for the years ended December
31, 1997, 1998 and 1999, 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 and the 14 1/4%
Preferred Stock and the Redeemable Preferred Stock. These costs are
partially offset by the minority interest share in losses of subsidiaries
of approximately $1.7 million for the year ended December 31, 1997. There
was no reported minority interest share in losses of subsidiaries for the
years ended December 31, 1998 or 1999.
(12) Stockholders' Deficit
(a) Stock Options and Employee Stock Purchase Plan
During the fiscal years ended September 30, 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, net of cancellations, have been
granted under these plans through December 31, 1999 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 2,073,277 options,
net of cancellations, have been granted under this plan through
December 31, 1999 at exercise prices ranging from $0.56 to $79.50,
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.
From the fiscal year ended September 30, 1994 through the year ended
December 31, 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
A-55
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(12) Stockholders' Deficit (continued)
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 7,808,496 options, net of cancellations, have been
granted under these plans through December 31, 1999 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.
Additionally, during the year ended December 31, 1999, the Company's
board of directors granted 696,836 non-qualified stock options, net of
cancellations through December 31, 1999, to certain officers and
employees at exercise prices ranging from $14.44 to $23.19, 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
non-qualified options granted during the year ended December 31, 1999
are subject to various vesting requirements and expire in 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
A-56
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(12) Stockholders' Deficit (continued)
participants in the plan. During the years ended December 13, 1997,
1998 and 1999, the Company sold 109,213, 111,390 and 205,568 shares of
ICG Common Stock, respectively, to employees under this plan.
The Company has recorded no compensation expense in connection with
its stock-based employee and non-employee director compensation plans
pursuant to the intrinsic value based method of APB 25 for the periods
presented. 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 the periods presented.
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
(in thousands, except per share amounts)
Net loss:
As reported $(360,735) (418,045) (234,162)
Pro forma (369,677) (439,362) (259,362)
Net loss per share basic and diluted:
As reported $ (8.49) (9.25) (4.97)
Pro forma (8.70) (9.72) (5.50)
</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 the year ended December 31, 1997, 70%
for the years ended December 31, 1998 and 1999; and risk-free interest
rates ranging 5.61% to 6.74% for the year ended December 31, 1997,
4.09% to 5.77% for the year ended December 31, 1998 and 4.59% to 6.28%
for the year ended December 31, 1999. 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 the years ended December 31, 1997, 1998
and 1999 was approximately $10.31, $13.23 and $10.53 per option,
respectively.
A-57
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(12) Stockholders' Deficit (continued)
As options outstanding at December 31, 1999 will continue to vest in
subsequent periods and additional options are expected to be awarded
under existing and new plans, the above pro forma results are not
necessarily indicative of the impact on net loss and net loss per
share in future periods.
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 January 1, 1997 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
Granted 3,374 18.50
Exercised (817) 13.55
Canceled (1,942) 17.70
-----------------
Outstanding at December 31, 1999 7,395 15.06 3,142
=================
</TABLE>
A-58
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(12) Stockholders' Deficit (continued)
The following table summarizes information about options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------------- ---------------------------
Weighted
average Weighted Weighted
Range of remaining average average
exercise Number contractual exercise Number exercise
prices outstanding life price exercisable price
- -------------- -------------- ----------- -------- -------------- --------
(in thousands) (in years) (in thousands)
<S> <C> <C> <C> <C> <C>
$ 2.69 - 10.00 2,027 5.51 $ 8.30 1,937 $ 8.30
10.38 - 16.88 2,371 7.85 15.44 966 15.36
16.94 - 19.13 1,836 9.24 18.07 151 18.07
19.19 - 30.00 1,161 8.95 21.41 88 21.41
-------------- --------------
7,395 3,142
============== ==============
</TABLE>
A-59
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(12) Stockholders' Deficit (continued)
(b) Warrants
Between the fiscal years ended September 30, 1993 and 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 common shares of
Holdings-Canada or ICG Common Stock. The following table summarizes
warrant activity for the three years ended December 31, 1999:
<TABLE>
<CAPTION>
Outstanding Exercise
warrants price range
-------------- ----------------
(in thousands)
<S> <C> <C>
Outstanding, January 1, 1997 2,623 $ 7.38 - 21.51
Exercised (599) 7.38 - 21.51
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
Exercised (119) 12.51
--------------
Outstanding, December 31, 1999 1,733 12.51
==============
</TABLE>
All warrants outstanding at December 31, 1999 have an expiration date
of August 6, 2005 and, in connection with the reorganization of
Holdings-Canada which occurred during the year ended December 31,
1998, 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, 1999, the
Company had no shares of preferred stock outstanding. All of the
issued and outstanding shares of ICG Preferred Stock at December 31,
1999 are held by ICG Funding.
A-60
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(13) Related Party Transactions
During the fiscal year ended September 30, 1996, Holdings-Canada and
International Communications Consulting, Inc. ("ICC") entered into a
consulting agreement whereby ICC provided various consulting services to
the Company through December 1999.
During the years ended December 31, 1997, 1998 and 1999, the Company paid
approximately $1.1 million, $1.0 million and $0.5 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 Capacity and Construction
In January 2000, Qwest Communications Corporation ("Qwest") and the
Company signed an agreement, whereby the Company will provide to
Qwest, for $126.5 million over the initial 6-year term of the
agreement, an indefeasible right of use ("IRU") for designated
portions of the Company's local fiber optic network. The Company will
recognize revenue ratably over the term of the agreement, as the
network capacity is available for use and receive payments in
installments through June 18, 2000. Qwest may, at its option, extend
the initial term of the agreement for an additional four-year period
and an additional 10-year period for incremental payment at the time
of the option exercises. In the event that the Company fails to
deliver any of the network capacity by March 31, 2001, Qwest is
entitled to cancel any undelivered network capacity segments and
receive immediate refund of any amounts already paid to the Company
for such segments.
In June 1999, the Company signed a minimum 10-year agreement to lease
certain portions of its fiber optic network to Qwest for $32.0
million, which was received in full by the Company in June 1999. The
Company has accounted for the agreement as a sales-type lease and is
recognizing revenue and operating costs in its consolidated financial
statements on a percentage of completion basis as the network build-
out is completed and is available for use. For the year ended
December 31, 1999, the Company included $18.1 million and $3.2 million
in revenue and operating costs, respectively, in its consolidated
financial statements related to the agreement, including revenue
attributed to maintenance services, which is recognized ratably over
the term of the agreement. The Company expects the network facilities
included in the agreement to be completed during the first half of
2000. Approximately $13.9 million of the total proceeds received
remain in deferred revenue in the Company's consolidated balance sheet
at December 31, 1999.
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
A-61
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
Company, stretches from Los Angeles to southern Orange County. Under
the terms of this agreement, SCE is entitled to receive an annual fee
for ten years, certain fixed quarterly payments, a quarterly payment
equal to a percentage of certain network revenue, and certain other
installation and fiber connection fees. The aggregate fixed payments
remaining under the agreement totaled approximately $125.4 million at
December 31, 1999. The agreement has been accounted for as a capital
lease in the accompanying consolidated balance sheets.
(b) Telecommunications Services and Line Purchase Commitments
Effective September 1998, the Company entered into two service
agreements with three-year terms with WorldCom Network Services, Inc.
("WorldCom"). 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, 1999.
In March 1999, the Company entered into an agreement with NorthPoint,
which designates NorthPoint as the Company's preferred digital
subscriber line ("DSL") provider through June 1, 2001. Under the
agreement, the Company agreed to purchase digital subscriber lines
before designated intervals. The Company and NorthPoint are currently
renegotiating the terms of the agreement with respect to pricing and
minimum purchase levels. The Company's policy is to accrue and
include in operating costs the effect of any shortfall in DSL
installations under its agreement with NorthPoint in the period in
which the shortfall occurred, although the Company has suspended this
practice until such time that negotiations with NorthPoint are
complete. Additionally, the Company sold its existing DSL equipment
to NorthPoint for total proceeds of approximately $2.7 million.
In November 1999, the Company entered into a one-year agreement with
Covad Communications Company, a California-based DSL provider
("Covad"), to purchase
A-62
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
DSL services from Covad. Under the agreement, the Company is required
to purchase a minimum number of digital subscriber lines before
designated intervals over the one-year period. In return, the Company
will receive certain DSL service price discounts. Additionally, the
Company will receive quarterly rebates from Covad for each line
installed which meets or exceeds the designated milestone schedule. In
the event that the Company fails to purchase the minimum number of
digital subscriber lines at the designated intervals, Covad and the
Company will renegotiate the terms of the agreement, which
renegotiations may include revision of the minimum purchase levels and
the elimination of DSL service price discounts. To date, the Company
has met all required minimum commitments under its agreement with
Covad.
(c) Capital Purchase Commitments
The Company has entered into various equipment purchase agreements
with certain of its vendors. Under these agreements, if the Company
does not meet a minimum purchase level in any given year, the vendor
may discontinue certain discounts, allowances and incentives otherwise
provided to the Company. In addition, the agreements may be
terminated by either the Company or the vendor upon prior written
notice.
Additionally, the Company has entered into certain commitments to
purchase capital assets with an aggregate purchase price of
approximately $165.0 million at December 31, 1999.
(d) Operating Leases
The Company leases office space and equipment under non-cancelable
operating leases. Lease expense was approximately $11.8 million,
$27.0 million and $21.3 million for the years ended December 31, 1997,
1998 and 1999, respectively.
Minimum lease payments due each year on or before December 31 under
the Company's operating leases are as follows (in thousands):
2000 $ 23,324
2001 21,597
2002 18,526
2003 16,111
2004 12,943
Thereafter 57,478
-------------
$ 149,979
=============
A-63
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
(e) Transport and Termination Charges
The Company has recorded revenue of approximately $4.9 million, $58.3
million and $124.1 million for the years ended December 31, 1997, 1998
and 1999, respectively, for reciprocal compensation relating to the
transport and termination of local traffic to ISPs from customers of
ILECs pursuant to various interconnection agreements. During this
period, some of the ILECs have not paid all of the bills they have
received from the Company and have disputed these charges based on the
belief that such calls are not local traffic as defined by the various
agreements and not subject to payment of transport and termination
charges under state and federal laws and public policies. In
addition, some ILECs, while paying a portion of reciprocal
compensation due to ICG for ISP-bound traffic, have disputed other
portions of the charges. However, the Company has resolved certain of
these disputes with some of the ILECs.
The resolution of these disputes have been, and will continue to be,
based on rulings by state public utility commissions and/or by the
Federal Communications Commission ("FCC"), or through negotiations
between the parties. To date, there have been favorable final rulings
from 31 state public 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. To date, five federal court
decisions, including two federal circuit court of appeals decisions
have been issued upholding state commission decisions ordering the
payment of reciprocal compensation for ISP traffic. 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 currently
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
is properly 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. Since the issuance of the FCC's decision on
February 25, 1999, 19 state utility commissions, have either ruled or
reaffirmed that ISP traffic is subject to reciprocal compensation
under current interconnection agreements, and two state commissions
have declined to apply reciprocal compensation for ISP traffic under
current interconnection agreements. Additionally, 11 state
commissions have awarded reciprocal compensation for ISP traffic in
arbitration proceedings involving new agreements. One state has
declined to order reciprocal compensation in an arbitration
proceeding, and two states have declined
A-64
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
to decide the issue in the arbitration until after the FCC and/or the
state commission reaches a decision in pending proceedings on
prospective compensation.
On March 24, 2000, the United States Court of Appeals for the District
of Columbia Circuit vacated and remanded the FCC's February 25, 1999
decision. The Company does not believe that the Circuit Court's
decision will adversely affect the state decisions noted above with
respect to reciprocal compensation. The decision does, however,
create some uncertainty and there can be no assurance that future FCC
or state rulings will be favorable to the Company.
The Company has aggressively participated in a number of regulatory
proceedings that address the obligation of the ILECs to pay the
Company reciprocal compensation for ISP-bound traffic under the
Company's interconnection agreements. These proceedings include
complaint proceedings brought by the Company against individual ILECs
for failure to pay reciprocal compensation under the terms of a
current interconnection agreement; generic state commission
proceedings concerning the obligations of ILECs to pay reciprocal
compensation to CLECs, and arbitration proceedings before state
commissions addressing the payment of reciprocal compensation on a
prospective basis under new interconnection agreements.
In 1999, the state utility commission in Colorado issued a final
decision granting a complaint filed by the Company against US West
Communications, Inc. ("US West"), and ruled that the Company is
entitled to be paid reciprocal compensation for ISP-bound traffic
under the terms of the Company's interconnection agreement in effect
at the time of the complaint proceeding. Additionally, in June 1999,
the Alabama Public Service Commission ruled that the Company is
entitled to be treated the same as other CLECs for which the Alabama
commission had previously ordered the payment of reciprocal
compensation for ISP traffic by BellSouth Corporation ("BellSouth").
The ILECs filed for judicial review in federal district court of each
of these favorable commission rulings; the appeals are pending. Also
in 1999, the California PUC issued a decision affirming a previously
issued decision that held that reciprocal compensation must be paid by
Pacific Bell and GTE-California for the termination of ISP traffic by
CLECs under existing interconnection agreements. The ILECs also have
appealed the California PUC decision, and the appeal is pending.
Subsequent to the issuance of the favorable rulings by the Colorado,
Alabama and California state commissions, the Company has received
payments from US West, Pacific Bell and GTE-California for amounts
owed for reciprocal compensation. Pursuant to an earlier decision by
the Ohio Commission, Ameritech has been paying ICG reciprocal
compensation for ISP traffic under its original interconnection
agreement which expired on February 15, 2000. Through December 31,
1999, the Company has received $65.8 million from Ameritech, $7.7
million from Pacific Bell and $11.7 million from GTE-California in
reciprocal compensation payments. Additionally, in January
A-65
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
and February 2000 the Company received additional payments from
Pacific Bell of $16.8 million, a portion of which represents amounts
previously placed in an escrow account by Pacific Bell calculated as
being owed to the Company for reciprocal compensation for ISP-bound
traffic. Also in January 2000, US West released to the Company $10.1
million in reciprocal compensation payments that had been in an escrow
account.
Additionally, through December 31, 1999, Southwestern Bell Telephone
Company ("SWBT") has remitted payment to the Company of $3.9 million
for reciprocal compensation owed to the Company for traffic from SWBT
customers in Texas to ISPs served by the Company. On December 29,
1999, SWBT initiated commercial arbitration to determine whether the
terms of the Company's current interconnection agreement with SWBT
require that the rates that the Company has been billing SWBT for
reciprocal compensation be reduced to rates established by the Texas
PUC in a 1998 consolidated arbitration with SWBT involving AT&T
Corporation, MCI Communications Corporation and other parties. Due to
subsequent procedural developments, this issue will be decided by the
Texas PUC, rather than in commercial arbitration, after the parties
have completed dispute resolution in accordance with the terms of the
interconnection agreement.
On September 16, 1999, the CPUC rendered a decision against
MFS/Worldcom, a CLEC ("MFS"), in an arbitration between Pacific Bell
and MFS. The California PUC ruled that MFS should not be permitted to
charge reciprocal compensation rates for the tandem switching and
common transport rate elements. Although the California PUC's ruling
did not involve the Company, the Company made a decision effective for
the three months beginning on September 30, 1999 and thereafter to
suspend the revenue recognition for the tandem switching and common
transport rate elements for services provided in California and in all
other states where the Company operates and such rate elements are
included in the Company's interconnection agreement with the ILEC.
Additionally, the Company recorded a provision of $45.2 million during
the three months September 30, 1999 for accounts receivable related to
these elements recognized in periods through June 30, 1999, which the
Company believes may be uncollectible. The Company continues to bill
Pacific Bell for the tandem switching and common transport rate
elements, and will pursue collection of its accounts receivable,
despite any provision. On February 4, 2000, the California PUC
initiated a new proceeding to examine, on a prospective basis,
compensation for ISP-bound traffic, including the tandem and transport
rate elements issue.
The Company has also recorded revenue of approximately $19.1 million
and $18.4 million for the years ended December 31, 1998 and 1999,
respectively, 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, 1998 and 1999 are $72.8 million and $76.3 million,
A-66
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
respectively, for all receivables related to reciprocal compensation
and other transport and termination charges. The receivables balance
at December 31, 1998 and 1999 is net of an allowance of $5.6 million
and $58.2 million, respectively, for disputed amounts and tandem
switching and common transport rate elements.
As the Company's interconnection agreements expire or are extended,
rates for transport and termination charges are being and will
continue to be renegotiated and/or arbitrated. Rates for transport
and termination also may be impacted by ongoing state and federal
regulatory proceedings addressing intercarrier compensation for
Internet traffic on a prospective basis. In addition to the FCC's
pending rulemaking proceeding and the District of Columbia Court of
Appeals recent remand, of the states in which ICG currently operates,
the Ohio, Texas and California commissions currently are conducting
proceedings on prospective compensation.
The Company has negotiated and/or arbitrated new or extended
interconnection agreements with Bell South, Ameritech, GTE-California
and Pacific Bell. The Company has completed arbitration proceedings
with Bell South before the state commissions in Alabama, North
Carolina, Georgia, Kentucky, Florida and Tennessee and with Ameritech
before the Ohio commission. Final decisions issued by the Alabama,
North Carolina, Kentucky and Georgia commissions awarded the Company
reciprocal compensation for ISP traffic in new agreements to be
executed by the parties, including the tandem and transport rate
element. The arbitration decisions of the Florida and Ohio
commissions declined to rule on the merits of whether the Company
should be paid reciprocal compensation for ISP traffic. The Florida
decision ruled that the compensation provisions of the parties'
current interconnection agreement would continue to apply, subject to
true up, until the completion of the FCC's rulemaking on future
compensation. The Ohio commission deferred ruling on the merits until
completion of the Ohio commission's generic proceeding on prospective
compensation, and ordered that in the interim period until completion
of the generic proceeding, bill and keep procedures should be
followed, subject to true up once the commission proceeding is
concluded. Arbitration proceedings with US West before the Colorado
commission and with SWBT before the Texas commission are pending. The
Company has negotiated an extension of its current agreement with GTE-
California until August 2000 that provides that reciprocal
compensation will be paid for ISP traffic, at rates that are lower
than the rates that previously applied under the agreement, and the
Company has adopted the MFS WorldCom/Pacific Bell interconnection
agreement, effective as of March 12, 2000, which agreement also
provides for reciprocal compensation for ISP traffic, with the tandem
and transport rate elements issue subject to further litigation.
Subsequent to completion of the arbitration proceedings with
BellSouth, the Company signed a three-year agreement with BellSouth
that, among other issues, addresses the payment of reciprocal
compensation for Internet traffic. BellSouth agreed to pay past
monies due to the Company for reciprocal compensation for the period
beginning when
A-67
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
ISP traffic was first received by the Company from BellSouth and
ending December 31, 1999, and the parties also agreed to the payment
of reciprocal compensation for Internet and voice traffic for the
period from January 1, 2000 through December 31, 2002 at per-minute
rates that gradually reduce over the three year period. The agreement
is applicable to all nine states in the BellSouth operating territory.
While the Company intends to pursue the collection of all receivables
related to transport and termination charges as of December 31, 1999
and believes that future revenue from transport and termination
charges recognized under the Company's interconnection agreements will
be realized, there can be no assurance that future regulatory and
judicial rulings will be favorable to the Company, or that different
pricing plans for transport and termination charges between carriers
will not be adopted when the Company's interconnection agreements
continue to be renegotiated or arbitrated, or as a result of FCC or
state commission proceedings on future compensation methods. In fact,
the Company believes that different pricing plans will continue to 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 subsequent periods,
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 and/or arbitrate 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 (Case 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 the Court of Appeals
affirmed the trial court's decision. Trial has been tentatively
scheduled for May 2000. 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.
A-68
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(15) Business Units
The Company conducts transactions with external customers through the
operations of its Telecom Services business unit. Shared administrative
services are provided to Telecom Services 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., ICG Services, Inc., ICG Corporate Headquarters,
L.L.C., ICG 161, L.P. and ICG Mountain View, Inc., which primarily hold
securities and real estate properties and provide certain legal, accounting
and finance, personnel and other administrative support services to Telecom
Services.
Direct and certain indirect costs incurred by Corporate Services on behalf
of Telecom Services are allocated to Telecom Services based on the nature
of the underlying costs. Transactions between Telecom Services and
Corporate Services 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 non-recurring and non-cash
charges), which represents the measure of operating performance used by
management to evaluate operating results, depreciation and amortization,
interest expense, capital expenditures of continuing operations and total
assets for Telecom Services and Corporate Services. As described in note
3, the operating results of the Company reflect the operations of NETCOM,
Network Services, Satellite Services and Zycom as discontinued for all
periods presented.
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
(in thousands)
Revenue:
Telecom Services $ 149,358 303,317 479,226
Corporate Services - - -
------------- ------------- -------------
Total revenue $ 149,358 303,317 479,226
============= ============= =============
EBITDA (before non-recurring and non-cash
charges) (a):
Telecom Services $ (92,053) (21,681) 28,941
Corporate Services (27,811) (20,415) (28,398)
------------- ------------- -------------
Total EBITDA (before non-recurring and
non-cash charges) $(119,864) (42,096) 543
============= ============= =============
Depreciation and amortization (b):
Telecom Services $ 46,092 87,641 170,607
Corporate Services 3,744 4,286 3,632
------------- ------------- -------------
Total depreciation and amortization $ 49,836 91,927 174,239
============= ============= =============
(Continued)
</TABLE>
A-69
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(15) Business Units (continued)
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
(in thousands)
Revenue
Provision for impairment of long-lived assets:
Telecom Services $ 5,169 - 31,815
Corporate Services - - -
------------- ------------- -------------
Total provision for impairment of
long-lived assets $ 5,169 - 31,815
============= ============= =============
Interest expense (b):
Telecom Services $ 11,996 2,692 7,848
Corporate Services 105,525 167,323 204,572
------------- ------------- -------------
Total interest expense $ 117,521 170,015 212,420
============= ============= =============
Income tax expense:
Telecom Services $ - 90 25
Corporate Services - - -
------------- ------------- -------------
Total income tax expense $ - 90 25
============= ============= =============
Extraordinary gain on sales of operations of
NETCOM:
Telecom Services $ - - 195,511
Corporate Services - - -
------------- ------------- -------------
Total interest expense $ - - 195,511
============= ============= =============
Capital expenditures of continuing operations
(c):
Telecom Services $ 250,934 355,076 735,220
Corporate Services 10,384 960 13
------------- ------------- -------------
Total capital expenditures of continuing
operations $ 261,318 356,036 735,233
============= ============= =============
</TABLE>
A-70
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(15) Business Units (continued)
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1999
------------ ------------
<S> <C> <C>
(in thousands)
Total assets:
Telecom Services (d) $1,135,937 1,845,171
Corporate Services (d) 371,157 261,085
Eliminations (20,287) (85,635)
Net assets of discontinued operations 102,840 -
------------ ------------
Total assets $1,589,647 2,020,621
============ ============
</TABLE>
(a) EBITDA (before non-recurring and non-cash charges) consists of loss
from continuing operations before interest, income taxes, depreciation
and amortization, provision for impairment of long-lived assets,
restructuring costs and other, net operating costs and expenses,
including deferred compensation and net loss (gain) on disposal of
long-lived assets, other expense, net and accretion and preferred
dividends on preferred securities of subsidiaries, or simply, revenue
less operating costs and selling, general and administrative expenses.
EBITDA (before non-recurring and non-cash charges) is presented as the
Company's measure of operating performance because it is a measure
commonly used in the telecommunications industry. EBITDA (before non-
recurring and non-cash charges) is presented to enhance an
understanding of the Company's operating results and is not intended
to represent cash flows from operating activities or results of
operations in accordance with generally accepted accounting principles
for the periods indicated. EBITDA (before non-recurring and non-cash
charges) is not a measurement under generally accepted accounting
principles and is not necessarily comparable with similarly titled
measures of other companies.
(b) Although not included in EBITDA (before non-recurring and non-cash
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 Telecom Services and Corporate Services. Interest expense
excludes amounts charged for interest on outstanding cash advances and
expense allocations between Telecom Services and Corporate Services.
(c) Capital expenditures include assets acquired under capital leases and
exclude payments for construction of the Company's corporate
headquarters and corporate headquarters assets acquired through the
issuance of long-term debt.
(d) Total assets of Telecom Services and Corporate Services excludes
investments in consolidated subsidiaries which eliminate in
consolidation.
A-71
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(16) Provision for Impairment of Long-lived Assets
During the year ended December 31, 1999, the Company recorded a provision
for impairment of long-lived assets of $31.8 million, which relates to the
impairment of software and other capitalized costs associated with Telecom
Services' billing and provisioning system projects under development. The
provision for impairment of long-lived assets was based on management's
decision to abandon the billing and provisioning systems under development
and to select new vendors for each of these systems, which vendors are
expected to provide the Company with billing and provisioning solutions
with improved functionality and earlier delivery dates at significantly
lower costs. The Company's billing and provisioning systems under
development were either not operational or were serving minimal customers
at the time management determined the carrying value of the underlying
assets was not recoverable.
For the year ended December 31, 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")
of approximately $5.2 million. 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.
(17) Restructuring Costs
During the year ended December 31, 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. The Company
has $0.1 million remaining in accrued liabilities at December 31, 1999
related to this restructuring plan.
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 $0.3 million were recorded as a result of the facility
closure during the year ended December 31, 1998. The Company has $0.1
million remaining in accrued liabilities at December 31, 1999 related to
the facility closure.
(18) Income Taxes
Current income tax expense for the years ended December 31, 1998 and 1999
represents state and federal income tax relating to operations of a
subsidiary company during periods when this entity's taxable income could
not be offset by the Company's current period losses or net operating loss
carryforwards.
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
A-72
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(18) Income Taxes (continued)
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, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1999
----------- -----------
<S> <C> <C>
(in thousands)
Deferred income tax liabilities:
Deferred gain on intercompany transactions - 6,598
Property and equipment, due to excess purchase price of
tangible assets and differences in depreciation for book
and tax purposes 10,173 15,427
----------- -----------
Net deferred income tax liabilities $ 10,173 22,025
----------- -----------
Deferred income tax assets:
Net operating loss carryforwards (247,126) (265,076)
Accrued interest on high yield debt obligations deductible when
paid (108,895) (154,601)
Accrued expenses not currently deductible for tax purposes (3,286) (18,150)
Allowance for doubtful accounts, not currently deductible for
tax purposes (5,989) (32,141)
Less valuation allowance 355,123 447,943
----------- -----------
Net deferred income tax assets (10,173) (22,025)
----------- -----------
Net deferred income tax liability $ - -
=========== ===========
</TABLE>
As of December 31, 1999, the Company has federal net operating loss
carryforwards ("NOLs") of approximately $662.7 million, which expire in
varying amounts through December 31, 2019. However, due to the provisions
of Section 382 and certain other provisions of the Internal Revenue Code
and Treasury Regulations (the "Code"), the utilization of these NOLs may be
limited. The Company is also subject to certain state income tax laws,
which may also limit the utilization of NOLs.
A valuation allowance has been provided for the Company's deferred tax
asset as management is not presently able to determine when the Company
will generate future taxable income.
(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
A-73
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(19) Employee Benefit Plans (continued)
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 $3.6 million, $4.0 million and $5.5 million during the
years ended December 31, 1997, 1998 and 1999, 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 1996 and 1995, respectively, are guaranteed by ICG and
Holdings-Canada.
The separate complete financial statements of Holdings have not been
included herein because such disclosure is not considered to be material to
the holders of the 11 5/8% Notes, the 12 1/2% Notes and the 13 1/2% Notes.
However, summarized consolidated financial information for Holdings and its
subsidiaries is as follows:
Summarized Consolidated Balance Sheet Information
December 31,
-----------------------
1998 1999
---------- ----------
(in thousands)
Current assets $ 241,667 263,870
Net current assets of discontinued operations 22,392 -
Property and equipment, net 610,671 675,613
Other non-current assets, net 147,283 128,489
Net non-current assets of discontinued operations 48,751 -
Current liabilities 69,204 148,042
Long-term debt, less current portion 1,004,316 1,138,734
Capital lease obligations, less current portion 62,946 57,564
Other long-term liabilities - 1,233
Due to parent 191,889 256,348
Due to ICG Services 137,762 128,893
Redeemable preferred stock 338,311 390,895
Stockholder's deficit (733,664) (1,053,737)
A-74
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(20) Summarized Financial Information of ICG Holdings, Inc. (continued)
Summarized Consolidated Statement of Operations Information
Years ended December 31,
-------------------------------------
1997 1998 1999
--------- --------- ---------
(in thousands)
Total revenue $ 149,358 305,612 478,850
Total operating costs and expenses 323,149 444,310 635,390
Operating loss (173,791) (138,698) (156,540)
Loss from continuing operations (313,303) (260,618) (376,725)
Net loss (328,193) (325,211) (320,073)
(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,
---------------------------
1998 1999
--------- -----------
(in thousands)
Current assets $ 162 82
Advances to subsidiaries 191,889 266,056
Non-current assets, net 2,414 -
Current liabilities 73 73
Long-term debt, less current portion 65 -
Due to parent 182,101 256,317
Share of losses of subsidiary 733,664 1,053,737
Shareholders' deficit (721,438) (1,043,989)
Condensed Statement of Operations Information
Years ended December 31,
-------------------------------------
1997 1998 1999
--------- --------- ---------
(in thousands)
Total revenue $ - - -
Total operating costs and expenses 195 192 2,478
Operating loss (195) (192) (2,478)
Losses of subsidiaries (328,193) (325,211) (320,073)
Net loss attributable to common
shareholders (328,388) (325,403) (322,551)
A-75
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(22) Condensed Financial Information of ICG Communications, Inc. (Parent
company) (continued)
The primary assets of ICG are its investments in ICG Services, ICG Funding
and Holdings-Canada, 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, $2.2 million and $1.4
million for the years ended December 31, 1997, 1998 and 1999, respectively.
ICG has no operations other than those of ICG Services, ICG Funding, ICG
Acquisition, Inc. and their subsidiaries.
(23) Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value:Cash and cash equivalents and short-term investments
available for sale:
The carrying amount approximates fair value because of the short maturities
of such instruments.
Long-term investments:
The fair values of long-term investments for which it is practicable are
estimated based on the quoted market prices for those or similar
investments. The long-term investments for which it is not practicable to
estimate the fair value relate to cost investments in unrelated entities
for which there is no market.
Long-term debt:
The fair value of the Company's long-term debt is estimated based on the
quoted market prices for the same or similar issues for the Senior Discount
Notes which are publicly traded. The fair value of both the Senior
Facility and the mortgage loan are estimated to be the carrying amount of
the debt as the debt instruments are not publicly traded and have stated
fixed or LIBOR plus a fixed percent interest rates.
Redeemable preferred stock:
The fair value of the preferred stock, which was issued in a private
placement, is included in the following table at carrying value as such
stock is not traded in the open market and a market price is not readily
available.
A-76
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(23) Fair Value of Financial Instruments (continued)
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------
1998 1999
----------------------------- -----------------------------
(in thousands)
Carrying Carrying
Amount Fair Value Amount Fair Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents and
short-term investments
available for sale $ 262,307 $ 262,307 $ 125,507 $ 125,507
Restricted Cash 16,912 16,912 12,537 12,537
Long-term investments:
Practicable - - 27,696 31,019
Not practicable - - 1,243 -
Long-term debt:
Senior facility - - (79,625) (79,625)
Senior discount notes (1,597,895) (1,471,633) (1,792,996) (1,504,089)
Mortgage loan payable - - (33,077) (33,077)
Redeemable preferred stock (466,352) (466,352) (519,323) (519,323)
</TABLE>
(24) Events Subsequent to Date of Independent Auditors' Report (Unaudited)
On February 22, 2000, the Company purchased 61,845 shares of restricted
Series D Preferred Stock ("Cyras Preferred Stock") of Cyras Systems, Inc.,
for approximately $1.0 million. Cyras is a manufacturer of
telecommunications equipment ("Cyras"). Dividends on the Cyras Preferred
Stock are 8% per annum, non-cumulative and payable in cash or any Cyras
assets legally available and as declared by the board of directors of
Cyras. The Cyras Preferred Stock is automatically convertible into shares
of common stock of Cyras, upon the initial public offering of the common
stock of Cyras or upon the election to convert by more than 66% of all of
the preferred stockholders of Cyras.
During the first quarter of 2000, the Company signed letters of intent with
its two biggest vendors, Lucent Technologies, Inc. and Cisco Systems, Inc.
for financing of future capital expenditures. The Company believes that
these proposed financing agreements will better enable the Company to fund
its scheduled network expansion through the purchase of Lucent and Cisco
equipment. It is anticipated that the Lucent credit agreement will provide
the Company with up to $250.0 million of long-term debt financing which can
be drawn down during the year following the closing to purchase network
equipment. Under the terms of the Lucent letter of intent, the Company
will commit to purchase a minimum of $175.0 million of equipment with
principal amounts outstanding required to be repaid in quarterly
installments over a five-year period beginning 2001. The proposed Cisco
credit facility will provide the Company with up to $180.0 million of
capital lease financing with a three-year repayment term.
A-77
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(24) Events Subsequent to Date of Independent Auditors' Report (Unaudited)
(continued)
During the first quarter of 2000, $50.0 million of the capital lease
financing with Cisco was finalized, however, no amounts have been drawn
down under this facility.
In February 2000, the Company announced that it had arranged to sell
approximately $750.0 million (before estimated expenses and fees of $45.0
million) of convertible preferred stock in the Company to three investors:
affiliates of Liberty Media Corporation ("Liberty Media"), Hicks, Muse,
Tate & Furst, Inc. ("Hicks, Muse") and Gleacher Capital Partners
("Gleacher"). Under the terms of the transaction, Liberty will invest
$500.0 million, Hicks Muse will invest $230.0 million and Gleacher will
invest $20.0 million in exchange for a total of 750,000 shares of Series A
convertible preferred stock at $1,000 per share. The preferred stock will
be convertible into the Company's common stock at a conversion rate of
$28.00 per common share. The Company will also issue 10 million common
stock warrants which will be exercisable at $34.00 per share. The proceeds
from this new equity investment will be used principally by the Company to
fund network expansion. It is expected that this equity financing will
close during the second quarter of 2000.
Separately, pursuant to an agreement dated February 28, 2000, a subsidiary
of the Company will purchase 1,000,000 shares of common stock of Teligent,
Inc., a fixed wireless broadband communications provider ("Teligent"), from
a subsidiary of Teligent in exchange for 2,996,076 shares of ICG Common
Stock. The Company and Teligent believe that they have complementary
systems and infrastructure that can be leveraged to expand each company's
network and service capabilities.
A-78
<PAGE>
MARKET FOR REGISTRANT'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 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 the high and low sales prices of ICG Common
Stock as reported on NASDAQ for the quarterly periods indicated:
NASDAQ National Market
----------------------
High Low
------ ------
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
1999:
First Quarter $24.13 $15.25
Second Quarter 28.56 16.81
Third Quarter 28.13 15.00
Fourth Quarter 21.94 13.94
2000:
First Quarter $39.00 $17.00
Second Quarter
(through April 24, 2000) 36.44 24.00
On April 24, 2000, the last reported sale price of the Common Stock on the
NASDAQ National Market was $24.56 per share. On April 24, 2000, there were 232
holders of record.
The Company has never declared or paid dividends on ICG Common Stock and
does not intend to pay cash dividends on 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 ICG Common Stock is effectively prohibited by the restrictions
contained in the Company's indentures relating to its senior indebtedness and in
the Second Amended and Restated Articles of Incorporation of Holdings, which
prohibit Holdings from making any material payment to the Company. Certain of
the Company's debt facilities also contain covenants that 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% Senior Discount Notes
due 2008 (the "9 7/8% Notes"). Morgan Stanley & Co. Incorporated acted as
placement agent for the offering and received placement fees of
A-79
<PAGE>
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% Senior
Discount Notes due 2008 (the "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 ("ICG Funding"),
completed a private placement of $132.25 million of 6 3/4% Exchangeable Limited
Liability Company Preferred Securities Mandatorily Redeemable 2009 (the "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 the
exchange price by 150%, for at least 20 days of any consecutive 30-day trading
period, 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% Senior Discount Notes due 2007
(the "11 5/8% Notes") and 100,000 shares of 14% Preferred Stock Mandatorily
Redeemable 2008 (the "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.
Each of the foregoing offerings was 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 ICG Common Stock (the
"CBG Shares") to certain shareholders of Communications Buying Group, Inc.
("CBG"), an Ohio based local exchange and Centrex reseller, 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.
In July 1998, the Company issued 145,997 shares of ICG Common Stock in
connection with the acquisition of DataChoice Network Services, L.L.C.
("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.
Resale of the DataChoice Shares was subsequently registered on a Form S-3
registration statement which was declared effective on April 2, 1999.
A-80
<PAGE>
Also in July 1998, the Company issued 356,318 shares of ICG Common Stock in
connection with the acquisition of NikoNet Inc., CompuFAX Acquisition Corp. and
Enhanced Messaging Services, Inc. (collectively, "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-81
<PAGE>
ICG COMMUNICATIONS, INC.
YEAR 2000 EXECUTIVE LONG-TERM INCENTIVE PLAN
<PAGE>
ICG COMMUNICATIONS, INC.
YEAR 2000 EXECUTIVE LONG-TERM INCENTIVE PLAN
SECTION 1
GENERAL TERMS
1.1 Purpose. The ICG Communications, Inc. Year 2000 Executive
Long-Term Incentive Plan has been established by ICG Communications, Inc. to
(i) attract and retain persons eligible to participate in the Plan; (ii)
motivate Participants, by means of appropriate incentives, to achieve long-
range goals; (iii) provide incentive compensation opportunities that are
competitive with those of other similar companies; and (iv) further identify
Participants' interests with those of the Company's other shareholders through
compensation that is based on the Company's common stock; and thereby promote
the long-term financial interest of the Company and the Subsidiaries, including
the growth in value of the Company's equity and enhancement of long-term
shareholder return.
1.2 Participation. Subject to the terms and conditions of the Plan,
the Committee will determine and designate, from time to time, from among the
Eligible Persons, those persons who will be granted one or more Awards under
the Plan, and thereby become Participants in the Plan. In the discretion of
the Committee, a Participant may be granted any Award permitted under the
provisions of the Plan, and more than one Award may be granted to a
Participant.
1.3 Operation, Administration, and Definitions. The operation and
administration of the Plan, including the Awards granted under the Plan, will
be subject to the provisions of Section 4 (relating to operation and
administration). Capitalized terms in the Plan will be defined as set forth
in Section 8.
1
<PAGE>
SECTION 2
OPTIONS AND SARS
2.1 Grants of Options and SARs.
(a) Options granted under this Section 2 may be either
Incentive Stock Options ("ISOs") or Non-Qualified Stock Options ("NSOs"), as
determined in the discretion of the Committee.
(b) A SAR may be granted to an Eligible Person who has been
granted an Option (hereinafter called a "related Option") with respect to all
or a portion of the shares of Stock subject to the related Option (a "Tandem
SAR") or may be granted separately to an Eligible Person (a "Free Standing
SAR").
(i) A Tandem SAR may be granted either concurrently
with the grant of the related Option or (if the related Option is a NSO) at any
time thereafter prior to the complete exercise, termination, expiration or
cancellation of such related Option. Tandem SARs will be exercisable only at
the time and to the extent that the related Option is exercisable (and may be
subject to such additional limitations on exercisability as the Award Agreement
may provide), and in no event after the complete termination or full exercise
of the related Option. Upon the exercise or termination of the related Option,
the Tandem SARs with respect thereto will be canceled automatically to the
extent of the number of shares of Stock with respect to which the related
Option was so exercised or terminated.
(ii) Free Standing SARs will be exercisable at the
time, to the extent and upon the terms and conditions set forth in the
applicable Award Agreement.
2.2 Exercise Price. The Exercise Price of each Option and SAR
granted under this Section 2 will be established by the Committee or will be
determined by a method established by the Committee at the time the Option or
SAR is granted.
2.3 Vesting. An Option or a SAR will become vested in accordance
with the vesting schedule and other terms and conditions set forth in the Award
Agreement. If no vesting schedule is provided in the Award Agreement, the
Option or SAR will become 25% vested on the first
2
<PAGE>
anniversary of the Grant Date, and vested as to an additional 25% on each of
the second, third and fourth anniversaries of the Grant Date.
2.4 Payment of Option Exercise Price. The payment of the Exercise
Price of an Option granted under this Section 2 will be subject to the
following:
(a) Subject to the provisions of this Section 2.4, the full
Exercise Price for shares of Stock purchased upon the exercise of any Option
will be paid at the time of such exercise (except that, in the case of an
exercise arrangement approved by the Committee and described in Section 2.4(c),
payment may be made as soon as practicable after the exercise).
(b) The Exercise Price will be payable by cashier's or
certified check or by tendering, by either actual delivery of shares or by
attestation, shares of Stock acceptable to the Committee, and valued at Fair
Market Value as of the day of exercise, or in any combination thereof, as
determined by the Committee.
(c) The Committee may permit a Participant to elect to pay the
Exercise Price upon the exercise of an Option by irrevocably authorizing a
third party to sell all or a portion of the shares of Stock acquired upon
exercise of the Option and remit to the Company a sufficient portion of the
sale proceeds to pay the entire Exercise Price and any tax withholding
resulting from such exercise.
2.5 Settlement of Award. Shares of Stock delivered pursuant to the
exercise of an Option or SAR will be subject to such conditions, restrictions
and contingencies as the Committee may establish in the applicable Award
Agreement. Settlement of SARs may be made in shares of Stock (valued at their
Fair Market Value at the time of exercise), in cash, or in a combination
thereof, as determined in the discretion of the Committee. The Committee, in
its discretion, may impose such conditions, restrictions and contingenc
ies with respect to shares of Stock acquired pursuant to the exercise of an
Option or a SAR as the Committee determines to be desirable.
2.6 Terms Applicable to NSOs and SARs. Except as otherwise expressly
provided in the Award Agreement or as agreed to by the Committee, the following
terms will apply to NSOs and to SARs:
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(a) The Exercise Price for each share of Stock covered by a NSO or
a SAR may be at any price; provided that NSOs and SARs granted in compliance
with the Code Section 162(m) performance-based compensation rules must be
granted with an Exercise Price not less than 100% of Fair Market Value.
(b) A NSO or a SAR may not be exercisable more than ten years from
the Grant Date of the NSO or SAR.
(c) Each NSO and each SAR will be treated as follows with respect
to the exercise of the NSO or SAR upon the termination of employment,
Disability or death of the Participant: If the Participant dies or becomes
Disabled during the Exercise Period while still employed, or within the 90-day
period referred to in the following sentence, the NSO or SAR may be exercised
by those entitled to do so (who will be, in the event of the Participant's
death, the Participant's beneficiary under Section 4.17) within twelve months
following the Participant's death or Disability, but not thereafter. If the
employment of the Participant is terminated (which for this purpose means that
the Participant is no longer employed by the Company or any Subsidiary) within
the Exercise Period for any reason other than for Cause or the Participant's
death or Disability, the NSO or SAR may be exercised by the Participant within
90 days following the date of such termination (provided that such exercise
must occur within the Exercise Period), but not thereafter. In any such case,
the NSO or SAR may be exercised only as to the shares of Stock as to which the
NSO or SAR had become exercisable on or before the date of the Participant's
termination, death or Disability.
(d) In the event the Participant's employment with the Company or a
Subsidiary is terminated for Cause, any NSO and any SAR then held by such
Participant (whether or not vested) will be cancelled and will become void and
the Participant will have no further interest in such NSO or SAR.
2.7 Terms Applicable to ISOs. Notwithstanding any other provision of the
Plan, the following terms will apply to Options intended to be treated as ISOs.
Any Option granted which is intended to be treated as an ISO which does not
satisfy the requirements applicable to ISOs under Code Section 422 will be
treated as a NSO to the extent such Option does not satisfy the ISO
requirements.
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(a) The aggregate Fair Market Value of the shares of Stock for
which an ISO is exercisable for the first time by a Participant in any
calendar year, under the Plan or otherwise, will not exceed $100,000. For this
purpose, the Fair Market Value of the Stock will be determined as of the Grant
Date of the Option. In the event that the Code, or the regulations or other
authority issued under the Code, are amended to provide for a different limit
on the Fair Market Value of shares of Stock to be subject to an ISO, such
different limit automatically will be incorporated herein and will apply to
any ISOs granted after the effective date of such amendment.
(b) The Exercise Price for each share of Stock covered by an ISO
granted to an Eligible Person who then owns stock possessing more than 10% of
the total combined voting power of all classes of stock of the Company or any
Parent or Subsidiary (a "10% Shareholder") must be at least 110% of the Fair
Market Value of the Stock subject to the ISO on the Grant Date of the Option.
(c) The ISO may not be exercisable more than ten years from the
Grant Date of the ISO; provided, however, that the exercise period of an ISO
granted to a 10% Shareholder must expire not more than five years from the
Grant Date of such ISO.
(d) Except as otherwise provided in the Award Agreement, each ISO
will be treated as follows with respect to the exercise of the ISO upon the
termination of employment, Disability or death of the Participant: If the
Participant dies or becomes Disabled during the Exercise Period while still
employed, or within the 90-day period referred to in the following sentence,
the ISO may be exercised by those entitled to do so (who will be, in the event
of the Participant's death, the Participant's beneficiary under Section 4.17)
within twelve months following the Participant's death or Disability, but not
thereafter. If the employment of the Participant is terminated (which for this
purpose means that the Participant is no longer employed by the Company or any
Subsidiary) within the Exercise Period for any reason other than for Cause or
the Participant's death or Disability, the ISO may be exercised by the
Participant within 90 days following the date of such termination (provided
that such exercise must occur within the Exercise Period), but not thereafter.
In any such case, the ISO may be exercised only as to the shares of Stock as
to which the ISO had become exercisable on or before the date of the
Participant's termination, death or Disability.
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(e) Except as otherwise provided in the Award Agreement, in the
event the Participant's employment with the Company or a Subsidiary i s
terminated for Cause, any ISO then held by such Participant (whether or not
vested) will be cancelled and will become void and the Participant will have no
further interest in such ISO.
2.8 Formula Grant Options to Non-Employee Directors.
(a) Notwithstanding any other provision of this Section 2.8, a
Director who receives formula grant options under the Company's 19 98 Stock
Option Plan, as amended, or under the Company's 1996 Stock Option Plan, as
amended, will not be eligible to receive grants of Options under this Section
2.8 covering the same periods.
(b) Subject to the terms and conditions of this Section, as of
December 15, 2000, and as of December 15 of each succeeding calendar year
through and including December 15, 2001, each Director automatically will be
granted Options on such dates to purchase twenty tho usand (20,000) shares of
Stock, subject to availability under the Plan. Except as set forth in the
following sentence, in the event that an individual becomes a Director during
any Plan Quarter commencing after December 15, 2000, such individual
automatically will be granted, as of the date of election of such individual as
a Director, Options to purchase that pro rata number of shares of Common Stock
for such calendar year as a Director otherwise would be entitled to receive
under this Section 2.8, at the rate of 5,000 share s per Plan Quarter, subject
to the following sentence and to the last sentence of Section 2.8(c) below. In
the event that an individ ual becomes a Director during the period from December
16 through December 31 of any calendar year, the Director automatically will b e
granted an Option to purchase the same number of shares as the Directors were
granted on the immediately preceding December 15, whi ch Options will vest over
the course of the following calendar year as set forth in Section 2.8(c) below.
(c) Subject to the provisions of Section 5.1, the Exercise Price of
the shares of Stock covered by each Option will equal the Fair Market Value of
such shares on the Grant Date. Each Option granted under this Section 2.8 will
expire ten (10) years from the Grant Date. Furthermore, an Option granted
pursuant to Section 2.8(b) will become vested and exercisable as to 5,000 shares
on March 31 of the year following the Grant Date, and as to an additional 5,000
shares on the last day of each of the next succeeding Plan Quarters during such
year, respectively, but only if,
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with regard to the shares of Stock with respect to which the Option becomes
exercisable at the end of any Plan Quarter, the Director has served in such
capacity on an uninterrupted basis for more than fifty percent (50%) of the
business days contained in such Plan Quarter.
(d) If a Director's services as a director of the Company is
terminated by reason of (i) his or her Disability, (ii) the failure of t he
Company to retain, or nominate for re-election, such Director (who otherwise is
eligible) other than for Cause, (iii) his or her i neligibility for re-election
pursuant to the Bylaws of the Company, or (iv) his or her voluntary termination
of such directorship, su ch termination will be considered a "Qualifying
Termination" and each Option granted to such Director, to the extent vested and
exerc isable (but not exercised) on the date of such Qualifying Termination,
will remain so exercisable by him or her until the end of the exercise period
under such Option. If a Director's service as a Director of the Company is
terminated for Cause, such termination wi ll be considered a "Non-Qualifying
Termination." In the event of a Non-Qualifying Termination, all outstanding
unexercised Options g ranted pursuant to this Section 2.8 will be forfeited or
canceled, as the case may be.
(e) If a Director dies while holding an outstanding Option, such
Option, to the extent vested and exercisable (but not exercised) on the date of
such Director's death, will remain so exercisable by the Director's beneficiary
under Section 4.17 until the end of the e xercise period under the Option.
(f) Grants under this Section 2.8 will be governed by the provisions
of this Section 2.8, and such other provisions of the Plan that are not
inconsistent with this Section 2.8. Directors may be granted Awards pursuant to
the provisions of this Plan, in addition to the Options granted under this
Section 2.8, and such additional Awards will be governed by the provisions of
this Plan, excluding this Section 2.8, unless the Committee determines
otherwise. Any reference to employment or termination of employment in this Plan
will be deemed to refer to the Director's status and term as a director of the
Company.
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SECTION 3
OTHER STOCK AWARDS
3.1 Grants of Other Stock Awards. The Committee may grant Stock
Units, Performance Shares, Restricted Stock, or Restrict ed Stock Units under
the Plan.
3.2 Restrictions on Stock Awards. Each Stock Unit Award,
Restricted Stock Award, Restricted Stock Unit Award and Perform ance Share Award
will be subject to such conditions, restrictions and contingencies (including
vesting periods and expiration dates) as the Committee shall determine.
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SECTION 4
OPERATION AND ADMINISTRATION
4.1 Effective Date. Subject to the approval of the shareholders of
the Company, the Plan will be effective as of June 7, 20 00; provided, however,
that to the extent that Awards are granted under the Plan prior to its approval
by shareholders, the Awards wi ll be contingent on approval of the Plan by the
shareholders of the Company.
4.2 Term of Plan. The Plan will be unlimited in duration and, in the
event of Plan termination, will remain in effect as lo ng as any Awards under it
are outstanding; provided, however, that, to the extent required by the Code, no
ISO may be granted under t he Plan on a date that is more than ten years from
the earlier of the date the Plan is adopted by the Company or the date the Plan
i s approved by shareholders.
4.3 Shares Subject to Plan. The shares of Stock for which Awards may
be granted under the Plan will be subject to the follo wing:
(a) Subject to the following provisions of this Section 4.3, the
maximum number of shares of Stock that may be delivered to Participa nts and
their beneficiaries under the Plan will equal 2,000,000 shares of Stock.
(b) To the extent any shares of Stock covered by an Award are
not delivered to a Participant or beneficiary becau se the Award is forfeited or
canceled, or the shares of Stock are not delivered because the Award is settled
in cash or used to satis fy applicable tax withholding obligations, such shares
will not be deemed to have been delivered for purposes of determining the maxi
mum number of shares of Stock available for delivery under the Plan.
(c) If the exercise price of any stock option granted under the
Plan or any Prior Plan is satisfied by tendering shares of Stock to the Company
(by either actual delivery or by attestation), only the number of shares of
Stock issued net of the sh ares of Stock tendered will be deemed delivered for
purposes of determining the maximum number of shares of Stock available for
deliv ery under the Plan.
(d) Subject to Section 5.1, the following additional maximums are
imposed under the Plan.
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(i) The number of shares of Stock that may be issued
under Options intended to be treated as ISOs will not exceed the number of
shares set forth in Section 4.3(a).
(ii) The maximum number of shares of Stock that may be
issued in conjunction with Awards granted pursuant to Section 3 will equal 10%
of the number of shares set forth in Section 4.3(a).
(iii) The maximum number of shares of Stock that may be
covered by Awards granted to any one individual pursuant to Sections 2 and 3
will be 500,000 shares during any calendar year.
4.4 General Restrictions. Delivery of shares of Stock or other
amounts under the Plan will be subject to the following:
(a) Notwithstanding any other provision of the Plan, the Company
will have no liability to deliver any shares of Stock under the Plan or make any
other distribution of benefits under the Plan unless such delivery or
distribution would comply with all applicable laws (including, without
limitation, the requirements of the Securities Act of 1933), and the applicable
requirements of any securities exchange or similar entity.
(b) To the extent that the Plan provides for issuance of stock
certificates to reflect the issuance of shares of Stock, the issuance may be
effected on a non-certificated basis, to the extent not prohibited by applicable
law or the applicable rules of any stock exchange.
4.5 Tax Withholding. All distributions under the Plan are subject to
withholding of all applicable taxes, and the Commit tee may condition the
delivery of any shares or other benefits under the Plan on satisfaction of the
applicable withholding obligations. The Committee, in its discretion, and
subject to such requirements as the Committee may impose prior to the occurrence
of such withholding, may permit such withholding obligations to be satisfied
through cash payment by the Participant, through the surrender of shares of
Stock which the Participant already owns, or through the surrender of shares of
Stock to which the Participant otherwise is entitled under the Plan.
4.6 Use of Shares. Subject to the overall limitation on the number of
shares of Stock that may be delivered under the Plan, the Committee may
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use available shares of Stock as the form of payment for compensation, grants or
rights earned or due under any other compensation plans or arrangements of the
Company or a Subsidiary, including the plans and arrangements of the Company or
a Subsidiary assumed in business combinations. In addition, Awards may be
granted as alternatives to or replacement of awards outstanding under the Plan,
or any other plan or arrangement of the Company or a Subsidiary (including a
plan or arrangement of a business or entity, all or a portion of which is
acquired by the Company or a Subsidiary).
4.7 Dividends and Dividend Equivalents. An Award (including without
limitation an Option or SAR Award) may provide the Participant with the right
to receive dividend payments or dividend equivalent payments with respect to
Stock subject to the Award (both before and after the Stock subject to the
Award is earned, vested, or acquired), which payments may be either made
currently or credited to an account for the Participant, and may be settled in
cash or Stock, as determined by the Committee. Any such settlements, and any
such crediting of dividends or dividend equivalents or reinvestment in shares of
Stock, may be subject to such conditions, restrictions and contingencies as the
Committee will establish, including the reinvestment of such credited amounts in
Stock equivalents.
4.8 Payments. Awards may be settled through cash payments, the
delivery of shares of Stock, the granting of replacement Awards, or any
combination thereof as the Committee will determine. Any Award settlement,
including payment deferrals, may be subject to such conditions, restrictions
and contingencies as the Committee will determine. The Committee may permit or
require the deferr al of any Award payment, subject to such rules and procedures
as it may establish, which may include provisions for the payment or crediting
of interest, or dividend equivalents, including converting such credits into
deferred Stock equivalents. Each Subsidiary will be liable for payment of cash
due under the Plan with respect to any Participant to the extent that such
benefits are attributable to the services rendered for that Subsidiary by the
Participant. Any disputes relating to liability of a Subsidiary for cash
payments will be resolved by the Committee.
4.9 Transferability. Except as otherwise provided by the Committee,
Awards under the Plan are not transferable except as designated by the
Participant by will or by the laws of descent and distribution.
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4.10 Form and Time of Elections. Unless otherwise specified herein,
each election required or permitted to be made by any Participant or other
person entitled to benefits under the Plan, and any permitted modification, or
revocation thereof, will be in writing filed with the Committee at such times,
in such form, and subject to such restrictions and limitations, not
inconsistent with the terms of the Plan, as the Committee will require.
4.11 Agreement With Company. An Award under the Plan will be
subject to such terms and conditions, not inconsistent with the Plan, as the
Committee will, in its sole discretion, prescribe. The terms and conditions of
any Award to any Participant will be reflected in an Award Agreement. A copy of
such Award Agreement will be provided to the Participant, and the Committee may,
but need not require that the Participant will sign a copy of such Award
Agreement. The Participant and such Award Agreement will be subject to all of
the terms of this Plan regardless of whether any Participant signature is
required.
4.12 Action by Company or Subsidiary. Any action required or
permitted to be taken by the Company or any Subsidiary will be evidenced by
resolution of its board of directors, or by action of one or more members of the
board (including a committee of the board) who are duly authorized to act for
the board, or (except to the extent prohibited by applicable law or applicable
rules of any stock exchange) by a duly authorized officer of such Company or
Subsidiary.
4.13 Gender and Number. Where the context admits, words in any
gender will include any other gender, words in the singular will include the
plural and the plural will include the singular.
4.14 Limitation of Implied Rights.
(a) Neither a Participant nor any other person will, by reason
of participation in the Plan, acquire any right in or title to any assets, funds
or property of the Company or any Subsidiary whatsoever, including, without
limitation, any specific funds, assets, or other property which the Company or
any Subsidiary, in their sole discretion, may set aside in anticipation of a
liability under the Plan. A Participant will have only a contractual right to
the Stock or amounts, if any, payable under the Plan, unsecured by any assets of
the Company or any Subsidiary, and nothing contained in the Plan will constitute
a guarantee that the assets of the
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Company or any Subsidiary will be sufficient to pay any benefits to any person.
(b) The Plan does not constitute a contract of employment, and
selection as a Participant will not give any participating employee the right
to be retained in the employ of the Company or any Subsidiary, nor any right or
claim to any benefit under the Plan, unless such right or claim has
specifically accrued under the terms of the Plan. Except as otherwise provided
in the Plan, no Award under the Plan will confer upon the holder thereof any
rights as a shareholder of the Company prior to the date on which the individual
fulfills all conditions for receipt of such rights.
4.15 Evidence. Evidence required of anyone under the Plan may be by
certificate, affidavit, document or other information which the person acting on
such evidence considers pertinent and reliable, and signed, made or presented by
the proper party or parties.
4.16 Leaves of Absence. Except as otherwise provided in any Award
Agreement, a leave of absence approved by the Company (such approval including,
but not limited to the reason for and duration of the leave) in accordance with
the Company policies and pro cedures, and as required by law, will not be deemed
a termination of employment for any purpose under this Plan.
4.17 Beneficiary of Award. Except as otherwise provided in a written
beneficiary designation (in such form approved by the Committee) signed by the
Participant and filed with the Committee prior to the death of the Participant,
upon the death of a Participant, the beneficiary of any Award granted under
this Plan will be the Participant's beneficiary or beneficiaries named under the
terms of the basic life insurance program offered by the Company and in effect
on the date of the Participant's death, including any and all provisions
applicable under such basic life insurance program with respect to the
beneficiary of a Participant who does not designate a beneficiary and a named
beneficiary who predeceases the Participant.
4.18 Binding Effect. This Plan will be binding upon, and inure to the
benefit of, the Company and its successors and assigns, and upon the
Participant and his or her heirs, beneficiaries, and personal representatives.
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4.19 Liability and Indemnification.
(a) Neither the Company nor any Parent or Subsidiary will be
responsible in any way for any action or omission of the Committee, or any
other persons or fiduciaries in the performance of their duties and obligations
as set forth in this Plan. Furthermore, neither the Company nor any Parent or
Subsidiary will be responsible for any act or omission of any of their agents,
or with respect to reliance upon advice of their counsel provided that the
Company or the appropriate Parent or Subsidiary relied in good faith upon the
action of such agent or the advice of such counsel.
(b) Except for their own gross negligence or willful misconduct
regarding the performance of the duties specifically assigned to them under, or
their willful breach of the terms of, this Plan, the Company, each Parent and
Subsidiary and the Commi ttee will be held harmless by the Participant, former
Participants, beneficiaries and their representatives against liability or loss
es occurring by reason of any act or omission. Neither the Company, any Parent
or Subsidiary, the Committee, nor any agents, employees, officers, directors,
or shareholders of any of them, nor any other person will have any liability or
responsibility with respect to this Plan, except as expressly provided herein.
4.20 Governing Law. All issues relating to the validity, construction,
and administration of this Plan will be governed by the laws of the State of
Delaware.
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SECTION 5
CORPORATE TRANSACTIONS AND CHANGES IN CONTROL
5.1 Corporate Transactions. In the event there is any change in the
Stock by reason of any reorganization, recapitalization, stock s plit, stock
dividend, or otherwise, there will be substituted for, or added to, each share
of Stock theretofore appropriated or there after subject, or which may become
subject, to any Award, the number and kind of shares of Stock or other
securities into which each outstanding share of Stock will be so changed or for
which each such share will be exchanged, or to which each such share will be ent
itled, as the case may be, and the per share price thereof shall also be
appropriately adjusted. Notwithstanding the foregoing, (a) each such adjustment
with respect to an ISO will comply with the rules of Code Section 424(a), and
(b) in no event will any adjustmen t be made which would render any ISO granted
hereunder to be other than an incentive stock option under Code Section 422.
5.2 Vesting Upon Change in Control. Upon the occurrence of a Change in
Control of the Company:
(a) All outstanding Options (regardless of whether in tandem with
SARs) will become fully vested and exercisable only if the Award Agreement
expressly provides for such full vesting.
(b) All outstanding SARs (regardless of whether in tandem with
Options) will become fully vested and exercisable only if the Award Agreement
expressly provides for such full vesting.
(c) All Stock Units, Restricted Stock, Restricted Stock Units, and
Performance Shares will become fully vested an d exercisable only if the Award
Agreement expressly provides for such full vesting.
5.3 Change in Control. Except as otherwise defined in any Award
Agreement, a "Change in Control" will be deemed to have o ccurred if any
"Person," as defined in Section 3(a)(9) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), or "g roup," as such term is used in Section
13(d)(3) and 14(d)(2) of the Exchange Act, but excluding Excluded Entities, is
or becomes a Be neficial Owner, directly or indirectly, of stock of the Company
representing 50 percent or more of the total voting power of the Comp any's then
outstanding securities.
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(a) For purposes of this Section, "Excluded Entities" means (i) any
trustee or fiduciary holding securities under an employee benefit plan of the
Company or a Subsidiary; (ii) a corporation owned, directly or indirectly, by
the shareholders of the Company in substantially the same proportions as their
ownership of the Company; (iii) the Company or any Subsidiary; and (iv) any
Participant who, tog ether with all Affiliates of the Participant, is or becomes
the direct or indirect Beneficial Owner of the percentage of such securit ies
set forth above.
(b) For purposes of this Section, an "Affiliate" means, with
respect to any Person, any other Person directly or indirectly controlle d by,
controlling or under common control with such Person and "control" means the
power to direct the management or policies of any Person, through the power to
vote shares or other equity interests, by contract or otherwise.
(c) The term "Beneficial Owner" means a beneficial owner as defined
in Rules 13d-3 and 13d-5 under the Exchange Act (or any successor rules),
including (but not limited to) the provisions of such rules that a Person will
be deemed to have beneficial ownership of all securities that such Person has a
right to acquire within 60 days; provided that a Person will not be deemed a
Beneficial Owner of, or to own beneficially, any securities if such Beneficial
Ownership (i) arises solely as a result of a revocable proxy delivered in r
esponse to a proxy or consent solicitation made pursuant to, and in accordance
with, the Exchange Act, and (ii) is not also then repo rtable on Schedule 13D or
Schedule 13G (or any successor schedule) under the Exchange Act.
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SECTION 6
COMMITTEE
6.1 Administration. The authority to control and manage the operation
and administration of the Plan will be vested in a co mmittee (the "Committee")
in accordance with this Section 6. The Committee will be selected by the Board
and generally will consist of two or more members of the Board. If the Committee
does not exist, or for any other reason determined by the Board, the Board may
take any action under the Plan that otherwise would be the responsibility of the
Committee. The Board may appoint such special comm ittees as the Board
determines necessary or desirable in accordance with the following provisions:
(a) With respect to the grant of Awards to persons who are or may
become "covered employees", as such term is defined in Code Section 162(m), the
Awards will be granted by a Committee consisting only of two or more outside
directors. For purpose s of this Section 6.1(a), a director will be treated as
an "outside director" if the director (i) is not a current employee of the Co
mpany or its affiliates; (ii) is not a former employee of the Company or its
affiliates who receives compensation for prior services (other than benefits
under a tax-qualified retirement plan) during the taxable year; (iii) has not
been an officer of the Company or its affiliates; and (iv) does not receive
remuneration, either directly or indirectly, in any capacity other than as a
director.
(b) With respect to the grant of Awards for which the exemption from
Section 16(b) of the Exchange Act provided by Rule 16b-3 is desired, the Award
will be granted by a Committee consisting of (i) only "non-employee directors"
or (ii) the full bo ard of directors. Alternatively, the Award may be granted by
a Committee consisting of persons who are not non-employee directors; p rovided
that the Award is approved by the full Board.
6.2 Powers of Committee. The Committee's administration of the Plan will
be subject to the following:
(a) Subject to the provisions of the Plan, the Committee will have
the authority and discretion to select from among the Eligible Persons those
persons who will receive Awards, to determine the time or times of receipt, to
determine the types of Awards and the number of shares covered by the Awards, to
establish the terms, conditions, performance criteria,
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restrictions, and other provisions of such Awards, to accelerate vesting of
Awards, and (subject to the restrictions imposed by Section 7) to cancel or
suspend Awards.
(b) To the extent that the Committee determines that the
restrictions imposed by the Plan preclude the achievement of the material
purposes of the Awards in jurisdictions outside the United States, the Committee
will have the authority and discre tion to modify those restrictions as the
Committee determines to be necessary or appropriate to conform to applicable
requirements or practices of jurisdictions outside of the United States.
(c) The Committee will have the authority and discretion to
interpret the Plan, to establish, amend, and rescind any rules and regulations
relating to the Plan, to determine the terms and provisions of any Award
Agreement made pursuant to the Plan, and to make all other determinations that
may be necessary or advisable for the administration of the Plan.
(d) Any interpretation of the Plan by the Committee and any decision
made by it under the Plan will be final and binding on all persons.
(e) In controlling and managing the operation and administration of
the Plan, the Committee will take action in a manner that conforms to the
articles and by-laws of the Company, and applicable state corporate law.
6.3 Delegation by Committee. Except to the extent prohibited by
applicable law or the applicable rules of a stock exchange, the Committee may
allocate all or any portion of its responsibilities and powers to any one or
more of its members and may delega te all or any part of its responsibilities
and powers to any person or persons selected by it. Any such allocation or
delegation may be revoked by the Committee at any time.
6.4 Information to be Furnished to Committee. The Company and
Subsidiaries will furnish the Committee with such data and information as it
determines may be required for it to discharge its duties. The records of the
Company and Subsidiaries with respect to an employee's or Participant's
employment, termination of employment, leave of absence, reemployment and
compensation will be conclusive on all persons unless determined to be
incorrect. Participants and other persons entitled to benefits under the Plan
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must furnish the Committee such evidence, data or information as the Committee
considers desirable to carry out the terms of the Plan.
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SECTION 7
AMENDMENT AND TERMINATION
The Board may, at any time, amend or terminate the Plan, provided that no
amendment or termination may, in the absence of written consent to the change
by the affected Participant (or, if the Participant is not then living, the
affected beneficiary), materially adversely affect the rights of any
Participant or beneficiary under any Award granted under the Plan prior to the
date such amend ment is adopted by the Board.
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SECTION 8
DEFINED TERMS
In addition to the other definitions contained herein, the following
definitions will apply:
(a) Award. The term "Award" will mean any award or benefit granted
under the Plan, including, without limitation, the grant of Optio ns, SARs,
Stock Unit Awards, Restricted Stock Awards, Restricted Stock Unit Awards and
Performance Share Awards.
(b) Award Agreement. The term "Award Agreement" means the written
document, in such form as is determined by the Committee, which reflects the
terms and conditions of an Award to a Participant.
(c) Board. The term "Board" will mean the Board of Directors of the
Company.
(d) Cause. Unless otherwise defined in the Award Agreement, the term
"Cause" will mean:
(i) a Participant's willful or gross misconduct, or willful or
gross negligence, in the performance of his or her duties for the Company or any
Parent or Subsidiary, after prior written notice of such misconduct or
negligence and the continuance thereof for a period of 30 days after receipt by
such Participant of such notice;
(ii) a Participant's intentional or habitual neglect of his or her
duties for the Company or any Parent or Subsidiary after prior written notice of
such neglect; or
(iii) a Participant's theft or misappropriation of funds or property
of the Company or any Parent or Subsidiary, or the commission of a felony.
(e) Code. The term "Code" means the Internal Revenue Code of 1986, as
amended. A reference to any provision of the Code will include reference to any
successor provision of the Code.
(f) Company. The term "Company" means ICG Communications, Inc., and any
successor thereto.
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(g) Director. The term "Director" means an individual who is a director
of the Company on the date of an Award grant, and who is not a common law
employee of the Company or any Parent or Subsidiary.
(h) Disabled or Disability. Unless otherwise provided by the Committee,
a Participant will be considered to be "Disabled" or to have a "Disability"
during the period in which the Participant is unable, by reason of a medically
determinable physical or mental impair ment, to engage in any substantial
gainful activity, which condition, in the opinion of a physician selected by the
Committee, is exp ected to have a duration of not less than twelve months, as
determined under Code Section 22(e)(3).
(i) Effective Date. The term "Effective Date" means June 7, 2000,
subject to approval of this Plan by the shareholders.
(j) Eligible Person. The term "Eligible Person" means any employee of
the Company or any Parent or Subsidiary, and any D irector of the Company.
(k) Exercise Period. The term "Exercise Period" means that period, as
established by the Committee, during which an Opti on or SAR may be exercised,
to the extent vested.
(l) Exercise Price. The term "Exercise Price" means that price at which
an Option or a SAR may be exercised.
(m) Fair Market Value. The term "Fair Market Value" will mean the last
reported sale price for the Stock on a Trading Day or, in the event no such
reported sale occurs on such Trading Day, the average of the closing bid and
asked prices for the Stock on such Trading Date, in either case on the principal
securities exchange on which the Stock is listed or admitted to trading. If the
Stock is not listed or admitted to trading on any securities exchange, but is
traded in the over-the-counter market, Fair Market Value will mean the closing
sale price of the Stock or, if no sale is publicly reported, the average of the
closing bid and asked quotations for the Stock as reported by the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") or any
comparable system. If the Stock is not listed on NASDAQ or a comparable system,
Fair Market Value will mean the closing sale price of the Stock or, if no sale
is publicly reported, the average of the closing bid and asked prices, as
furnished by two members of
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the National Association of Securities Dealers, Inc. who make a market in the
Stock, as selected from time to time by the Company for that purpose. A Trading
Day will mean, if the Stock is listed on any securities exchange, a business day
on which such exchange was open for trading and at least one trade of Stock was
effected on such exchange on such business day, or, if the Stock is not listed
on any national securities exchange but is traded in the over-the-counter
market, a business day on which the over-the-counter market was open for trading
and at least one "eligible dealer" quoted both a bid and asked price for the
Stock. In the event the Stock is not publicly traded, the Fair Market Value of
the Stock will be determined in good faith by the Committee.
(n) Grant Date. The term "Grant Date" means the date, as determined by
the Committee, as of which an Award is granted to an Eligible Person.
(o) ISO. The term "ISO" means an Option that is intended to satisfy the
requirements applicable to an "incentive stock o ption" described in Code
Section 422(b).
(p) NSO. The term "NSO" means an Option that is not intended to be an
"incentive stock option" as that term is described in Code Section 422(b).
(q) Option. The term "Option" means a right to purchase shares of Stock
at an Exercise Price established by the Committee.
(r) Parent. The term "Parent" means any company during any period in
which it is a "parent corporation" (as that term is defined in Code Section
424(e)) with respect to the Company.
(s) Participant. The term "Participant" means any Eligible Person who is
selected by the Committed to receive an Award.
(t) Performance Share. The term "Performance Share" means a right to
receive shares of Stock or Stock Units, which right is contingent on the
achievement of performance or other objectives during a specified period.
(u) Plan. The term "Plan" means this Year 2000 Executive Long-Term
Incentive Plan, as it may be amended.
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(v) Plan Quarter. The term "Plan Quarter" means the three calendar
month periods beginning on each January 1, April 1, July 1, and October 1.
(w) Restricted Stock. The term "Restricted Stock" means shares of Stock
which are subject to a risk of forfeiture or other restrictions that will lapse
upon the achievement of one or more goals relating to completion of service by
the Participant, or ac hievement of performance or other objectives, as
determined by the Committee.
(x) Restricted Stock Unit. The term "Restricted Stock Unit" means the
right to receive shares of Stock in the future, with such right to future
delivery of such shares of Stock subject to a risk of forfeiture or other
restrictions that will lapse upon t he achievement of one or more goals relating
to completion of service by the Participant, or achievement of performance or
other obje ctives, as determined by the Committee.
(y) SAR. The term "SAR" or "stock appreciation right" means the right to
receive, in cash or Stock (as determined in accordance with Section 2.5) value
equal to (or otherwise based on) the excess of: (i) the Fair Market Value of a
specified number of sh ares of Stock at the time of exercise; over (ii) an
Exercise Price established by the Committee.
(z) Stock. The term "Stock" means shares of common stock of the Company.
(aa) Stock Unit. The term "Stock Unit" means a right to receive shares of
Stock in the future.
(bb) Subsidiaries. The term "Subsidiary" means any company during any
period in which it is a "subsidiary corporation" (as that term is defined in
Code Section 424(f)) with respect to the Company.
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Document dated 03/16/00
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Document dated 03/16/00
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ICG COMMUNICATIONS, INC. 2000 ANNUAL MEETING
June 7, 2000
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 9, 2000, 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 and 8% Series A-1, Series
A-2 and Series A-3 Convertible Preferred 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 7, 2000, 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:
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<CAPTION>
Please mark your Management recommends that you vote FOR all nominees for directors
votes as in this listed belo and vote FOR Proposals 2, 3 and 4
example.
<S> <C> <C> <C> <C> <C> <C>
FOR AGAINST ABSTAIN
FOR WITHHOLD 2. Approval of the adoption by the Board [ ] [ ] [ ]
all nominees AUTHORITY of Directors of the Company's Year
listed below to vote for 2000 Executive Long-Term Incentive
(except as indicated) all Plan.
nominees
listed below 3. Approval of the Board of Directors' plan [ ] [ ] [ ]
to amend the Company's Certificate of
1. Election of [ ] [ ] Incorporation to increase the number of
Directors authorized shares of the Company's
Common Stock and Preferred Stock.
NOMINEES: William S. Beans, Jr., John U. 4. Ratification of the appointment of [ ] [ ] [ ]
Moorhead II, Carl E. Vogel KPMG Peat Marwick LLP as
independent auditors of the Company
Instructions: To withhold authority to vote for and its subsidiaries for the fiscal year
any individual nominee, write such ending December 31, 2000.
nominee's or nominees' name(s) in
the space provided below. 5. 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 three named individuals as directors, FOR the approval of the
adoption by the Board of Directors of the Company's Year 2000
Executive Long-Term Incentive Plan, FOR the approval of the Board of
Directors' plan to amend the Company's Certificate of Incorporation
to increase the number of authorized shares of Common Stock and
Preferred Stock, 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.
Signature______________________________ Date________________ Signature_______________________________________ Date________________
Signature if held jointly
Please sign your name exactly as it appears hereon. When signing as attorney, executor, administrator, trustee or guardian, please
give your full title as it appears hereon. When signing as joint tenants, all parties in the joint tenancy must sign. When a proxy
is given by a corporation, it should be signed by an authorized officer and the corporate seal affixed. No postage is required if
returned in the enclosed envelope and mailed in the United States.
</TABLE>
