UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Commission File Number 1-11965)
ICG COMMUNICATIONS, INC.
(Commission File Number 1-11052)
ICG HOLDINGS (CANADA) CO.
(Commission File Number 33-96540)
ICG HOLDINGS, INC.
(Exact names of registrants as specified in their charters)
--------------------------------------------------------------------------------
Delaware 84-1342022
Nova Scotia Not Applicable
Colorado 84-1158866
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
--------------------------------------------------------------------------------
161 Inverness Drive West Not applicable
Englewood, Colorado 80112
161 Inverness Drive West c/o ICG Communications, Inc.
Englewood, Colorado 80112 161 Inverness Drive West
Englewood, Colorado 80112
161 Inverness Drive West Not applicable
Englewood, Colorado 80112
(Address of principal executive offices) (Address of U.S. agent for service)
--------------------------------------------------------------------------------
Registrants' telephone numbers, including area codes: (888) 424-1144 or (303)
414-5000
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes |X| No
The number of registrants' outstanding common shares as of August 11,
2000 were 51,933,460, 31,931,588 and 1,918, respectively. ICG Canadian
Acquisition, Inc., a wholly owned subsidiary of ICG Communications, Inc.,
owns all of the issued and outstanding common shares of ICG Holdings (Canada)
Co. ICG Holdings (Canada) Co. owns all of the issued and outstanding shares
of ICG Holdings, Inc.
1
<PAGE>
TABLE OF CONTENTS
PART I ................................................................... 3
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ................ 3
-------------------------------------------
Consolidated Balance Sheets as of December 31, 1999 and June
30, 2000 (unaudited)...................................... 3
Consolidated Statements of Operations for the Three Months
and Six Months Ended June 30, 1999 and 2000 (unaudited)... 3
Consolidated Statement of Stockholders' Deficit for the Six
Months Ended June 30, 2000(unaudited)...................... 5
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1999 and 2000 (unaudited)......................... 8
Notes to Consolidated Financial Statements,(unaudited)...... 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ................................... 21
--------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .. 38
----------------------------------------------------------
PART II ................................................................... 40
ITEM 1. LEGAL PROCEEDINGS ......................................... 40
------------------
ITEM 2. CHANGES IN SECURITIES ..................................... 40
---------------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ........................... 41
-------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS ..... 41
-----------------------------------------------------
ITEM 5. OTHER INFORMATION ......................................... 42
-----------------
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K ........................... 42
--------------------------------
Exhibits .................................................... 42
Report on Form 8-K .......................................... 42
2
<PAGE>
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and June 30, 2000 (unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
--------------- --------------
(in thousands)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 103,288 496,688
Short-term investments available for sale 22,219 31,283
Receivables:
Trade, net of allowance of $78.7 million
and $31.6 million at December 31, 1999
and June 30, 2000, respectively (note 6) 167,273 192,611
Other 1,458 12,119
--------------- --------------
Total net receivables
168,731 204,730
Prepaid expenses, deposits and inventory
11,388 14,968
--------------- --------------
Total current assets 305,626 747,669
--------------- --------------
Property and equipment 1,805,378 2,363,160
Less accumulated depreciation (279,698) (399,184)
--------------- --------------
Net Property and equipment
1,525,680 1,963,976
--------------- --------------
Restricted cash 12,537 9,811
Investments 28,939 2,402
Other assets, net of accumulated amortization:
Goodwill 95,187 80,190
Deferred financing costs 35,884 33,563
Other, net 16,768 20,498
--------------- --------------
147,839 134,251
--------------- --------------
Total Assets $2,020,621 2,858,109
=============== ==============
</TABLE>
(Continued)
<PAGE>
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (unaudited), Continued
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ ---------
(in thousands)
Liabilities and Stockholders' Deficit
<S> <C> <C>
Current liabilities:
Accounts payable 112,291 36,547
Payable pursuant to IRU agreement) 135,322 84,516
Accrued liabilities 85,709 107,831
Deferred revenue (note 6) 25,175 154,249
Deferred gain on sale (note 3) 5,475 -
Current portion of capital lease obligations 8,090 49,676
Current portion of long-term debt (note 4) 796 796
Current liabilities of discontinued operations 529 329
------------ ---------
Total current liabilities 373,387 433,944
------------ ---------
Capital Lease obligations, less current portion 63,348 127,088
Long-term debt, net of discount, less current
portion (note 4) 1,905,901 2,106,658
Other long-term liabilities 2,526 3,389
------------ ---------
Total liabilities 2,345,162 2,671,079
Redeemable preferred stock of subsidiary ($397.9 million and $426.6 million
liquidation value at December 31, 1999 and June 30, 2000,
respectively) (note 5) 390,895 420,011
Company-obligated mandatorily redeemable preferred securities of subsidiary
limited liability company which holds solely Company Preferred stock ($133.4
million liquidation value at December 31, 1999 and June 30, 2000,
respectively) 128,428 128,621
8% Series A Convertible Preferred Stock ($764.5
million liquidation value at June 30, 2000)
(note 5) - 641,566
Stockholders' deficit:
Common stock, $0.01 par value, 100,000,000 and 200,000,000 shares authorized
at December 31, 1999 and June 30, 2000, respectively; 47,761,337 and
48,909,665 shares issued and outstanding at
December 31, 1999 and June 30, 2000, respectively 478 489
Additional paid-in capital 599,282 858,169
Accumulated deficit (1,443,624) (1,861,826)
------------ -----------
Total stockholders' deficit (843,864) (1,003,168)
------------ -----------
Commitments and contingencies (note 6)
Total liabilities and stockholders' deficit $2,020,621 2,858,109
============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months and Six Months Ended June 30, 1999 and 2000 (unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------------------------
1999 2000 1999 2000
--------- -------- -------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenue 117,654 175,753 221,985 332,977
Operating costs and expenses:
Operating costs 59,458 102,589 113,107 185,491
Selling, general and administrative
expenses 42,975 49,676 85,783 104,765
Depreciation and amortization 44,683 72,892 81,058 137,491
Provision for impairment of long-lived
assets 29,300 - 29,300 -
Net loss on disposal of long-lived assets - 545 - 545
Other, net 398 828 (535) 1,259
--------- -------- -------- ---------
Total operating costs and expenses 176,814 226,530 308,713 429,551
--------- -------- -------- ---------
Operating loss (59,160) (50,777) (86,728) (96,574)
Other income (expense):
Interest expense (51,308) (66,759) (98,746) (129,393)
Interest income 3,793 11,263 7,897 14,539
Other income (expense), net (1,843) (155) (2,343) 3
--------- -------- -------- ---------
(49,358) (55,651) (93,192) (114,851)
--------- -------- -------- ---------
Loss from continuing operations before
preferred dividends and extraordinary
gain (108,518) (106,428) (179,920) (211,425)
Accretion and preferred dividends on
preferre securities of subsidiaries (15,241) (17,135) (30,045) (33,772)
--------- -------- -------- ---------
Loss from continuing operations before
extraordinary gain (123,759) (123,563) (209,965) (245,197)
Discontinued operations (note 3):
Net income (loss) from discontinued
operations (692) 736 (803) 736
Loss on disposal of discontinued
operations, including provision
of $0.3 million for operating losses
during phase out period (7,959) - (7,959) -
--------- -------- -------- ---------
(8,651) 736 (8,762) 736
--------- -------- -------- ---------
Extraordinary gain on sales of operations of
NETCOM, net of income taxes of $6.4
million (note 3) - - 193,029 -
--------- -------- -------- ---------
Net loss (132,410) (122,827) (25,698) (244,461)
Accretion and dividends of 8% Series A
Convertible Preferred Stock to liquidation
value (note 5) - (14,462) - (14,462)
Charge for beneficial conversion feature of
8% Series A Convertible Preferred Stock
(note 5) - (159,279) - (159,279)
--------- -------- -------- ---------
Net loss attributable to common
stockholders (132,410) (296,568) (25,698) (418,202)
========= ======== ======== =========
(Continued)
</TABLE>
<PAGE>
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (unaudited), Continued
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------------------------
1999 2000 1999 2000
-------- -------- -------- --------
(in thousands, except per share data)
Net loss per share - basic and diluted:
<S> <C> <C> <C> <C>
Net loss attributable to common $ (2.63) (6.11) (4.49) (8.65)
stockholders , before net income
(loss) from discontinued operations
and extraordinary gain
Net income (loss) from discontinued
operations (0.19) 0.02 (0.19) 0.02
Extraordinary gain on sales of
operations of NETCOM - - 4.13 -
-------- -------- -------- --------
Net loss per share - basic and diluted $(2.82) (6.09) (0.55) (8.63)
======== ======== ======== ========
Weighted average number of shares
outstanding - basic and diluted 46,988 48,723 46,763 48,455
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Deficit
Six Months Ended June 30, 2000 (unaudited)
<TABLE>
<CAPTION>
Common Stock Additional Total
---------------- paid-in Accumulated stockholders'
Shares Amount capital deficit Deficit
---------------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 2000 47,761 478 599,282 (1,443,624) (843,864)
Shares issued for cash in
connection with the
Exercise of options and warrants 908 9 13,924 - 13,933
Shares issued for cash in
connection with the Employee stock
purchase plan 106 1 1,852 - 1,853
Shares issued as contribution to
401 (k) plan 134 1 3,236 - 3,237
Warrants issued in connection with
8% Series A Convertible Preferred
Stock - - 80,596 - 80,596
Value ascribed to beneficial
conversion feature of 8%
Series A Convertible
Preferred Stock - - 159,279 (159,279) -
Accretion and dividends of 8%
Series A Convertible Preferred Stock - - - (14,462) (14,462)
Net loss
- - - (244,461) (244,461)
---------------- -------- ----------- -----------
Balances at June 30, 2000 48,909 489 858,169 (1,861,826)(1,003,168)
================ ======== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1999 and 2000 (unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
--------------------
1999 2000
--------- ---------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net loss
Net (income) loss from discontinued operations $(25,698) (244,461)
Extraordinary gain on sales of discontinued operations 8,762 (736)
Adjustments to reconcile net loss to net cash used by
operating activities: (193,029) -
Recognition of deferred gain (10,498) (6,239)
Accretion and preferred dividends on preferred securities
of subsidiaries 30,045 33,773
Depreciation and amortization 81,058 137,491
Provision for impairment of long-lived assets 29,300 -
Deferred compensation 431 862
Net loss (gain) on disposal of long-lived assets (966) 545
Gain on sale of securities (439) (634)
Provision for uncollectible accounts 8,103 2,813
Interest expense deferred and included in long-term debt,
net of amounts capitalized on assets under construction 87,765 102,531
Interest expense deferred and included in capital lease
obligations 2,672 2,554
Amortization of deferred financing costs included in
interest expense 2,283 2,627
Contribution to 401(k) plan through issuance of common
stock 2,077 3,237
Other noncash expenses - 301
Change in operating assets and liabilities, excluding the
effects of dispositions and noncash transactions:
Receivables (60,100) (38,813)
Prepaid expenses, deposits and inventory 3,243 (775)
Accounts payable and accrued liabilities (9,690) 23,152)
Deferred revenue 34,090 31,155
--------- ---------
Net cash provided (used) by operating activities (10,591) 03,079
--------- ---------
Cash flows from investing activities:
Acquisition of property, equipment and other assets (229,747) 347,315)
Payments for construction of corporate headquarters - (5,492) Change in
accounts payable for purchase of long-term assets (11,405) (43,484) Proceeds
from sales of operations of NETCOM, net of cash
included in sale 252,881 -
Proceeds from disposition of property, equipment and other
assets 4,302 -
Proceeds from sales of short-term investments available for
sale 21,354 8,621
Proceeds from sale of marketable securities, net of
realized gain 30,439 10,634
Decrease in restricted cash 3,540 2,728
Purchase of investments (27,686) (1,150)
Purchase of minority interest in subsidiary (4,189) -
--------- ---------
Net cash provided (used) by investing activities 39,489 375,458)
--------- ---------
(Continued)
</TABLE>
<PAGE>
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited), Continued
<TABLE>
<CAPTION>
Six months ended June 30,
-----------------------
1999 2000
----------- ----------
(in thousands)
<S> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of common stock:
Exercise of options and warrants $ 7,095 13,939
Employee stock purchase plan 2,134 1,847
Proceeds of 8% Series A Convertible Preferred Stock,
net of issuance costs - 720,330
Proceeds from issuance of long-term debt - 95,000
Principal payments on capital lease obligations (9,589) (10,973)
Payments on IRU agreement - (149,729)
Principal payments on long-term debt (23) (404)
Payments of preferred dividends (4,463) (4,463)
Deferred debt issuance costs - (304)
----------- --------
Net cash provided (used) by financing activities (4,846) 665,243
----------- --------
Net increase in cash and cash equivalents 24,052 392,864
Net cash provided by discontinued operations 354 536
Cash and cash equivalents, beginning of period 210,307 103,288
----------- --------
Cash and cash equivalents end of period $234,713 496,688
=========== ========
Supplemental disclosure of cash flows information of continuing operations:
Cash paid for interest $ 6,026 9,626
=========== ========
Cash paid for income taxes $ 931 220
=========== ========
Supplemental schedule of noncash investing activities of continuing operations:
Acquisition of corporate headquarters assets through
the issuance
of long-term debt and conversion of security deposit $ 33,077 -
=========== ========
Assets acquired pursuant to IRU agreement $ - 98,147
Assets acquired under capital leases 6,190 111,414
----------- --------
Total $ 6,190 209,561
=========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and June 30, 2000 (unaudited)
(1) Organization and Basis of Presentation
ICG Communications, Inc., a Delaware corporation ("ICG"), was
incorporated on April 11, 1996 and is the publicly-traded U.S. parent
company of ICG Funding, LLC, a special purpose Delaware limited
liability company ("ICG Funding"), ICG Holdings (Canada) Co., a Nova
Scotia unlimited liability company ("Holdings-Canada"), ICG Holdings,
Inc., a Colorado corporation ("Holdings"), and ICG Services, Inc., a
Delaware corporation ("ICG Services"), and their subsidiaries. ICG and
its subsidiaries are collectively referred to as the "Company."
The Company is a facilities -based communications provider and local
exchange carrier. The Company primarily offers voice and data
communications services, including local, long distance and enhanced
telephony, to small - to medium-sized business customers and offers
network facilities and data management to ISP customers. The Company also
provides interexchange services such as special access and switched access
services to long distance carriers and other customers. The Company began
marketing competitive local dial-tone services to business customers in
early 1997, subsequent to the passage of the Telecommunications Act of
1996, which permitted competitive interstate and intrastate telephone
services. The Company began offering network services to ISPs and other
telecommunications providers in February 1999.
During 1999, the Company sold the retail customer ISP business of
NETCOM, but retained the national Tier 1 data network assets.
Additionally, during 1999, the Company sold ICG Fiber Optic
Technologies, Inc. and Fiber Optic Technologies of the Northwest, Inc.,
(collectively "Network Services") and ICG Satellite Services, Inc. and
Maritime Telecommunications Network, Inc. (collectively "Satellite
Services"). Network Services provided information technology services
and selected networking products. Satellite Services provided
satellite voice, data and video services to major cruise ship lines,
the U.S. Navy, the offshore oil and gas industry and integrated
communications providers. (See note 3, " Sale of Assets and
Discontinued Operations".)
(2) Significant Accounting Policies
(a) Basis of Presentation
The Company's financial statements should be read in conjunction with
ICG's Annual Report on Form 10-K for the year ended December 31, 1999,
as certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the
rules and regulations of the United States Securities and Exchange
Commission. The interim financial statements reflect all adjustments
which are, in the opinion of management, necessary for a fair
presentation of financial position, results of operations and cash
flows as of and for the interim periods presented. Such adjustments
are of a normal recurring nature. Operating results for the six months
ended June 30, 2000 are not necessarily indicative of the results that
may be expected for the fiscal year ending December 31, 2000.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
<PAGE>
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Significant Accounting Policies (continued)
(b) Recent Accounting Pronouncements
In March 2000, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 44 "Accounting for Certain Transactions
involving Stock Compensation - and interpretation of APB Opinion No.
25" ("FIN 44"). This opinion provides guidance on the accounting for
certain stock option transactions and subsequent amendments to stock
option transactions. FIN 44 is effective July 1, 2000, but certain
conclusions cover specific events that occur after either December 15,
1998 or January 12, 2000. To the extent that FIN 44 covers events
occurring during the period from December 15, 1998 and January 12,
2000, but before July 1, 2000, the effects of applying this
Interpretation are to be recognized on a prospective basis. The
Company has not yet assessed the impact, if any, that FIN 44 might
have on its financial position or results of operations. The Company
does not believe that the adoption of FIN 44 will have a material
effect on the Company's financial position or results of operation.
In December 1999, the SEC released Staff Accounting Bulletin ("SAB")
No. 101, "Revenue Recognition in Financial Statements", which provides
guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. Subsequently, the SEC
released SAB 101B, which delayed the implementation date of SAB 101
for the company until the quarter ending December 31, 2000. The
Company has not completed its assessment of the impact of SAB 101,
however, based on our initial analysis, if implemented, implementation
would result in an increase in accumulated deficit at January, 1, 2000
of approximately $14 million and a reduction in revenue recognized in
the three and six months ended June 30, 2000 of approximately $2.0
million and $3.3 million, respectively.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133
establishes accounting and reporting standards for derivative
instruments and hedging activities. As amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral
of Effective Date of FASB Statement No. 133", SFAS 133 is effective
for all fiscal years beginning after June 15, 2000. The Company will
adopt SFAS 133 effective at the beginning of its fiscal year end 2001.
The Company does not believe that the adoption of SFAS 133 will have a
material effect on the Company's financial position or results of
operations.
(c) Reclassifications
Certain 1999 amounts have been reclassified to conform with the 2000
presentation.
(3) Sale of Assets and Discontinued Operations
To better focus its efforts on its core operations, the Company has
disposed of certain assets which management believes did not complement
its overall business strategy. The Company will from time to time evaluate
all of its assets as to its core needs and, based on such analysis, may
sell or otherwise dispose of assets which management does not believe
complement its overall business strategy.
NETCOM
On November 3, 1998 the Company's board of directors adopted the formal
plan to dispose of the operations of NETCOM. Once this formal plan was
adopted, all historical revenue, operating costs, depreciation, interest,
and other costs of NETCOM's operations were classified as discontinued in
the Company's consolidated statements of operations.
(3) Sale of Assets and Discontinued Operations (continued)
On February 17, 1999, the Company sold certain of the operating assets and
liabilities of NETCOM to MindSpring Enterprises, Inc., predecessor to
EarthLink, Inc. ("MindSpring") for total proceeds of $245.0 million.
Assets and liabilities sold to MindSpring included those directly related
to the domestic operations of NETCOM's Internet dial-up, dedicated access
and Web site hosting services. The carrying value of the assets retained
by the Company was approximately $21.7 million, including approximately
$17.5 million of network equipment, on February 17, 1999. The Company also
retained approximately $11.3 million of accrued liabilities and capital
lease obligations. Additionally, on March 16, 1999, the Company sold all
of the capital stock of NETCOM's international operations (including
NETCOM Canada and NETCOM U.K.) for total proceeds of approximately $41.1
million.
In conjunction with the sale to MindSpring, the Company entered into an
agreement to lease to MindSpring for a one-year period the capacity of
certain network operating assets formerly owned by NETCOM and retained by
the Company (the "MindSpring Capacity Agreement"). Under the agreement,
MindSpring utilized the Company's network capacity to provide Internet
access to the dial-up services customers formerly owned by NETCOM. In
addition, the Company received for a one-year period 50% of the gross
revenue earned by MindSpring from the dedicated access customers formerly
owned by NETCOM. As the Company expected to generate operating losses
under the MindSpring Capacity Agreement, and the terms of the sale
agreement were dependent upon and negotiated in conjunction with the terms
of the sale of the operating assets of NETCOM, the Company deferred
approximately $35.5 million of the proceeds from the sale agreement to be
applied on a periodic basis to losses incurred under the MindSpring
Capacity Agreement. Accordingly, the Company did not recognize any
revenue, operating costs or selling, general and administrative expenses
from services provided to MindSpring for the twelve-month term of the
agreement which expired February 17, 2000. Any incremental revenue or
costs generated by other customers, or by other services provided to
MindSpring was recognized in the Company's consolidated statement of
operations as incurred.
As discussed above, the terms of the MindSpring Capacity Agreement were
negotiated in conjunction with and were dependent upon the terms of the
sale of the operating assets of NETCOM to MindSpring. As such, these
transactions are collectively referred to as "Sale of Operating Assets of
NETCOM".
Network Services
On July 15, 1999, the Company's board of directors adopted a formal plan
to dispose of the Company's investments in its wholly-owned subsidiaries,
ICG Fiber Optic Technologies, Inc. and Fiber Optic Technologies of the
Northwest, Inc. (collectively, "Network Services"). Accordingly, the
Company's consolidated financial statements reflect the operations of
Network Services as discontinued for all periods presented. On October 22,
1999, the Company completed the sale of all of the capital stock of
Network Services for total proceeds of $23.9 million in cash.
Satellite Services
On July 15, 1999, the Company's board of directors adopted a formal
plan to dispose of the Company's investments in ICG Satellite Services,
Inc. and Maritime Telecommunications Network, Inc. (collectively,
"Satellite Services"). Accordingly, the Company's consolidated
financial statements reflect the operations of Satellite Services as
discontinued for all periods presented. On November 30, 1999, the
Company completed the sale of all of the capital stock of Satellite
Services to ATC Teleports, Inc. for total proceeds of $98.1 million in
cash.
<PAGE>
(3) Sale of Assets and Discontinued Operations (continued)
Zycom
The Company owns a 70% interest in Zycom Corporation ("Zycom") which,
through its wholly owned subsidiary, Zycom Network Services, Inc.
("ZNSI"), operated an 800/888/900 number services bureau and a switch
platform in the United States and supplied information providers and
commercial accounts with audiotext and customer support services. In June
1998, Zycom was notified by its largest customer of the customer's intent
to transfer its call traffic to another service bureau. Accordingly,
effective October 1, 1998, Zycom assigned the majority of its revenue and
the related volume purchase agreements to ICN Limited. Zycom's board of
directors approved a plan to wind down and ultimately discontinue Zycom's
operations on August 25, 1998. On October 22, 1998, Zycom completed the
transfer of all customer traffic to other providers. On January 4, 1999,
the Company completed the sale of the remainder of Zycom's long-lived
operating assets to an unrelated third party for total proceeds of $0.2
million. As Zycom's assets were recorded at estimated fair market value at
December 31, 1998, no gain or loss was recorded on the sale during the
year ended December 31, 1999.
The Company's consolidated financial statements reflect the operations of
Zycom as discontinued for all periods presented. The Company has accrued
for all expected future net losses of Zycom.
(4) Long-term Debt
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
-------------- -------------
(in thousands)
<S> <C> <C>
Senior Facility due on scheduled maturity
dates, secured by substantially all
of the assets of ICG Equipment and
NetAhead with weighted average interest
rates ranging from 9.56% to 9.87% for
the six months ended June 30, 2000 $ 79,625 174,250
9 7/8% Senior discount notes of ICG Services,
net of discount 293,925 308,439
10% Senior discount notesof ICG Services,
net of discount 361,290 379,354
11 5/8% Senior discount notes of Holdings,
net of discount 137,185 145,159
12 1/2% Senior discount notes of Holdings,
net of discount 468,344 497,616
13 1/2% Senior discount notes of Holdings,
net of discount 532,252 568,589
Mortgage loan payable with interest at 8
1/2%, due monthly
into 2009, secured by building 999 970
Mortgage loan payable with variable rate of
interest (15.21% at June 30, 2000) due
monthly into 2013, secured by corporate
headquarters 33,077 33,077
-------------- -------------
1,906,697 2,107,454
Less current portion (796) (796)
-------------- -------------
$ 1,905,901 2,106,658
============== =============
</TABLE>
<PAGE>
(5) Redeemable Preferred Stock of Subsidiary and Mandatorily Redeemable 8%
Series A Convertible Preferred Stock
Redeemable preferred stock of subsidiary is summarized as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
---------------- -----------
<S> <C> <C> (in thousands)
14% Exchangeable preferred stock of
Holdings, mandatorily redeemable in 2008 $ 144,144 154,804
14 1/4% Exchangeable preferred stock of
Holdings, mandatorily redeemable in 2007 246,751 265,207
---------------- -----------
$ 390,895 420,011
================ ===========
Mandatorily Redeemable 8% Series A Convertible Preferred Stock
On April 10, 2000, the Company sold 75,000 shares of mandatorily
redeemable 8% Series A-1, A-2 and A-3 Convertible Preferred Stock of ICG
(the "8% Series A Convertible Preferred Stock") and 10,000,000 warrants to
purchase ICG Common Stock to affiliates of Liberty Media Corporation
("Liberty Media"), Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse")
and Gleacher Capital Partners ("Gleacher Capital") (collectively, "the
Investors"). The sale of the 8% Series A Convertible Preferred Stock
resulted in net proceeds to the Company of $707.7 million. Each share of
8% Series A Convertible Preferred Stock has an initial liquidation
preference of $10,000 per share and bears a cumulative dividend rate of 8%
per annum, compounded daily. Dividends accrete to the liquidation
preference on a daily basis for five years and are thereafter payable in
cash or additional liquidation preference.
In the event of a change in control of the Company, as defined in the
agreement, occurring prior to five years from the date of issuance of the
8% Series A Convertible Preferred Stock, the Company is, in most
instances, required to make a special dividend payment to the 8% Series A
Convertible Preferred Stockholders equal to the difference between the
fully accreted liquidation preference of the 8% Series A Convertible
Preferred Stock five years from the date of issuance and the existing
liquidation preference on the date of the change in control. In addition,
the Company has the right, but not the obligation, to offer to repurchase
the 8% Series A Convertible Preferred Stock at 101% of the liquidation
preference on the date of the change in control (after giving effect to
the special dividend, if applicable).
The 8% Series A Convertible Preferred Stock is immediately convertible
into shares of ICG Common Stock at a conversion rate of $28.00 per share,
subject to adjustment, and will have voting rights with the common
stockholders on an as-converted basis. The holders of the Series A-1 and
A-2 8% Series A Convertible Preferred Stock collectively will be entitled
to elect up to three directors to the Company's Board of Directors.
Additionally, certain material transactions outside the ordinary course of
business will require an affirmative vote of at least one of the three
directors elected by the holders of the Series A-1 and A-2 8% Series A
Convertible Preferred Stock. The Company may redeem the 8% Series A
Convertible Preferred Stock at any time after five years from the date of
issuance through their mandatory redemption on June 15, 2015. The warrants
to purchase ICG Common Stock are immediately convertible into shares of
ICG Common Stock at a conversion rate of $34.00 per share and expire in
five years from the date of issuance. The affiliates of Liberty Media,
Hicks Muse and Gleacher Capital purchased $500.0 million, $230.0 million
and $20.0 million, respectively, in 8% Series A Convertible Preferred
Stock and received a ratable portion of the total 10,000,000 warrants. The
value allocated to the warrants was $80.6 million at the time of the
transaction.
(5) Redeemable Preferred Stock of Subsidiary and 8% Series A Convertible
Preferred Stock (continued)
In accordance with Emerging Issues Task Force ("EITF") 98-5 "Accounting
for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios", the Company allocated $159.3
million of the proceeds from the issuance of the 8% Series A Convertible
Preferred Stock to the intrinsic value of the embedded beneficial
conversion feature of the convertible preferred securities to additional
paid-in capital. As the 8% Series A Convertible Preferred Stock is
immediately convertible into shares of ICG common stock, the beneficial
conversion feature was recognized as a return to the preferred
shareholders and included as an element of net loss attributable to common
shareholders during the three months ended June 30, 2000 in the
accompanying consolidated statement of operations.
(6) Commitments and Contingencies
(a) Network Capacity and Construction
In January 2000, Qwest Communications Corporation ("Qwest") and the
Company signed an agreement, whereby the Company will provide, for
$126.5 million over the initial six-year term of the agreement, an
indefeasible right of use ("IRU") for designated portions of the
Company's local fiber optic network. The Company will recognize revenue
ratably over the term of the agreement, as the network capacity is
available for use. The agreement was amended in March 2000 to include
additional capacity for proceeds of $53.8 million to be received in
installments through September 18, 2000. Qwest may, at its option,
extend the initial term of the agreement for an additional four-year
period and an additional 10-year period for incremental payment at the
time of the option exercises. In the event that the Company fails to
deliver any of the network capacity by March 31, 2001, Qwest is
entitled to cancel any undelivered network capacity segments and
receive immediate refund of any amounts already paid to the Company for
such segments.
In June 1999, the Company signed a minimum ten-year agreement to lease
certain portions of its fiber optic network to Qwest for $32.0 million,
which was received, in full by the Company in June 1999. The Company
has accounted for the agreement as a sales-type lease and is
recognizing revenue and operating costs in its consolidated financial
statements on a percentage of completion basis as the network build-out
is completed and is available for use. On March 23, 2000, the final
network facilities to be included under the agreement were identified
and made available for use allowing the Company to recognize all
remaining revenue under the agreement except amounts deferred related
to maintenance services. For the six months ended June 30, 2000, the
Company included $11.5 million in revenue and $1.1 million in operating
costs, respectively, in its consolidated financial statements related
to the agreement, including revenue attributed to maintenance services,
which is recognized ratably over the term of the agreement.
Approximately $2.3 million of the total proceeds received related to
maintenance services remain in deferred revenue in the Company's
consolidated balance sheet at June 30, 2000.
(b) Telecommunications and Line Purchase Commitments
Effective September 1998, the Company entered into two service
agreements with three-year terms with WorldCom Network Services, Inc.
("WorldCom"). Under the Telecom Services Agreement, WorldCom provides,
at designated rates, switched telecommunications services and other
related services to the Company, including termination services,
toll-free origination, switched access, dedicated access and travel
card services. Under the Carrier Digital Services Agreement, WorldCom
provides the Company, at designated rates, with the installation and
operation of dedicated digital telecommunications interexchange
services, local access and other related services, which the Company
believes expedites service availability to its customers. Both
agreements require that the Company provide WorldCom with
(6) Commitments and Contingencies (continued)
certain minimum monthly revenue, which if not met, would require
payment by the Company for the difference between the minimum
commitment and the actual monthly revenue. Additionally, both
agreements limit the Company's ability to utilize vendors other than
WorldCom for certain telecommunications services specified in the
agreements. The Company met all minimum revenue commitments to
WorldCom under these agreements through June 30, 2000.
(c) Other Commitments
The Company formalized two vendor financing agreements with Cisco
Systems, Inc. for financing of certain future capital expenditures
during the six months ended June 30, 2000. The two agreements will
together provide $180.0 million in financing with a three year
repayment term. As of June 30, 2000, $99.1 million was drawn under the
facilities.
The Company has entered into various equipment and line purchase
agreements with certain of its vendors. Under these agreements, if the
Company does not meet a minimum purchase level in any given year, the
vendor may discontinue certain discounts, allowances and incentives
otherwise provided to the Company. In addition, the agreements may be
terminated by either the Company or the vendor upon prior written
notice.
Additionally, the Company has entered into certain commitments to
purchase capital assets with an aggregate purchase price of
approximately $272.3 million at June 30, 2000.
(d) Transport and Termination Charges
ICG records revenue earned under interconnection agreements with
incumbent local exchange carriers ("ILECs") as an element of its local
services revenue. Some of the ILECs have not paid all of the bills
they have received from ICG and have disputed these charges based on
the belief that dial-up calls to ISPs are not local traffic as defined
by the various agreements and not subject to payment of transport and
termination charges under state and federal law and public policies.
In addition, some ILECs, while paying a portion of reciprocal
compensation due to ICG, have disputed other portions of the charges
related to reciprocal compensation.
ICG has, as of June 30, 2000, a net receivable for terminating local
traffic in the approximate amount of $54 million, $29 million of which
is due from one ILEC and will be paid, pursuant to the terms of an
agreement between the parties, when regulatory approval of the
amendments to the parties' interconnection agreements is obtained. ICG
has received cash of approximately $26 million and $84 million, during
the three months and six months ended June 30, 2000, respectively,
from certain ILECs for terminating local traffic. The allowance for
doubtful accounts has decreased from December 31, 1999 to June 30,
2000. This decrease is primarily due to the settlement of disputes
regarding amounts owed to ICG between ICG and two separate ILECs,
<PAGE>
(6) Commitments and Contingencies (continued)
The following table represents the amount of revenue ICG has
recognized for terminating local traffic during the respective periods
($ in millions):
Three months ended June 30, Six months ended June 30,
1999 2000 1999 2000
------------- ------------ ----------- ------------
$40.1 $38.4 $70.9 $74.0
Revenue for the three months and six months ended June 30, 1999
includes approximately $12 million and $22 million, respectively, for
the tandem switching and common transport rate elements. ICG ceased,
effective July 1, 1999, recognition of these rate elements as revenue
until cash receipts are either received or the uncertainty of receipt
has been removed (such as the execution of a binding agreement). ICG
has continued to bill and vigorously pursue collection of all amounts
due under the agreements.
Revenue for the three and six months ended June 30, 2000 includes
approximately $9 million and $13 million, respectively, derived from
the resolution of previously disputed issues not related to the
respective periods and approximately $4 million of revenues in each of
the periods from rates earned pursuant to the previous interconnection
agreement, neither of which will recur subsequent periods.
(e) Litigation
On April 4, 1997, certain shareholders of Zycom filed a shareholder
derivative suit and class action complaint for unspecified damages,
purportedly on behalf of all of the minority shareholders of Zycom, in
the District Court of Harris County, Texas (Case No. 97-17777) against
the Company, Zycom and certain of their subsidiaries. In this action,
the plaintiffs alleged that the Company and certain of its subsidiaries
breached certain fiduciary duties owed to the plaintiffs. The Company
denied all such allegations. In April 2000, the Company reached a
tentative arrangement to settle all claims asserted in this litigation.
The trial court is currently reviewing the proposed settlement
agreement. The Company anticipates that the settlement will not be
finalized until the fourth quarter of 2000, if at all.
The Company is a party to certain other litigation which has arisen in
the ordinary course of business. In the opinion of management, the
ultimate resolution of these matters will not have a material adverse
effect on the Company's financial condition, results of operations or
cash flows.
(7) Summarized Financial Information of ICG Holdings, Inc.
The 11 5/8% Senior Discount Notes due 2007 (the "11 5/8% Notes") issued by
Holdings during 1997 are guaranteed by ICG. The 12 1/2% Senior Discount
Notes due 2006 (the "12 1/2% Notes") and the 13 1/2% Senior Discount Notes
due 2005 (the "13 1/2% Notes") issued by Holdings during 1996 and 1995,
respectively, are guaranteed by ICG and Holdings-Canada.
The separate complete financial statements of Holdings have not been
included herein because such disclosure is not considered to be material
to the holders of the 11 5/8% Notes, the 12 1/2% Notes and the 13 1/2%
Notes.
<PAGE>
(7) Summarized Financial Information of ICG Holdings, Inc. (continued)
However, summarized combined financial information for Holdings and its
subsidiaries is as follows:
Summarized Consolidated Balance Sheet Information
December 31, June 30,
1999 2000
-------------- --------------
(in thousands)
-------------------------------
Current assets $ 263,870 539,947
Property and equipment, net 675,613 825,209
Other non-current assets, net 128,489 100,118
-------------- --------------
Total assets
$ 1,067,972 1,465,274
============== ==============
Current liabilities $ 148,042 317,662
Long-term debt, less current portion 1,138,734 1,212,289
Capital lease obligations, less 57,564 50,441
current portion
Other long-term liabilities 1,233 1,233
Due to parent 256,348 518,241
Due to ICG Services 128,893 239,104
Redeemable preferred stock 390,895 420,011
Stockholder's deficit (1,053,737) (1,293,707)
-------------- --------------
Total liabilities and
stockholders' deficit $1,067,972 1,465,274
============== ==============
Summarized Consolidated Statement of Operations Information
Three months ended Six months ended
June 30, June 30,
-------------------- ---------------------
1999 2000 1999 2000
--------- --------- ---------- ----------
(in thousands)
Total revenue $ 119,026 167,428 224,759 320,305
Total operating costs and
expenses 181,509 232,828 319,614 439,487
--------- --------- ---------- ----------
Operating loss $ (62,483) (65,400) (94,855) (119,182)
========= ========= ========== ==========
Loss from continuing $
operations (101,381) (120,581) (168,751) (240,325)
========= ========= ========== ==========
Net loss $(122,712) (120,226) (204,962) (239,970)
========= ========= ========== ==========
<PAGE>
(8) Condensed Financial Information of ICG Holdings (Canada) Co.
Condensed financial information for Holdings-Canada only is as follows:
Condensed Balance Sheet Information
December 31, June 30,
1999 2000
-------------- -------------
(in thousands)
------------------------------
<S> <C> <C>
Current assets $ 82 82
Advances to subsidiaries 256,348 518,241
-------------- -------------
Total assets $ 256,430 518,323
============== =============
Current liabilities $ 73 73
Due to parent 246,609 508,514
Share of losses of subsidiaries 1,053,737 1,293,707
Shareholders' deficit (1,043,989) (1,283,971)
-------------- -------------
Total liabilities and
shareholders' deficit $ 256,430 518,323
============== =============
</TABLE>
Condensed Statement of Operations Information
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------- --------------------
1999 2000 1999 2000
---------- ---------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Total revenue $ - - - -
Total operating costs and
expenses 603 12 1,206 12
---------- --------- --------- ---------
Operating loss (603) (12) (1,206) (12)
Losses of subsidiaries (122,712) (120,226) (204,962) (239,970)
---------- --------- --------- ---------
Net loss attributable to
common shareholders $(123,315) (120,238) (206,168) (239,982)
========== ========= ========= =========
</TABLE>
(9) Condensed Financial Information of ICG Communications, Inc. (Parent
company)
The primary assets of ICG are its investments in ICG Services, ICG Tevis,
ICG Funding and Holdings-Canada, including advances to those subsidiaries.
Certain corporate expenses of the parent company are included in ICG's
statement of operations and were approximately $0.4 million and $0.9
million for the three months and six months ended June 30, 1999,
respectively, and $0.5 million and $1.0 million for the three months and
six months ended June 30, 2000, respectively. ICG has no operations other
than those of ICG Services, ICG Funding and Holdings-Canada and their
subsidiaries.
<PAGE>
(10) Event subsequent to June 30, 2000
On July 6, 2000, ICG Tevis, Inc., a subsidiary of the Company, purchased
1,000,000 shares of common stock of Teligent, Inc., a fixed wireless
broadband communications provider ("Teligent"), from a subsidiary of
Teligent in exchange for 2,996,076 shares of ICG Common Stock. The value
the Company assigned to the stock acquired was approximately $21.6
million.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion includes certain forward-looking statements and
information that is based on the beliefs of management as well as assumptions
made by management based on information currently available to the Company. When
used in this document, the words "anticipate", "believe", "estimate" and
"expect" and similar expressions, as they relate to the Company or its
management, are intended to identify forward-looking statements. These
forward-looking statements are intended to qualify as safe harbors from
liability as established by the Private Securities Litigation Reform Act of
1995. Such statements reflect the current views of the Company with respect to
future events and are subject to certain risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described in this document. These forward-looking statements are affected
by important factors, including, but not limited to, the ability of the Company
to obtain adequate financing to fund expansion, the dependence on increased
traffic on the Company's facilities, the successful implementation of the
Company's strategy of offering an integrated telecommunications package of
local, long distance, data and enhanced telephony and network services, the
continued development of the Company's network infrastructure and actions of
competitors and regulatory authorities that could cause actual results to differ
materially from the forward-looking statements. The results of operations for
the three and six months ended June 30, 1999 and 2000 represent the consolidated
operating results of the Company. (See the unaudited consolidated financial
statements of the Company for the three and six months ended June 30, 2000
included elsewhere herein). The Company's consolidated financial statements
reflect the operations of Network Services, Satellite Services, Zycom and NETCOM
as discontinued for all periods presented. The terms "fiscal" and "fiscal year"
refer to the Company's fiscal year ending December 31. All dollar amounts are in
U.S. dollars.
COMPANY OVERVIEW
ICG Communications Inc. ("ICG" or the "Company") is a facilities-based
communications provider. The Company primarily offers voice and data
communication services directly to small- to medium-sized business customers and
offers network facilities and data management to ISP customers. In addition, the
Company also offers special access and switched access services to long-distance
companies and other customers.
ICG's business has been transformed over the past few years from a
regional competitive access provider primarily providing access services to
interexchange carriers and medium- to large-sized business customers to a
competitive local exchange carrier with a nationwide backbone providing a full
array of voice and data services to small- to medium-sized business customers as
well as network facilities and data management to ISP customers. The Company's
business transformation was initially driven by the deregulation of the local
telephony markets in 1996 and subsequently by changing technology and growth of
the Internet. ICG's focus, originally regional in scope, is now increasingly
national in scope.
Total revenue for the Company has grown from $222.0 million for the six
months ended June 30, 1999 to $333.0 million for the six months ended June 30,
2000 primarily due to an increase in the number of local access lines in service
between June 1999 and June 2000. As of June 30, 2000, the Company had
approximately 1.1 million customer lines in service.
Network and Service Offerings
At June 30, 2000, the Company's data network included:
o 24 ATM data switches;
o 18,000 miles of leased long-haul fiber optic lines; o 43 voice switches; o
4,767 miles of local fiber and connections to 9,152 buildings.
The data network connects to major public peering connections located in
Washington D.C., California, New Jersey, and Illinois and the local network
covers approximately 30 metropolitan areas in California, Colorado, Ohio, Texas
and the Southeast.
The Company provides data access and transport services to ISPs that, in
many cases, rely on the Company to provide network ownership and management.
Current product offerings to the ISP market include dial-up products as well as
broadband access services including T-1 and T-3 connections and DSL. Dial-up
products include:
o Primary rate interfaces ("PRI"): PRI has been the traditional product
that allows an ISP to connect to its customers using the Company's
local access network;
o Remote access services ("RAS"): RAS uses our switches and modem banks
to provide access to our own switch locations for connection to an ISP,
eliminating the need for the ISP to physically deploy modems at each of
its POPs; and
o Internet remote access services ("IRAS"): IRAS combines access,
transport and routing services to all Internet Protocol ("IP") data
packets either directly to the ISP or directly to the Internet,
bypassing the ISP.
The Company's voice and data communication services offered to business
customers include local, long distance and enhanced telephony services through
its Internet protocol, circuit switched and regional fiber optic networks. In
regional markets, the Company is generally a less expensive alternative to the
area's incumbent local telephone company for businesses.
The Company also provides interexchange services to long-distance carriers
and other customers such as connecting end-users to long-distance carriers'
facilities, connecting a long-distance carrier's facilities to the local
telephone company's central office and connecting facilities of the same or
different long distance carriers.
Sale of Assets and Discontinued Operations
The Company has disposed of certain assets which management believes did
not complement its overall business strategy. The Company will from time to time
evaluate all of its assets as to its core needs and, based on such analysis, may
sell or otherwise dispose of assets which management does not believe complement
its overall business strategy. Following is a discussion of the Company's sale
of assets of NETCOM, Network Services, and Satellite Services.
NETCOM
On November 3, 1998 the Company's board of directors adopted the formal
plan to dispose of the operations of NETCOM. Once this formal plan was adopted,
all historical revenue, operating costs, depreciation, interest, and other costs
of NETCOM's operations were classified as discontinued in the Company's
consolidated statements of operations.
On February 17, 1999, the Company sold certain of the operating assets and
liabilities of NETCOM to MindSpring Enterprises, Inc., predecessor to EarthLink,
Inc. ("MindSpring") for total proceeds of $245.0 million. Assets and liabilities
sold to MindSpring included those directly related to the domestic operations of
NETCOM's Internet dial-up, dedicated access and Web site hosting services. The
carrying value of the assets retained by the Company was approximately $21.7
million, including approximately $17.5 million of network equipment, on February
17, 1999. The Company also retained approximately $11.3 million of accrued
liabilities and capital lease obligations. Additionally, on March 16, 1999, the
Company sold all of the capital stock of NETCOM's international operations
(including NETCOM Canada and NETCOM U.K.) for total proceeds of approximately
$41.1 million.
In conjunction with the sale to MindSpring, the Company entered into an
agreement to lease to MindSpring for a one-year period the capacity of certain
network operating assets formerly owned by NETCOM and retained by the Company
(the "MindSpring Capacity Agreement"). Under the agreement, MindSpring utilized
the Company's network capacity to provide Internet access to the dial-up
services customers formerly owned by NETCOM. In addition, the Company received
for a one-year period 50% of the gross revenue earned by MindSpring from the
dedicated access customers formerly owned by NETCOM. As the Company expected to
generate operating losses under the MindSpring Capacity Agreement, and the terms
of the sale agreement were dependent upon and negotiated in conjunction with the
terms of the sale of the operating assets of NETCOM, the Company deferred
approximately $35.5 million of the proceeds from the sale agreement to be
applied on a periodic basis to losses incurred under the MindSpring Capacity
Agreement. Accordingly, the Company did not recognize any revenue, operating
costs or selling, general and administrative expenses from services provided to
MindSpring for the twelve month term of the agreement which expired February 17,
2000. Any incremental revenue or costs generated by other customers, or by other
services provided to MindSpring was recognized in the Company's consolidated
statement of operations as incurred.
As discussed above, the terms of the MindSpring Capacity Agreement were
negotiated in conjunction with and were dependent upon the terms of the sale of
the operating assets of NETCOM to MindSpring. As such, these transactions are
collectively referred to as "Sale of Operating Assets of NETCOM".
Network Services
On July 15, 1999, the Company's board of directors adopted a formal plan
to dispose of the Company's investments in its wholly-owned subsidiaries, ICG
Fiber Optic Technologies, Inc. and Fiber Optic Technologies of the Northwest,
Inc. (collectively, "Network Services"). Accordingly, the Company's consolidated
financial statements reflect the operations of Network Services as discontinued
for all periods presented. On October 22, 1999, the Company completed the sale
of all of the capital stock of Network Services for total proceeds of $23.9
million in cash.
Satellite Services
On July 15, 1999, the Company's board of directors adopted a formal
plan to dispose of the Company's investments in ICG Satellite Services, Inc.
and Maritime Telecommunications Network, Inc. (collectively, "Satellite
Services"). Accordingly, the Company's consolidated financial statements
reflect the operations of Satellite Services as discontinued for all periods
presented. On November 30, 1999, the Company completed the sale of all of
the capital stock of Satellite Services to ATC Teleports, Inc. for total
proceeds of $98.1 million in cash.
Zycom
The Company owns a 70% interest in Zycom Corporation ("Zycom") which,
through its wholly owned subsidiary, Zycom Network Services, Inc. ("ZNSI"),
operated an 800/888/900 number services bureau and a switch platform in the
United States and supplied information providers and commercial accounts with
audiotext and customer support services. In June 1998, Zycom was notified by its
largest customer of the customer's intent to transfer its call traffic to
another service bureau. Accordingly, effective October 1, 1998, Zycom assigned
the majority of its revenue and the related volume purchase agreements to ICN
Limited. Zycom's board of directors approved a plan to wind down and ultimately
discontinue Zycom's operations on August 25, 1998. On October 22, 1998, Zycom
completed the transfer of all customer traffic to other providers. On January 4,
1999, the Company completed the sale of the remainder of Zycom's long-lived
operating assets to an unrelated third party for total proceeds of $0.2 million.
As Zycom's assets were recorded at estimated fair market value at December 31,
1998, no gain or loss was recorded on the sale during the year ended December
31, 1999.
The Company's consolidated financial statements reflect the operations of
Zycom as discontinued for all periods presented. The Company has accrued for all
expected future net losses of Zycom.
Financial Impacts of Asset Sales and Discontinued Operations
The following table illustrates the financial impacts of the sale of
assets of NETCOM, Network Services and Satellite Services and the discontinuance
of operations of Zycom for the three and six months ended June 30, 1999 and
2000:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
1999 2000 1999 2000
--------- --------- --------- -------
(in thousands)
Income (loss) from discontinued operations:
<TABLE>
<S> <C> <C> <C> <C>
Network Services (1) $ (8,662) - (9,074) -
Satellite Services 11 - 312 -
Zycom (2) - 736 - 736
Sale of Operating Assets of NETCOM:
Extraordinary gain recorded
on the sale of NETCOM - - 193,029 -
operations (3)
Taxes on sale of NETCOM - - (6,400) -
operations
Losses from discontinued
operations offset against
gain (including losses from - - (16,600) -
November 3, 1998 - February
17, 1999) (3)
Recognition of Deferred Gain 3,800 - 10,500 6,239
Summary Results of Operations
(February 17, 2000 - June 30, 2000):
Revenue - 8,300 - 12,600
Operating Costs - (13,800) - (23,200)
SG&A - (700) - (1,700)
</TABLE>
(1) Included in the loss from discontinued operations of Network Services for
both the three and six months ended June 30, 1999 is an $8.0 million
estimate of the loss on its disposal.
(2) Income from discontinued operations for both the three and six months
ended June 30, 2000 relate to legal fees incurred prior to January 1, 2000
by Zycom which were reimbursed as part of the final settlement of the
litigation outstanding (see note 6 "Commitments and Contingencies" in the
unaudited consolidated financial statements of the Company for the six
months ended June 30, 2000 included elsewhere herein).
(3) Offsetting the gain recorded on the Sale of Operating Assets of NETCOM
during the six months ended June 30, 1999 is approximately $16.6 million
of net losses from operations of NETCOM from November 3, 1998 (the date on
which the Company's board of directors adopted the formal plan to dispose
of the operations of NETCOM) through the dates of the sales. Also, as the
operations sold were acquired by ICG in a transaction accounted for as a
pooling of interests, the gain on the sales of the operations of NETCOM is
classified as an extraordinary item in the Company's consolidated
statement of operations.
<PAGE>
RESULTS OF OPERATIONS
The following table provides a breakdown of revenue, operating costs and
selling, general and administrative expenses for the Company for the periods
indicated. The table also shows certain revenue, expenses, operating loss,
EBITDA and EBITDA (before nonrecurring and noncash charges) as a percentage of
the Company's total revenue.
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
---------------------------------- ---------------------------------
1999 2000 1999 2000
---------------------------------- ---------------------------------
$ % $ % $ % $ %
---------------------------------- ---------------------------------
(unaudited)
(in thousands)
Statement of Operations
Data:
Revenue:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Local service (1) 76,770 65 127,502 73 144,169 65 230,097 69
Special access (2) 23,438 20 33,926 19 46,000 20 73,757 22
Switched access (3) 12,353 10 9,953 6 21,592 10 20,467 6
Long distance & other 5,093 5 4,372 2 10,224 5 8,656 3
(4)
---------------------------------- ---------------------------------
Total Revenue 117,654 100 175,753 100 221,985 100 332,977 100
Operating costs 59,458 51 102,589 58 113,107 51 185,491 56
Selling, general and 42,975 37 49,676 29 85,783 37 104,765 32
administrative
Depreciation and 44,683 38 72,892 42 81,058 36 137,491 41
amortization
Provision for impairment
of long-lived assets 29,300 25 - - 29,300 13 - -
Net loss on disposal of
long-lived assets - - 545 - - - 545 -
Other, net 398 - 828 - (535) - 1,259 -
--------------------------------------------------------------------
Operating loss (59,160) (50) (50,777) (29) (86,728) (39) (96,574) (29)
Other Data:
Net cash provided (used)
by operating activities 31,611 79,949 (10,591) 103,079
Net cash provided (used)
by investing activities (87,908) (223,626) 39,489 (375,458)
Net cash provided (used)
by financing activities (4,390) 599,036 (4,846) 665,243
EBITDA (5) (14,477) (12) 22,115 13 (5,670) (3) 40,917 12
EBITDA (before nonrecurring
and noncash charges)(5) 15,221 13 23,488 13 23,095 10 42,721 13
Capital expenditures of
continuing
operations (6) 133,025 343,668 235,937 556,876
Capital expenditures of
discontinued
operations (6) 3,354 - 6,159 -
</TABLE>
(Continued)
<PAGE>
<TABLE>
<CAPTION>
June 30, September December March June 30,
1999 30, 1999 31, 1999 31, 2000 2000
----------- ------------ ----------- ---------- ----------
(unaudited)
Statistical Data (7):
<S> <C> <C> <C> <C> <C>
Full time employees 2,753 3,054 2,853 2,930 2,975
Access lines in service (8) 494,405 584,827 730,975 904,629 1,112,964
Buildings connected:
On-net (9) 874 939 963 1,046 924
Hybrid (10) 5,915 6,476 7,115 7,746 8,228
----------- ----------- ---------- ---------- ----------
Total buildings connected 6,789 7,415 8,078 8,792 9,152
Operational switches:
Circuit 29 29 31 35 43
ATM - - 24 24 24
Frame Relay (11) 16 16 16 16 -
----------- ----------- ---------- ---------- ----------
Total operational switches 45 45 71 75 67
Regional fiber route miles (12):
Operational 4,406 4,449 4,596 4,807 4,767
Under construction - - - - 495
Regional fiber strand miles (13):
Operational 164,416 167,067 174,644 177,103 184,064
Under construction - - - - 12,254
Long-haul broadband route miles - - 18,000 18,000 18,000
Collocations with ILECs 126 139 147 183 188
</TABLE>
(1) Local service revenue includes revenue earned from providing competitive
voice and data services to business customers and network facilities and
data management services to ISP customers. Local service revenue also
includes revenue earned from terminating local traffic under agreements
with ILECs.
(2) Special access revenue includes revenue earned from providing direct
intra-state and intra-city private line broadband connections to long
distance carriers, ISP and end user business customers.
(3) Switched access revenue includes revenue earned from both switched
terminating access and SS7 gateway services.
Switched terminating access: Switched terminating access services provide
long distance customers connectivity to the ILEC's local switched network.
SS7 gateway services: SS7 gateway services allow for rapid call setup via
high-speed circuit switched connections. ICG services include nationwide
signaling with access to SS7 networks in every LATA.
(4) Long distance revenue includes revenue earned from providing voice services
outside the customers local calling area.
(5) EBITDA consists of earnings (loss) from continuing operations before
interest expense, income taxes, depreciation and amortization, other
expense, net and accretion and preferred dividends on preferred securities
of subsidiaries, or otherwise defined as operating loss plus depreciation
and amortization. EBITDA (before nonrecurring and noncash charges)
represents EBITDA before certain nonrecurring charges such as the net loss
(gain) on disposal of long-lived assets and other, net operating costs and
expenses, including deferred compensation. EBITDA and EBITDA (before
nonrecurring and noncash charges) are provided because they are measures
commonly used in the telecommunications industry. EBITDA and EBITDA (before
nonrecurring and noncash charges) are presented to enhance an understanding
of the Company's operating results and are not intended to represent cash
flows or results of operations in accordance with generally accepted
accounting principles ("GAAP") for the periods indicated. EBITDA and EBITDA
(before nonrecurring and noncash charges) are not measurements under GAAP
and are not necessarily comparable with similarly titled measures of other
companies. Net cash flows from operating, investing and financing
activities of continuing operations as determined using GAAP are also
presented in Other Data.
(6) Capital expenditures include assets acquired with cash, under capital
leases, and pursuant to IRU agreement. Capital expenditures of discontinued
operations includes the capital expenditures of Network Services, Satellite
Services, Zycom and NETCOM combined for all periods presented.
(7) Amounts presented are for three-month periods ended, or as of the end of
the period presented.
(8) Access lines in service at June 30, 2000 includes approximately 75%
provisioned through the Company's switch with the remainder provisioned
through resale and other agreements with various local exchange carriers.
Resale lines typically generate lower margins and are used primarily to
obtain customers. Although the Company plans to migrate most lines from
resale to higher margin on-switch lines, there is no assurance that it will
be successful in executing this strategy.
(9) Beginning in the three months ended June 30, 2000, on-net buildings will be
defined to exclude facilities used exclusively for ICG network operations.
(10) Hybrid buildings connected represent buildings connected to the Company's
network via another carrier's facilities.
(11) Frame relay switches are no longer included in switch count as
functionality is now handled by ATM switches.
(12) Regional fiber route miles refers to the number of miles of fiber optic
cable, including leased fiber. As of June 30, 2000, the Company had 4,767
regional fiber route miles. Regional fiber route miles under construction
represents fiber under construction, which is expected to be operational
within six months.
(13) Regional fiber strand miles refers to the number of regional fiber route
miles, including leased fiber, along a telecommunications path multiplied
by the number of fiber strands along that path. As of June 30, 2000, the
Company had 184,064 regional fiber strand miles. Regional fiber strand
miles under construction represents fiber under construction, which is
expected to be operational within six months.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Three Months Ended June 30,
---------------------------------------
1999 2000
------------------ -------------------
$ % $ %
-------- -------- --------- -------
($ values in thousands)
Local service 76,770 65 127,502 73
Special access 23,438 20 33,926 19
Switched access 12,353 10 9,953 6
Long distance & other 5,093 5 4,372 2
-------- -------- --------- -------
Total Revenue 117,654 100 175,753 100
======== ======== ========= =======
Operating costs 59,458 51 102,589 58
======== ======== ========= =======
Selling, general and
administrative 42,975 37 49,676 29
======== ======== ========= =======
Depreciation and amortization 44,683 38 72,892 42
======== ======== ========= =======
Revenue
Most of ICG's revenue is earned from small- to medium-sized business
customers who purchase voice and data communications services or by providing
network facilities and data management services to ISPs. The Company also offers
special access and switched access services to long-distance companies and other
customers. Total revenue increased $58.1 million or 49% from the three months
ended June 30, 1999 to 2000.
Local service revenue increased from $76.8 million for the three months
ended June 30, 1999 to $127.5 million for the same period in 2000, a 66% annual
increase primarily due to an increase in the average local access lines of 120%
offset by a reduction in the average revenue per line. This reduction in revenue
per line is driven by a higher percentage of ISP lines in 2000, which typically
earn lower revenue per line. Local service revenue includes approximately $40.1
million (or 34% of revenue) and $38.4 million (or 22% of revenue) for the three
months ended June 30, 1999 and 2000, respectively, for terminating local ISP
traffic. Revenue for terminating local ISP traffic for the three months ended
June 30, 2000, includes approximately $9 million derived from the resolution of
previously disputed issues not related to the period and approximately $4
million of revenues from rates earned pursuant to a previous interconnection
agreement, neither of which will recur in subsequent periods. Additionally,
approximately $3 million recognized in the three months ended June 30, 2000
relates to nonrecurring elements of terminating other traffic, which is also for
services not provided within the period. For further discussion on nonrecurring
reciprocal compensation revenue earned, see "Liquidity and Capital Resources -
Transport and Termination Charges".
<PAGE>
Special access revenue increased from $23.4 million for the three months
ended June 30, 1999 to $33.9 million for the same period in 2000, an increase of
45%. The increase in special access revenue is primarily due to increased unit
sales.
Switched access revenue decreased from $12.4 million for the three months
ended June 30, 1999 to $10.0 million for the same period in 2000, a 19%
decrease. The decrease is due to the expected attrition of switch customers.
Revenue from long distance services decreased from $5.1 million for the
three months ended June 30, 1999 to $4.4 million for the same period in 2000, a
14% decline. ICG's long distance revenue for the three months ended June 30,
2000 was impacted by planned attrition of resale access lines, which had high
long distance service penetration rates as well as a reduction in revenue per
minute.
Additionally, the increase in revenue during the three months ended June
30, 2000 over 1999 is also due to the recognition of approximately $8.3 million
of revenue during the three months ended June 30, 2000 which prior to February
17, 2000 had been offset against the deferred gain on the sale of NETCOM assets
(see further discussion in "Sale of Assets and Discontinued Operations" above).
Operating costs
Total operating costs increased from $59.5 million for the three months
ended June 30, 1999 to $102.6 million for the same period in 2000, a 72%
increase. Operating costs increased as a percentage of revenue from 51% for 1999
to 58% for 2000. Operating costs consist primarily of payments to ILECs, other
CLECs, and long distance carriers for the use of network facilities to support
local, special, switched access services and, long distance services as well as
internal network operating costs, right of way fees and other operating costs.
Internal network operating costs include the cost of engineering and operations
personnel dedicated to the operations and maintenance of the network. During
periods of rapid market expansion, such as ICG is experiencing in 2000, backhaul
and intracity facilities are leased on an interim basis until such time as owned
facilities are in service, resulting in an increase of operating expenses as
percent of revenue. During the three months ended June 30, 2000, ICG incurred
approximately $7 million associated with the advanced deployment of lines in
expansion cities to accommodate customer requirements. The lines were
provisioned using either ILEC or other CLEC capacity to meet customer demand. As
ICG completes installation of switches in these markets, operating costs are
expected to decline as the number of leased lines decreases and ICG earns
revenue from terminating local traffic. Additionally, the increase in operating
costs during the three months ended June 30, 2000 over 1999 is due to the
recognition of approximately $13.8 million of operating expenses for the three
months ended June 30, 2000 which prior to February 17, 2000 had been offset
against the deferred gain on the sale of NETCOM assets (see further discussion
in "Sale of Assets and Discontinued Operations" above). ICG expects the ratio of
operating costs to revenue will decrease as ICG provides a greater volume of
higher margin services, carries more traffic on its own facilities rather than
leased facilities and obtains the right to use unbundled leased facilities on
satisfactory terms, any or all of which may not occur.
Selling, general and administrative expenses
Total selling, general and administrative ("SG&A") expenses increased from
$43.0 million for the three months ended June 30, 1999 to $49.7 million for the
same period in 2000, a 16% increase. SG&A expenses decreased as a percentage of
revenue from 37% for 1999 to 29% for 2000. The increase in absolute dollars is
principally due to an increase in average staff levels and increased salary and
benefits per employee attributable to the new compensation plan implemented in
2000 to remain competitive in the marketplace. The number of full time employees
increased from 2,753 at June 30, 1999 to 2,975 at June 30, 2000. Certain of the
SG&A increase can also be attributed to increases in facilities costs for new
office space as well as increased sales and property taxes as well as legal and
professional fees. These increases were offset by a net recovery of previously
reserved uncollectible amounts. SG&A costs as a percent of revenue are expected
to continue to decline as ICG benefits from a larger revenue base for which the
most significant new product development costs have been incurred and as
efficiencies from new systems and processes are experienced.
<PAGE>
Depreciation and amortization
Depreciation and amortization increased from $44.7 million for the three
months ended June 30, 1999 to $72.9 million for the same period in 2000. The
increase is primarily due to increased investment in depreciable assets
resulting from the continued expansion of the Company's networks and services,
as well as a reduction in the overall weighted-average useful life of
depreciable assets in service as ICG invests a larger portion of its capital in
assets with shorter lives such as routers and computers. ICG expects that
depreciation and amortization will continue to increase as ICG continues to
build out its network.
Provision for impairment of long-lived assets
During the three months ended June 30, 1999, the Company recorded a
provision for impairment of long-lived assets of $29.3 million. This provision
relates to the impairment of software and other capitalized costs associated
with the Company's billing and provisioning system projects under development.
The provision for impairment of long-lived assets was based on management's
decision to abandon the billing and provisioning solutions under development and
to select new vendors for these systems, which vendors are expected to provide
the Company with billing and provisioning solutions with improved functionality
and earlier delivery dates at lower costs than what was proposed by the former
vendors. The provision for impairment of long-lived assets was recorded based on
management's estimate of the net realizable value.
Other, net
Other, net operating costs and expenses increased from $0.4 million of
expense for the three months ended June 30, 1999 to $1.3 million for the same
period in 2000. For both the three months ended June 30, 1999 and 2000, other,
net operating costs and expenses primarily includes deferred compensation
expense related to the Company's deferred compensation arrangement with its
chief executive officer.
Interest expense
Interest expense increased from $51.3 million for the three months ended
June 30, 1999 to $66.8 million for the same period in 2000. Included in interest
expense for the three months ended June 30, 1999 and 2000 was $47.1 million and
$57.4 million of noncash interest, respectively. The Company's interest expense
will continue to increase as the principal amount of its indebtedness increases
due to the accretion of noncash interest. The Company's senior indebtedness does
not begin to pay interest in cash until 2001. Interest expense also increased
due to the increase in debt issued under the senior secured financing facility
(the "Senior Facility"). Additionally, interest expense is net of interest
capitalized related to construction in process of $3.5 million and $2.2 million
during the three months ended June 30, 1999 and 2000, respectively.
Interest income
Interest income increased from $3.8 million for the three months ended
June 30, 1999 to $11.3 million for the same period in 2000. The increase is
attributable to the increase in cash, cash equivalents and short-term
investments resulting from the cash proceeds to the Company of the 8% Series A
Convertible Preferred Stock.
Accretion and preferred dividends on preferred securities of subsidiaries
Accretion and preferred dividends on preferred securities of subsidiaries
increased from $15.2 million for the three months ended June 30, 1999 to $17.1
million for the same period in 2000. The increase is due primarily to the
periodic payment of dividends on the 14% Exchangeable Preferred Stock
Mandatorily Redeemable 2008 (the "14% Preferred Stock") and the 14 1/4%
Exchangeable Preferred Stock Mandatorily Redeemable 2009 (the "14 1/4% Preferred
Stock") in additional shares of 14% Preferred Stock and 14 1/4% of Preferred
Stock. Accretion and preferred dividends on preferred securities of subsidiaries
recorded during the three months ended June 30, 2000 consists of the accretion
of issuance costs and the accrual of the preferred securities dividends
associated with the 6 3/4% Exchangeable Limited Liability Company Preferred
Securities Mandatorily Redeemable 2009 (the "6 3/4% Preferred Securities"), the
14% Preferred Stock and the 14 1/4% Preferred Stock.
Loss from continuing operations
Loss from continuing operations decreased from $123.8 million for the
three months ended June 30, 1999 to $123.6 million for same period in 2000 due
to the increases in operating costs, SG&A expenses and depreciation and
amortization, offset by an increase in revenue and a decrease in the provision
for impairment of long-lived assets, as noted above.
Income (loss) from discontinued operations
Income (loss) from discontinued operations was an $8.7 million loss for
the three months ended June 30, 1999 and $0.7 million income for the same period
in 2000. The loss from discontinued operations for 1999 consists of the combined
net losses of Network Services and Satellite Services. Net loss from
discontinued operations for the three months ended June 30, 1999 including an
estimated loss on the disposal of Network Services of $8.0 million. Income from
discontinued operations in 2000 is from the Zycom legal expenses reimbursed as
part of the settlement outstanding with the minority shareholders. (See "Sale of
Assets and Discontinued Operations" for further discussion)
Accretion and dividends of 8% Series A Convertible Preferred Stock to
liquidation value.
Accretion and dividends of 8% Series A Convertible Preferred Stock to
liquidation value is comprised of the dividends and the accretion to liquidation
value of the 8% Series A Convertible Preferred Stock of$14.4 million.
Charge for beneficial conversion feature of 8% Series A Convertible Preferred
Stock
Charge for beneficial conversion of 8% Series A Convertible Preferred
Stock during the three months ended June 30, 2000 relates to the charge of
$159.3 million of the proceeds of the 8% Series A Convertible Preferred Stock
which was allocated to the intrinsic value of the beneficial conversion feature
of the convertible preferred securities to additional paid-in capital. As the 8%
Series A Convertible Preferred Stock is immediately convertible into shares of
ICG common stock, the beneficial conversion feature was recognized immediately
as a return to the preferred shareholders during the three months ended June 30,
2000.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Six Months Ended June 30,
---------------------------------------
1999 2000
------------------ -------------------
$ % $ %
-------- -------- --------- -------
($ values in thousands)
Local service 144,169 65 230,097 69
Special access 46,000 20 73,757 22
Switched access 21,592 10 20,467 6
Long distance & other 10,224 5 8,656 3
-------- -------- --------- -------
Total Revenue 221,985 100 332,977 100
======== ======== ========= =======
Operating costs 113,107 51 185,491 56
======== ======== ========= =======
Selling, general and
administrative 85,783 37 104,765 32
======== ======== ========= =======
Depreciation and amortization 81,058 36 137,491 41
======== ======== ========= =======
<PAGE>
Revenue
Most of ICG's revenue is earned from small- to medium-sized business
customers who purchase voice and data communications services or by providing
network facilities and data management services to ISPs. The Company also offers
special access and switched access services to long-distance companies and other
customers. Total revenue increased $111.0 million or 50% from the six months
ended June 30, 1999 to 2000.
Local service revenue increased from $144.2 million for the six months
ended June 30, 1999 to $230.1 million for the same period in 2000, a 60% annual
increase primarily due to an increase in the average local access lines offset
by a reduction in the average revenue per line. This reduction in revenue per
line is driven by a higher percentage of ISP lines in 2000, which typically earn
lower revenue per line. Local service revenue includes approximately $70.9
million (or 32% of revenue) and $74.0 million (or 22% of revenue) for the six
months ended June 30, 1999 and 2000, respectively, for terminating local ISP
traffic. Revenue for terminating local ISP traffic for the six months ended June
30, 2000, includes approximately $13 million derived from the resolution of
previously disputed issues not related to the respective period and
approximately $4 million of revenues from rates earned pursuant to the previous
interconnection agreement, neither of which will recur in subsequent periods.
Additionally, approximately $3.0 million recognized in the three months ended
June 30, 2000 relates to nonrecurring elements of terminating other traffic,
which is also for services not provided within the period. For further
discussion on nonrecurring reciprocal compensation revenue earned, see
"Liquidity and Capital Resources - Transport and Termination Charges" below.
Special access revenue increased from $46.0 million for the six months
ended June 30, 1999 to $73.8 million for the same period in 2000, an increase of
60%. The increase in special access revenue is due to increased unit sales as
well as $12.5 million of revenue recognized during the six months ended June 30,
2000 under ICG's fiber optic sales- type lease agreement with a major
interexchange carrier.
Switched access revenue decreased from $21.6 million for the six months
ended June 30, 1999 to $20.5 million for the same period in 2000, a 5% decrease.
The decrease is due to the expected attrition of switch customers.
Revenue from long distance services decreased from $10.2 million for the
six months ended June 30, 1999 to $8.7 million for the same period in 2000, a
15% decline. ICG's long distance revenue for the six months ended June 30, 2000
was impacted by planned attrition of resale access lines, which had high long
distance service penetration rates as well as a reduction in revenue per minute.
Additionally, the overall increase in revenue can also be attributed to
the recognition of $12.6 million of revenue which prior to February 17, 2000 had
been offset against the deferred gain on the sale of NETCOM assets (see further
discussion in "Sale of Assets and Discontinued Operations" above).
Operating costs
Total operating costs increased from $113.1 million for the six months
ended June 30, 1999 to $185.5 million for the same period in 2000, a 64%
increase. Operating costs increased as a percentage of revenue from 51% for 1999
to 56% for 2000. During periods of rapid market expansion, such as ICG is
experiencing in 2000, backhaul and intracity facilities are leased on an interim
basis until such time as owned facilities are in service resulting in an
increase of operating expenses as a percent of revenue.. As ICG completes
installation of switches in these markets operating costs may decline for these
lines and ICG will earn revenue from terminating local traffic. Additionally,
the increase in operating costs during the six months ended June 30, 2000 over
1999 is due to the recognition of approximately $23.2 million of operating
expenses for the six months ended June 30, 2000 which prior to February 17, 2000
had been offset against the deferred gain on the sale of NETCOM assets (see
further discussion in "Sale of Assets and Discontinued Operations" above). ICG
expects the ratio of operating costs to revenue will decrease as ICG provides a
greater volume of higher margin services, carries more traffic on its own
facilities rather than the leased facilities and obtains the right to use
unbundled leased facilities on satisfactory terms, any or all of which may not
occur.
<PAGE>
Selling, general and administrative expenses
Total selling, general and administrative ("SG&A") expenses increased from
$85.8 million for the six months ended June 30, 1999 to $104.8 million for the
same period in 2000. SG&A expenses decreased as a percentage of revenue from 39%
for 1999 to 32% for 2000. The increase in absolute dollars is principally due to
an increase in average staff levels and increased salary and benefits per
employee attributable to the new compensation plan implemented in 2000 to remain
competitive in the marketplace. The number of full time employees increased from
2,753 at June 30, 1999 to 2,975 at June 30, 2000. Certain of the SG&A increase
can also be attributed to increases in facilities costs for new office and
switch space as well as increased sales and property taxes and legal and
professional fees offset by a net recovery of previously reserved uncollectible
amounts. Additionally, the increase in SG&A expenses during the six months ended
June 30, 2000 over 1999 is due to the recognition of $1.7 million of SG&A
expenses which prior to February 17, 2000 had been offset against the deferred
gain on the sale of NETCOM assets (see further discussion in "Sale of Assets and
Discontinued Operations" above). SG&A costs as a percent of revenue are expected
to continue to decline as ICG benefits from a larger revenue base for which the
most significant new product development costs have been incurred and as
efficiencies from new systems and processes are experienced.
Depreciation and amortization
Depreciation and amortization increased from $81.1 million for the six
months ended June 30, 1999 to $137.5 million for the same period in 2000. The
increase is primarily due to increased investment in depreciable assets
resulting from the continued expansion of the Company's networks and services as
well as a reduction in the overall weighted-average useful life of depreciable
assets in service as ICG invests a larger portion of its capital in assets with
shorter lives such as routers and computers. ICG expects that depreciation and
amortization will continue to increase as ICG continues to build out its
network.
Provision for impairment of long-lived assets
During the six months ended June 30, 1999, the Company recorded a
provision for impairment of long-lived assets of $29.3 million. This provision
relates to the impairment of software and other capitalized costs associated
with the Company's billing and provisioning system development projects under
development. The provision for impairment of long-lived assets was based on
management's decision to abandon the billing and provisioning solutions under
development and to select new vendors for these systems, which vendors are
expected to provide the Company with billing and provisioning solutions with
improved functionality and earlier delivery dates at lower costs than what was
proposed by the former vendors. The provision for impairment of long-lived
assets was recorded based on management's estimate of the net realizable value.
Other, net
Other, net operating costs and expenses decreased from $0.5 million of
income for the six months ended June 30, 1999 to $1.3 million of expense for the
same period in 2000. For both the six months ended June 30, 1999 and 2000,
other, net operating costs and expenses primarily includes deferred compensation
expense related to the Company's deferred compensation arrangement with its
chief executive officer.
Interest expense
Interest expense increased from $98.7 million for the six months ended
June 30, 1999 to $129.4 million for the same period in 2000. Included in
interest expense for the six months ended June 30, 1999 and 2000 was $92.7
million and $111.3 million of noncash interest, respectively. The Company's
interest expense will continue to increase as the principal amount of its
indebtedness increases due to the accretion of noncash interest. The Company's
senior indebtedness does not begin to pay interest in cash until 2001. Interest
expense also increased due to the increase in debt issued under the senior
secured financing facility (the "Senior Facility"). Additionally, interest
expense is net of interest capitalized related to construction in process of
$6.7 million and $3.6 million during the six months ended June 30, 1999 and
2000, respectively.
Interest income
Interest income increased from $7.9 million for the six months ended June
30, 1999 to $14.5 million for the same period in 2000. The increase is
attributable to the increase in cash, cash equivalents and short-term
investments resulting from the cash proceeds to the Company of the 8% Series A
Convertible Preferred Stock.
Accretion and preferred dividends on preferred securities of subsidiaries
Accretion and preferred dividends on preferred securities of subsidiaries
increased from $30.0 million for the six months ended June 30, 1999 to $33.8
million for the same period in 2000. The increase is due primarily to the
periodic payment of dividends on the 14% Exchangeable Preferred Stock
Mandatorily Redeemable 2008 (the "14% Preferred Stock") and the 14 1/4%
Exchangeable Preferred Stock Mandatorily Redeemable 2009 (the "14 1/4% Preferred
Stock") in additional shares of 14% Preferred Stock and 14 1/4% of Preferred
Stock. Accretion and preferred dividends on preferred securities of subsidiaries
recorded during the six months ended June 30, 2000 consists of the accretion of
issuance costs and the accrual of the preferred securities dividends associated
with the 6 3/4% Exchangeable Limited Liability Company Preferred Securities
Mandatorily Redeemable 2009 (the "6 3/4% Preferred Securities"), the 14%
Preferred Stock and the 14 1/4% Preferred Stock.
Loss from continuing operations
Loss from continuing operations increased from $210.0 million for the six
months ended June 30, 1999 to $245.2 million for same period in 2000 due to the
increases in operating costs, SG&A expenses, depreciation and amortization and
provision for impairment of long-lived assets, offset by an increase in revenue
and a decrease in the provision for impairment of long-lived assets, as noted
above.
Income (loss) from discontinued operations
Income (loss) from discontinued operations was a loss of $8.8 million for
the six months ended June 30, 1999 and income of $0.7 million for the same
period in 2000. The loss from discontinued operations for the six months ended
June 30, 1999 consists of the combined net losses of Network Services and
Satellite Services including an estimated loss on the disposal of Network
Services of $8.0 million. Income from discontinued operations in 2000 is from
the Zycom legal expenses reimbursed as part of the settlement outstanding with
the minority shareholders. (See "Sale of Assets and Discontinued Operations"
above for further discussion.)
Extraordinary gain on sales of operations of NETCOM
The Company reported an extraordinary gain on the sales of the operations
of NETCOM during the six months ended June 30, 1999 of $193.0 million, net of
income taxes of $6.4 million. Offsetting the gain on the sales is approximately
$16.6 million of net losses of operations of NETCOM from November 3, 1998
through the dates of the sales and approximately $35.5 million of the proceeds
was deferred and recognized over the one year term of the MindSpring Capacity
Agreement. (See "Sale of Assets and Discontinued Operations" above for further
discussion.)
Accretion and dividends of 8% Series A Convertible Preferred Stock to
liquidation value.
Accretion and dividends of 8% Series A Convertible Preferred Stock to
liquidation value is comprised of the dividends and the accretion to liquidation
value of the 8% Series A Convertible Preferred Stock of$14.4 million.
<PAGE>
Charge for beneficial conversion feature of 8% Series A Convertible Preferred
Stock
Charge for beneficial conversion of 8% Series A Convertible Preferred
Stock during the three months ended June 30, 2000 relates to the charge of
$159.3 million of the proceeds of the 8% Series A Convertible Preferred Stock
which was allocated to the intrinsic value of the beneficial conversion feature
of the convertible preferred securities to additional paid-in capital. As the 8%
Series A Convertible Preferred Stock is immediately convertible into shares of
ICG common stock, the beneficial conversion feature was recognized immediately
as a return to the preferred shareholders during the three months ended June 30,
2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's growth to date has been funded through a combination of
equity, debt and lease financing and non-core asset sales. The Company has
incurred losses since inception. As of June 30, 2000, the Company had
approximately $528.0 million of cash and short term investments and
approximately $25.0 million of credit available under the Senior Facility,
amounts adequate to fund operations and capital expansion through early 2001.
Management believes that financing, including bank financing, vendor
financing, and/or the issuance of high yield debt will likely be available to
fund operations and achieve the Company's targeted future growth beyond early
2001. While the Company believes that it will be able to obtain additional
financing, there can be no assurance that such financing will be available on a
timely basis, on acceptable terms or at all.
Net Cash Provided (Used) By Operating Activities
The Company's operating activities used $10.6 million and provided $103.1
million for the six months ended June 30, 1999 and 2000, respectively. Net cash
provided (used) by operating activities increased primarily due to the advance
payments received pursuant to the IRU agreements.
Net Cash Provided (Used) By Investing Activities
Investing activities provided $39.5 million and used $375.5 million in the
six months ended June 30, 1999 and 2000, respectively. Net cash provided by
investing activities for the six months ended June 30, 1999 includes proceeds
from the sales of the operations of NETCOM of $252.9 million and proceeds from
the sales of short-term investments available for sale and marketable securities
of $51.8 million, offset by cash expended for the acquisition of property,
equipment and other assets of $229.7 million and the change in accounts payable
for the purchase of long-term assets of $11.4 million. Net cash used by
investing activities for the six months ended June 30, 2000 primarily includes
cash expended for the acquisition of property, equipment and other assets of
$352.8 million and the change in accounts payable for the purchase of long-term
assets of $43.5 million, partially offset by proceeds from the sale of
short-term investments available for sale and marketable securities of $19.3
million. The Company will continue to use cash in 2000 and subsequent periods
for the construction of new networks, the expansion of existing networks and,
potentially, for acquisitions. The Company acquired assets under capital leases
and pursuant to IRU agreements of $209.6 million during the six months ended
June 30, 2000.
Net Cash Provided (Used) By Financing Activities
Financing activities used $4.8 million and provided $665.2 million in the
six months ended June 30, 1999 and 2000, respectively. Net cash provided (used)
by financing activities for the six months ended June 30, 1999 and 2000 include
proceeds from the issuance of common stock in conjunction with the exercise of
options and warrants and the Company's employee stock purchase plan, offset by
principal payments on long-term debt and capital leases and payments of
preferred dividends on preferred securities of subsidiaries. Net cash provided
by financing activities for the six months ended June 30, 2000 also includes
$95.0 million in proceeds from the issuance of long-term debt and $720.3 million
in proceeds from the issuance of the 8% Series A Convertible Preferred Stock
partially offset by $149.7 million of payments made on the IRU agreement.
On August 12, 1999, ICG Equipment and NetAhead entered into a $200.0
million senior secured financing facility (the "Senior Facility") consisting of
a $75.0 million term loan, a $100.0 million term loan and a $25.0 million
revolving line of credit. As of June 30, 2000, $174.3 million was outstanding
under the loans at weighted average interest rates ranging from 9.56% to 9.87%
for the six months ended June 30, 2000. Quarterly repayments on the debt
commence at various dates beginning September 30, 1999 with remaining
outstanding balances maturing on June 30, 2005 for the $100.0 million term loan
and the $25.0 million line of credit and March 31, 2006 for the $75.0 million
term loan.
As of June 30, 2000, the Company had an aggregate accreted value of
approximately $1.9 billion outstanding under the 13 1/2% Senior Discount Notes
due 2005 (the "13 1/2 % Notes"), the 12 1/2% Senior Discount Notes due 2006 (the
"12 1/2 % Notes"), the 11 5/8% Senior Discount Notes due 2007 (the "11 5/8 %
Notes"), the 10% Notes and the 9 7/8% Notes. The 13 1/2% Notes require payments
of interest to be made in cash commencing March 15, 2001 and mature on September
15, 2005. The 12 1/2% Notes require payments of interest to be made in cash
commencing November 1, 2001 and mature on May 1, 2006. The 11 5/8% Notes require
payments of interest to be made in cash commencing September 15, 2002 and mature
on March 15, 2007. The 10% Notes require payments of interest in cash commencing
August 15, 2003 and mature on February 15, 2008. The 9 7/8% Notes require
payments of interest in cash commencing November 1, 2003 and mature on May 1,
2008. With respect to fixed rate senior indebtedness outstanding on June 30,
2000, the Company has cash interest payment obligations of approximately $113.3
million in 2001, $158.0 million in 2002, $212.6 million in 2003 and $257.2
million in 2004.
As of June 30, 2000, an aggregate amount of $1.2 billion was outstanding
under the 6 3/4% Preferred Securities, the 14% Preferred Stock, the 14 1/4%
Preferred Stock and the 8% Series A Convertible Preferred Stock. The 6 3/4%
Preferred Securities require payments of dividends to be made in cash through
November 15, 2000. The 14% Preferred Stock and 14 1/4% Preferred Stock require
payments of dividends to be made in cash commencing June 15, 2002 and August 1,
2001, respectively. Additionally, the 8% Series A Convertible Preferred
Securities require dividend payments in additional liquidation preference
through June 30, 2005 and are payable in cash or additional liquidation
preference from September 30, 2005 through June 30, 2015. With respect to
preferred securities currently outstanding, the Company has cash dividend
obligations of approximately $4.5 million remaining in 2000 for which the
Company has restricted cash balances available for such dividend payments, $10.7
million in 2001 and $35.4 million in 2002 and each year thereafter through 2007.
Capital Expenditures
The Company's capital expenditures including assets acquired with cash,
under capital leases and pursuant to IRU agreement were $235.9 million and
$556.9 million for the six months ended June 30, 1999 and 2000, respectively.
The Company anticipates that the expansion of existing networks, construction of
new networks and further development of the Company's products and services will
require capital expenditures of approximately $500.0 million during the
remainder of 2000. In the event that the Company's efforts to acquire new
customers and deploy new services are more successful then planned, the Company
may be required to expand capital resources earlier in the year than expected to
accommodate customer demands.
During the six months ended June 30, 2000, the Company formalized two
agreements with Cisco Systems, Inc. The Company believes that these financing
agreements will better enable the Company to fund its scheduled network
expansion through the purchase of Cisco equipment. The Cisco credit facilities
provide for up to $180.0 million of financing with a three-year repayment term.
To facilitate the expansion of its services and networks, the Company has
entered into equipment purchase agreements with various vendors under which the
Company has committed to purchase a substantial amount of equipment and other
assets, including a full range of switching systems, fiber optic cable, network
electronics, software and services. If the Company fails to meet the minimum
purchase level in any given year, the vendor may discontinue certain discounts,
allowances and incentives otherwise provided to the Company. Further, the
Company's ability to make capital expenditures to meet its business plan will
depend on numerous factors, including certain factors beyond the Company's
control. These factors include, but are not limited to, economic conditions,
competition, regulatory developments and the availability of equity, debt and
lease financing.
Other Cash Commitments and Capital Requirements
The Company's operations have required and will continue to require
significant capital expenditures for development, construction, expansion and
acquisition of telecommunications assets. Significant amounts of capital are
required to be invested before revenue is generated, which results in initial
negative cash flows. In addition to the Company's planned capital expenditures,
it has other cash commitments as described in the footnotes to the Company's
unaudited consolidated financial statements for the six months ended June 30,
2000 included elsewhere herein.
In view of the continuing development of the Company's products and
services, the expansion of existing networks and the construction, leasing and
licensing of new networks, the Company will require additional amounts of cash
in the future from outside sources. Changes in the Company's business plan may
require additional sources of cash which may be obtained through public and
private equity and debt financings, credit facilities and other financing
arrangements. In the past, the Company has been able to secure sufficient
amounts of financing to meet its capital needs. There can be no assurance,
however, that additional financing will be available to the Company or, if
available, that it can be obtained on terms acceptable to the Company.
The failure to obtain sufficient amounts of financing could result in the
delay or abandonment of some or all of the Company's development and expansion
plans, which could have a material adverse effect on the Company's business. In
addition, the inability to fund operating deficits with the proceeds of
financings until the Company establishes a sufficient revenue-generating
customer base could have a material adverse effect on the Company's liquidity.
Receivables
Net receivables increased from December 31, 1999 to June 30, 2000 by $36.0
million. The increase is primarily due to the following: i) a receivable from
the sale of the NorthPoint stock for which the cash was received in early July,
ii) a decrease in the allowance for doubtful accounts due to the elimination of
the uncertainty of collection of certain balances (see additional discussion in
"Transport and Termination Charges" below), and iii) an increase in the number
of days outstanding of trade accounts receivable which are allpartially offset
by increased cash receipts during the six months.
Transport and Termination Charges
Terminating Local Traffic
ICG records revenue earned under interconnection agreements with incumbent
local exchange carriers ("ILEC") as an element of its local services revenue.
Some of the ILECs have not paid all of the bills they have received from ICG and
have disputed these charges based on the belief that dial-up calls to ISPs are
not local traffic as defined by the various agreements and not subject to
payment of transport and termination charges under state and federal laws and
public policies. In addition, some ILECs, while paying a portion of reciprocal
compensation due to ICG, have disputed other portions of the charges.
ICG has, as of June 30, 2000, a net receivable for terminating local
traffic in the approximate amount of $54 million, $29 million of which will be
paid, pursuant to the terms of an executed agreement with one ILEC, when
regulatory approval of amendments to the parties' interconnection agreements
have been obtained. ICG has received cash of approximately $26 million and $84
million during the three months and six months ended June 30, 2000,
respectively, from the ILECs for terminating local traffic.
The following table represents the amount of revenue ICG has recognized
for terminating local traffic of the ILECs during the respective periods ($ in
millions):
Three months ended June 30, Six months ended June 30,
1999 2000 1999 2000
------------- ------------ ----------- ------------
$40.1 $38.4 $70.9 $74.0
Revenue for the three months and six months ended June 30, 1999 includes
approximately $12 million and $22 million, respectively, for the tandem
switching and common transport rate elements, the collection of which was
determined to be uncertain in the quarter commencing July 1, 1999. ICG recorded
a provision of approximately $45 million against the accounts receivable
balances recorded prior to July 1, 1999 in the event the tandem switching and
common transport rate element amounts were not ultimately collected. Effective
July 1, 1999, ICG ceased recognition of these rate elements as revenue until
cash is received but continued to bill and vigorously pursue collection of all
amounts due under its interconnection agreements.
During the six months ended June 30, 2000, ICG entered into agreements to
resolve certain disputes with two ILECs that collectively represent
approximately 75% of ICG's applicable terminating traffic. One of the agreements
has an effective date of December 31, 1999 and the other June 1, 2000. The
agreements separately resolve the payment of certain past amounts. The revenue
for the three months and six months ended June 30, 2000 includes approximately
$9 million and $13 million, respectively, derived from the resolution of
previously disputed issues not related to the respective periods and
approximately $4 million in each of the periods from rates earned pursuant to
the previous interconnection agreement, neither of which will recur in
subsequent periods.
The resolution of ICG's disputes with the remaining ILECs will continue to
be based on rulings by state public utility commissions and/or by the Federal
Communications Commission ("FCC"), or through negotiations between the parties.
ICG continues to pursue collection of the remaining amounts owed by these ILECs
under ICG's existing interconnection agreements, and certain disputes remain
outstanding.
Other Transport and Terminating Traffic
ICG has also recognized revenue for other transport and terminating
traffic of the ILECs. The amount of revenue recognized, pursuant to ICG's
interconnection agreements, during the respective periods ($ in millions):
Three months ended June 30, Six months ended June 30,
1999 2000 1999 2000
------------- ------------ ----------- ------------
$2.3 $11.0 $7.6 $16.5
The revenue for the three months and six months ended June 30, 2000
include approximately $3 million derived from the resolution of previously
disputed issues not related to the respective periods.
ICG has, as of June 30, 2000, a net receivable for other terminating
traffic in the approximate amount of $25 million, $16 million of which is due
from one ILEC and payment in this amount will be received as it is part of a
binding agreement, subject only to regulatory approval of the interconnection
agreements. ICG has received cash of approximately $3 million and $7 million,
during the three months and six months ended June 30, 2000, respectively.
Future Reciprocal Compensation Revenue
ICG has reached interconnection agreements with certain ILECs that provide
for the payment of compensation for terminating ISP traffic. These agreements
expire at dates ranging from October 2000 through May 2003. Upon expiration of
its interconnection agreements, the Company expects to continue to negotiate
and/or arbitrate reasonable compensation and collection terms for transport and
termination services, although there is no assurance that such compensation will
remain consistent with current levels. Additionally, in those states in which
ICG has not reached a negotiated resolution with the ILEC with respect to the
reciprocal compensation rate to be applied on a going-forward basis, and/or for
subsequent time periods, ongoing state and federal regulatory proceedings
addressing intercarrier compensation for Internet traffic also may impact future
rates of compensation.
Subsequent to quarter end, the Colorado PUC issued a ruling in an ICG
arbitration decision that, subject to the outcome of PUC reconsideration and
judicial appellate proceedings, denies ICG the ability to collect reciprocal
compensation for ISP-bound traffic initiated on the incumbent network and
connected on ICG's network in Colorado when a new interconnection agreement
between ICG and Qwest Communications (formerly US West) becomes effective. ICG
believes that the new interconnection agreement may become effective by the
fourth quarter, subject to the outcome of the PUC's decision on reconsideration
and after the parties' execute and receive PUC approval of a new interconnection
agreement that complies with the PUC's final arbitration decision. Once
effective, the terms in the new agreement concerning compensation for
terminating ISP traffic will then be applied retroactively beginning 45 days
prior to the effective date of the new agreement. Pursuant to the PUC's
procedures, ICG will file by August 28, 2000 for reconsideration by the PUC of
the terminating ISP compensation provisions of the arbitration decision, and
will vigorously pursue judicial review of the final PUC decision if necessary.
In prior periods, the impacted traffic has represented approximately 15% of the
applicable terminating traffic.
While ICG intends to pursue the collection of all receivables related to
transport and termination charges and believes that future revenue from
transport and termination charges recognized under ICG's interconnection
agreements will be realized, there can be no assurance that future regulatory
and judicial rulings will be favorable to ICG, or that different reciprocal
compensation rates and rate structures will not be adopted when ICG's agreements
are renegotiated or arbitrated, or as a result of FCC or state commission
proceedings on future compensation methods. ICG believes that different pricing
plans will continue to be considered and adopted, and although ICG expects that
revenue from transport and termination charges likely will decrease as a
percentage of total local services revenue from local services in subsequent
periods, ICG's local termination services will still be required by the ILECs
and must be provided under the Telecommunications Act of 1996, and likely will
result in increasing volume in minutes due to the growth of the Internet and
related services markets.
During the three months ended June 30, 2000, ICG successfully negotiated
agreements, which assured the recognition and receipt of compensation for
terminating ISP traffic and resolved disputed issues with two ILECs as discussed
above. The future rates negotiated are generally lower than ICG has been
historically receiving and were negotiated for a three-year period subsequent to
the date of the agreements. The rates negotiated in these agreements will apply
for the term of the agreement irrespective of any state or federal regulatory or
judicial rulings that may be issued over the three-year period concerning the
applicability of compensation obligations for ISP traffic. ICG may not be able
to sustain its current position of earning revenue for terminating local traffic
in the state of Colorado. In addition, approximately $13 million and $3 million
of the revenue recognized during the three months ended June 30, 2000 for
terminating local traffic and for terminating other traffic is nonrecurring. As
a result of these factors, ICG therefore expects its revenue from these sources
and the EBITDA contribution from these sources may be significantly less in the
quarter ending September 30, 2000 than in the quarter ending June 30, 2000.
The revenue from reciprocal compensation is driven by three factors. The
number of lines on switch, the minutes of use per line, and the rate under the
interconnnection agreement. These factors are in large measure beyond the
control of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial position and cash flows are subject to a variety
of risks in the normal course of business, which include market risks associated
with movements in interest rates and equity prices. The Company routinely
assesses these risks and has established policies and business practices to
protect against the adverse effects of these and other potential exposures. The
Company does not, in the normal course of business, use derivative financial
instruments for trading or speculative purposes.
Interest Rate Risk
The Company's exposure to market risk associated with changes in interest
rates relates primarily to the Company's investments in marketable securities
and its senior indebtedness.
The Company invests primarily in high grade short-term investments which
consist of money market instruments, commercial paper, certificates of deposit,
and government and agency obligations, all of which are considered to be
available for sale and generally have maturities of one year or less. The
Company's short-term investment objectives are safety, liquidity and yield, in
that order. As of June 30, 2000, the Company had approximately $528.0 million in
cash, cash equivalents, and short-term investments available for sale at a
weighted average fixed interest rate of 6.58% for the six months ended June 30,
2000. A hypothetical 10% fluctuation in market rates of interest would not cause
a material change in the fair value of the Company's investment in marketable
securities at June 30, 2000 and, accordingly, would not cause a material impact
on the Company's financial position, results of operations or cash flows.
At June 30, 2000, the Company's indebtedness included $1.9 billion under
the 13 1/2% Notes, 12 1/2% Notes, 11 5/8% Notes, 10% Notes and 9 7/8% Notes and
$641.6 million under the 14 1/4% Preferred Stock, 14% Preferred Stock, 6 3/4%
Preferred Securities and 8% Series A Convertible Preferred Stock. These
instruments contain fixed annual interest and dividend rates. Accordingly, any
change in market interest rates would have no impact on the Company's financial
position, results of operations or cash flows. Future increases in interest
rates could increase the cost of any new borrowings by the Company. The Company
does not hedge against future changes in market rates of interest.
On August 12, 1999, the Company entered into the Senior Facility,
consisting of two term loans and a revolving line of credit. All components of
the Senior Facility bear variable annual rates of interest, based on the change
in LIBOR, the Royal Bank of Canada prime rate and the federal funds rate.
Consequently, additional borrowings under the Senior Facility and increases in
LIBOR, the Royal Bank of Canada prime rate and the federal funds rate will
increase the Company's indebtedness and may increase the Company's interest
expense in future periods. Additionally, under the terms of the Senior Facility,
the Company is required to hedge the interest rate risk on $100.0 million of the
Senior Facility if LIBOR exceeds 9.0% for 15 consecutive days. As of June 30,
2000, the Company had $174.3 million outstanding under the Senior Facility. A
hypothetical change in annual interest rate of 1% per annum would result in a
change in interest expense of approximately $0.4 million for the six months
ended June 30, 2000.
Market Price Risk
The fair value of the Company's Senior Discount Notes outstanding was $1.2
billion as of June 30, 2000 compared to the carrying value of $1.9 billion. The
fair value of the Senior Discount Notes was calculated using the quoted bid
price per bond as of June 30, 2000. A hypothetical 10% fluctuation in market
rates of interest would not cause a material change in the fair value of the
Company's Senior Discount Notes at June 30, 2000.
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
See Note 6 (e) to the Company's unaudited condensed consolidated
financial statements for the six months ended June 30, 2000 contained
elsewhere in this Quarterly Report.
ITEM 2. CHANGES IN SECURITIES
In February 2000, the Board of Directors authorized the issuance of
50,000 shares of 8% Series A-1 Convertible Preferred Stock, due in 2015,
par value $0.01 per share; 23,000 shares of 8% Series A-2 Convertible
Preferred Stock, par value $0.01 per share; and 75,000 shares of 8%
Series A-3 Convertible Preferred Stock, par value $0.01. (The Series A-1
Convertible Preferred Stock, the Series A-2 Convertible Preferred Stock
and the Series A-3 Convertible Preferred Stock are, unless otherwise
noted, referred to herein as the "8% Series A Convertible Preferred
Stock.")
On April 10, 2000, the Company closed a Preferred Stock and Warrant
Purchase Agreement (the "Purchase Agreement") with HMTF Bridge ICG, LLC
("HMTF"), Liberty Media Corporation ("Liberty") and Gleacher/ICG
Investors, LLC ("Gleacher") wherein the Company sold an aggregate of
75,000 shares of the Company's newly issued 8% Series A Convertible
Preferred Stock due 2015. Pursuant to the Purchase Agreement, the
Company issued (i) 50,000 shares of the 8% Series A Convertible
Preferred Stock to Liberty in exchange for $500 million; (ii) 23,000
shares of the 8 % Series A Convertible Preferred Stock to HMTF in
exchange for $230 million; (iii) 20,000 shares of the 8% Series A
Convertible Preferred Stock to Gleacher in exchange for $20 million.
Dividends on the 8% Series A Convertible Preferred Stock accrete and
cumulate daily from the date of issuance at an annual rate of 8% of the
then-effective liquidation preference. Dividends will be computed on the
basis of a 360-day year of twelve, 30-day months and will be payable
quarterly; however, until the fifth anniversary of the issuance of the
8% Series A Convertible Preferred Stock, dividends will be added
cumulatively and remain part of the liquidation preference. After such
date, dividends may be paid in cash. Dividends not declared and paid in
cash will accrue and be added to the liquidation preference. The 8%
Series A Convertible Preferred Stock will rank on a parity with the
Preferred Stock Mandatorily Redeemable 2009 of the Company. Each share
of 8% Series A Convertible Preferred Stock is convertible, at a
conversation price of $28.00 per share (subject to certain adjustments
in the event of specified changes in the Company's capital structure),
at any time and at the holder's option, based upon the then-effective
liquidation preference, into shares of the Company's Common Stock.
The 8% Series A Convertible Preferred Stock had an initial preference
value equal to the sum of $10,000 per share. Upon liquidation, holders
of the 8% Series A Convertible Preferred Stock will be entitled to
receive the greater of (i) the liquidation preference plus an amount
equal to all accrued and unpaid dividends or (ii) the amount which the
8% Series A Convertible Preferred Stock would receive on an as-converted
basis. The issuance of the 8% Series A Convertible Preferred Stock is
not registered under the Securities Act of 1933, as amended and such 8%
Series A Convertible Preferred Stock was issued in a private placement
pursuant to an exemption therefrom.
Except in relation to director appointment rights, the power,
preferences and relative, participating, option and other special rights
of the Series A-1 Preferred Stock, the Series A-2 Preferred Stock and
the Series A-3 Preferred Stock are identical. As of June 30, 2000, the
holders of the Series A-1 Preferred Stock were entitled to elect two (2)
directors to the Company's Board of Directors, and the holders of the
Series A-2 Preferred Stock were entitled to elect one (1) director to
the Company's Board of Directors.
In conjunction with the issuance of the 8% Series A Convertible
Preferred Stock, in April the Company issued 10,000,000 warrants to
HMTF, Liberty and Gleacher pro rata according to the number of 8% Series
A Convertible Preferred Stock purchased by each of the shareholders. The
Warrants are exercisable for shares of the Company's Common Stock at an
exercise price of $34 per share (subject to certain adjustments in the
event of specified changes in the Company's capital structure). The
Warrants expire on April 10, 2005.
The holders of the 8% Series A Convertible Preferred Stock and Warrants
have been granted registration rights for the shares of Common Stock
issuable upon conversion of the 8% Series A Convertible Preferred Stock
and upon exercise of the Warrants, respectively.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The Annual Meeting of stockholders of ICG Communications, Inc. was held
on June 7, 2000 (the "Annual Meeting"). At the Annual Meeting, four
matters were considered and acted upon: (1) the election of three
directors to serve until the 2003 Annual Meeting of Stockholders and
until their successors have been duly elected and qualified; (2) the
adoption of the ICG Communications, Inc. Year 2000 Executive Long-Term
Incentive Plan; (3) the adoption of an amendment to the Company's
Certificate of Incorporation to increase the authorized shares of the
Company's Common Stock from one hundred million (100,000,000) to two
hundred million (200,000,000) shares and to increase the number of the
Company's authorized Preferred Stock from one million (1,000,000) to
two million (2,000,000) and (4) the ratification of the appointment of
KPMG LLP as independent auditors of ICG Communications, Inc. and its
subsidiaries for the fiscal year ending December 31, 2000.
Indicated below are the total votes in favor of each director nominee
and the total votes withheld:
Votes
----------------------------------------
For Withheld
----------------------------------------
William S. Beans, Jr. 69,819,037 312,043
John U. Moorhead II 69,817,637 313,443
Carl E. Vogel 50,000 (a) 0
(a) Represents 50,000 shares of 8% Series A-1 Convertible Preferred Stock
which, at the time of the annual meeting, were convertible into
17,857,000 shares of common stock. The holders of the 8% Series A-1
Convertible Preferred Stock were entitled to elect one director at
this year's annual meeting. All of the Series A-1 Convertible
Preferred shareholders eligible to vote voted in favor of Mr. Vogel.
In connection with the vote on the adoption of the ICG Communications,
Inc. Year 2000 Executive Long-Term Incentive Plan, 57,010,030 votes
were cast in favor of the adoption and 12,997,751 were cast in
opposition thereto.
In connection with the vote on the adoption of an amendment to the
Company's Certificate of Incorporation to increase the authorized
shares of the Company's Common Stock from one hundred million
(100,000,000) to two hundred million (200,000,000) shares and to
increase the number of the Company's authorized Preferred Stock from
one million (1,000,000) to two million (2,000,000), 56,771,696 votes
were cast in favor of the adoption and 3,099,002 were cast in
opposition thereto.
In connection with the vote on the ratification of the appointment of
KPMG LLP as independent auditors of ICG Communications, Inc. and its
subsidiaries for the fiscal year ending December 31, 2000, 69,998,362
votes were cast in favor of the adoption and 113,480 were cast in
opposition thereto.
<PAGE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(A) Exhibits.
(10) Material Contracts.
10.1: Amendment to Employment Agreement, dated as of May
10, 2000, by and between ICG Communications, Inc. and
Carla J. Wolin.
10.2: Amendment to Employment Agreement, dated as of May
10, 2000, by and between ICG Communications, Inc. and
James Washington.
10.3: Amendment to Employment Agreement, dated as of May
10, 2000, by and between ICG Communications, Inc. and
Cindy Z. Schonhaut
10.4: Amendment to Employment Agreement, dated as of May
10, 2000, by and between ICG Communications, Inc. and
Don Teague.
(27) Financial Data Schedule.
27.1: Financial Data Schedule of ICG Communications, Inc.
for the Six Months Ended June 30, 2000.
(B) Report on Form 8-K. The following report on Form 8-K was filed by
the registrants during the six months ended June 30, 2000:
(i) Current Report on Form 8-K dated May 4, 2000, regarding the announcement of
earnings information and results of operations for the quarter ended March
31, 2000 of ICG Communications, Inc.
<PAGE>
INDEX TO EXHIBITS
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
<PAGE>
INDEX TO EXHIBITS
10.1 Amendment to Employment Agreement, dated as of May 10, 2000, by and
between ICG Communications, Inc. and Carla J. Wolin.
10.2 Amendment to Employment Agreement, dated as of May 10, 2000, by and
between ICG Communications, Inc. and James Washington
10.3 Amendment to Employment Agreement, dated as of May 10, 2000, by and
between ICG Communications, Inc. and Cindy Z. Schonhaut.
10.4 Amendment to Employment Agreement, dated as of May 10, 2000 by and
between ICG Communications, Inc. and Don Teague.
27.1 Financial Data Schedule of ICG Communications, Inc. for the Six Months
Ended June 30, 2000.
<PAGE>
EXHIBIT 10.1
Amendment to Employment Agreement, dated as of May 10, 2000, by and between
ICG Communications, Inc. and Carla J. Wolin.
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EXHIBIT 10.2
Amendment to Employment Agreement, dated as of May 10, 2000, by and between
ICG Communications, Inc. and James Washington.
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EXHIBIT 10.3
Amendment to Employment Agreement, dated as of May 10, 2000, by and between
ICG Communications, Inc. and Cindy Z. Schonhaut.
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EXHIBIT 10.4
Amendment to Employment Agreement, dated as of May 10, 2000, by and between
ICG Communications, Inc. and Don Teague.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on August 14, 2000.
ICG COMMUNICATIONS, INC.
Date: August 14, 2000 By: /s/ Harry R. Herbst
------------------------------------
Harry R. Herbst, Executive Vice
President and
Chief Financial Officer (Principal
Financial Officer)
Date: August 14, 2000 By: /s/ John V. Colgan
------------------------------------
John V. Colgan, Vice President of
Finance and Controller
(Principal Accounting Officer)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on August 14, 2000.
ICG HOLDINGS (CANADA) CO.
Date: August 14, 2000 By: /s/ Harry R. Herbst
------------------------------------
Harry R. Herbst, Executive Vice
President and
Chief Financial Officer (Principal
Financial Officer)
Date: August 14, 2000 By: /s/ John V. Colgan
------------------------------------
John V. Colgan, Vice President of
Finance and
Controller (Principal Accounting
Officer)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on August 14, 2000.
ICG HOLDINGS, INC.
Date: August 14, 2000 By: /s/ Harry R. Herbst
------------------------------------
Harry R. Herbst, Executive Vice
President and
Chief Financial Officer (Principal
Financial Officer)
Date: August 14, 2000 By: /s/ John V. Colgan
------------------------------------
John V. Colgan, Vice President of
Finance and
Controller (Principal Accounting
Officer)