<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the quarterly period ended JUNE 30, 1996
COMMISSION FILE NUMBER: 1-11052
ICG HOLDINGS (CANADA), INC.
(FORMERLY KNOWN AS INTELCOM GROUP INC.)
(Exact name of Registrant as specified in its Charter)
<TABLE>
<S> <C>
CANADA N/A
(Jurisdiction of Incorporation) (I.R.S. Employer Identification Number)
ICG HOLDINGS (CANADA), INC. JAMES D. GRENFELL, CHIEF FINANCIAL OFFICER
1710-1177 WEST HASTINGS STREET ICG COMMUNICATIONS, INC.
VANCOUVER, B.C. V6E 2L3 9605 EAST MAROON CIRCLE
(Registrant's Registered Office) P.O. BOX 6742
ENGLEWOOD, COLORADO 80155-6742
(604) 683-9262 (303) 572-5960
(Registrant's telephone number, (Agent for Service)
including area code)
INTELCOM GROUP INC.
(Former Name)
</TABLE>
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
------ ------
The number of Registrant's outstanding common shares as of August 2, 1996 was
29,882,258.
<PAGE>
ICG HOLDINGS (CANADA), INC.
Part I - Financial Information
------------------------------
<TABLE>
<CAPTION>
Item 1. Financial Statements (Unaudited)
<S> <C>
Consolidated Balance Sheets as of September 30, 1995 and June 30, 1996...... 3
Consolidated Statements of Operations for the Three Months and Nine Months
Ended June 30, 1995 and 1996.............................................. 5
Consolidated Statements of Shareholders' Equity (Deficit) for the Year ended
September 30, 1995 and Nine Months Ended June 30, 1996.................... 6
Consolidated Statements of Cash Flows for the Nine Months
Ended June 30, 1995 and 1996.............................................. 7
Notes to Consolidated Financial Statements.................................. 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 13
</TABLE>
Part II - OTHER INFORMATION
---------------------------
<TABLE>
<S> <C>
Part II - Other Information......................................................... 27
Signatures.......................................................................... 28
</TABLE>
<PAGE>
ICG HOLDINGS (CANADA), INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares)
<TABLE>
<CAPTION>
September 30, June 30,
1995 1996
--------------- -----------
(unaudited)
<S> <C> <C>
ASSETS
--------
Current assets:
Cash and cash equivalents (note 1) $ 269,416 514,164
Short-term investments at cost, approximating market value (note 1) - 2,000
Receivables:
Trade, net of allowance of $2,217 and $2,102 at September 30, 1995
and June 30, 1996, respectively 23,483 29,878
Revenue earned, but unbilled (note 2) 7,046 2,624
Joint venture and affiliate 732 731
Other 1,430 1,361
Inventory 2,165 3,105
Prepaid expenses and deposits 3,424 4,193
Notes receivable 1,761 1,628
------------- -----------
Total current assets 309,457 559,684
Property and equipment 228,609 345,418
Less accumulated depreciation (note 2) (26,605) (39,658)
------------- -----------
202,004 305,760
Investments 5,209 5,169
Long - term notes receivable 7,599 9,960
Restricted cash (note 9) - 13,333
Other assets, net of accumulated amortization:
Goodwill 29,199 30,049
Deferred financing costs 16,018 24,046
Transmission and other licenses 10,792 8,740
Other 3,275 6,612
------------ ----------
59,284 69,447
------------ ----------
$583,553 963,353
============ ==========
(continued)
</TABLE>
3
<PAGE>
ICG HOLDINGS (CANADA), INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(in thousands, except shares)
<TABLE>
<CAPTION>
September 30, June 30,
1995 1996
-------------- -------------
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Accounts payable $ 14,712 16,126
Accrued liabilities 18,346 27,087
Line-of-credit payable 3,692 -
Current portion of long-term debt (note 4) 14,454 887
Current portion of capital lease obligations 9,164 8,047
---------- ----------
Total current liabilities 60,368 52,147
Long-term debt, net of discount, less current portion (note 4) 379,100 708,079
Capital lease obligations, less current portion 26,435 68,470
Deferred income taxes (note 2) 5,702 847
Share of losses of joint venture in excess of investment 1,037 2,296
---------- ----------
Total liabilities 472,642 831,839
Minority interests 4,040 4,827
Redeemable preferred stock of subsidiary
($30,000,000 and $150,000,000 liquidation value at
September 30, 1995 and June 30, 1996, respectively)(notes 4 and 5) 14,986 147,711
Shareholders' equity (deficit)(note 6):
Convertible Series B Preferred Stock, no par value, 2,000,000
shares authorized; 990,000 shares issued
and outstanding at September 30, 1995 9,350 -
Common shares, no par value, 100,000,000
shares authorized; 24,990,839 and 28,383,130
shares issued and outstanding at September 30, 1995
and June 30, 1996, respectively 190,753 216,127
Additional paid-in capital 26,492 23,861
Foreign currency translation adjustment (330) (330)
Accumulated deficit (note 2) (134,380) (260,682)
---------- -----------
Total shareholders' equity (deficit) 91,885 (21,024)
---------- -----------
Commitments and contingencies (note 9)
$ 583,553 963,353
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
ICG HOLDINGS (CANADA), INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1995 1996 1995 1996
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
(unaudited)
Revenue:
Telecom services (note 2) $ 9,173 24,371 22,007 55,519
Network services 14,061 14,679 42,850 44,370
Satellite services 5,825 5,596 14,758 16,100
---------- ---------- ----------- ------------
Total revenue 29,059 44,646 79,615 115,989
Cost of services 20,224 31,170 53,477 80,994
Selling, general and administrative expenses 16,681 24,683 44,166 64,922
Depreciation and amortization (note 2) 4,597 9,055 11,704 21,416
---------- ---------- ----------- ------------
Operating expenses 41,502 64,908 109,347 167,332
Operating loss (12,443) (20,262) (29,732) (51,343)
Other income (expense):
Interest expense (note 4) (4,352) (32,940) (10,549) (62,372)
Interest income 478 5,957 1,681 12,432
Share of losses of joint venture (196) (449) (552) (1,259)
Other, net 681 (466) (221) (3,043)
---------- ---------- ----------- ------------
Loss before minority interest, income taxes and
cumulative effect of change in accounting (15,832) (48,160) (39,373) (105,585)
Minority interest in share of losses (earnings),
accretion and preferred dividends (notes 4 and 7) (203) (16,561) 308 (20,719)
---------- ---------- ----------- ------------
Loss before income taxes and cumulative effect
of change in accounting (16,035) (64,721) (39,065) (126,304)
Income tax benefit (note 2) 119 - 108 4,482
---------- ---------- ----------- ------------
Loss before cumulative effect of change in accounting (15,916) (64,721) (38,957) (121,822)
Cumulative effect of change in accounting for
revenue from long-term telecom services contracts - - - (3,453)
---------- ---------- ----------- ------------
Net loss (15,916) (64,721) (38,957) (125,275)
Preferred stock dividend (note 6) - - - (1,027)
---------- ---------- ----------- ------------
Net loss attributable to
common shareholders $ (15,916) (64,721) (38,957) (126,302)
========== ========== =========== ============
Loss per common share:
Loss before cumulative effect of
change in accounting $ (0.66) (2.43) (1.68) (4.72)
Cumulative effect of change in accounting - - - (0.13)
Preferred stock dividend - - - (0.04)
---------- ---------- ----------- ------------
Loss per common share $ (0.66) (2.43) (1.68) (4.89)
========== ========== =========== ============
Weighted average number of shares outstanding 24,070 26,580 23,187 25,841
========== ========== =========== ============
Pro forma amounts before cumulative effects of
change in accounting assuming the new method of
accounting for revenue from long-term telecom
services contracts is applied retroactively:
Telecom services revenue $ 8,835 24,371 21,029 55,519
Total revenue 28,721 44,646 78,637 115,989
Operating loss (12,781) (20,262) (30,710) (51,343)
Net loss (16,254) (64,721) (39,935) (121,822)
Net loss attributable to common shareholders $ (16,254) (64,721) (39,935) (122,849)
========== ========== =========== ============
Loss per common share $ (0.68) (2.43) (1.72) (4.75)
========== ========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
ICG HOLDINGS (CANADA), INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands)
Additional
Preferred shares Common shares Paid-in
Shares Amount Shares Amount Capital
<S> ----------------------- ------------------- ----------
<C> <C> <C> <C> <C>
BALANCES AT SEPTEMBER 30, 1994 - $ - 17,047 $ 95,606 2,200
Shares issued for cash:
Public offering and private placements 1,600 16,000 6,312 84,498 -
Public offering and private placement costs - (850) - (6,162) -
Exercise of options and warrants - - 338 1,471 -
Shares issued as repayment of debt
and related accrued interest - - 614 8,402 -
Shares issued in connection with
business combinations - - 130 1,737 -
Shares issued upon conversion of
subordinated notes - - 69 1,080 -
Conversion of preferred shares (200) (2,000) 302 2,000 -
Shares issued as contribution to 401(k) plan - - 38 490 -
Warrants issued in connection with offerings - - - - 24,134
Redemption of preferred shares (410) (3,800) - - -
Dividend on preferred shares - - - - -
Change in foreign currency translation adjustment - - - - -
Compensation expense related to issuance of
stock options - - - - 158
Shares issued in exchange for investments and
other assets - - 123 1,398 -
Shares issued as payment of trade payables - - 18 233 -
Net loss - - - - -
------------------------- --------------------- ------
BALANCES AT SEPTEMBER 30, 1995 990 $ 9,350 24,991 $190,753 26,492
Shares issued for cash - options and warrants - - 1,503 1,715 -
Shares issued as contribution to 401(k) plan - - 72 856 -
Shares issued upon conversion of
subordinated notes (note 4) - - 1,127 17,588 -
Conversion of preferred shares to
common shares (note 6) (400) (3,780) 496 3,780 -
Redemption of preferred shares (note 6) (590) (5,570) - - -
Dividend on preferred shares (note 6) - - - - -
Repurchase of warrants (note 4) - - - - (2,671)
Shares issued as repayment of debt
and related accrued interest - - 130 687 -
Shares issued in connection with
business combinations (note 3) - - 64 748 -
Compensation expense related to issuance
of stock options - - - - 40
Net loss - - - - -
------------------------- ---------------------- ------
BALANCES AT JUNE 30, 1996 - $ - 28,383 $216,127 23,861
========================= ====================== ======
Foreign
Currency Total
Translation Accumulated Shareholder's
Adjustment Deficit Equity
------------ ----------- -------------
BALANCES AT SEPTEMBER 30, 1994 (292) (57,732) 39,782
Shares issued for cash:
Public offering and private placements - - 100,498
Public offering and private placement costs - - (7,012)
Exercise of options and warrants - - 1,471
Shares issued as repayment of debt
and related accrued interest - - 8,402
Shares issued in connection with business
combinations - - 1,737
Shares issued upon conversion of
subordinated notes - - 1,080
Conversion of preferred shares - - -
Shares issued as contribution to 401(k) plan - - 490
Warrants issued in connection with offerings - - 24,134
Redemption of preferred shares - - (3,800)
Dividend on preferred shares - (467) (467)
Change in foreign currency translation adjustment (38) - (38)
Compensation expense related to issuance of
stock options - - 158
Shares issued in exchange for investments and
other assets - - 1,398
Shares issued as payment of trade payables - - 233
Net loss - (76,181) (76,181)
----------- ---------- ------------
BALANCES AT SEPTEMBER 30, 1995 (330) (134,380) 91,885
Shares issued for cash - options and warrants - - 1,715
Shares issued as contribution to 401(k) plan - - 856
Shares issued upon conversion of subordinated
notes (note 4) - - 17,588
Conversion of preferred shares to
common shares (note 6) - - -
Redemption of preferred shares (note 6) - - (5,570)
Dividend on preferred shares (note 6) - (1,027) (1,027)
Repurchase of warrants (note 4) - - (2,671)
Shares issued as repayment of debt
and related accrued interest - - 687
Shares issued in connection with
business combinations (note 3) - - 748
Compensation expense related to issuance
of stock options - - 40
Net loss - (125,275) (125,275)
----------- ---------- ------------
BALANCES AT JUNE 30, 1996 (330) (260,682) (21,024)
=========== ========== ============
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
ICG HOLDINGS (CANADA), INC.
CONSOLIDATED STATEMENTS OF
CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
1995 1996
----------- -----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (38,957) (125,275)
Adjustments to reconcile net loss to net cash used
by operating activities:
Cumulative effect of change in accounting - 3,453
Share of losses of joint venture 552 1,259
Minority interest in share of earnings
(losses), accretion and preferred dividends (308) 20,719
Depreciation and amortization 11,704 21,416
Compensation expense related to issuance of
stock options 119 40
Interest expense deferred and included in long-term
debt and non-cash interest expense 3,807 42,514
Amortization of deferred financing costs
included in interest expense 540 2,286
Deferred debt issuance costs (898) (9,265)
Contribution to 401(k) plan through issuance
of common shares 490 856
Deferred income tax benefit - (4,482)
Loss on sale of certain Satellite Services assets - 891
Decrease (increase) in operating assets, excluding
the effects of business acquisitions, dispositions and
non-cash transactions:
Accounts receivable (1,695) (6,244)
Inventory 194 (1,099)
Prepaid expenses and deposits (5,244) (3,059)
Increase in operating liabilities, excluding the
effects of business acquisitions, dispositions and
non-cash transactions:
Accounts payable and accrued liabilities 11,780 9,691
------------- -------------
Net cash used by operating activities (17,916) (46,299)
------------- -------------
Cash flows from investing activities:
Notes receivable (5,327) 283
Advances to affiliates (202) (374)
Advances to joint venture (4,523) (2,316)
Payments for business acquisitions, net of
cash acquired (8,229) (6,567)
Long-term investment (2,000) 40
Purchase of short-term investments - (2,000)
Restricted cash - (13,333)
Acquisition of property, equipment and other
assets, net (33,492) (82,615)
Proceeds from the sale of certain Satellite
Services assets - 21,593
-------------- -------------
Net cash used by investing activities (53,773) (85,289)
-------------- -------------
Cash flows from financing activities:
Issuance of preferred shares, net of costs 15,150 -
Issuance of redeemable preferred stock of
subsidiary, net of costs - 144,000
Issuance of common shares for cash:
Public offering, net of costs 74,314 -
Private offering, net of costs 4,022 -
Exercise of options and warrants 867 1,715
Redemption of preferred shares - (5,570)
Dividend on preferred shares - (1,027)
Repurchase of redeemable preferred stock of
subsidiary and payment of accrued dividend - (32,629)
Repurchase of redeemable warrants - (2,671)
Principal payments on capital lease obligations (4,253) (8,634)
Proceeds from issuance of short-term debt - 17,500
Principal payments on short-term debt - (21,192)
Proceeds from issuance of long-term debt - 300,034
Principal payments on long-term debt (13,008) (15,190)
------------- -------------
Net cash provided by financing activities 77,092 376,336
------------- --------------
Net increase in cash and cash equivalents 5,403 244,748
Cash and cash equivalents, beginning of period 6,025 269,416
------------- --------------
Cash and cash equivalents, end of period $ 11,428 514,164
================ ================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 6,491 17,572
================= ================
Supplemental schedule of non-cash financing
and investing activities:
Common shares issued in connection with
business combinations, repayment
of debt or conversion of liabilities to
equity $ 12,495 19,023
================= ================
Assets acquired under capital leases and
through the issuance of debt $ 33,656 49,552
================= ================
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996 and 1995
(unaudited)
1. ORGANIZATION, NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
ICG Holdings (Canada), Inc. ("ICG" or the "Company") (formerly known as
IntelCom Group Inc. ("IntelCom")) is incorporated as a Canadian federal
corporation. At the Annual and Special Meeting of Shareholders held on July 30,
1996, the shareholders of IntelCom approved a Plan of Arrangement ("Plan") under
which IntelCom became a subsidiary of a new publicly traded U.S. corporation,
ICG Communications, Inc. The Plan was approved by the Ontario Courts of Justice
(General Division) on August 2, 1996. Pursuant to the Plan, each shareholder of
IntelCom exchanged their common shares for either (i) new Class A shares of
IntelCom (which are exchangeable into shares of common stock, $.01 par value, of
ICG Communications, Inc.), or (ii) shares of common stock, $.01 par value, of
ICG Communications, Inc. IntelCom's name was also changed to ICG Holdings
(Canada), Inc. More than 98% of the issued and outstanding shares of IntelCom
have been exchanged for shares of ICG Communications, Inc. As a result of the
Plan, IntelCom's common shares ceased trading on the American Stock Exchange
("AMEX") at the close of trading on August 2, 1996, and ICG Communications,
Inc.'s common stock began trading on the AMEX on August 5, 1996, under the
symbol "ICG." ICG's new Class A shares will continue to be listed on the
Vancouver Stock Exchange under a new symbol, "IHC.A." The Company has also
announced it will be changing its fiscal year to a calendar year beginning in
1997.
The Company's primary business activity is telecommunications services
provided through its wholly owned U.S. subsidiary, ICG Holdings, Inc.
("Holdings") (formerly known as IntelCom Group (U.S.A.), Inc.). ICG Holdings
(Canada), Inc. and its subsidiaries are collectively referred to herein as the
Company.
(a) Reference to Annual Report
These financial statements should be read in conjunction with the Annual
Report on Form 10-K/A for the year ended September 30, 1995, 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 June 30, 1996,
are not necessarily indicative of the results that may be expected for the year
ending September 30, 1996.
(b) Cash equivalents and short-term investments
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. The Company invests
primarily in high grade short-term investments which consist of money market
instruments, commercial paper, certificates of deposit, government obligations
and corporate bonds. The Company's investment objectives are safety, liquidity
and yield, in that order.
Presently, the Company carries all cash equivalents and short-term
investments at cost, which approximates fair value. Gains and losses are
included in investment income in the period they are realized. The cost of all
securities sold is based on the specific identification method.
(c) Reclassifications
Certain 1995 amounts have been reclassified for comparative purposes.
2. ACCOUNTING CHANGES:
Effective January 1, 1996, the Company changed its method of accounting for
long-term telecom services contracts. Under the new method, the Company will
recognize revenue as services are provided and will continue to charge direct
selling expenses to operations as incurred. The Company had previously
recognized the noncancelable portion of the contract, which is a minimum of one
year on a three-year or longer contract, at the inception of the contract and
upon activation of service to the customer to the extent of direct installation
and selling expenses incurred in obtaining customers during the period in which
such revenue was recognized. Revenue recognized in excess of normal monthly
billings during the year was limited to an amount which did not exceed such
installation and selling expense. The remaining revenue from the contract had
been recognized ratably over the remaining noncancelable portion of the
contract. The Company believes the new method is preferable because it provides
a better matching of revenue and related operating expenses and is more
consistent with accounting practices within the telecommunications industry.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As required by generally accepted accounting principles, the Company has
reflected the effects of the change in accounting as if such change had been
adopted as of October 1, 1995, and has presented the pro forma effects on prior
periods assuming the change had been applied retroactively. The Company's
results for the nine months ended June 30, 1996, reflect a charge of $3.5
million relating to the cumulative effect of this change in accounting as of
October 1, 1995. The effect of this change in accounting for the nine months
ended June 30, 1996, was not significant and the effect of the change is not
expected to be significant for the year ended September 30, 1996.
In addition, the Company has shortened the estimated depreciable lives for
substantially all of its fixed assets. These estimates were changed to better
reflect the estimated periods during which these assets will remain in service
and result in useful lives which are more consistent with industry practice.
The changes in estimates of depreciable lives were made on a prospective basis
beginning January 1, 1996. The effect of this change was to increase
depreciation expense and net loss attributable to common shareholders for the
nine months ended June 30, 1996, by approximately $4.6 million ($1.78 per common
share). This change in estimate is expected to increase depreciation expense
during fiscal year 1996 by approximately $7.0 million. The change would have had
an annual effect of approximately $9.0 million had the change been in effect for
the entire year. The deferred tax liability has been adjusted for the effect of
this change in estimated depreciable lives, which resulted in an income tax
benefit of $4.5 million for the nine months ended June 30, 1996.
3. BUSINESS COMBINATIONS:
In January 1996, the Company purchased the 49% minority interest of
Fiber Optic Technologies, Inc. ("FOTI"), making FOTI a wholly owned subsidiary.
Consideration for the purchase was $2.0 million in cash and 64,366 common shares
of ICG valued at $0.8 million for total consideration of $2.8 million.
In February 1996, the Company entered into an agreement with Linkatel
California, L.P. ("Linkatel") and its other partners, Linkatel Communications,
Inc., and The Copley Press, Inc., publisher of The San Diego Union Tribune,
under which the Company acquired a 60% interest in Linkatel for an aggregate
purchase price of $10.0 million in cash and became the general partner of
Linkatel. In April 1996, the partnership was renamed ICG Telecom of San Diego,
L.P. ("ICG Telecom of San Diego").
In March 1996, the Company acquired a 90% equity interest in Maritime
Cellular Tele-Network, Inc. ("MCN"), a Florida-based provider of cellular and
satellite communications for commercial ships, private vessels, off-shore
platforms and land-based mobile units, for $0.7 million in cash and $0.1 million
of assumed debt, for total consideration of $0.8 million.
The above acquisitions have been accounted for using the purchase method of
accounting, and accordingly the net assets and results of operations are
included in the Consolidated Financial Statements from the date of acquisition.
Revenue, net loss and loss per share on a pro forma basis are not significantly
different from the Company's historical results for the period presented herein.
4. LONG-TERM DEBT:
<TABLE>
<CAPTION>
September 30, June 30,
1995 1996
------------- ----------
(in thousands)
<S> <C> <C>
12 1/2% Senior discount notes, net of discount (a) $ - 307,292
13 1/2% Senior discount notes, net of discount 299,934 331,326
Convertible subordinated notes (b) 74,434 59,971
Credit facility (paid subsequent to September 30, 1995) 13,515 -
Note payable with interest at the 90 day commercial paper rate plus 4.75%, due 2001 - 5,888
Note payable with interest at 11%, due monthly
through fiscal 1999, secured by equipment 3,493 3,004
Mortgage payable with interest at 8.5%, due
monthly through 2009, secured by building 1,242 1,203
Notes payable to sellers of FOTI (paid subsequent to September 30, 1995) 600 -
Notes payable to sellers of PrivaCom (paid subsequent to September 30, 1995) 99 -
Other 237 282
------------- ----------
393,554 708,966
Less current portion (14,454) (887)
------------- ----------
$ 379,100 708,079
============= ==========
</TABLE>
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(a) On April 30, 1996, Holdings completed a private placement (the "Private
Placement") of 12 1/2% Senior Discount Notes (the "12 1/2% Notes") and of
14 1/4% Exchangeable Preferred Stock (the "Preferred Stock") for gross
proceeds of $300.0 million and $150.0 million, respectively. Net proceeds
from the Private Placement after costs of approximately $17.0 million were
approximately $433.0 million.
The 12 1/2% Notes are unsecured senior obligations of Holdings
(guaranteed by the Company and ICG Communications, Inc.) that mature on May
1, 2006, at 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.
Approximately $35.3 million of the proceeds from the Private Placement
were used to redeem the 12% Redeemable Preferred Stock of Holdings (the
"Redeemable Preferred Stock") issued in August 1995 ($30.0 million), pay
accrued preferred dividends ($2.6 million) and to repurchase 916,666
warrants of the Company ($2.7 million) issued in connection with the
Redeemable Preferred Stock. The Company recognized a charge to minority
interest in share of losses (earnings), accretion and preferred dividends
of approximately $12.3 million for the excess of the redemption price of
the Redeemable Preferred Stock over the carrying amount at April 30, 1996,
and recognized a charge to interest expense of approximately $11.5 million
for the payments made to noteholders with respect to consents to amendments
to the 13 1/2% Notes Indenture to permit the Private Placement. See further
discussion of the use of proceeds in "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
(b) During the nine months ended June 30, 1996, $14.9 million of the
convertible subordinated notes and $2.7 million of the interest on such
notes was converted into 1,127,431 common shares of ICG. The Company has
notified the holders of the remaining notes of its intent to redeem the
notes, together with accrued interest. The holders have until August 26,
1996, to convert the notes to common shares of ICG prior to the Company
redeeming the notes.
5. REDEEMABLE PREFERRED STOCK OF SUBSIDIARY:
The Preferred Stock issued in the Private Placement (note 4) consists of
150,000 shares 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 commencing August 1, 1996. Through May 1, 2001, the dividend is
payable at the option of Holdings in cash or additional shares of Preferred
Stock. On August 1, 1996, the Company paid the first dividend in additional
shares of Preferred Stock. Holdings may exchange the Preferred Stock into 14
1/4% Senior Subordinated Exchange Debentures at any time after the exchange is
permitted by certain indenture restrictions. The Preferred Stock is subject to
mandatory redemption on May 1, 2007.
6. SHAREHOLDERS' EQUITY:
Preferred Stock
During the first nine months of fiscal 1996, the Company repurchased $5.6
million of Series B ICG Preferred Stock and $3.8 million of the Series B
Preferred Stock was converted to ICG common shares. The excess of the repurchase
and conversion price over the stated value of the preferred shares purchased of
$1.0 million has been recorded as a preferred stock dividend in the accompanying
consolidated financial statements.
7. MINORITY INTEREST IN SHARE OF LOSSES (EARNINGS), ACCRETION AND
PREFERRED DIVIDENDS:
Included in minority interest in share of losses (earnings), accretion and
preferred dividends for the nine months ended June 30, 1996, is approximately
$21.3 million associated with Preferred Stock of Holdings, including accretion
of warrants issued in connection with the Redeemable Preferred Stock ($3.0
million), accretion of issuance costs ($0.3 million), accrual of preferred
dividends ($5.7 million) and the excess of the redemption price of the
Redeemable Preferred Stock over the carrying amount at April 30, 1996 ($12.3
million). These costs are offset by the minority interest share of losses in
subsidiaries of approximately $0.6 million.
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. SALE OF TELEPORTS:
In December 1995, the Company received approximately $21.1 million from the
purchaser of four of its teleports in partial payment for the assets and entered
into a management agreement with the purchaser whereby the purchaser took over
the teleport operations. Upon FCC approval of the transaction the Company
completed the sale in March 1996 and received an additional $0.4 million due to
certain closing adjustments. Total proceeds received were $21.5 million and the
Company recognized a loss of approximately $0.8 million on the sale. Revenue
associated with these assets was approximately $2.3 million and $6.8 million for
the three and nine months ended June 30, 1995, respectively, and $2.5 million
for the three months ended December 31, 1995. The Company has reported results
of operations from these assets through December 31, 1995.
9. COMMITMENTS AND CONTINGENCIES:
(a) Network Construction
In November 1995, the Company signed an agreement with City Public Service
of San Antonio ("CPS") to license excess fiber optic facilities on a new 300-
mile fiber network being built by the municipally owned electric and gas utility
to provide for its communications needs in the greater metropolitan area.
Pursuant to this agreement the Company has provided a $12.0 million irrevocable
letter of credit to finance the Company's portion of the construction costs.
The letter of credit is secured by cash collateral of $13.3 million.
SBC Communications, Inc. ("SBC") has alleged before the San Antonio city
council that the Company's agreement to lease dark fiber from CPS in greater San
Antonio violates state law and has sought a city council resolution recommending
that CPS rescind the contract with the Company. The assertion of SBC is that CPS
would, through its license arrangement with the Company, be providing
telecommunications services in contravention of Texas state law. Following
passage of that state law in 1995, the Telecommunications Act was enacted. In
May 1996, the Company filed a petition with the FCC asking it to declare that
the national pro-competitive policy in the Telecommunications Act does not allow
the application of the Texas law in a way that precludes implementation of the
agreement between the Company and CPS. The FCC has instituted a proceeding to
consider the Company's request and is expected to rule on this issue before the
end of the year. At the same time, the Company has applied for a franchise from
the city of San Antonio to provide telecommunications services.
In February 1996, the Company entered into a 20-year agreement with
WorldCom, Inc. ("WorldCom") under which the Company will pay approximately $8.8
million for the right to use fiber along a 330-mile fiber optic network in Ohio.
The network is being constructed by WorldCom in conjunction with the Company.
An aggregate of approximately $2.6 million has been paid by the Company through
June 30, 1996, with the balance due upon the completion of specified segments of
the network.
In the second quarter of 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. The agreement
also allows the Company to utilize SCE's facilities to install up to 500
additional miles of fiber optic cable. Under the terms of this agreement, SCE
will be entitled to receive an annual fee for ten years, certain fixed quarterly
payments, including 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 this 25-year agreement totaled approximately
$142.8 million at June 30, 1996. The agreement has been accounted for as
construction in progress and as a capital lease in the accompanying consolidated
balance sheets, with balances of $50.4 million and $49.8 million, respectively,
as of June 30, 1996.
In March 1996, the Company entered into a long-term agreement with a
subsidiary of The Southern Company ("Southern") and Alabama Power Company
("Alabama Power") for the right to use 22 miles of existing fiber and 122 miles
of additional Alabama Power rights of way and facilities to reach the three
major business centers in Birmingham. Southern will, in conjunction with the
Company, construct the network and provide maintenance services with respect to
the fiber installed. Southern also will provide consulting services to the
Company relating to the buildout of the network and potential enhancements to
the Company's products and services. Under the agreement, the Company is
required to pay Southern a quarterly fee based on specified percentages of the
Company's revenue for services provided through this network.
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In addition to the above agreements, the Company has entered into
commitments to purchase assets with an aggregate purchase price of approximately
$13.0 million at June 30, 1996.
(b) Litigation
Four putative class action complaints have been filed in the U.S. District
Court for the District of Colorado by shareholders of the Company naming the
Company and certain of its current and former officers and directors as
defendants. The complaints allege that the defendants violated the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), with respect to the
content and timing of certain disclosures. The complaints seek damages for all
persons who purchased common shares of the Company between May 16, 1994 and May
16, 1995. The Company has filed an answer, discovery has commenced and the
plaintiffs have recently filed a motion for class certification. After
consultation with legal counsel, the Company believes that it has meritorious
defenses and intends to vigorously defend these lawsuits.
The Company is a party to certain other litigation which has arisen in the
ordinary course of business. In the opinion of management and legal counsel,
the ultimate resolution of these matters will not have a significant effect on
the financial condition of the Company.
10. SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY
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 Senior Notes issued by Holdings in August 1995 and April 1996.
However, summarized consolidated financial information for Holdings and
subsidiaries as of September 30, 1995 and June 30, 1996 and for the nine months
ended June 30, 1995 and 1996 is as follows (in thousands):
Summarized Consolidated Balance Sheet Information
<TABLE>
<CAPTION>
September 30, 1995 June 30, 1996
------------------ -------------
<S> <C> <C>
Current assets $ 309,208 559,314
Property and equipment, net 201,983 305,760
Other noncurrent assets, net 66,737 93,701
Current liabilities 60,036 51,945
Long-term debt, less current portion 304,666 648,108
Due to shareholder 238,282 10,000
Other noncurrent liabilities 37,214 76,440
Preferred stock 14,986 147,711
Shareholders' equity (deficit) (77,256) 24,571
</TABLE>
Summarized Consolidated Statement of Operations Information
<TABLE>
<CAPTION>
Nine Months Ended June 30,
1995 1996
------------ ------------
<S> <C> <C>
Total revenue $ 50,556 115,989
Total operating costs and expenses 67,437 164,608
Operating loss (16,881) (48,619)
Net loss attributable to common shareholders (19,576) (117,592)
</TABLE>
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion includes certain forward-looking statements which
are affected by important factors including, but not limited to, dependence on
increased traffic on the Company's facilities, increased Satellite Services
revenue from the cruise ship and U.S. Navy telephone services business and
actions of competitors and regulatory authorities that could cause actual
results to differ materially from the forward-looking statements.
COMPANY OVERVIEW
The Company provides Telecom Services, Network Services and Satellite
Services. Telecom Services consist of the Company's CLEC (competitive local
exchange company) operations. The Company is one of the largest providers of
competitive local access services in the United States, based on estimates of
the industry's 1995 revenue. CLECs, formerly known as CAPs (competitive access
providers), seek to provide an alternative to the local exchange telephone
company ("LEC") for a full range of telecommunications services in the newly
opened federal regulatory environment. The Company operates networks in 37
cities with populations in excess of 100,000, has recently acquired fiber optic
facilities in 22 more cities and has networks under construction in four
additional cities. As a result, the Company now serves more Tier II and Tier
III markets with populations of between 250,000 and 2,000,000 than any other
CLEC in the United States, with a significant presence in regional clusters
covering major metropolitan areas in California, Colorado and the Ohio Valley.
Network Services consist of information technology services, network design and
installation, and support of network systems. Satellite Services consist of
maritime and international satellite transmission services. As a leading
participant in a rapidly growing industry, the Company has experienced
significant growth, with total revenues increasing from $7.6 million for fiscal
1992 to $111.6 million for fiscal 1995 and $148.0 million for the 12-month
period ended June 30, 1996. The Company's rapid growth since 1990 is the
result of the initial installation, acquisition and subsequent expansion of its
networks, the acquisition and growth of its network systems integration business
and growth in Satellite Services.
The Company commenced the design and construction of its first fiber optic
network in Denver in 1990, which became operational to a limited extent in May
1991. During 1992 and 1993, the Company continued to build out its Denver
network. The Company began construction of its fiber optic network in Phoenix
during 1993 and expanded this network throughout 1994. During 1994, the Company
commenced construction of networks in Akron, Boulder, Colorado Springs, Columbus
and Nashville. The Company also acquired operating networks serving Charlotte,
Cleveland, Dayton, Louisville, Melbourne(Florida), Sacramento and 17 cities
with populations in excess of 100,000 in the Los Angeles and San Francisco
metropolitan areas. In addition, in 1995 the Company commenced development of
fiber optic networks in Birmingham and Greensboro/Winston-Salem. During 1996,
the Company acquired fiber optic facilities in 22 additional cities in the Los
Angeles metropolitan area through its agreement with SCE and is developing
networks in Cincinnati and San Antonio. The Company is in the process of
selling its networks in Melbourne and Phoenix. The Company's operating networks
have grown from approximately 12,000 customer voice grade equivalent circuits
("VGEs") at the end of fiscal 1992 to approximately 431,000 VGEs at the end of
fiscal 1995 and 522,000 VGEs as of June 30, 1996. This has driven Telecom
Services revenue from $1.1 million for fiscal 1992 to $32.3 million for fiscal
1995 and $65.8 million for the 12-month period ended June 30, 1996. Since
initiation of competitive access services, the Company has experienced declining
access rates and increasing price competition which have been more than offset
by increasing network usage. The Company expects to continue to experience
declining access rates for the foreseeable future.
In the third and fourth quarters of fiscal 1994 and throughout fiscal 1995,
the Company launched its switched services strategy by acquiring 13 high
capacity digital switches. The Company has installed switches in Birmingham,
Charlotte, Cleveland, Columbus, Denver, Irvine, Los Angeles, Louisville,
Melbourne, Nashville, Oakland, Phoenix and Sacramento. The Company financed the
acquisition of 12 of the switches pursuant to capital leases totaling $24.5
million. The Company began generating switched services revenue in the fourth
quarter of fiscal 1994 and expects revenue from switched services to continue to
increase. The Company's switched services revenue has increased from $20,000 in
the first quarter of fiscal 1995 to $14.7 million in the third quarter of fiscal
1996.
The Company expects to continue to experience negative operating margins
from the provision of switched services while its networks are in the
development and construction phases, during which the Company relies on LEC
networks to carry a significant portion of its customers' traffic. The Company
expects to realize improved operating margins for switched services on a given
network when (i) sales efforts result in increased volumes of traffic carried on
the Company's own network instead of LEC facilities, and (ii) higher margin
enhanced services are provided to customers on the network. In addition, the
Company believes that the unbundling of LEC services and the implementation of
local telephone number portability, which are mandated by the Federal
Telecommunications Act of 1996 and are being implemented by the FCC, will
reduce the Company's costs of providing switched services and facilitate the
marketing of such services. However, the Company's switched services strategy
has not yet been profitable and may not become profitable due to, among other
factors, lack of customer demand, competition from other CLECs and pricing
pressure from the LECs. In addition, in order to fully implement its switched
services strategy,
13
<PAGE>
the Company must make significant capital expenditures to provide additional
switching capacity, network infrastructure and electronic components. The
Company has limited experience providing switched services and there can be no
assurance that the Company will be able to successfully implement its switched
services strategy.
The Federal Telecommunications Act of 1996 (the "Telecommunications Act"),
the FCC's August 1996 decision implementing the Telecommunications Act and
several state regulatory initiatives have substantially changed the
telecommunications regulatory environment in the United States. Due to these
regulatory changes, the Company is now permitted to offer all interstate and
intrastate switched services, including local dial tone (which the Company
intends to begin offering in California, Ohio and Colorado in the second half of
calendar 1996). The Company's high capacity digital switches will enable the
Company to offer these services in all of its markets.
In response to these regulatory changes, the Company is accelerating the
development of its Telecom Services business and, in order to facilitate rapid
and cost-effective expansion, is investing significant resources to expand its
network footprint and service offerings and is entering into agreements with
utility companies and other local strategic partners. The Company has entered
into long-term agreements with four utilities, SCE, CPS, a subsidiary of
Southern and most recently with subsidiaries of Ohio-based American Electric
Power ("AEP"). Under the SCE, CPS and Southern agreements, the Company is
licensing fiber optic facilities in Southern California (1,258 miles), San
Antonio (300 miles, 60 of which currently exist) and Birmingham (144 miles, 22
of which currently exist). Under the AEP agreement, the Company will jointly
build a 45-mile network addition in metropolitan Columbus, plus a 138-mile long-
haul link to Canton, Ohio. The Company also has invested in ICG Telecom of San
Diego, which operates a fiber optic network (50 miles) in metropolitan San
Diego.
In the second quarter of 1996, the Company and SCE entered into an
agreement under which the Company will license 1,258 miles of fiber optic cable
in Southern California. This network, which will be operated and maintained by
the Company, stretches from suburban Los Angeles to San Diego. In addition, the
agreement allows the Company to utilize SCE's facilities to install up to 500
additional miles of fiber optic cable. The Company has identified over 1,300
buildings which will be targeted by the Company for connection to the network.
The Company believes this agreement is strategically important to enhancing its
market position in California and providing it with a fiber optic infrastructure
in a timely, cost-effective manner.
The Company recently invested $10.0 million to acquire a 60% interest in,
and became the general partner of, ICG Telecom of San Diego, a partnership whose
other partners are Linkatel Communications, Inc. and The Copley Press Inc., the
publisher of The San Diego Union Tribune. ICG Telecom of San Diego operates a
50-mile fiber optic network and is constructing an additional 110 miles of fiber
in metropolitan San Diego. As a result of the ICG Telecom of San Diego
acquisition, combined with the Company's existing California networks and the
facilities under agreement with SCE, the Company now has a network presence in
all major metropolitan areas of California.
In March 1996, the Company entered into a national contract with AT&T Corp.
("AT&T") under which the Company will provide special and switched access
services to AT&T on a non-exclusive basis. The Company and AT&T initially have
identified 12 MSAs (metropolitan statistical areas) in which the Company will
provide services to AT&T and are in discussions with respect to seven additional
MSAs in which the Company may provide services. The Company believes that this
agreement is indicative of a trend by long distance carriers to shift
origination and termination of long distance traffic away from LEC networks to
the facilities of CLECs. Under the agreement, the Company will work with AT&T
to provide special and switched access services in the Company's other markets
and new markets which the Company may enter.
In March 1996, the Company entered into a long-term license agreement with
a subsidiary of Southern and Alabama Power, for the right to use 22 miles of
existing fiber and 122 miles of additional Alabama Power rights of way and
facilities to reach the three major business centers in Birmingham.
In November 1995, the Company entered into a long-term agreement with CPS
to license half of the capacity on a 300-mile fiber optic network (60 of which
currently exist) in greater San Antonio. CPS will construct the remaining 240-
mile network in conjunction with the Company. It is anticipated that the
network will be able to service 120 buildings when completed in approximately
two years. During construction, the Company will be able to provide services to
completed segments of the network.
In February 1996, the Company entered into a long-term agreement with
WorldCom under which the Company will pay approximately $8.8 million for the
right to use fiber along a 330-mile fiber optic network in Ohio. The network,
which is being constructed by WorldCom in conjunction with the Company, will
provide a direct fiber link between the Company's existing networks in Akron,
Cleveland, Columbus and Dayton and its new network under development in
Cincinnati.
The continued development, construction and expansion of the Company's
business requires significant capital, a large portion of which is expended
before any revenue is generated. The Company has experienced, and expects to
continue to experience, negative cash flow and significant losses while it
implements its switched services strategy, expands its operations and
establishes a sufficient revenue-generating customer base. There can be no
assurance that the Company will be able to
14
<PAGE>
establish such a customer base. When constructing and relying principally on its
own facilities, the Company has experienced a period of up to 18 months from
initial design of a network to revenue generation for that network. However,
based upon its experience with using leased LEC facilities to provide initial
customer service and the Company's new agreements to use utilities' existing
fiber, the Company anticipates accelerating initial revenue generation to within
six to nine months after commencing network design.
In April 1996, Holdings completed the Private Placement of (i) $550.3
million principal amount of 12 1/2% Notes, for gross proceeds of $300.0 million,
which are guaranteed on a senior unsecured basis by ICG and ICG Communications,
Inc., and (ii) 150,000 shares of Preferred Stock for gross proceeds of $150.0
million. The net proceeds from the Private Placement totaled $433.0 million
after transaction fees and expenses of $17.0 million. Of the net proceeds,
$35.3 million was used to redeem Redeemable Preferred Stock and to purchase
redeemable warrants previously issued by Holdings, and approximately $397.7
million will be used for capital expenditures and to fund net operating losses
over the next 20 months. The Company believes that its liquidity has improved
because the 12 1/2% Notes do not require the payment of cash interest prior to
2001 and do not require payment of principal until maturity in 2006 and
dividends on the Preferred Stock are payable in additional Preferred Stock
through May 1, 2001.
The Company first began providing Satellite Services in 1990 when it
acquired its Denver teleport facility, which has since been sold. Growth in
Satellite Services revenue has resulted principally from increased transmissions
of video programming, the acquisitions of satellite teleports in the Los
Angeles, Atlanta and New York metropolitan areas in 1994 (all of which have
been sold), the acquisition of Nova-Net Communications, Inc. in 1994, the
acquisition of a 64% interest in Maritime Telecommunication Network, Inc.
("MTN") in January 1995 and the acquisition of a 90% interest in MCN in March,
1996. The Company acquired a 51% interest in FOTI, which accounts for most of
the Company's Network Services, in May 1992 and the remaining 49% in January
1996. As a result of the significant lag time between commencement of network
development and generation of appreciable related Telecom Services revenue, the
majority of the Company's revenue historically has been derived from Network
Services. However, the Company's Network Services revenue (as well as Satellite
Services revenue) will continue to represent a diminishing percentage of the
Company's consolidated revenue as the Company continues to emphasize its Telecom
Services.
At the Annual and Special Meeting of the Shareholders held on July 30,
1996, the shareholders of IntelCom approved a Plan of Arrangement ("Plan") under
which IntelCom became a subsidiary of a new publicly traded U.S. corporation,
ICG Communications, Inc. The Plan was approved by the Ontario Court of Justice
(General Division) on August 2, 1996. Pursuant to the Plan, each shareholder of
IntelCom has exchanged their common shares for either (i) new Class A shares of
IntelCom (which are exchangeable into shares of common stock, $.01 par value, of
ICG Communications, Inc.), or (ii) shares of common stock, $.01 par value, of
ICG Communications, Inc. IntelCom's name was also changed to ICG Holdings
(Canada), Inc. More than 98% of the issued and outstanding shares of IntelCom
have been exchanged for shares of ICG Communications, Inc. As a result of the
Plan, IntelCom's common shares ceased trading on the American Stock Exchange
("AMEX") at the close of trading on August 2, 1996, and ICG Communications,
Inc.'s common stock began trading on the AMEX on August 5, 1996, under the
symbol "ICG." ICG's new Class A shares will continue to be listed on the
Vancouver Stock Exchange under a new symbol, "IHC.A." Substantially all of the
Company's operations (which are conducted by Holdings' subsidiaries) are located
in the United States. In addition, the Company views the United States as its
primary source for raising capital in the future and the Company believes that
the U.S. incorporation will facilitate access to such markets and increase its
flexibility to meet its future financing needs. Also, certain aspects of the
Company's operations are regulated by the FCC, which imposes restrictions on the
interests a foreign company may hold in telecommunications businesses in the
United States. The Company also has announced it will be changing its fiscal
year to a calendar year beginning in 1997.
15
<PAGE>
RESULTS OF OPERATIONS
The following table provides a breakdown of revenue and cost of services
for Telecom Services, Network Services, Satellite Services and certain other
financial data for the Company for the periods indicated. The table also shows
certain revenue, expenses, operating loss and EBITDA as a percentage of the
Company's total revenue.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------------------------ ----------------------------------------
1995 1996 1995 1996
------------------------- --------------------- -------------------- ------------------
$ % $ % $ % $ %
----------- ----------- ------------ -------- ---------- -------- ---------- -------
(unaudited) (unaudited)
Revenue: (in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Telecom services (1) 9,173 32 24,371 55 22,007 28 55,519 48
Network services 14,061 48 14,679 33 42,850 54 44,370 38
Satellite services 5,825 20 5,596 12 14,758 18 16,100 14
-------------------- ------------------------------------------------------------------
Total revenue 29,059 100 44,646 100 79,615 100 115,989 100
Cost of services:
Telecom services 6,265 18,186 11,980 39,805
Network services 10,794 10,569 33,993 33,625
Satellite services 3,165 2,415 7,504 7,564
-------------------- ------------------------------------------------------------------
Total cost of services 20,224 70 31,170 70 53,477 67 80,994 70
Selling, general and administrative 16,681 57 24,683 55 44,166 55 64,922 56
Depreciation and amortization 4,597 16 9,055 20 11,704 15 21,416 18
-------------------- ------------------------------------------------------------------
Operating loss (12,443) (43) (20,262) (45) (29,732) (37) (51,343) (44)
EBITDA (2) (7,846) (27) (11,207) (25) (18,028) (23) (29,927) (26)
Supplemental Pro Forma Data (1):
Telecom services revenue 8,835 31 24,371 55 21,029 27 55,519 48
Total revenue 28,721 100 44,646 100 78,637 100 115,989 100
Operating loss (12,781) (45) (20,262) (45) (30,710) (39) (51,343) (44)
EBITDA (8,184) (28) (11,207) (25) (19,006) (24) (29,927) (26)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
STATISTICAL DATA: June 30, September 30, June 30,
Telecom networks: 1995 1995 1996
-------------------------------------------------
Cities served 32 32 37
Cities under construction or development - - 26
-------------------------------------------------
Total cities 32 32 63
Buildings connected:
On-net 273 280 384
Off-net 978 1,095 1,493
-------------------------------------------------
Total buildings connected 1,251 1,375 1,877
Customer circuits in service (VGEs) 389,928 430,535 521,890
Switches operational 12 13 13
Switched minutes of use (millions) (3) 97 144 475
Fiber route miles: (4)
Operational 579 627 886
Under construction - - 2,100
Fiber strand miles: (5)
Operational 25,264 27,150 45,098
Under construction - - 58,660
Wireless miles (6) 606 568 483
Satellite Services:
VSATs 687 626 659
C-Band installations (7) 25 28 48
L-Band installations (8) - - 53
Minutes of use (thousands)(3)(9) 479 694 1,135
</TABLE>
(Accompanying footnotes are on the following page)
16
<PAGE>
(1) Effective January 1, 1996, the Company changed its method of
accounting for long-term telecom services contracts to recognize
revenue as services are provided. See "--Accounting Matters--
Accounting Changes." As required by generally accepted accounting
principles, the Company has reflected the effects of the change in
accounting as if such change had been adopted as of October 1, 1995,
and is presenting the pro forma effects on prior periods assuming the
change had been applied retroactively.
(2) EBITDA consists of operating loss plus depreciation and amortization.
EBITDA is provided because it is a measure commonly used in the
telecommunications industry. It is presented to enhance an
understanding of the Company's operating results and is not intended
to represent cash flow or results of operations in accordance with
generally accepted accounting principles for the periods indicated.
(3) Amounts presented are for three-month periods.
(4) Fiber route miles refers to the number of miles of fiber optic cable,
including leased fiber. As of June 30, 1996, the Company had 886 fiber
route miles, of which 233 fiber route miles were leased. Fiber route
miles under construction represents fiber under construction and fiber
which is expected to be operational within six months.
(5) Fiber strand miles refers to the number of fiber route miles,
including leased fiber, along a telecommunications path multiplied by
the number of fiber strands along that path. As of June 30, 1996, the
Company had 45,098 fiber strand miles, of which 2,635 fiber strand
miles were leased. Fiber strand miles under construction represents
fiber under construction and fiber which is expected to be operational
within six months.
(6) Wireless miles represents the total distance of the digital microwave
paths between Company transmitters which are used in the Company's
networks.
(7) C-Band frequencies service large cruise ships, navy vessels, and
off-shore platform installations.
(8) L-Band frequencies service smaller maritime installations and both
mobile and fixed land-based units.
(9) Reflects minutes of use for C-Band installations and, for the three
months ended June 30, 1996, also includes minutes of use for the
L-Band installations.
THREE MONTHS ENDED JUNE 30, 1996, COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
The following information reflects the results of operations for the three
months ended June 30, 1996, compared to the pro forma results of operations for
the three months ended June 30, 1995, assuming the change in accounting for
long-term telecom services contracts described in "--Accounting Matters--
Accounting Changes" had been applied retroactively.
Revenue. Revenue for the three months ended June 30, 1996, increased
$15.9 million, or 55.4%, from the three months ended June 30, 1995. The
increase in total revenue reflects continued growth in Telecom Services and
Network Services, offset slightly by the decline in Satellite Services revenue
resulting from the sale of four of the Company's teleports. Telecom Services
revenue increased 175.8% to $24.4 million due to an increase in network usage
for both special and switched access services, offset in part by a decline in
average access rates. The number of operational switches increased from 12 as
of June 30, 1995, to 13 as of June 30, 1996. Switched services revenue
increased from $2.4 million (27.3% of Telecom Services revenue) for the quarter
ended June 30, 1995, to $14.7 million (60.2% of Telecom Services revenue) for
the quarter ended June 30, 1996. Network usage as reflected in VGEs increased
33.8% from 389,928 VGEs on June 30, 1995, to 521,890 VGEs on June 30, 1996. On
June 30, 1995, the Company had 273 on-net buildings connected to its networks
compared to 384 on-net buildings connected on June 30, 1996. Network Services
revenue increased 4.4% to $14.7 million primarily due to additional projects
from existing customers and increased business networking requirements.
Consistent with expectations, Network Services revenue growth has been moderate
while the Company continues to reposition its systems and operations to better
manage its bottom line growth. Satellite Services revenue decreased 3.9% from
$5.8 million for the three months ended June 30, 1995 to $5.6 million for the
three months ended June 30, 1996. The decrease resulted from the sale of four
of the Company's teleports. The decrease was partially offset by an increase in
maritime services revenue from MTN and MCN, which the Company acquired in March
1996. Satellite Services revenue increased $1.3 million from the second quarter
of fiscal 1996 as a result of the purchase of MCN in March 1996, and increased
maritime minutes of use from cruise ships. Satellite Services revenue for the
three months ended June 30, 1995, on a pro forma basis to reflect the recent
sale of the teleports, was $3.5 million.
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Cost of services. Total cost of services for the three months ended June
30, 1996 increased $10.9 million, or 54.1%, from the three months ended June 30,
1995. Telecom cost of services increased from $6.3 million, or 70.9%, of
Telecom Services revenue for the three months ended June 30, 1995, to $18.2
million, or 74.6%, of Telecom Services revenue for the three months ended June
30, 1996. Telecom cost of services consists of payments to LECs for the use of
network facilities to support off-net and switched services, right of way fees
and other costs. The increase in absolute dollars is attributable to the
increase in switched services and the expansion in off-net special access
service offerings. The increase in the cost of services as a percentage of total
revenue is due primarily to the increase in revenue from switched services,
which currently generate lower margins than special access revenue. The Company
expects that its Telecom Services ratio of cost of services to revenue will
continue to increase until the Company carries more traffic on its own
facilities, provides a sufficient volume of higher margin enhanced services,
including local dial tone, and obtains the right to use unbundled LEC facilities
on satisfactory terms, any or all of which may not occur. Network cost of
services decreased 2.1% to $10.6 million, and also decreased as a percentage of
Network Services revenue from 76.8% for the three months ended June 30, 1995, to
72.0% for the three months ended June 30, 1996, due to an improved job bidding
process and a more selective job acceptance process, whereby more acceptable
gross margins were obtained. Network cost of services includes the cost of
equipment sold, direct hourly labor and other direct project costs. Satellite
cost of services decreased to $2.4 million for the three months ended June 30,
1996, from $3.2 million for the three months ended June 30, 1995. Satellite cost
of services as a percentage of revenue also declined from 54.3% at June 30,
1995, to 43.2% at June 30, 1996. The decrease both in absolute dollars and as a
percentage of revenue is attributable to the sale of four of the Company's
teleports, partially offset by the increase in maritime services revenue at MTN.
Satellite cost of services consists of MTN transponder costs, VSAT network costs
and costs of VSAT equipment sold and, for the three months ended June 30, 1995,
also includes other satellite transponder lease costs. Revenue from teleport
operations historically have yielded lower gross margins than revenue from the
cruise ship and U.S. Navy telephone services business of MTN. Gross margins for
Satellite Services has and should continue to improve as a result of the sale of
the teleports. The expectation described in the foregoing forward-looking
statement is dependent upon, among other things, increased Satellite Services
revenue from the cruise ship and U.S. Navy services business and lack of a new
technology which could potentially render the Company's satellite facilities
obsolete.
Selling, general and administrative ("SG&A") expense. SG&A expense for
the three months ended June 30, 1996, increased $8.0 million, or 48.0%, compared
to the three months ended June 30, 1995. This increase was principally due to
the continued rapid expansion of the Company's Telecom Services networks and
related significant additions to the Company's engineering, operations,
management information systems, marketing and sales staff dedicated to the
expansion of the networks, implementation of the Company's switched services
strategy and development of local dial tone. A portion of the increase was also
attributable to approximately $1.4 million of legal, accounting, and SEC filing
fees incurred in the reorganization of the Company as a new publicly traded
U.S. corporation, ICG Communications, Inc. and approximately $0.4
million of consulting fees relating to various process improvement initiatives.
SG&A expense as a percentage of total revenue declined to 55.3% for the three
months ended June 30, 1996, from 58.1% for the comparable period in 1995. There
is typically a period of higher administrative and marketing expense prior to
the generation of appreciable revenue from newly acquired or developed networks.
The Company expects SG&A expense for Telecom Services to increase over the near
term as a result of hiring new staff to facilitate the marketing and development
of local dial tone services. SG&A expense for Network Services increased due to
increased engineering, marketing and sales staff to support increased growth in
network systems builds.
Depreciation and amortization. Depreciation and amortization increased $4.5
million, or 97.0%, for the three months ended June 30, 1996, compared to the
three months ended June 30, 1995. Depreciation of fixed assets increased by
approximately $2.3 million as a result of the shortening of estimated
depreciable lives discussed in "--Accounting Matters" and also increased as a
result of the increased investment in depreciable fixed assets as a result of
the continued expansion of competitive access networks. The increase in
depreciation expense was offset slightly by the decrease in depreciable assets
resulting from the sale of four of the Company's teleports. The Company reports
high levels of depreciation relative to revenue during the early years of
operation of a new network because the full cost of a network is depreciated
using the straight line method despite the low rate of capacity utilization in
the early stages of network operation.
Interest expense. Interest expense increased by $28.5 million from $4.4
million for the three months ended June 30, 1995, to $32.9 million for the three
months ended June 30, 1996, which included $20.2 million of non-cash interest.
This increase was attributable to an increase in long-term debt, primarily the
13 1/2% Notes issued in the fourth quarter of fiscal 1995 and the 12 1/2% Notes
issued in April 1996, and an increase in capitalized lease obligations to
finance Telecom Services and Satellite Services equipment. Also included in
interest expense is a charge of approximately $11.5 million for the payments
made to noteholders with respect to consents to amendments to the 13 1/2% Notes
Indenture in order to permit the Private Placement.
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Interest income. Interest income increased by $5.5 million from $0.5
million for the three months ended June 30, 1995, to $6.0 million for the three
months ended June 30, 1996. The increase is attributable to the increase in
cash from the proceeds of the issuance of 13 1/2% Notes in August 1995 and 12
1/2% Notes and the Preferred Stock in April 1996.
Share of losses of joint venture. Share of losses of joint venture
increased $0.3 million, or 129.1%, from the three months ended June 30, 1995, to
$0.4 million for the three months ended June 30, 1996. This increase is due to
increased losses of the Phoenix network joint venture in which the Company holds
a 50% equity interest. The losses of the joint venture increased due to
continued expansion and implementation of switched services at low margins.
Other, net. Other, net decreased $1.2 million for the three months ended
June 30, 1996 from net income of $0.7 million for the three months ended June
30, 1995 to net expense of $0.5 million for the three months ended June 30,
1996. The majority of the change is due to the reclassification of a litigation
accrual totaling $0.5 million to SG&A expense during the three months ended
June 30, 1995, and a $0.3 million write-off of an investment during the three
months ended June 30, 1996.
Minority interest in share of losses (earnings), accretion and preferred
dividends. Minority interest in share of losses (earnings), accretion and
preferred dividends increased $16.4 million, from an expense of $0.2 million for
the three months ended June 30, 1995, to an expense of approximately $16.6
million for the three months ended June 30, 1996. The majority of the increase
is due to a charge of approximately $12.3 million for the excess of the
redemption price of the Redeemable Preferred Stock over the carrying amount at
April 30, 1996. Also included is the accretion of warrants and issue costs
associated with the issuance of the Redeemable Preferred Stock in August 1995
($0.5 million), accrual of the Redeemable Preferred Stock dividend ($0.3
million), and the dividend accrual on the Preferred Stock issued in April 1996
($3.6 million).
Income tax benefit. There was no income tax expense or benefit recorded
for the three months ended June 30, 1996 compared to a $0.1 million income tax
benefit for the three months ended June 30, 1995. The income tax benefit in
1995 was due to a tax refund received by FOTI.
NINE MONTHS ENDED JUNE 30, 1996, COMPARED TO NINE MONTHS ENDED JUNE 30, 1995
The following information reflects the results of operations for the nine months
ended June 30,1996, compared to the pro forma results of operations for the nine
months ended June 30, 1995, assuming the change in accounting for long-term
telecom services contracts described in "--Accounting Matters--Accounting
Changes" had been applied retroactively.
Revenue. Revenue for the nine months ended June 30, 1996 increased $37.4
million, or 47.5%, from the nine months ended June 30, 1995. The increase in
total revenue reflects continued growth in Telecom Services, Network Services
and Satellite Services operations. Telecom Services revenue increased 164.0% to
$55.5 million due to an increase in network usage for both special and switched
access services, offset in part by a decline in average access rates. The number
of operational switches increased from 12 as of June 30, 1995, to 13 as of June
30, 1996. Switched services revenue increased from $3.5 million (16.7% of
Telecom Services revenue) for the nine months ended June 30, 1995, to $29.7
million (53.5% of Telecom Services revenue) for the nine months ended June 30,
1996. Network usage as reflected in VGEs increased 33.8% from 389,928 VGEs on
June 30, 1995 to 521,890 VGEs on June 30, 1996. On June 30, 1995, the Company
had 273 on-net buildings connected to its networks compared to 384 on-net
buildings connected on June 30, 1996. Network Services revenue increased 3.5% to
$44.4 million primarily due to additional projects from existing customers and
increased business networking requirements. Satellite Services revenue increased
9.1% to $16.1 million for the nine months ended June 30, 1996. The increase
resulted principally from the acquisition of MTN in January 1995, the increased
volume of uplink hours for the three months ended December 31, 1995 and the
acquisition of MCN in March 1996, offset by the decrease resulting from the sale
of four of the Company's teleports. Satellite Services revenue increased $1.3
million from the second quarter of fiscal 1996 to the third quarter of fiscal
1996 as a result of the purchase of MCN in March 1996, and increased maritime
minutes of use from cruise ships.
Cost of services. Total cost of services for the nine months ended June
30, 1996, increased $27.5 million, or 51.5%, from the nine months ended June 30,
1995. Telecom cost of services increased from $12.0 million, or 57.0%, of
Telecom Services revenue for the nine months ended June 30, 1995, to $39.8
million, or 71.7%, of Telecom Services revenue for the nine months ended June
30, 1996. Telecom cost of services consists of payments to LECs for the use of
network facilities to support off-net and switched services, right of way fees
and other costs. The increase in absolute dollars is attributable to the
increase in switched services and the expansion in off-net special access
service offerings. The increase in the cost of services as a percentage of total
revenue is due primarily to the increase in switched services revenues, which
currently generate lower margins than special access services. The Company
expects that the Telecom Services ratio of cost of services to revenue will
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continue to increase until the Company carries more traffic on its facilities,
provides a sufficient volume of higher margin enhanced services, including local
dial tone, and obtains the right to use unbundled LEC facilities on satisfactory
terms, any or all of which may not occur. Network cost of services decreased
1.1% to $33.6 million and also decreased as a percentage of Network Services
revenue from 79.3% for the nine months ended June 30, 1995, to 75.8% for the
nine months ended June 30, 1996, due to an improved job bidding process and a
more selective job acceptance process, whereby improved gross margins have been
obtained. Network cost of services includes the cost of equipment sold, direct
hourly labor and other direct project costs. Satellite cost of services
increased to $7.6 million for the nine months ended June 30, 1996, from $7.5
million for the nine months ended June 30, 1995. Satellite cost of services as a
percentage of revenue decreased to 47.0% at June 30, 1996, compared to 50.8% at
June 30, 1995, due to the sale of four of the Company's teleports which had
yielded lower gross margins than revenue from the cruise ship and U.S. Navy
telephone services business of MTN. The increase in absolute dollars was
attributable to an increased volume of Satellite Services business primarily due
to the increase in maritime services revenue. Satellite cost of services
consists of satellite transponder lease costs (for the prior period and for the
three months ended December 31, 1995), MTN transponder costs, VSAT network costs
and costs of VSAT equipment sold. Gross margins for Satellite Services should
continue to improve as a result of the sale of the teleports. The expectation
described in the foregoing forward-looking statement is dependent upon, among
other things, increased Satellite Services revenue from the cruise ship and U.S.
Navy telephone services business and lack of a new technology which potentially
could render the Company's leased satellite facilities obsolete.
Selling, general and administrative expense. SG&A expense for the nine
months ended June 30, 1996, increased $20.8 million, or 47.0%, compared to the
nine months ended June 30, 1995. This increase was principally due to the
continued rapid expansion of the Company's Telecom Services networks and related
significant additions to the Company's engineering, operations, management
information systems, marketing and sales staff dedicated to the expansion of the
networks, implementation of the Company's switched services strategy and
development of local dial tone. A portion of the increase was also attributable
to approximately $1.6 million of legal, accounting, and SEC filing fees incurred
in the reorganization of the Company as a new publicly traded U.S. corporation,
ICG Communications, Inc. and approximately $.5 million of consulting fees
relating to various process improvement initiatives. SG&A expense as a
percentage of total revenue remained relatively constant at 56.0% for the nine
months ended June 30, 1996, compared to 56.2% for the comparable period in 1995.
There is typically a period of higher administrative and marketing expense prior
to the generation of appreciable revenue from newly acquired or developed
networks. SG&A expense for Network Services increased due to increased
engineering, marketing and sales staff to support increased growth in network
systems builds. Satellite Services SG&A expense increased primarily due to the
acquisition and continued growth of MTN.
Depreciation and amortization. Depreciation and amortization increased
$9.7 million, or 83.0%, for the nine months ended June 30, 1996, compared to the
nine months ended June 30, 1995. Depreciation of fixed assets increased by $4.6
million as a result of the shortening of estimated depreciable lives discussed
in "--Accounting Matters", and also increased as a result of the increase in
depreciable fixed assets as a result of the continued expansion of competitive
access networks. The increase in depreciation expense was offset slightly by
the decrease in depreciable assets resulting from the sale of four of the
Company's teleports. The Company reports high levels of depreciation relative
to revenues during the early years of operation of a new network because the
full cost of a network is depreciated using the straight line method despite the
low rate of capacity utilization in the early stages of network operation.
Interest expense. Interest expense increased by $51.8 million, from
$10.6 million for the nine months ended June 30, 1995, to $62.4 million for the
nine months ended June 30, 1996, which included $44.8 million of non-cash
interest. This increase was attributable to an increase in long-term debt,
primarily the 13 1/2% Notes issued in the fourth quarter of fiscal 1995 and the
12 1/2% Notes issued in April 1996, and an increase in capitalized lease
obligations to finance Telecom Services and Satellite Services equipment and the
expansion of the Company's competitive access networks. Also included in
interest expense is a charge of approximately $11.5 million for the payments
made to noteholders with respect to consents to amendments to the 13 1/2% Notes
Indenture in order to permit the Private Placement in April 1996.
Interest income. Interest income increased $10.6 million, from $1.8
million for the nine months ended June 30, 1995, to $12.4 million for the nine
months ended June 30, 1996. The increase is attributable to the increase in
cash from the proceeds of the issuance of 13 1/2% Notes in August 1995 and the
12 1/2% Notes in April 1996.
Share of losses of joint venture. Share of losses of joint venture
increased $0.7 million, or 128.1% from the nine months ended June 30, 1995, to
$1.3 million for the nine months ended June 30, 1996. This increase is due to
increased losses of the Phoenix network joint venture in which the Company holds
a 50% equity interest. The losses of the joint venture increased due to
continued expansion and implementation of switched services.
Other, net. Other, net decreased $2.8 million from net expense of $0.2
million for the nine months ended June 30,
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1995, to net expense of $3.0 million for the nine months ended June 30, 1996.
The majority of the increase is due to a $0.9 million loss on the sale of four
of the Company's teleports and certain other Satellite Services assets, a $0.5
million write-off of certain other assets and a $0.3 million dollar write-off of
an investment.
Minority interest in share of losses (earnings), accretion and preferred
dividends. Minority interest in share of losses (earnings), accretion and
preferred dividends increased $21.0 million from income of $0.3 million for the
nine months ended June 30, 1995, to an expense of approximately $20.7 million
for the nine months ended June 30, 1996. The majority of the increase is due to
a charge of approximately $12.3 million for the excess of the redemption price
of the Redeemable Preferred Stock over the carrying amount at April 30, 1996,
the accretion of warrants and issue costs associated with the issuance of the
Redeemable Preferred Stock ($3.3 million), accrual of the Redeemable Preferred
Stock dividend ($2.1 million) and the dividend accrual on the Preferred Stock
issued in April 1996 ($3.6 million).
Income tax benefit. Income tax benefit for the nine months ended June 30,
1996, was $4.5 million compared to a $0.1 income tax expense for the nine months
ended June 30, 1995. The income tax benefit is due to an adjustment to the
Company's deferred tax liability as a result of the change in estimated
depreciable lives of property and equipment.
Cumulative effect of change in accounting for revenue from long-term
telecom services contracts. The increase in cumulative effect of change in
accounting for revenue from long-term telecom services contracts is due to the
change in accounting as described in "--Accounting Matters--Accounting Changes."
Preferred stock dividend. The $1.0 million preferred stock dividend for
the nine months ended June 30, 1996, represents the excess redemption price over
the stated value of Convertible Series B Preferred Stock (the "Series B
Preferred Stock"). There was no Series B Preferred Stock outstanding during the
nine months ended June 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have required significant capital expenditures
for development, construction, expansion and acquisitions. Significant amounts
of capital are required to be invested before revenue is generated, which
results in initial negative cash flow.
Cash Used By Operating Activities
The Company's operating activities used $2.8 million, $10.2 million and
$56.2 million in fiscal 1993, 1994 and 1995, respectively, and $17.9 million and
$46.3 million for the nine months ended June 30, 1995 and 1996, respectively.
Cash used by operations is primarily due to net losses, which are partially
offset by non-cash expenses, such as depreciation and deferred interest expense,
and changes in working capital items.
The Company expects to continue to generate negative cash flow from
operating activities while it emphasizes development, construction and expansion
of its Telecom Services business. Consequently, it does not anticipate that
cash provided by operations will be sufficient to fund future expansion of
existing networks or the construction and acquisition of new networks in the
near term.
Cash Used By Investing Activities
Cash used by investing activities was $13.4 million, $51.5 million and
$71.3 million in fiscal 1993, 1994 and 1995, respectively, and $53.8 million and
$85.3 million (net of $21.6 million received in connection with the sale of
certain Satellite Services equipment, including four teleports) for the nine
months ended June 30, 1995 and 1996, respectively. Cash used by investing
activities includes cash expended for the acquisition of property, equipment and
other assets of $12.2 million, $43.2 million and $49.8 million for fiscal years
1993, 1994 and 1995, respectively, and $33.5 million and $82.6 million for the
nine months ended June 30, 1995 and 1996, respectively. The Company will
continue to use cash for the remainder of fiscal 1996 for the construction of
new networks, the expansion of existing networks and to fund net operating
losses. The Company acquired assets under capital leases and through the
issuance of debt or warrants of $8.4 million, $11.7 million and $38.7 million in
fiscal years 1993, 1994 and 1995, respectively, and $33.7 million and $49.6
million for the nine months ended June 30, 1995 and 1996, respectively. The
majority of assets acquired under capital leases and through the issuance of
debt during the nine months ended June 30, 1995, was for the purchase and
installation of 12 of the Company's 13 high capacity digital switches. Assets
acquired during the nine months ended June 30, 1996, under capital leases
primarily consisted of the fiber optic networks included in the SCE agreement.
In January 1994, the Company committed to provide $10.0 million in
financing to its Telecom joint venture in Phoenix, of which $6.9 million and
$9.2 million had been provided through September 30, 1995, and June 30, 1996,
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respectively. The acquisition in January 1995 of a 64% interest in MTN, $4.4
million convertible promissory notes of MTN and consulting and non-compete
agreements valued at an aggregate of $250,000, required cash payments of $9.0
million, the surrender and cancellation of a $0.6 million note and the issuance
of approximately $5.1 million in ICG common shares and funding of $2.7 million
in MTN working capital requirements. The Company also has agreed that if MTN has
not completed an initial public offering of its common stock by January 3, 1998,
the Company will, at the option of the minority shareholders, buy the minority
shares of MTN at the then fair market value.
The Company owns approximately 70.0% of the issued and outstanding common
stock of Zycom Corporation (Alberta, Canada), Zycom Corporation (Texas) and
Zycom Network Services, Inc. (collectively, "Zycom"). In March 1995, the
Company acquired a 56.0% equity interest in Zycom for approximately $3.2
million, consisting of $0.6 million in cash, the conversion of a $2.0 million
note receivable to equity of Zycom and the assumption of $0.6 million in debt.
In July 1995, the Company purchased an additional 2.0% of Zycom common stock
held by Zycom's former president and chief executive officer for approximately
$0.2 million. In March 1996, the Company acquired an additional approximate
12.0% equity interest in Zycom by converting a $3.2 million receivable due from
Zycom.
In March 1996, the Company sold four teleports and related assets for
approximately $21.5 million in cash.
In November 1995, the Company entered into a long-term agreement with CPS,
a municipally owned electric and gas utility, to license half of the capacity on
a 300-mile fiber optic network (60 of which currently exist) in greater San
Antonio. Pursuant to this agreement the Company has provided a $12.0 million
irrevocable letter of credit to finance the Company's portion of the
construction costs. The letter of credit is secured by cash collateral of $13.3
million.
On January 3, 1996, the Company acquired the remaining 49% minority
interest in FOTI, resulting in FOTI becoming a wholly owned subsidiary.
Consideration for the acquisition was $2.0 million in cash and 66,236 ICG common
shares valued at $0.8 million for total consideration of $2.8 million.
In February 1996, the Company invested $4.0 million and in April 1996
invested $6.0 million to acquire a 60% interest in, and become the general
partner of, ICG Telecom of San Diego.
In February 1996, the Company entered into a long-term agreement with
WorldCom under which the Company will pay approximately $8.8 million for the
right to use fiber along a 330-mile fiber optic network in Ohio. An aggregate
of approximately $2.6 million has been paid by the Company through June 30,
1996.
In the second quarter of 1996, the Company and SCE entered into an
agreement under which the Company will license 1,258 miles of fiber optic cable
in Southern California. An aggregate of approximately $3.6 million has been paid
by the Company through June 30, 1996.
In March 1996, the Company entered into a long-term agreement with
Southern and Alabama Power for the right to use 22 miles of existing fiber and
122 miles of additional Alabama Power rights of way and facilities to reach the
three major business centers in Birmingham for which the Company paid Southern
$3.0 million dollars.
Cash Provided (Used) By Financing Activities
Financing activities provided $30.4 million, $52.1 million and $390.9
million in fiscal 1993, 1994 and 1995, respectively, and $77.1 million and
$376.3 million for the nine months ended June 30, 1995, and 1996, respectively.
The significant change in cash provided in the nine months ended June 30, 1995,
to cash provided in the nine months ended June 30, 1996, is due to the
completion of the Private Placement in April 1996. The funds to finance the
Company's past business acquisitions, capital expenditures, working capital
requirements and operating losses were from public and private offerings of
ICG's common shares, units (the "Units") consisting of 13 1/2% Senior
Discount Notes due 2005 (the "13 1/2% Notes") and warrants (the "Unit Warrants")
to purchase ICG's common shares (the "Unit Offering"), 12% Redeemable Preferred
Stock of Holdings (the "Redeemable Preferred Stock"), 8% Convertible
Subordinated Notes and 7% Convertible Subordinated Notes (together the
"Convertible Subordinated Notes"), Convertible Preferred Shares of ICG, capital
lease financings and various working capital sources, including credit
facilities. The Company's funds have been obtained from the following sources:
(i) On April 30, 1996, Holdings completed the Private Placement of the 12
1/2% Notes and 150,000 shares of the Preferred Stock for aggregate net proceeds
of approximately $433.0 million. The net proceeds of the Private Placement,
along with the balance of the net proceeds of the Unit Offering, will improve
the Company's operating and financial flexibility over the near term. The
Company believes its liquidity improved because (a) the 12 1/2% Notes do not
require the payment of cash interest until 2001 and (b) Holdings has the option
to pay dividends on the Preferred Stock in additional shares of Preferred
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Stock through May 1, 2001 and the Preferred Stock is not mandatorily redeemable
until 2007. Approximately $35.3 million of the proceeds from the Private
Placement were used to redeem the Redeemable Preferred Stock issued in August
1995 ($30.0 million), pay accrued preferred dividends ($2.6 million) and to
repurchase 916,666 warrants of ICG ($2.7 million) issued in connection
with the Redeemable Preferred Stock. The Company recognized a charge of
approximately $12.3 million for the excess of the redemption price of the
Redeemable Preferred Stock over the carrying amount at April 30, 1996, and
recognized a charge of approximately $11.5 million for the payment with respect
to consents to amendments to the 13 1/2% Notes Indenture to permit the Private
Placement. On July 8, 1996, the Company made an offer to exchange the 12
1/2% Notes and the Preferred Stock for 12 1/2% Notes and Preferred Stock
registered under the Securities Act of 1933.
(a) The 12 1/2% Notes: The 12 1/2% Notes are unsecured senior
obligations of Holdings (guaranteed by ICG and ICG Communications, Inc.)
that mature on May 1, 2006. 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.
(b) Preferred Stock: Dividends on the Preferred Stock are cumulative
at a rate of 14 1/4% per annum and are payable quarterly each February 1,
May 1, August 1 and November 1, commencing August 1, 1996. The Preferred
Stock has a liquidation preference of $1,000 per share, plus accrued and
unpaid dividends, and is mandatorily redeemable in 2007. The Preferred
Stock is exchangeable, at the option of Holdings, into 14 1/4% senior
subordinated exchange debentures of ICG due 2007, at any time after the
exchange is permitted under certain indenture restrictions.
(ii) In the fourth quarter of fiscal 1995, the Company completed the Unit
Offering consisting of the 13 1/2% Notes and the Unit Warrants, and sold the
Redeemable Preferred Stock of Holdings and the Redeemable Warrants (as defined
below) to improve its operating and financial flexibility over the near term.
The Company believes its liquidity improved because the 13 1/2% Notes do not
require the payment of cash interest until 2001 and do not require payment of
principal until maturity in 2005. The foregoing consisted of:
(a) Unit Offering: In August 1995, the Company and Holdings issued and
sold Units comprised of the 13 1/2% Notes and the Unit Warrants for net
proceeds of approximately $286.4 million. The 13 1/2% Notes are unsecured
senior obligations of Holdings (guaranteed by ICG and ICG Comunications,
Inc.) that mature on September 15, 2005. Interest is payable each March
15 and September 15 commencing March 15, 2001. Holdings completed an
offer to exchange the 13 1/2% Notes for 13 1/2% Notes registered under
the Securities Act of 1933, in January 1996.
(b) Preferred Stock Placement: Simultaneously with the closing of the
Unit Offering, Holdings issued the Redeemable Preferred Stock to Princes
Gate Investors, L.P., an affiliate of Morgan Stanley & Co. Incorporated
("Morgan Stanley"), and related investors (collectively, "PGI"), together
with 916,666 redeemable warrants (the "Redeemable Warrants") and warrants
to purchase 2,353,334 common shares of ICG (the"PGI Warrants") (the
"Preferred Stock Placement"). The Redeemable Preferred Stock accrued
dividends quarterly at an annual rate of 12% per annum. On April 30,
1996, the Redeemable Preferred Stock and the Redeemable Warrants were
redeemed with a portion of the proceeds from the Private Placement
offering described above. In June 1996, 1,333,334 PGI warrants were
exercised through a cashless exercise in which 909,190 shares of ICG were
issued.
(iii) As an interim financing arrangement, in July 1995, ICG, Holdings and
certain subsidiaries of Holdings entered into a Note Purchase Agreement with
Morgan Stanley Group Inc. ("Morgan Stanley Group") and PGI for up to $35.0
million of Senior Secured Notes and issued warrants to Morgan Stanley Group to
purchase 800,000 common shares of ICG and warrants to PGI to purchase 600,000
common shares of ICG. Proceeds from the Unit Offering and the Preferred Stock
Placement were used to repay principal and interest (approximately $6.0 million)
on all Senior Secured Notes purchased by Morgan Stanley Group. In connection
with such repayment, warrants to purchase 280,000 ICG common shares issued to
Morgan Stanley Group were returned to the Company and canceled. In June 1996,
520,000 warrants were exercised through a cashless exercise in which 362,461
common shares of ICG were issued.
(iv) Public Offering of ICG's Common Shares: On October 24, 1994, ICG and an
unaffiliated shareholder completed the sale of 6,900,000 common shares of ICG at
a price of $14.00 per share in a public offering, of which 5,716,853 common
shares of ICG were sold by ICG for net proceeds of approximately $74.3 million.
The Company used $6.9 million of such proceeds to repay a note issued in April
1994 in connection with its purchase of the telecom network assets of Mtel
Digital Services, Inc. in Los Angeles.
(v) Convertible Subordinated Long-Term Debt Financing: The Company issued
and sold $18.0 million principal amount of 8% Convertible Subordinated Notes
(the "8% Notes") in September 1993. As of June 30, 1996, $15.9 million of the 8%
Notes and $2.8 million of the interest on such notes had been converted to
1,205,122 common shares of ICG. Subsequent to June 30, 1996, the remaining $2.1
million of the 8% Notes and $0.4 million of the interest on such notes were
converted to 162,307 common shares of ICG. An additional $47.8 million principal
amount of 7% Convertible Subordinated Notes (the "7% Notes") were issued and
23
<PAGE>
sold in October 1993. Interest on these notes is payable in cash or in kind, at
the option of the Company. The Company has paid the first five installments of
interest by issuing additional interest notes (the "Interest Notes"). The
Company has notified the holders of the 7% Notes of its intent to redeem the 7%
Notes, together with accrued interest. The holders have until August 26, 1996,
to convert the 7% Notes to common shares prior to the Company redeeming the 7%
Notes.
(vi) Private Equity Financing: The Company raised $13.2 million in
1993 through private placements of ICG's common shares. In settlement of
certain short-term obligations to vendors, ICG issued $0.3 million in common
shares of ICG in 1993. In February 1994, William W. Becker, a Director of the
Company, purchased 600,000 common shares of ICG for $3.8 million pursuant to an
outstanding warrant obtained in February 1992. In May and June 1995, the Company
raised $4.0 million in a private placement of 595,000 common shares of ICG and
$16.0 million ($15.2 million net proceeds) in private placements of Convertible
Preferred Shares. A portion of the proceeds from the Unit Offering and the
Preferred Stock Placement has been used to repurchase $10.0 million of the
Convertible Preferred Shares and the remaining $6.0 million of the Convertible
Preferred Shares have been converted to 783,657 common shares of ICG.
(vii) Lease Financing: The Company used lease financing of $24.5
million for the acquisition of 12 digital switches. A capital lease agreement
with AT&T Capital Corporation provides $18.2 million for the acquisition of 9
digital switches from Lucent Technologies, Inc. (formerly AT&T Network Systems).
After six and one-half years, the Company may purchase these switches for 30% of
the original price. At June 30, 1996, the interest rate on the leases was
approximately 7.6%. Additional capital lease obligations (including a lease
obligation for three other switches) totaled $6.3 million, bearing interest at
rates ranging from 11.8% to 13.0% as of June 30, 1996.
In the second quarter of 1996, the Company entered into a 25-year
agreement with SCE under which the Company will license 1,258 miles of fiber
optic cable in Southern California. The agreement also allows the Company to
utilize SCE's facilities to install up to 500 additional miles of fiber optic
cable. Under the terms of the agreement the Company will pay SCE an annual fee
for ten years, certain fixed quarterly payments, including a quarterly payment
equal to a percentage of network revenue, and certain other installation and
fiber connection fees. The aggregate fixed payments remaining under this 25-year
agreement (consisting of the annual fee and fixed quarterly payments) totaled
approximately $142.8 million at June 30, 1996.
(viii) Working Capital Sources: FOTI and its subsidiaries had a $4.0
million working capital line of credit (the "FOTI Line of Credit") with Norwest
Business Credit, Inc., which was guaranteed by the Company. The FOTI Line of
Credit bore interest at the prime rate plus 5.0% per annum, which was 13.75% at
September 30, 1995, and was due on demand. At September 30, 1995, the
outstanding borrowings under the FOTI Line of Credit totaled approximately $3.7
million. In December 1995, the Company refinanced the FOTI Line of Credit as
part of a short-term facility with Norwest Bank Colorado, N.A. ("Norwest") (see
(ix) below). The Company also has a $4.5 million working capital line of credit,
of which $0.8 million was outstanding as of June 30, 1996, with a supplier that
provides goods and services that are used on network system integration
installations.
(ix) Short-Term Credit Facility: In December 1995, the Company
obtained a short-term credit facility with Norwest to refinance certain of the
Company's debt. The credit facility provided for $17.5 million in short-term
financing with interest at 2.5% above the Money Market Account yield (3.3% at
December 31, 1995, for a rate of 5.8%). The Company paid off this debt and
accrued interest in March 1996.
Capital Expenditures
The Company expects to continue to generate negative cash flow from
operating activities while it emphasizes development, construction and expansion
of its business and until the Company establishes a sufficient revenue-
generating customer base. The Company's capital expenditures were $20.7 million,
$54.9 million and $88.5 million in fiscal 1993, 1994 and 1995, respectively, and
$67.1 million and $132.2 million (including assets acquired under capital leases
and through the issuance of debt) for the nine months ended June 30, 1995 and
1996, respectively. The Company anticipates that the expansion of existing
networks, construction of new networks and further development of the Company's
products and services will require capital expenditures of up to $165.0 million
for fiscal 1996, $300.0 million for fiscal 1997 and continued significant
capital expenditures thereafter. Actual capital expenditures will depend on
numerous factors beyond the Company's control or ability to predict. These
factors include the nature of future expansion and acquisition opportunities,
economic conditions, competition, regulatory developments and the availability
of capital.
General
In view of the anticipated negative cash flow from operating
activities, the continuing development of the Company's
24
<PAGE>
products and services, the expansion of existing networks and the construction,
leasing and licensing of new networks, the Company will require additional
amounts of cash in the future from outside sources. Management believes that the
Company's funds on hand, the funds from the Private Placement, the funds
remaining from the Unit Offering and amounts expected to be available through
vendor financing arrangements will provide the funds necessary for the Company
to expand its telecom services business as currently planned and to fund its
operating deficits for approximately 20 months. Additional sources of cash may
include public and private equity and debt financings, sales of non-strategic
assets, capital leases and other financing arrangements. The Company may
require additional amounts of equity capital in the near term. In the past, the
Company has been able to secure sufficient amounts of financing to meet its
capital expenditure needs. There can be no assurance that additional financing
will be available to the Company or, if available, that it can be obtained on
terms acceptable to the Company.
ACCOUNTING MATTERS
Accounting Changes
Effective January 1, 1996, the Company changed its method of accounting
for long-term telecom services contracts. Under the new method, the Company will
recognize revenue as services are provided and will continue to charge direct
selling expenses to operations as incurred. The Company had previously
recognized revenue in an amount equal to the noncancelable portion of the
contract, which is a minimum of one year on a three-year or longer contract, at
the inception of the contract and upon activation of service to the customer to
the extent of direct installation and selling expense incurred in obtaining
customers during the period in which such revenue was recognized. Revenue
recognized in excess of normal monthly billings during the year was limited to
an amount which did not exceed such installation and selling expense. The
remaining revenue from the contract had been recognized ratably over the
remaining noncancelable portion of the contract. The Company believes the new
method is preferable because it provides a better matching of revenue and
related operating expenses and is more consistent with accounting practices
within the telecommunications industry.
As required by generally accepted accounting principles, the Company has
reflected the effects of the change in accounting as if such change had been
adopted as of October 1, 1995 and has presented the pro forma effects on prior
periods assuming the change had been applied retroactively. The Company's
results for the nine months ended June 30, 1996 reflect a charge of $3.5 million
($0.13 per common share) relating to the cumulative effect of this change in
accounting as of October 1, 1995. The effect of this change in accounting for
the nine months ended June 30, 1996, was not significant and the effect of the
change is not expected to be significant for the year ended September 30, 1996.
If the new revenue recognition method had been applied retroactively, Telecom
Services revenue would have decreased by $2.0 million, $0.5 million, and $0.7
million for fiscal 1993, 1994, and 1995, respectively, and $0.9 million for the
nine months ended June 30, 1995.
In addition, the Company has shortened the estimated depreciable lives for
substantially all of its fixed assets. These estimates were changed to better
reflect the estimated periods during which these assets will remain in service
and result in useful lives which are more consistent with industry practice. The
changes in estimates of depreciable lives were on a prospective basis beginning
January 1, 1996. The effect of this change in estimate was to increase
depreciation expense and net loss attributable to common shareholders for the
nine months ended June 30, 1996, by approximately $4.6 million ($1.78 per common
share). This change in estimate is expected to increase depreciation expense
during fiscal year 1996 by approximately $7.0 million. The change would have had
an estimated annual effect of approximately $9.0 million had the change been in
effect for the entire year. The Company's deferred tax liability has been
adjusted for the effect of this change in estimated depreciable lives, which
resulted in an income tax benefit of $4.5 million.
New Accounting Standards
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), was issued in March 1995 by the Financial Accounting Standards
Board. It 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 amount of an asset may not be
recoverable. SFAS 121 is required to be adopted for fiscal years beginning
after December 15, 1995 and will be adopted by the Company as of October 1,
1996. Adopting this statement is not expected to have a significant effect on
the consolidated financial statements of the Company.
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation (SFAS 123), was issued by the Financial Accounting Standards
Board in October 1995. SFAS 123 establishes financial accounting and
25
<PAGE>
reporting standards for stock-based employee compensation plans as well as
transactions in which an entity issues its equity instruments to acquire goods
or services from non-employees. This statement defines a fair value based method
of accounting for employee stock options or similar equity instruments, and
encourages all entities to adopt this method of accounting for all employee
stock compensation plans. However, it also allows an entity to continue to
measure compensation cost for those plans using the intrinsic value based method
of accounting prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. Entities electing to remain with the
accounting method prescribed in Opinion 25 must make pro forma disclosures of
net income and, if presented, earnings per share, as if the fair value based
method of accounting defined by SFAS 123 had been applied. SFAS 123 is
applicable to fiscal years beginning after December 15, 1995. The Company
currently accounts for its equity instruments using the accounting method
prescribed by Opinion 25. The Company does not currently expect to adopt the
accounting method prescribed by SFAS 123; however, the Company will include the
pro forma disclosures required by SFAS 123 when required.
26
<PAGE>
PART II
- -------
OTHER INFORMATION
- -----------------
Item 1. Legal Proceedings. See Note 9 (b) in Notes to the Consolidated
Financial Statements for the nine months ended June 30, 1996.
Item 2. Changes in Securities. None
Item 3. Defaults Upon Senior Securities. 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. None
(b) Reports on Form 8-K
(i) A report on Form 8-K dated March 27, 1996, was filed on April 17,
1996, relating to various press releases the Company had issued prior
to the Private Placement (an Item 5 event).
(ii) A report on Form 8-K dated April 29, 1996, was filed on April 29,
1996, relating to the change in the Company's fiscal year end (an Item
8 event).
(iii) A report on Form 8-K dated June 5, 1996, was filed on June 6,
1996, relating to the FOTI debarment settlement (an Item 5 event).
(iv) A report on Form 8-K dated August 2, 1996, was filed on August
6, 1996, relating to the Company's name change and reorganization as
a U.S. corporation (Item 1 and 5 events).
27
<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.
ICG HOLDINGS (CANADA), INC.
Date: August 7, 1996 By:\S\ James D. Grenfell
-------------------------------------------
James D. Grenfell, Chief Financial Officer
Date: August 7, 1996 By:\S\ Richard Bambach
------------------------------------------
Richard Bambach, Corporate Controller
28
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<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-30-1996
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