UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Commission File Number 333-51037)
ICG SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1448147
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
161 Inverness Drive West
Englewood, Colorado 80112
(888) 424-1144 or (303) 414-5000
(Address of principal executive offices and registrant's
telephone numbers, including area codes)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
On November 13, 1998, ICG Services, Inc. had 10 shares of common stock
outstanding. ICG Communications, Inc. owns all of the issued and outstanding
shares of common stock of ICG Services, Inc.
<PAGE>
2
TABLE OF CONTENTS
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . 3
Consolidated Balance Sheets as of December 31, 1997 and
September 30, 1998 (unaudited). . . . . . . . . . . . . . 3
Consolidated Statements of Operations (unaudited) for the
Three Months and Nine Months Ended September 30, 1997
and 1998. . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statement of Stockholders' Equity (unaudited)
for the Nine Months Ended September 30, 1998 . . . . . . 6
Consolidated Statements of Cash Flows (unaudited) for the
Nine Months Ended September 30, 1997 and 1998 . . . . . 7
Notes to Consolidated Financial Statements, December 31,
1997 and September 30, 1998 (unaudited) . . . . . . . . . 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . 13
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . 22
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS . . . . . . . . . 22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . . 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . 22
ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . 22
Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . 22
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 22
<PAGE>
3
ICG SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and September 30, 1998 (unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------------ ----------------
(in thousands)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 63,368 314,670
Short-term investments available for sale - 41,000
Receivables:
Trade, including amounts due from ICG, net of allowance
of $1,628 and $2,609 at December 31, 1997 and
September 30, 1998, respectively (note 7) 2,397 5,547
Due from ICG (note 7) - 113,747
Other - 5,554
----------------- ----------------
2,397 124,848
----------------- ----------------
Total current assets 65,765 480,518
----------------- ----------------
Property and equipment - 123,757
Less accumulated depreciation - (686)
----------------- ----------------
Net property and equipment - 123,071
----------------- ----------------
Investment in ICG Ohio LINX, accounted for under the equity
method (note 6) - 9,187
Deferred financing costs, net of accumulated amortization - 16,551
----------------- ----------------
- 25,738
----------------- ----------------
Net assets of discontinued operations (note 4) 75,041 77,758
----------------- ----------------
Total assets $ 140,806 707,085
================= ================
(Continued)
</TABLE>
<PAGE>
4
ICG SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (unaudited), Continued
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------------- -------------------
(in thousands)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 9,314 49,223
Accrued liabilities 13,987 15,868
Deferred revenue 5,170 5,576
------------------- -------------------
Total current liabilities 28,471 70,667
------------------- -------------------
Long-term debt, net of discount (note 5) - 580,333
------------------- -------------------
Total liabilities 28,471 651,000
------------------- -------------------
Stockholders' equity:
Common stock 117 -
Additional paid-in capital 207,208 207,798
Accumulated deficit (95,134) (151,663)
Accumulated other comprehensive income (loss) 144 (50)
------------------- -------------------
Total stockholders' equity 112,335 56,085
------------------- -------------------
Commitments and contingencies (notes 4, 5, 7 and 8)
Total liabilities and stockholders' equity $ 140,806 707,085
=================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
5
ICG SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (unaudited)
Three Months and Nine Months Ended September 30, 1997 and 1998
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------ --------------------------------
1997 1998 1997 1998
------------- ------------- ------------- ---------------
(in thousands)
<S> <C> <C> <C> <C>
Revenue from services provided to ICG (note 7) $ 3,104 - 3,556
-
Operating expenses:
Selling, general and administrative
expenses, including amounts allocated
from ICG (note 7) - 1,255 - 2,760
Depreciation - 537 - 686
------------- ------------- ------------- ---------------
Total operating expenses - 1,792 - 3,446
------------- ------------- ------------- ---------------
Operating income - 1,312 - 110
Other (expense) income:
Interest expense - (14,560) - (30,796)
Interest income, including amounts earned
from ICG (note 7) - 7,996 - 16,406
------------- ------------- ------------- ---------------
- (6,564) - (14,390)
------------- ------------- ------------- ---------------
Loss before share of earnings of ICG Ohio LINX - (5,252) - (14,280)
Share of earnings of ICG Ohio LINX (note 6) - 187 - 187
------------- ------------- ------------- ---------------
Loss from continuing operations - (5,065) - (14,093)
------------- ------------- ------------- ---------------
Loss from discontinued operations (notes 4 and 7) (6,827) (14,062) (25,217) (42,436)
------------- ------------- ------------- ---------------
Net loss $ (6,827) (19,127) (25,217) (56,529)
============= ============= ============= ===============
Other comprehensive loss:
Foreign currency translation adjustment (266) (118) (500) (194)
Unrealized loss on short-term investments
available for sale (235) - (540) -
------------- ------------- ------------- ---------------
Other comprehensive loss (501) (118) (1,040) (194)
------------- ------------- ------------- ---------------
Comprehensive loss $ (7,328) (19,245) (26,257) (56,723)
============= ============= ============= ===============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
6
ICG SERVICES, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity (unaudited)
Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Accumulated
Common stock Additional other Total
--------------------- paid-in Accumulated comprehensive stockholders'
Shares Amount capital deficit income (loss) equity
---------- ---------- -------------- --------------- --------------- ---------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1998 11,783 $ 117 207,208 (95,134) 144 112,335
Shares issued for cash in connection
with the exercise of NETCOM's
options and warrants (note 3) 10 - 341 - - 341
Shares issued for cash in connection
with NETCOM's employee stock
purchase plan (note 3) 28 1 131 - - 132
Elimination of NETCOM's historical
equity in connection with NETCOM's
merger with ICG (note 3) (11,821) (118) (102,349) - - (102,467)
Contribution of ICG's investment
in NETCOM to ICG Services, Inc.
(note 3) - - 102,467 - - 102,467
Cumulative foreign currency
translation adjustment - - - - (194) (194)
Net loss - - - (56,529) - (56,529)
========== ========== ============== =============== =============== ===============
Balances at September 30, 1998 - $ - 207,798 (151,663) (50) 56,085
========== ========== ============== =============== =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
7
ICG SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended September 30, 1997 and 1998
<TABLE>
<CAPTION>
Nine months ended September 30,
------------------------------------
1997 1998
--------------- ----------------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (25,217) (56,529)
Non-cash operating activities of discontinued operations 25,490 31,098
Adjustments to reconcile net loss to net cash used by operating activities
of continuing operations:
Share of earnings of ICG Ohio LINX - (187)
Depreciation - 686
Interest expense deferred and included in long-term debt - 29,759
Amortization of deferred financing costs included in interest expense - 1,037
Change in operating assets and liabilities:
Receivables (524) (122,451)
Accounts payable and accrued liabilities 294 41,790
Deferred revenue 2,330 406
--------------- ----------------
Net cash provided (used) by operating activities of continuing
operations 2,373 (74,391)
--------------- ----------------
Cash flows from investing activities:
Acquisition of property, equipment and other assets - (123,757)
Purchase of short-term investments available for sale - (41,000)
Investment in ICG Ohio LINX - (9,000)
--------------- ----------------
Cash used by investing activities of continuing operations - (173,757)
--------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of common stock:
Exercise of stock options 489 341
Employee stock purchase plan 706 132
Proceeds from issuance of long-term debt - 550,574
Deferred long-term debt issuance costs - (17,589)
--------------- ----------------
Net cash provided by financing activities of continuing operations 1,195 533,458
--------------- ----------------
Net increase in cash and cash equivalents of continuing operations 3,568 285,310
Net cash used by discontinued operations (10,243) (34,008)
Cash and cash equivalents, beginning of period 73,408 63,368
=============== ================
Cash and cash equivalents, end of period $ 66,733 314,670
=============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
8
ICG SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and September 30, 1998 (unaudited)
(1) Organization and Nature of Business
ICG Services, Inc., a Delaware corporation ("ICG Services" or "the
Company"), was incorporated on January 23, 1998 and is a wholly owned
subsidiary of ICG Communications, Inc., a Delaware corporation ("ICG"). The
Company owns all of the issued and outstanding common stock of NETCOM
On-Line Communication Services, Inc. ("NETCOM"), as described in note 3.
NETCOM was incorporated in the State of California in August 1992 and
reincorporated in the State of Delaware in October 1994. NETCOM is
considered to be a predecessor entity to the Company and, accordingly, the
financial statements of the Company prior to January 23, 1998 consist of
the accounts of NETCOM and its subsidiaries. Effective November 3, 1998,
the Company's board of directors adopted a formal plan to dispose of the
operations of NETCOM (see note 4) and, accordingly, the Company's
consolidated financial statements reflect operations of NETCOM as
discontinued for all periods presented.
On January 23, 1998, ICG Equipment, Inc., a Colorado corporation ("ICG
Equipment") and wholly owned subsidiary of the Company, was formed for the
principal purpose of purchasing telecommunications equipment, software and
capacity and related services for sale and lease to other operating
subsidiaries of ICG.
(2) Significant Accounting Policies
(a) Basis of Presentation
These financial statements should be read in conjunction with NETCOM's
audited consolidated financial statements for the fiscal year ended
December 31, 1997 included in the Company's Form S-4 Amendment No. 3
dated July 16, 1998, as certain information and note disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the United States
Securities and Exchange Commission. The interim financial statements
reflect all adjustments which are, in the opinion of management,
necessary for a fair presentation of financial position, results of
operations and cash flows as of and for the interim periods presented.
Such adjustments are of a normal recurring nature. Operating results
for the nine months ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the fiscal year
ending December 31, 1998.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
(b) Investments
Investments representing an equity interest of 20% or more, but less
than 50%, are accounted for using the equity method of accounting,
whereby the Company's share of earnings or losses in the investee
company is included in operations. Investments of less than 20% equity
interest are accounted for using the cost method, unless the Company
exercises significant influence and/or control over the operations of
the investee company, in which case the equity method is used.
(c) Net Loss Per Share
The Company has 10 shares of common stock issued and outstanding,
which are owned entirely by ICG. Accordingly, the Company does not
present net loss per share in its consolidated financial statements as
such disclosure is not considered to be meaningful.
<PAGE>
9
ICG SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) Business Combination
On January 21, 1998, ICG completed a merger with NETCOM, accounted for by
ICG as a pooling of interests. At the effective time of the merger, each
outstanding share of NETCOM common stock became automatically convertible
into shares of ICG common stock at an exchange ratio of 0.8628 shares of
ICG common stock per share of NETCOM common stock. In conjunction with the
merger between ICG and NETCOM, NETCOM's employee stock purchase plan was
dissolved and all outstanding options to purchase common stock of NETCOM
were converted into options to purchase common stock of ICG.
Upon the formation of ICG Services on January 23, 1998, ICG contributed its
investment in NETCOM to ICG Services and NETCOM became a wholly owned
subsidiary of, and predecessor entity to, ICG Services.
(4) Discontinued Operations
Effective November 3, 1998, ICG's and the Company's boards of directors
adopted a formal plan to dispose of the operations of NETCOM and,
accordingly, the Company's consolidated financial statements reflect the
operations of NETCOM as discontinued for all periods presented. ICG's and
the Company's plan of disposal consists of the sale to one or more third
parties in one or more transactions of all of the operating assets of
NETCOM which will not be used in ICG's or the Company's future operations.
At September 30, 1998, net assets of NETCOM included in net assets of
discontinued operations in the Company's consolidated balance sheet are
approximately $3.0 million of inventory and prepaid expenses and
approximately $80.3 million of net property and equipment and other
non-current assets, offset by approximately $5.5 million of capital lease
obligations. ICG has commenced an active plan to locate a buyer and intends
to complete the sale within one year. The Company expects to record a gain
on the sale of NETCOM in the period of disposition, although the amount of
such gain is not presently determinable.
Other remaining assets and liabilities of NETCOM included in the Company's
consolidated balance sheet at September 30, 1998 are net trade accounts
receivable of approximately $2.5 million, amounts due to ICG of
approximately $26.4 million and accounts payable and accrued liabilities of
approximately $7.5 million.
(5) Long-term Debt
The Company had no long-term debt outstanding at December 31, 1997.
Long-term debt at September 30, 1998 is summarized as follows (in
thousands):
9 7/8% Senior discount notes, net of discount (a) $ 260,531
10% Senior discount notes, net of discount (b) 319,802
====================
$ 580,333
====================
(a) 9 7/8% Notes
On April 27, 1998, the Company 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 $7.8 million,
were approximately $242.2 million.
The 9 7/8% Notes are unsecured senior obligations of the Company 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,
<PAGE>
10
ICG SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) Long-term Debt (continued)
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 will be accreted through May
1, 2003, the date on which the 9 7/8% Notes may first be redeemed. The
accretion of the discount and debt issuance costs is included in
interest expense in the accompanying consolidated financial
statements.
(b) 10% Notes
On February 12, 1998, the Company 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 the Company 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 debt issuance costs is
included in interest expense in the accompanying consolidated
financial statements.
(6) Investment in ICG Ohio LINX
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 ICG 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 has
accounted for its investment in ICG Ohio LINX under the equity method of
accounting. During the three months and nine months ended September 30,
1998, the Company included approximately $0.2 million in its consolidated
statement of operations for its proportionate share of earnings of ICG Ohio
LINX.
(7) Related Party Transactions
Upon the formation of ICG Services, the Company, including ICG Equipment,
entered into certain intercompany and shared services agreements with ICG,
whereby ICG allocates to the Company direct and certain indirect costs
incurred by ICG or its other subsidiaries (the "Restricted Subsidiaries")
on behalf of the Company. Allocated expenses generally include a portion of
salaries and related benefits of legal, accounting and finance, information
systems support and other ICG employees, certain overhead costs and
reimbursement for invoices of the Company paid by ICG. Conversely, any cash
collected by ICG on behalf of the Company or invoices paid by the Company
on behalf of ICG are in turn reimbursed to the Company by ICG. As the
Company and its subsidiaries and ICG and its Restricted Subsidiaries
jointly enter into service offerings and other transactions, joint costs
incurred are generally allocated to each of the
<PAGE>
11
ICG SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) Related Party Transactions (continued)
Company and ICG according to the relative capital invested and efforts
expended of each party. All transactions between the Company and its
subsidiaries and ICG and its Restricted Subsidiaries are approved by the
disinterested members of the Board of Directors of the Company and of ICG
and are settled in cash on a quarterly basis.
For the three months and nine months ended September 30, 1998, ICG charged
approximately $2.5 million and $5.7 million, respectively, to the Company
for intercompany transfers and direct and indirect costs incurred by ICG
and its Restricted Subsidiaries on behalf of the Company. Of these amounts,
approximately $1.1 million and $1.7 million are included in the Company's
selling, general and administrative expenses for the three months and nine
months ended September 30, 1998, respectively. In addition, for the three
months and nine months ended September 30, 1998, the Company charged
approximately $116.1 million and $145.4 million, respectively, to ICG and
its Restricted Subsidiaries for intercompany transfers and direct and
indirect costs incurred by the Company on behalf of ICG and its Restricted
Subsidiaries. The resulting net receivable from ICG is included in due from
ICG in the Company's consolidated balance sheet at September 30, 1998.
During the three months ended September 30, 1998, ICG Telecom and NETCOM
jointly began offering certain telecommunications services. Included in due
from ICG at September 30, 1998 and in loss from discontinued operations for
the three months and nine months ended September 30, 1998 is approximately
$0.7 million for the reimbursement of expenses incurred by NETCOM for this
joint service offering. Net interest income accrued by the Company on
outstanding balances from ICG and its Restricted Subsidiaries is included
in interest income in the Company's consolidated statement of operations
and was approximately $1.6 million for the three months and nine months
ended September 30, 1998. Interest accrues on outstanding balances of
intercompany transfers and direct and indirect costs from ICG Services to
ICG and its Restricted Subsidiaries at 10% per annum and from ICG and its
Restricted Subsidiaries to ICG Services at 12 1/2% per annum, which
represents the approximate weighted average cost of capital of the
respective entities at the beginning of the current fiscal year.
ICG Equipment was formed for the principal purpose of purchasing
telecommunications equipment, software and capacity and related services
for sale and lease to other operating subsidiaries of ICG. During the three
months and nine months ended September 30, 1998, ICG Equipment purchased
certain telecommunications equipment and fiber optic capacity both from and
for ICG Telecom Group, Inc., an indirectly wholly owned subsidiary of ICG
and a Restricted Subsidiary ("ICG Telecom"), for an aggregate purchase
price of approximately $30.9 million and $45.7 million, respectively.
Simultaneously with each of the purchases, ICG Equipment entered into
separate agreements to lease the same telecommunications equipment and
fiber optic capacity back to ICG Telecom under operating leases, with
annual lease payments commencing one year from the date of the lease. ICG
Equipment recognizes revenue from the lease payments ratably over the lease
terms. The Company recognized approximately $1.4 million in revenue under
these operating leases for the three months and nine months ended September
30, 1998, all of which is included in trade accounts receivable at
September 30, 1998. Subsequent to September 30, 1998, ICG Equipment
purchased certain telecommunications equipment and fiber optic capacity
from ICG Telecom and its subsidiaries for an aggregate purchase price of
approximately $59.5 million and simultaneously entered into agreements to
lease the same telecommunications equipment and fiber optic capacity back
to ICG Telecom and its subsidiaries under operating leases, with annual
lease payments commencing one year from the date of the lease. The purchase
prices and lease payments for all leases are subject to adjustment, based
on the results of an independent appraisal which may be requested at the
option of ICG Telecom and ICG Equipment on or before 90 days from the
purchase date. On September 30, 1998, ICG Equipment submitted a formal
written request to ICG Telecom for independent appraisals of
<PAGE>
12
ICG SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) Related Party Transactions (continued)
certain of the telecommunications equipment and fiber optic capacity
purchased during the nine months ended September 30, 1998.
Additionally, under a master lease agreement between ICG Equipment and ICG
Telecom, ICG Telecom is required to pay ICG Equipment a monthly lease
service fee, at an annual rate of prime plus 4% (12 1/4% at September 30,
1998), based on the average daily balance of assets purchased by ICG
Equipment and intended for future lease to ICG Telecom, but not yet placed
into service. For the three months and nine months ended September 30,
1998, ICG Equipment recorded approximately $1.7 million and $2.2 million,
respectively, of monthly service fee revenue under this agreement and
approximately $1.7 million was included in trade accounts receivable at
September 30, 1998. The amount of assets purchased by ICG Equipment and
intended for future lease to ICG Telecom, but not yet placed into service,
was approximately $78.1 million at September 30, 1998. Included in this
amount is approximately $7.1 million of fiber optic capacity purchased from
ICG Telecom during the nine months ended September 30, 1998.
In the normal course of business, ICG Telecom provides the use of certain
of its local access lines to NETCOM and, accordingly, charges NETCOM for
costs of any installation and recurring access to its network. For the
three months and nine months ended September 30, 1998, NETCOM incurred
approximately $0.5 million and $1.6 million, respectively, for installation
and recurring local access charges from ICG Telecom, which have been
included in loss from discontinued operations in the Company's consolidated
financial statements.
(8) Commitments and Contingencies
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 $71.7
million at September 30, 1998.
NETCOM is a party to certain 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.
<PAGE>
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion includes certain forward-looking statements which
are affected by important factors including, but not limited to, the Company's
lack of operating history and lack of credit support from ICG. The results of
operations for the three months and nine months ended September 30, 1998
represent the consolidated operating results of the Company. See the unaudited
condensed consolidated financial statements of the Company for the nine months
ended September 30, 1998 included elsewhere herein. The Company's consolidated
financial statements reflect the operations of NETCOM as discontinued for all
periods presented. The terms "fiscal" and "fiscal year" refer to the Company's
fiscal year ending December 31.
Company Overview
ICG Services, Inc. ("ICG Services" or the "Company") was formed in January
1998 and currently conducts operations through its two operating subsidiaries,
NETCOM On-Line Communication Services, Inc. ("NETCOM") and ICG Equipment, Inc.
("ICG Equipment").
NETCOM owns and operates a data communications network consisting of 16
hubs containing frame relay switches and high-performance routers connecting a
backbone of leased asynchronous transfer mode ("ATM") switches and leased
high-speed dedicated data lines in the United States, Canada and the United
Kingdom. NETCOM maintains 255 points of presence ("POPs") in the United States
and Canada and also offers virtual local access numbers in Canada and the United
Kingdom. The design and architecture of the physical network permits NETCOM to
offer highly flexible, reliable high-speed services to its customers and support
significant subscriber growth. The NETCOM infrastructure is monitored by network
operating centers in San Jose, Dallas, Toronto and London.
ICG acquired NETCOM on January 21, 1998 in a transaction accounted for as a
pooling of interests. Upon the formation of ICG Services on January 23, 1998,
ICG contributed its investment in NETCOM to ICG Services and NETCOM became a
wholly owned subsidiary of, and predecessor entity to, ICG Services. Effective
November 3, 1998, ICG's and the Company's boards of directors adopted a formal
plan to dispose of the operations of NETCOM. ICG's and the Company's plan of
disposal consists of the sale to one or more third parties in one or more
transactions of all of the operating assets of NETCOM which will not be used in
ICG's or the Company's future operations. ICG has commenced an active plan to
locate one or more buyers and intends to complete the sales within one year. The
Company expects to record a gain on the sale of NETCOM in the period of
disposition, although the amount of such gain is not presently determinable. For
fiscal 1997 and the nine months ended September 30, 1998, NETCOM reported
revenue of $160.7 million and $122.6 million, respectively, and EBITDA losses
(before nonrecurring charges) of $(9.4) million and $(10.3) million,
respectively. The Company's consolidated financial statements reflect the
operations of NETCOM as discontinued for all periods presented.
The Company formed ICG Equipment in January 1998 for the principal purpose
of purchasing telecommunications equipment for sale or lease to other operating
subsidiaries of ICG. ICG Equipment completed its first significant transaction
on June 30, 1998 and, accordingly, the Company's results of operations prior to
the three months ended September 30, 1998 are not significant. ICG Equipment has
entered into a series of agreements whereby ICG Equipment has purchased
equipment from ICG Telecom Group, Inc., an indirectly wholly owned subsidiary of
ICG ("ICG Telecom"), and leased back the same equipment to ICG Telecom under
operating leases. Additionally, under master lease agreements between ICG
Equipment and ICG Telecom, ICG Telecom is required to pay ICG Equipment a
monthly lease service fee based on the average daily balance of assets purchased
by ICG Equipment and intended for future lease to ICG Telecom, but not yet
placed into service.
The Company may acquire telecommunications and related businesses that
complement ICG's business strategy to offer a wide array of telecommunications
and related services primarily to communications-intensive business customers.
Acquisition targets could include U.S. or foreign competitive local exchange
carriers and long distance companies, among others. Any future acquisitions
would be primarily through the use of ICG common stock, cash on hand and the
proceeds from securities offerings. However, there is no assurance that
acquisitions at favorable prices to the Company will occur or that the Company
will have sufficient sources of funding to make such acquisitions. The Company's
results of operations and financial condition will change as the operations of
ICG Equipment become more significant and as it consummates acquisitions, if
any.
<PAGE>
14
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 expenses, operating income and EBITDA as
a percentage of the Company's revenue.
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
------------------------------------------- --------------------------------------------
1997 1998 1997 1998
------------------- ---------------------- ---------------------- --------------------
$ % $ % $ % $ %
--------- -------- ----------- --------- ---------- --------- ----------- -------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue - - 3,104 100 - - 3,556 100
Operating expenses:
Selling, general and
administrative - - 1,255 41 - - 2,760 78
Depreciation - - 537 17 - - 686 19
-------- ------- ----------- -------- --------- --------- ----------- --------
Total operating expenses - - 1,792 58 - - 3,446 97
Operating income - - 1,312 42 - - 110 3
Other Data:
Net cash provided by (used in)
operating activities of continuing
operations 133 71,521 2,373 (74,391)
Cash used by investing activities
of continuing operations - (105,429) - (173,757)
Net cash provided by (used in)
financing activities of
continuing operations 327 (384) 1,195 533,458
EBITDA (1) - - 1,849 60 - - 796 22
Capital expenditures of
continuing operations (2) - 71,521 - 123,757
Capital expenditures of
discontinued operations (2) 3,117 5,021 13,990 20,218
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31, March 31, June 30, September 30,
1997 1997 1998 1998 1998
----------------- ----------------- ------------ ---------- ---------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statistical Data (3):
Direct access and Web site
hosting services subscribers 10,630 12,275 14,976 18,638 23,308
Average monthly revenue per
subscriber $ 24.24 25.01 25.12 25.87 26.52
</TABLE>
(1) EBITDA consists of earnings (loss) from continuing operations before
interest, income taxes, depreciation, other expense, net and share of
earnings, or simply, operating income plus depreciation. EBITDA is provided
because it is a measure commonly used in the telecommunications industry.
EBITDA is presented to enhance the understanding of the Company's operating
results and is not intended to represent cash flows or results of
operations in accordance with generally accepted accounting principles
("GAAP") for the periods indicated. EBITDA is not a measurement under GAAP
and is not necessarily comparable with similarly titled measures of other
companies. Net cash flows from operating, investing and financing
activities of continuing operations as determined using GAAP are also
presented in Other Data.
(2) Capital expenditures includes assets acquired under capital leases. Capital
expenditures of discontinued operations includes capital expenditures of
NETCOM.
(3) The statistical data presented herein represents operating data of NETCOM.
<PAGE>
15
The Company's consolidated financial statements reflect the operations of
NETCOM as discontinued for all periods presented. Amounts presented are for
the three-month periods ended, or as of the end of the period presented.
Revenue. The Company recorded revenue of approximately $3.1 million and
$3.6 million for the three months and nine months ended September 30, 1998,
respectively, which consists entirely of revenue from services provided to ICG
or ICG's other operating subsidiaries. Revenue recorded on operating leases of
property and equipment to ICG Telecom was $1.4 million for both the three months
and nine months ended September 30, 1998. Additionally, the Company charged
lease service fees to ICG Telecom during the periods presented for the cost of
carrying assets not yet placed into service. For the three months and nine
months ended September 30, 1998, revenue earned on lease service fees was $1.7
million and $2.2 million, respectively. The Company anticipates that revenue
will increase substantially in future periods as the volume of ICG Equipment's
operations increases.
Selling, general and administrative expenses. Selling, general and
administrative ("SG&A") expenses were approximately $1.3 million and $2.8
million for the three months and nine months ended September 30, 1998,
respectively. SG&A expenses consist principally of allocations of a portion of
ICG's general and administrative expenses for certain direct and indirect costs
incurred by ICG on behalf of the Company. Such allocations were $1.1 million and
$1.7 million, representing 84% and 61% of total SG&A expenses for the three
months and nine months ended September 30, 1998, respectively. Remaining SG&A
expenses include general corporate administrative expenses, including
professional and cash management fees. SG&A expenses are expected to increase in
absolute dollars as the volume of ICG Equipment's operations increases.
Depreciation. Depreciation was $0.5 million and $0.7 million for the three
months and nine months ended September 30, 1998, respectively, and includes
depreciation of ICG Equipment's property and equipment purchased from ICG
Telecom and leased back under long-term operating leases. The Company's
depreciation expense will continue to increase as ICG Equipment purchases
additional property and equipment for lease to ICG's other operating
subsidiaries.
Interest expense. Interest expense was $14.6 million and $30.8 million for
the three months and nine months ended September 30, 1998, respectively, and
consists entirely of non-cash interest. Interest expense is attributable to 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 and April 1998,
respectively. The Company's interest expense will continue to increase because
the principal amount of its indebtedness increases until the Company's senior
indebtedness begins to pay interest in cash.
Interest income. Interest income was $8.0 million and $16.4 million for the
three months and nine months ended September 30, 1998, respectively, and
primarily represents interest earned on invested cash balances from the proceeds
from the issuance of the 10% Notes and the 9 7/8% Notes. The Company also earned
net interest income from ICG of approximately $1.6 million during the three
months and nine months ended September 30, 1998 for invoices paid by the Company
on behalf of ICG and its other operating subsidiaries and repaid on a quarterly
basis.
Share of earnings of ICG Ohio LINX. Share of earnings of joint venture of
$0.2 million for the three months and nine months ended September 30, 1998
represents the Company's share of earnings of ICG Ohio LINX, Inc. ("ICG Ohio
LINX"). The Company purchased a 20% equity interest in ICG Ohio LINX on August
27, 1998.
Loss from continuing operations. Loss from continuing operations of $5.1
million and $14.1 million for the three months and nine months ended September
30, 1998, respectively, is primarily a result of interest expense, offset by
interest income, as described above. As the operations of ICG Equipment become
more significant, the Company's loss from continuing operations will be
increasingly impacted by the operating income of ICG Equipment.
Loss from discontinued operations. For the three months and nine months
ended September 30, 1998, loss from discontinued operations was $14.1 million
and $42.4 million, respectively, or 74% and 75%, respectively, of the Company's
net loss, compared to $6.8 million and $25.2 million, or 100% of the Company's
net loss, for the three months and nine months ended September 30, 1997. Loss
from discontinued operations consists of the net loss of NETCOM. The increase in
the net loss of NETCOM between the 1997 and 1998 comparative periods relates
primarily to increases in SG&A expenses, depreciation and amortization and
approximately $9.4 million for merger costs incurred by NETCOM during the nine
<PAGE>
16
months ended September 30, 1998, relating to NETCOM's merger with ICG in January
1998.
Liquidity and Capital Resources
The Company's near term growth will be funded through its 1998 debt
financings (the 10% Notes and the 9 7/8% Notes issued in February and April
1998, respectively). As of September 30, 1998, the Company had current assets of
$480.5 million, including $355.7 million of cash, cash equivalents and
short-term investments, which exceeded current liabilities of $70.7 million,
providing working capital of $409.8 million. The Company invests excess funds in
short-term, interest-bearing, investment-grade securities until such funds are
used to fund the capital investments and operating needs of the Company's
business. The Company's short-term investment objectives are safety, liquidity
and yield, in that order.
Net Cash Used By Operating Activities of Continuing Operations
The Company's operating activities of continuing operations provided $2.4
million and used $74.4 million for the nine months ended September 30, 1997 and
1998, respectively. Net cash used by operations of continuing operations is
primarily due to net losses, which are partially offset by non-cash expenses,
such as non-cash operating activities of discontinued operations, depreciation
and deferred interest expense, and changes in working capital items.
The Company expects to continue to generate negative cash flows from
operating activities of continuing operations while the advances to ICG for
invoices paid by the Company on behalf of ICG and its other operating
subsidiaries continue to increase each consecutive period. Consequently, the
Company does not anticipate that cash provided by the continuing operations of
ICG Equipment alone will be sufficient to fund operating activities of
continuing operations in the near term. The Company anticipates that cash used
by operating activities of continuing operations will improve when the Company
expands leasing operations under ICG Equipment and the advances to ICG for
invoices paid by the Company on behalf of ICG and its other operating
subsidiaries stabilize, either of which may not occur.
Net Cash Used By Investing Activities of Continuing Operations
The Company's investing activities of continuing operations used $173.8
million for the nine months ended September 30, 1998 compared to no reported
investing activities of continuing operations for the nine months ended
September 30, 1997. Cash used by investing activities of continuing operations
for the nine months ended September 30, 1998 includes cash expended for the
acquisition of property, equipment and other assets of $123.8 million, the
purchase of short-term investments of $41.0 million and the purchase of the 20%
equity interest in ICG Ohio LINX of $9.0 million. The Company will continue to
use cash in 1998 and subsequent periods for the purchase of telecommunications
equipment by ICG Equipment for sale or lease to other operating subsidiaries of
ICG and, potentially, for acquisitions.
Net Cash Provided By Financing Activities of Continuing Operations
The Company's financing activities of continuing operations provided $1.2
million for the nine months ended September 30, 1997. Net cash provided by
financing activities of continuing operations for this period consists of
proceeds from purchases under NETCOM's employee stock purchase plan (which was
dissolved in conjunction with NETCOM's merger with ICG in January 1998) and
proceeds from the exercise of NETCOM stock options.
The Company's financing activities of continuing operations provided $533.5
million for the nine months ended September 30, 1998. On February 12, 1998, the
Company completed a private placement of 10% Notes for net proceeds, after
underwriting and other offering costs, of approximately $290.9 million. Interest
will accrue at 10% per annum, beginning February 15, 2003, and is payable each
February 15 and August 15, commencing August 15, 2003. The 10% Notes will be
redeemable at the option of the Company, in whole or in part, on or after
February 15, 2003. On April 27, 1998, the Company completed a private placement
<PAGE>
17
of 9 7/8% Notes for net proceeds, after underwriting and other offering costs,
of approximately $242.2 million. Interest will accrue at 9 7/8% per annum,
beginning May 1, 2003, and is payable each May 1 and November 1, commencing
November 1, 2003. The 9 7/8% Notes will be redeemable at the option of the
Company, in whole or in part, on or after May 1, 2003. On an aggregate basis,
the Company's senior indebtedness matures at a value of approximately $895.3
million.
As of September 30, 1998, the Company had an aggregate accreted value of
approximately $580.3 million outstanding under the 10% Notes and the 9 7/8%
Notes. Management believes that the Company's cash on hand and amounts expected
to be available through asset sales, cash flows from operations and vendor
financing arrangements will provide sufficient funds necessary for the Company
to expand ICG Equipment's businesses and to fund its operating deficits as
currently planned. With respect to indebtedness outstanding on September 30,
1998, the Company has cash interest payment obligations of approximately $44.5
million in 2003, and $89.3 million in 2004 and each year thereafter through
2007. Accordingly, the Company may have to refinance a substantial amount of
indebtedness and obtain substantial additional funds prior to August 2003. The
Company's ability to do so will depend on, among other things, its financial
condition at the time, restrictions in the instruments governing its
indebtedness, and other factors, including market conditions, beyond the control
of the Company. There can be no assurance that the Company will be able to
refinance such indebtedness or obtain additional funds, and if the Company is
unable to effect such refinancing or obtain additional funds, the Company's
ability to make principal and interest payments on its indebtedness would be
adversely affected.
Other Cash Commitments and Capital Requirements
The Company's capital expenditures of continuing operations were $71.4
million and $123.8 million for the three months and nine months ended September
30, 1998, respectively. The Company anticipates that for both continuing and
discontinued operations, the expansion of the Company's businesses will require
capital expenditures of approximately $185.0 million, including assets to be
purchased by ICG Equipment from ICG Telecom, during the last quarter of 1998. To
facilitate the expansion of its services and networks, the Company has entered
into equipment purchase agreements with various vendors under which the Company
will purchase equipment and other assets, including a full range of switching
systems, fiber optic cable, network electronics, software and services. If the
Company fails to meet the minimum purchase level in any given year, the vendor
may discontinue certain discounts, allowances and incentives otherwise provided
to the Company. Actual capital expenditures will depend on numerous factors,
including certain factors beyond the Company's control. These factors include
the nature of future expansion and acquisition opportunities, economic
conditions, competition, regulatory developments and the availability of equity,
debt and lease financing.
Management believes that the Company's cash on hand and amounts expected to
be available through asset sales, cash flows from operations and vendor
financing arrangements will provide sufficient funds necessary for the Company
to expand NETCOM's (until disposition) and ICG Equipment's businesses and to
fund its operating deficits as currently planned. Additional sources of cash, if
needed, may include public and private debt financings, capitalized leases and
other financing arrangements. To date, the Company has been able to secure
sufficient amounts of financing to meet its capital expenditure needs. There can
be no assurance that additional financing will be available to the Company or,
if available, that it can be obtained on terms acceptable to the Company. The
failure to obtain sufficient amounts of financing could result in the delay or
abandonment of some or all of the Company's development and expansion plans,
which could have a material adverse effect on the Company's business.
Year 2000 Compliance
As a wholly owned subsidiary of ICG, the Company's Year 2000 compliance
plan is embedded within ICG's Year 2000 compliance plan for its consolidated
operations. It is not practicable for ICG to address the state of Year 2000
readiness, compliance costs, risks or contingency plans of the Company, or for
any other legal entity on a stand-alone basis, as ICG's plan was designed to
resolve Year 2000 compliance issues for all entities combined, which is the most
cost-effective manner. Moreover, as a result of the Company's and ICG's shared
management and administrative personnel and ICG Equipment's dependence upon the
continuing successful operations of certain of ICG's subsidiaries, evaluating
the Company's plan for Year 2000 compliance on a stand-alone basis is not
meaningful. Accordingly, the following paragraphs describe ICG's plan for
addressing Year 2000 compliance issues, of which the issues facing the Company
are an integral part.
<PAGE>
18
Importance
Many computer systems, software applications and other electronics
currently in use worldwide are programmed to accept only two digits in the
portion of the date field which designates the year. The "Year 2000 problem"
arises because these systems and products cannot properly distinguish between a
year that begins with "20" and the familiar "19." If these systems and products
are not modified or replaced, many will fail, create erroneous results and/or
may cause interfacing systems to fail.
Year 2000 compliance issues are of particular importance to ICG since its
operations rely heavily upon computer systems, software applications and other
electronics containing date-sensitive embedded technology. Some of these
technologies were internally developed and others are standard purchased systems
which may or may not have been customized for ICG's particular application. ICG
also relies heavily upon various vendors and suppliers that are themselves very
reliant on computer systems, software applications and other electronics
containing date-sensitive embedded technology. These vendors and suppliers
include: (i) ILECs and other local and long distance carriers with which ICG has
interconnection or resale agreements; (ii) manufacturers of the hardware and
related operating systems that ICG uses directly in its operations; (iii)
providers that create custom software applications that ICG uses directly in its
operations; and (iv) providers that sell standard or custom equipment or
software which allow ICG to provide administrative support to its operations.
Strategy
ICG's approach to addressing the potential impact of Year 2000 compliance
issues is focused upon ensuring, to the extent reasonably possible, the
continued, normal operation of its business and supporting systems. Accordingly,
ICG has developed a four-phase plan which it is applying to each functional
category of ICG's computer systems and components. Each of ICG's computer
systems, software applications and other electronics containing date-sensitive
embedded technology is included within one of the following four functional
categories:
o Voice and Data Network, which consists of all components whether
hardware, software or embedded technology used directly in ICG's
operations, including components used by ICG's voice and data switches
and collocations;
o IT Systems, which consists of all components used to support ICG's
operations, including provisioning and billing systems;
o Building and Facilities, which consists of all components with
embedded technology used at ICG's headquarters building and other
leased facilities, including security systems, elevators and internal
use telephone systems;
o Office Equipment, which consists of all office equipment with
date-sensitive embedded technology.
For each of the categories described above, ICG will apply the following
four-phase approach to identifying and addressing the potential impact of Year
2000 compliance issues:
o Phase I - Assessment
During this phase, ICG's technology staff will perform an inventory of
all components currently in use by ICG. Based upon this inventory,
ICG's business executives and technology staff will jointly classify
each component as a "high," "medium" or "low" priority item,
determined primarily by the relative importance that the particular
component has to ICG's normal business operations, the number of
people internally and externally which would be affected by any
failure of such component and the interdependence of such component
with other components used by ICG that may be of higher or lower
priority.
Based upon such classifications, ICG's business executives and
information technology staff will jointly set desired levels of Year
2000 readiness for each component inventoried, using the following
criteria, as defined by ICG:
<PAGE>
19
- Capable, meaning that such computer system or component will be
capable of managing and expressing calendar years in four digits;
- Compliant, meaning that ICG will be able to use such component
for the purpose for which ICG intended it by adapting to its
ability to manage and express calendar years in only two digits;
- Certified, meaning that ICG has received testing results to
demonstrate, or the vendor or supplier is subject to contractual
terms which requires, that such component requires no Year 2000
modifications to manage and express calendar years in four
digits; or
- Non-critical, meaning that ICG expects to be able to continue to
use such component unmodified or has determined that the
estimated costs of modification exceed the estimated costs
associated with its failure.
o Phase II - Remediation
During this phase, ICG will develop and execute a remediation plan for
each component based upon the priorities set in Phase I. Remediation
may include component upgrade, reprogramming, replacement, receipt of
vendor and supplier certification or other actions as deemed necessary
or appropriate.
o Phase III - Testing
During this phase, ICG will perform testing sufficient to confirm that
the component meets the desired state of Year 2000 readiness. This
phase will consist of: (i) testing the component in isolation, or unit
testing; (ii) testing the component jointly with other components, or
system testing; and (iii) testing interdependent systems, or
environment testing.
o Phase IV - Implementation
During the last phase, ICG will implement each act of remediation
developed and tested for each component, as well as implement adequate
controls to ensure that future upgrades and changes to ICG's computer
systems, for operational reasons other than Year 2000 compliance, do
not alter ICG's Year 2000 state of readiness.
Current State of Readiness
ICG has commenced certain of the phases within its Year 2000 compliance
strategy for each of its functional system categories, as shown by the table set
forth below. ICG does not intend to wait until the completion of a phase for all
functional category components together before commencing the next phase.
Accordingly, the information set forth below represents only a general
description of the phase status for each functional category.
<PAGE>
20
<TABLE>
<CAPTION>
- ------------------------------- ----------------------------------------------------------------------------------------------
Phase
- ------------------------------- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
I II III IV
System and Level of Priority Assessment Remediation Testing Implementation
- ------------------------------- ----------------------------------------------------------------------------------------------
Voice and Data Network
- ------------------------------- ----------------------------------------------------------------------------------------------
High In progress In progress To begin Q1 1999 To begin Q1 1999
To complete Q1 1999 To complete Q2 1999 To complete Q2 1999 To complete Q3 1999
- ------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
Medium In progress To begin Q4 1998 To begin Q1 1999 To begin Q1 1999
To complete Q1 1999 To complete Q2 1999 To complete Q3 1999 To complete Q4 1999
- ------------------------------- ---------------------- -----------------------------------------------------------------------
Low To begin Q4 1998 To be determined based on the results of Phase I
To complete Q2 1999
- ------------------------------- ---------------------- -----------------------------------------------------------------------
IT Systems
- ------------------------------- ----------------------------------------------------------------------------------------------
High In progress In progress In progress In progress
To complete Q1 1999 To complete Q2 1999 To complete Q2 1999 To complete Q3 1999
- ------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
Medium In progress In progress To begin Q1 1999 To begin Q1 1999
To complete Q1 1999 To complete Q2 1999 To complete Q2 1999 To complete Q3 1999
- ------------------------------- ---------------------- -----------------------------------------------------------------------
Low In progress To be determined based on the results of Phase I
To complete Q2 1999
- ------------------------------- ----------------------------------------------------------------------------------------------
Building and Facilities
- ------------------------------- ----------------------------------------------------------------------------------------------
High In progress To begin Q4 1998 To be determined based on the results of
To complete Q1 1999 To complete Q2 1999 Phase II
- ------------------------------- ---------------------- ----------------------- -----------------------------------------------
Medium In progress To begin Q4 1998 To be determined based on the results of
To complete Q1 1999 To complete Q2 1999 Phase II
- ------------------------------- ---------------------- -----------------------------------------------------------------------
Low To begin Q1 1999 To be determined based on the results of Phase I
To complete Q2 1999
- ------------------------------- ----------------------------------------------------------------------------------------------
Office Equipment
- ------------------------------- ----------------------------------------------------------------------------------------------
High In progress In progress To begin Q1 1999 To begin Q1 1999
To complete Q1 1999 To complete Q2 1999 To complete Q2 1999 To complete Q3 1999
- ------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
Medium In progress In progress To begin Q1 1999 To begin Q1 1999
To complete Q1 1999 To complete Q2 1999 To complete Q3 1999 To complete Q4 1999
- ------------------------------- ---------------------- -----------------------------------------------------------------------
Low In progress To be determined based on the results of Phase I
To complete Q2 1999
- ------------------------------- ---------------------- -----------------------------------------------------------------------
</TABLE>
Separately, ICG is in the process of reviewing ICG's material contracts
with contractors and vendors/suppliers and considering the necessity of
renegotiating certain existing contracts, to the extent that the contracts fail
to address the allocation of potential Year 2000 liabilities between parties.
Prior to entering into any new material contracts, ICG will seek to address the
allocation of potential Year 2000 liabilities as part of the initial
negotiation.
Costs
ICG expenses all incremental costs to ICG associated with Year 2000
compliance issues as incurred. Through September 30, 1998, such costs incurred
have been less than $0.1 million and have primarily included miscellaneous costs
of reference and other Year 2000 compliance planning materials. ICG has also
incurred certain internal costs, including salaries and benefits for employees
dedicating various portions of their time to Year 2000 compliance issues, of
which costs ICG believes has not exceeded $0.5 million through September 30,
1998. ICG expects that total future incremental costs of Year 2000 compliance
efforts will be approximately $3.8 million, consisting of $2.3 million in
consulting fees, $1.5 million in replacement hardware and software and other
miscellaneous costs. These anticipated costs have been included in ICG's fiscal
1999 budget and represent approximately 4% of ICG's budgeted expenses for
information technology through fiscal 1999. Such cost estimates are based upon
presently available information and may change as ICG continues with its Year
2000 compliance plan. ICG intends to use cash on hand for Year 2000 compliance
costs, as necessary.
<PAGE>
21
Risk, Contingency Planning and Reasonably Likely Worst Case Scenario
While ICG is heavily reliant upon its computer systems, software
applications and other electronics containing date-sensitive embedded technology
as part of its business operations, such components upon which ICG primarily
relies were developed with current state-of-the-art technology and, accordingly,
ICG has reasonably assumed that its four-phase approach will demonstrate that
many of its high-priority systems do not present material Year 2000 compliance
issues. For computer systems, software applications and other electronics
containing date-sensitive embedded technology that have met ICG's desired level
of Year 2000 readiness, ICG will use its existing contingency plans to mitigate
or eliminate problems it may experience if an unanticipated system failure were
to occur. For components that have not met ICG's desired level of readiness, ICG
will develop a specific contingency plan to determine the actions ICG would take
if such component failed.
At the present time, ICG is unable to develop a most reasonably likely
worst case scenario for failure to achieve adequate Year 2000 compliance. ICG
will be better able to develop such a scenario once the status of Year 2000
compliance of ICG's material vendors and suppliers is complete. ICG will monitor
its vendors and suppliers, particularly the other telecommunications companies
upon which ICG relies, to determine whether they are performing and implementing
an adequate Year 2000 compliance plan in a timely manner.
ICG acknowledges the possibility that ICG may become subject to potential
claims by customers if ICG's operations are interrupted for an extended period
of time. However, it is not possible to predict either the probability of such
potential litigation, the amount that could be in controversy or upon which
party a court would place ultimate responsibility for any such interruption.
ICG views Year 2000 compliance as a process that is inherently dynamic and
will change in response to changing circumstances. While ICG believes that
through execution and satisfactory completion of its Year 2000 compliance
strategy its computer systems, software applications and electronics will be
Year 2000 compliant, there can be no assurance until the Year 2000 occurs that
all systems and all interfacing technology when running jointly will function
adequately. Additionally, there can be no assurance that the assumptions made by
ICG within its Year 2000 compliance strategy will prove to be correct, that the
strategy will succeed or that the remedial actions being implemented will be
able to be completed by the time necessary to avoid system or component
failures. In addition, disruptions with respect to the computer systems of
vendors or customers, which systems are outside the control of ICG, could impair
ICG's ability to obtain necessary products or services to sell to its customers.
Disruptions of ICG's computer systems, or the computer systems of ICG's vendors
or customers, as well as the cost of avoiding such disruption, could have a
material adverse effect on ICG's financial condition and results of operations.
<PAGE>
22
PART II
ITEM 1. LEGAL PROCEEDINGS
See Note 8 to the Company's unaudited condensed consolidated financial
statements for the quarterly period ended September 30, 1998 contained
elsewhere in this Quarterly Report.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES AND USE OF PROCEEDS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits.
(27) Financial Data Schedules.
27.1:Financial Data Schedule of ICG Services, Inc. for the Nine
Months Ended September 30, 1998.
27.2:Financial Data Schedule of ICG Services, Inc. for the Nine
Months Ended September 30, 1997.
(B) Reports on Form 8-K.
None.
<PAGE>
INDEX TO EXHIBITS
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
<PAGE>
INDEX TO EXHIBITS
27.1:Financial Data Schedule of ICG Services, Inc. for the Nine Months Ended
September 30, 1998.
27.2:Financial Data Schedule of ICG Services, Inc. for the Nine Months Ended
September 30, 1997.
<PAGE>
EXHIBIT 27.1
Financial Data Schedule of ICG Services, Inc. for the
Nine Months Ended September 30, 1998.
<PAGE>
EXHIBIT 27.2
Financial Data Schedule of ICG Services, Inc. for the
Nine Months Ended September 30, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on November 13, 1998.
ICG SERVICES, INC.
Date: November 13, 1998 By: /s/ Harry R. Herbst
----------------------------------------
Harry R. Herbst, Executive Vice
President and Chief Financial Officer
(Principal Financial Officer)
Date: November 13, 1998 By: /s/ Richard Bambach
----------------------------------------
Richard Bambach, Vice President and
Corporate Controller (Principal
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF ICG SERVICES, INC. AND SUBSIDIARIES FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997, WHICH PRESENT THE OPERATIONS OF NETCOM AS
DISCONTINUED, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 66,733
<SECURITIES> 0<F1>
<RECEIVABLES> 3,354
<ALLOWANCES> 1,546
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 68,541
<PP&E> 0<F1>
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 146,536
<CURRENT-LIABILITIES> 26,807
<BONDS> 0<F1>
0<F1>
0<F1>
<COMMON> 117
<OTHER-SE> 119,612
<TOTAL-LIABILITY-AND-EQUITY> 146,536
<SALES> 0<F1>
<TOTAL-REVENUES> 0<F1>
<CGS> 0<F1>
<TOTAL-COSTS> 0<F1>
<OTHER-EXPENSES> 0<F1>
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 0<F1>
<INCOME-PRETAX> 0<F1>
<INCOME-TAX> 0<F1>
<INCOME-CONTINUING> 0<F1>
<DISCONTINUED> (25,217)
<EXTRAORDINARY> 0<F1>
<CHANGES> 0<F1>
<NET-INCOME> (25,217)
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>THIS VALUE IS NOT APPLICABLE.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF ICG SERVICES, INC. AND SUBSIDIARIES FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 314,670
<SECURITIES> 41,000
<RECEIVABLES> 127,457
<ALLOWANCES> 2,609
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 480,518
<PP&E> 123,757
<DEPRECIATION> 686
<TOTAL-ASSETS> 707,085
<CURRENT-LIABILITIES> 70,667
<BONDS> 580,333
0<F1>
0<F1>
<COMMON> 0<F1>
<OTHER-SE> 56,085
<TOTAL-LIABILITY-AND-EQUITY> 707,085
<SALES> 0<F1>
<TOTAL-REVENUES> 3,556
<CGS> 0<F1>
<TOTAL-COSTS> 0<F1>
<OTHER-EXPENSES> 3,446
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 30,796
<INCOME-PRETAX> (14,280)
<INCOME-TAX> 0<F1>
<INCOME-CONTINUING> (14,093)
<DISCONTINUED> (42,436)
<EXTRAORDINARY> 0<F1>
<CHANGES> 0<F1>
<NET-INCOME> (56,529)
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>THIS VALUE IS NOT APPLICABLE.
</FN>
</TABLE>
